Value-Destroying Villains: Narcissistic CEOs

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Arijit Chatterjee and Don Hambrick, professors of management at Penn State, have finally quantified the effects of narcissistic CEOs. The results aren't pretty.

Working together on a rigorous academic study (PDF file, Adobe Acrobat required), Chatterjee and Hambrick reached a conclusion that leaves little room for question: Narcissistic CEOs are value destroyers.

Measuring narcissism
Of course, you can't just walk into any CEO's office and ask them how narcissistic they are, so Hambrick and Chatterjee got clever.

They decided to take a look at things like the size of the CEO's picture in the annual report, the number of times a CEO was mentioned in a press release, how often the CEO uses the first-person singular in public comments, and the gap between the CEO's pay and the second-highest paid employee.

The results
Studying technology CEOs between the time period of 1992 and 2004, the researchers reached a few crucial conclusions. First off, narcissistic CEOs spent more money than average -- whether on research and development, advertising, or administrative costs.

Furthermore, the performance of companies with narcissistic CEOs was wildly variant over time. After a few years of besting analyst expectations, these companies usually swung to the downside in quick fashion. And if you think about it, that makes sense. If a CEO has an inflated sense of self, then besting expectations -- and being patted on the back for it -- is incredibly important. But you can only finagle the numbers for so long to meet expectations, and eventually the chickens come home to roost.

But the result that stood out the most to me was this: Narcissistic CEOs tended to make more acquisitions at higher valuations than their not-so-narcissistic counterparts. Nothing can kill shareholder value quicker than using cash on hand (or going into debt) in order to purchase a company that -- 10 years down the road -- won't add an ounce of shareholder value.

Real-life proof
Perhaps no technology companies better illuminate the perils of growth-by-acquisition than Microsoft (NAS: MSFT) and Hewlett-Packard (NYS: HPQ) .

Let's tackle Microsoft and CEO Steve Ballmer first. Want to know how the company has been spending its cash since he took the helm? Take a look at the numbers.

Year

Company Acquired

Cost

Result

2007aQuantive$6.6 billionDecision to focus on Bing made deal worth far less. Part of aQuantive later sold off for just $530 million.
2008Greenfield Online$486 millionMicrosoft is reportedly selling the main asset it bought (the website Ciao) for under $100 million.
2008Danger$500 millionDanger employees were put to work on a phone that was on the market for only two months before being scrapped.
2008FAST Search & Transfer$1.2 billionMicrosoft paid a 42% premium. Someone didn't do the due diligence: 10 months later, FAST's offices were being raided to investigate fraud charges.
2011Skype$8.5 billion???

Source: Fool.com.

Not to be outdone, HP has been a hot mess for a while now. They've had a carousel of executives since Mark Hurd's ousting. As Fool Morgan Housel pointed out last year, if HP's share price remained depressed, "the company would repurchase its entire market cap within the next decade."

But instead of doing that, the company cancelled its repurchase program and paid $10 billion in cash to acquire U.K. software company Autonomy. That cash represents a whopping 20% of HP's market cap!

Hubris, hubris everywhere
Forbes contributor Eric Jackson, reflecting on the research, also called out Cisco (NAS: CSCO) CEO John Chambers. Noting that narcissistic CEOs tend to do a substandard job of planning for succession, Jackson wondered "why there's been no public questioning of where John Chambers' succession plan is."

But maybe no CEO would provide a more perfect example of narcissism and hubris -- as defined by the research -- than Netflix (NAS: NFLX) CEO Reed Hastings. Let's be clear: He deserves a lot of credit for taking the blame for this summer's missteps.

But whether it was through personal entries on this Netflix blog or videos he was filming to explain his decisions, Hastings -- not his company -- was the center of attention.

Steve Jobs, anyone?
If you've read any of Walter Isaacson's biography of Apple's (NAS: AAPL) late Steve Jobs, you might think there'd be no question that he'd qualify as a narcissistic CEO who bucked the trend.

But that's not so -- at least as far as narcissism was measured here. Jobs was rarely in conference calls, didn't insist on being in press releases, had a succession plan in mind (even though we weren't aware of it), and most important, he surrounded himself with smart people. "Most narcissists feel threatened by having people around them that are smarter than them," Forbes' Jackson notes.

A foolproof plan
Knowing the kind of damage narcissistic CEOs can do to your portfolio, your safest bet is probably to invest in solid, dividend-paying companies. If cash is being paid out to you, it isn't being used for silly acquisitions, and studies have shown that dividends are probably the most surefire way to build wealth.

The Motley Fool has prepared a special free report highlighting 11 rock-solid dividends for your consideration. Hand-picked by our top analysts, they promise to help usher your portfolio toward a comfortable retirement. Get your copy of the report today, absolutely free!

At the time this article was published Fool contributor Brian Stoffel owns shares of Apple and Netflix. You can follow him on Twitter at @TMFStoffel.The Motley Fool owns shares of Microsoft, Apple, and Cisco Systems, and has created a bull call spread position on Cisco Systems. Motley Fool newsletter services have recommended buying shares of Apple, Microsoft, Cisco Systems, and Netflix, and creating a bull call spread position in Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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