We all know that chief executive officers have wide-ranging influence over the companies they head. It is they who chart the strategic course of the company, help set the workplace culture, build a strong team and attract new talent. But what is the relationship between a company’s fortunes and the personality of its CEO?
This was the focus of a new paper titled CEO Personality and Firm Policies where the authors did not use questionnaires or interviews to measure personality traits. Instead, they used the linguistic features exhibited by CEOs during conference calls to develop a measure of CEO personality in terms of five traits: agreeableness, conscientiousness, extraversion (versus introversion), neuroticism (versus emotional stability) and openness to experience, and examined the associations between these five measures to the investment and financing choices made by these executives to the performance of the company.
By scrutinizing the language used on calls, the authors were able to explore the links between CEO personality and company performance on a large scale. They analysed more than 72,000 transcripts of the question-and-answer portion of conference calls with investors and analysts that took place from 2001 through early 2013, involving more than 4,700 individual CEOs. The authors focused specifically on the Q&A sections because it is believed that CEOs speak more freely when fielding questions than when delivering prepared remarks.
In line with previous linguistic research, the authors analysed the transcripts to isolate 33 different linguistic features that, taken together, indicate what kind of personality someone has. These features included certain keywords or markers that indicate emotion, hesitation or contemplation on the part of the speaker, as well as self-references and the use of terms or phrases associated with a range of feelings, including positivity, negativity and certainty. Next, the authors used each CEO’s linguistic evaluation to categorize him or her into one of the so-called five personality traits, which they believe can give insight into how CEOs run their companies. For example, the study found that CEOs who are characterized by their openness tended to lead R&D-intensive companies. But being open doesn’t extend to “being open to carrying large amounts of debt”. The authors found that these CEOs ran firms that took risks with R&D projects, but not with their financing choices, and that they resisted taking on large debts in other facets of the company.
Conscientious CEOs, meanwhile, usually oversaw companies with high book-to-market ratios; that is, their accounting and financial health were in line with their company’s stock price. This reflects a conscientious leader’s desire to follow rules and embrace the status quo, and to forgo the risk taking and inventiveness that’s often necessary to promote growth but that can destabilize an established company. The authors also found that extroverted CEOs were associated with both negative short- and long-term returns on assets and cash flows. This could be because extroverts like to dominate the decision-making process and seek compliance and agreement from those around them, thus missing out on the benefits of collaboration.
The paper concludes with the observation that openness is positively associated with R&D intensity and negatively with net leverage; whereas conscientiousness is negatively associated with growth. In performance tests, extraversion is negatively associated with both current and future return on assets and cash flow. However, the authors caution that their paper is meant to be descriptive of the larger relationship between CEO personality and company performance and further research is necessary to understand the nature of the causal relations, if any, between personality and company policies and performance.