Smart Takes

Charismatic CEO? Investors should duck

Posting in Science

Charismatic CEOs may be entertaining, but they could be dangerous to your pocketbook, according to a study.

Charismatic CEOs may be entertaining, but they could be dangerous to your pocketbook, according to a study.

INFORMS, the Institute for Operations Research and the Management Sciences, recently studied the impact on a new charismatic CEO and financial analysts projections. In a nutshell, analysts made errors in forecasting future performance with a charismatic CEO.

According to "In Charisma We Trust: The Effects of CEO Charismatic Visions on Securities Analysts," Angelo Fanelli of the HEC School of Management in France, Vilmos F. Misangyi of Pennsylvania State University, and Henry L. Tosi of the University of Florida argue the following:

  • The vision of charismatic CEOs influences optimistic recommendations about a company;
  • Analysts start a herd effect and everyone things the company is poised for greatness;
  • It's hard to link stock performance with charisma, but positive recommendations generally boost a stock 2 percent to 3 percent.

Investors pile on only to find out charisma doesn't cut it.

In a statement, INFORMs notes:

The authors examined a sample of CEO succession events that occurred between 1990 and 1990, identified through the ExecuComp database, within a random sample of 800 U.S. publicly traded corporations within 30 industries. After exclusions, the final sample was 367 CEO succession events. Charismatic vision statements, as identified by the authors, are those which use language that 1) is critical of the status quo, 2) presents goals in ideological and moral overtones rather than in pragmatic terms, and 3) tends to empower stakeholders.

The study has a few examples that are worth noting. Here's an excerpt from the study:

The business press and stock market actors alike see CEO charisma as a key to shareholder wealth. For instance, a New York Times article on the ousting of Morgan Stanley CEO Philip J. Purcell maintained, “[W]hat seems to have really hurt Morgan Stanley was that Mr. Purcell did not have the charisma to make his vision ... function effectively” (Anderson 2005). Securities analysts also exalt charisma, as shown by a Dillon Read analyst celebrating the appointment of C. Michael Armstrong to AT&T’s head post in 1997: “AT&T appears to have gotten the superstar CEOit needs to firmly guide the company” (Khurana 2002, p. 78). Of course, such institutional intermediary proclamations implicitly presuppose that CEO charisma is related to organizational performance, a question receiving growing attention by researchers.

Share this

Larry Dignan

Editor-in-Chief

Editor-in-Chief Larry Dignan is editor-in-chief of SmartPlanet and ZDNet. He is also editorial director of TechRepublic. Previously, he was an editor at eWeek, Baseline and CNET News. He has written for WallStreetWeek.com, Inter@ctive Week, New York Times and Financial Planning. He holds degrees from the Columbia University Graduate School of Journalism and the University of Delaware. He is based in New York but resides in Pennsylvania. Follow him on Twitter. Disclosure