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How CEO Personality Impacts on Firm Performance - Ideas for Leaders
Idea #632

How CEO Personality Impacts on Firm Performance

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KEY CONCEPT

Different personality traits, such as openness to change, conscientiousness and extraversion, are associated with different approaches to investment decisions and differences in firm performance, according to a new study using linguistic metrics for personality.


IDEA SUMMARY

How much does the personality of a CEO impact his or her decision-making and the performance of the firm? A team of researchers explored connections between the personality traits of more than 4500 CEOs and their investment and financing decisions and the performance of their firms. Their study offers a glimpse into how personality can impact business performance.

Personality psychologists recognize a ‘Big 5’ set of personality traits that are most relevant to the ‘patterns of thoughts, feelings and behaviours’ of individuals. These five personality traits are:

Agreeableness. Avoiding conflict, looking to collaborate, but perhaps giving in too easy.
Conscientiousness. Disciplined, ambitious and persistent, but perhaps overly cautious and unable to deal with ambiguity.
Extraversion. Full of inspirational energy but can over-estimate abilities and reject resistance to ideas.
Neuroticism. The level of emotional stability.
Openness to experience. Intellectually curious, thoughtful and creative. Less adverse to risk.

To assess the CEOs in the sample on these traits, the research team avoided questionnaires or interviews and instead focused on clues from linguistics. Certain words have been shown to reflect certain personality traits. For example, agreeable people talk less because they are considerate of others. They also tend to use more adverbs and quantifiers (‘a great deal,’ ‘a number of,’ etc.). On the other hand, conscientious people, among other linguistic habits, use qualifiers to help them remain cautious.

The team linguistically analysed a database of 70,000 conference call transcripts to develop a personality profile of each CEO in the sample. The team then collected statistics on business decisions (focusing on R&D intensity, investment, book-to-market and net leverage) and firm performance (specifically return on assets and cash flow) for each CEO’s firms.

With this data in hand, the team was able to identify the correlations between personality traits and decision-making and firm performance.

The analysis reveals a number of definite associations, including:

A positive relation between openness and R&D intensity. CEOs who are more open to change will value creativity and experimentation, and are thus comfortable in companies dependent on R&D and innovation.

A negative relation between openness and net leverage. At first glance, this result seems confusing, as one would expect open CEOs to be willing to accept riskier debt financing. However, high business risk (e.g. through higher R&D) is often coupled with lower leverage.

A positive relation between conscientiousness and book-to-market ratio. Conscientious CEOs are more cautious; the low growth implication of high book-to-market ratio is therefore consistent with this personality trait.

A negative relation between extraversion and return on assets and cash flow. Looking at the firm performance components, extraversion does not seem enhance business performance. Given the tendency of extraverts to emphasize obedience and submissiveness, thus undermining the engagement of their employees, as well as their penchant for riskier aggressive strategies, it is not surprising to find extraversion associated with relative low firm performance.

 


BUSINESS APPLICATION

The researchers emphasize that their study is descriptive and invite future researchers to dig deeper into the causes of the relations flagged here.

Nevertheless, the significant associations between certain personality traits and certain decision-making tendencies (e.g. risk-aversion) or the performance of the firm can guide decisions in succession planning or promotion decisions. For example, if a firm wants to emphasize growth, a more open and less conscientious and cautious candidate may be the best candidate for a CEO position. Another example would be the CEO who might want to add a candidate with an open personality to a management team that is too conservative.

The research can also be applied in the opposite direction. The personality traits of a CEO might help explain why a firm is having a serious problem in a certain business performance area — and might help a board decide whether the incumbent CEO is the right person for the job.


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Idea conceived

November 4, 2016

Idea posted

Nov 2016
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