A research study conducted at the University of California and published in the "Personality and Social Psychology Bulletin, suggests that:
CEOs with psychotic personality traits have the ability to attract investors better than those without.
The study involves traits around the corporate psychopath, which is distinct from the psychotic individual, in that they do not lose touch with reality. Instead, the corporate psychopath is defined as someone who thrives in chaos, has incredible charisma, craves power and recognition, but lacks empathy or an emotional concern for their actions. It is their ruthlessness that sets them apart. Corporate psychopaths will lie and wrestle their way to the top with little regard for the consequences of their actions or who they disappoint or destroy in the process.
This definition may sound aggressive and out of touch, but it also makes sense how this type of person could rise to the top of an organization. In fact, British psychologist Kevin Dutton, found that the most attractive job for psychopaths, is the role of the CEO. Aggressive, but superficially charming risk taker with little care for the feelings of others is right out of central casting for the Hollywood CEO or Wall St. tycoon. Imagine taking this mythical creature on a road show to raise capital or a management presentation for the sale of a business.
The University of California study found that the hedge fund managers with psychopathic traits were better able to attract investment in their flagship funds. The catalogued traits common to corporate psychopaths were narcissism, superficial pride, aggression, and dominance, all of which were found to attract above average investments.
Interestingly, these same psychopathic traits that brought in big dollars up front, resulted in poor financial overall performance of the fund. As anyone who has worked with or for a narcissist can attest to, these personality traits undermine collaborative efforts and lead to organizational failures over the long term. The study showed that $1 million invested with a manager who displayed psychopathic tendencies at 2 standard deviations above the mean, earned $311,834, or 30% less than the mean hedge fund manager.
What does this research mean for those of us in mergers and acquisitions?
If you are aware that the role of CEO tends to attract corporate psychopaths, you can be on the lookout for the signs of the personality traits. Do not be fooled by their charm, their devil may care attitude, and their glamourous march to the top. Watching the documentary of Elizabeth Holmes, the founder of Theranos, lying to investors, you ask yourself "how can people be so taken with her?" People like Holmes are what Psychology Today calls "social chameleons." In other words, they are able to disguise their ruthlessness as personal magnetism. Holmes managed to charm her investors, lying the entire time without any remorse.
This can be a cautionary tale for those of us that buy businesses.
Management due diligence is as important as financial due diligence when acquiring a business (as those 30% lower returns show). Make sure the team you are acquiring works well together and there are no bullies in the organization. Make sure that the managers are comfortable with your plans for the future and carrying out a vision that isn't theirs. Lastly, don't be afraid to walk away from a good business that is being run by a bad manager. Over the long run, their seemingly shiny personality will destroy a lot of value.