Why humble CEOs make a better investment than their narcissistic counterparts
Financial analysts often dismiss humble CEOs as weak and lacking confidence, a tendency that could prove beneficial to investors who bet on those chief executives and their companies.
A new study accepted for publication in the Strategic Management Journal found that analysts, as a result of their own biases, underestimate the earning power of humble CEOs. That results in lower market expectations for the earnings reports, which the companies can then more-easily beat (or at least meet), according to the paper, titled “The Case for Humble Expectations: CEO Humility and Market Performance.”
That perception of humble CEOs as weaker has nothing to do with their ability compared to their more-outspoken peers, Oleg Petrenko, an assistant professor at Texas Tech University and one of the authors of the report, told FOX Business. Rather, they benefit from an “expectation discount,” which can, in turn, cause increased market returns if they top Wall Street forecasts.
GET FOX BUSINESS ON THE GO BY CLICKING HERE
“The market feels really strongly about firms meeting or beating expectations,” Petrenko said. “And when they don’t, even if the firm is profitable, you see a drop in stock, loss of investor confidence and things like that. It’s really a strong market mechanism.”
Depending on how humble the CEO is, the paper found that the effect could result in at least a 7 percent jump in total shareholder returns annually, the researchers, which also includes Federico Aime at Oklahoma State University, Tessa Recendes at the Pennsylvania State University and Jeffrey Chandler at Western Kentucky University.
Of course, that doesn’t mean humble CEOs are better leaders than their narcissistic counterparts, Petrenko said — but that markets and analysts should reconsider their inherent biases.
AS MCDONALD'S CEO LEARNED, WORKPLACE ROMANCE CAN BE PERILOUS
“When you see somebody who is humble, and our initial inclination is to assume they aren’t confident, we have to think twice about it,” he said. “Humble people can be very confident, very capable, and we shouldn’t let our own biases affect the evaluation of the organizations that they lead.”
The study focused on a sample of 185 CEOs compiled from all of the S&P 500 firms between 2000 and 2013. They measured humility by hiring senior undergraduate students and experts in psychology to assess and rate CEO humility based on different videos they appeared in. The scale they used to rank the CEOs was based on several characteristics, including modesty and honesty.