Narcissistic leaders, mirrors in the boardroom and firms’ risk-taking behaviour

Narcissists embrace applause, praise and adulation from others to maintain their inflated self-view

PUBLISHED : Friday, 05 February, 2016, 10:01am
UPDATED : Friday, 05 February, 2016, 10:01am

Consider the actions taken by Jean-Marie Messier, who converted a Paris-based company, Compagnie Generale des Eaux (CGE), with core businesses in water, electrical and waste utilities, into a media and entertainment conglomerate with a new name Vivendi.

We have to ask what are the strategic reasons behind this. Were the core businesses declining, did the company have existing capabilities to manage the new businesses, was it chic to enter unrelated business areas, or did Messier have rich experience in the media industry?

There was no clear “yes” for any of the above questions when he embarked upon a large-scale business diversification during his tenure as chief executive. Some attribute this to the fact that Messier was trying to change the company to suit his own self-image, by upping stakes in media-related businesses to enter this glitzy world. Such big and bold actions could be due to Messier’s highly narcissistic personality, after all he was a person who sometimes signed his emails “J6M”, which stood for Jean-Marie Messier Moi-Meme, Maitre du Monde (Jean-Marie Messier Myself, Master of the World).

Narcissists not only believe in their superior qualities but also carry an intense need to have their superiority reaffirmed. They embrace applause, praise and adulation from others to maintain their inflated self-view. Their insatiable need for public glorification is reflected in bold, attention-grabbing actions whose outcomes normally skew to the extreme ends of the performance scale. This often makes their companies exciting for outsiders to watch, like dramas, but stakeholders may not similarly appreciate the suspense. Those with skin in the game are apt to want some mechanisms to mitigate the downside risk that narcissistic chief executives can cause. In theory, that is supposed to come from the board.

Seeking a friendly reception for their future decisions, chief executives will try their best to choose directors similar to themselves

However, there is a paradox at work in 21st century boardrooms. If best practices are to be believed, the gradually increasing diversity and independence of corporate boards should have improved their ability to restrain managerial excesses. But research suggests otherwise.

In the paper “Narcissism, Director Selection, and Risk-Taking Spending” (co-authored with David Zhu of Arizona State University), recently published in Strategic Management Journal, we found that, when narcissistic chief executives interact with the board, they often meet not a moment of reckoning but their favourite thing: a mirror.

In the paper we link this mirroring effect to chief executives’ awareness of the social risk in new director selection. Seeking a friendly reception for their future decisions, chief executives will try their best to choose directors similar to themselves – not just in terms of the oft-cited demographic characteristics (e.g. race, class background, gender) but also personality type.

Figuring out personality is no simple task, but research shows that people can identify a narcissist by watching his or her interactions with others. Narcissists may be especially adept at spotting their own kind – as implied by the adage “It takes one to know one”. Additionally, a CV can speak volumes: has the potential director had prior experience with other narcissistic chief executives? If the answer is yes, he or she may be accustomed to their ways, or even share their tendencies; and that’s rather preferred by narcissistic leaders.

In some firms, chief executives are powerful enough on the boards to greatly influence the director selection, by virtue of also being board chairman, majority shareholder, etc. We found that the more weight a narcissistic chief executive carries with the board, the more likely it is that a new director will match the chief executive’s narcissism. For both chief executives and directors who had been chief executives, we used established indices to measure narcissism, such as the prominence of their photo in annual reports, how often their name was mentioned in press releases, and their compensation relative to the second-highest-paid executive. We also found a positive association between chief executive power and a new director’s past experience with other similarly narcissistic chief executives.

A narcissistic consensus on the board is a potential problem because of the above-mentioned tendency of narcissists to engage in risk-taking behaviour. Because directors have become increasingly involved in strategic decisions in recent years, new directors can significantly influence the chief executive’s risk-taking decisions. New directors who are favourably disposed towards the chief executive’s narcissism are more likely to applaud risk-taking behaviour without seriously considering potential negative outcomes or challenging the chief executive’s decisions. They may also attempt to convince sceptics on the board that a risky course is the right one.

Indeed, we found that the closer chief executives and new directors were in terms of narcissism, the more liberated chief executives were to indulge their narcissism by upping their risk-taking spending, i.e. expenditure on mergers and acquisitions, capital investment, and research and development.

Much of the corporate governance research in recent years has gone towards analysing the failure of boards to anticipate and prevent the risk-taking decisions that brought on the crisis. Board configuration seems to have played a role in allowing the 2008 crisis to occur, and should therefore be an area of concern for companies going forward. Many have specified the slow pace of demographic change on corporate boards as part of the problem.

Our paper points to an area that has been less discussed: how personality types affect board-chief executive interactions as well as ensuing company behaviours. Demographic diversity remains an important consideration, but overlooking how personality fits in could result in differences on the board being merely skin-deep.

Guoli Chen is associate professor of strategy at INSEAD