Corporate board structures have come under greater scrutiny since (at least) the 1990s. The U.S. government has taken steps to review potential problems, such as Securities and Exchange Commission rules — put in place in 2010 — that require listed companies to disclose their board leadership structure and explain why they have determined that such a structure is appropriate. Much of the legal governance is aimed at reducing the sort of risk-taking that can cause major problems for the company, shareholders, and even necessitate government intervention (think of the Enron scandal, for example).

Even so, corporate risk-taking doesn’t seem to be slowing.

A new study published in the Strategic Management Journal offers more data to help identify when such risk-taking could occur, and how our understanding of CEO behavior and personality types drives risk management strategies. According to the research, narcissistic CEOs are adept at controlling how boards of directors focus their attention, allowing the CEO to get their way. The study found that by driving board discussions about risk-taking to hold a positive tone, the CEO can allocate more resources toward risk-taking strategies.

The research team — Christopher S. Tuggle of the University of Central Arkansas, Cameron J. Borgholthaus of the University of Wyoming, Peter D. Harms of the University of Alabama, and Jonathan P. O’Brien of the University of Nebraska–Lincoln — studied how CEO narcissism is connected to corporate risk-taking, specifically through the board of director discussion tone around risk-taking during board meetings. To explore CEO narcissism and its effects on risk-taking, they pulled together a dataset that included transcripts from 88 public firms and 197 CEOs over 20 years. They ran text analyses to identify the emotionality of the board conversations and measure how narcissistic the CEOs at these firms were. For the latter measure, the researchers looked at factors such as the CEO salary compared to others in the firm, how prominent the CEO’s picture was in reports, and how many times the CEO’s name would appear in reports.

The study also considered how CEOs can stack the deck in their favor by selecting their preferred directors over time, leading to a board that favors the CEO and is willing to follow the executive’s lead. The researchers also looked at how a CEO could use emotionality, conveying their ideas with a lot of enthusiasm and confidence to build excitement around their idea. And, importantly, they also considered CEO duality and how an individual acting as both CEO and board chair can exert control over the board: In this situation, the CEO can decide who on the board speaks, perhaps choosing those who can talk more positively about a risk-taking idea. The CEO can also identify outside experts who can speak positively about the idea. As board chair, the CEO can even control where a board meeting is held, which can sway how receptive board members feel about concepts presented. (Want to win over other board members? It’s not a bad idea to hold the meeting somewhere tropical during winter.)

The researchers found that narcissistic CEOs significantly influence board conversations to mirror their pro-risk inclinations. This personality trait in CEOs was positively related to positive discussions of risk-taking, an insight that helps clarify the importance of understanding CEO behavior in guiding risk-management strategies.

Borgholthaus underscored the importance of identifying a narcissistic CEO to determine when they might be capable of manipulation — especially in cases where the CEO is also the board chair.

“Narcissists are often viewed as visionaries,” Borgholthaus explains, using Elon Musk and the risks he took — one of which led to his stepping down as board chair — as an example. “I think that a lot of people kind of grasped this idea of Tesla, of Elon Musk, as, ‘Well, he’s super determined. He’s gonna do all these cool things for society.’ But things didn’t pan out exactly the way that he wanted them to.” His board has largely gone along with his risk-taking ideas, likely because of the way personality traits sway board members. But Tesla’s stock price and overall performance have more recently shown the repercussions of unchecked risk taking.

Published Date
16 July 2024

Reference

Tuggle, C. S.Borgholthaus, C. J.Harms, P. D., & O’Brien, J. P. (2024). Setting the tone to get their way: An attention-based approach to how narcissistic CEOs influence the board of directors to take more riskStrategic Management Journal127https://doi.org/10.1002/smj.3610

Contributed By
Sarah Steimer

Article Type
Article Summary/Abstract, Journals News

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