Are luxury possessions and speeding tickets indicative of CEOs who will cultivate scandal and commit fraud? They can be. Recently on The Science of Personality, cohosts Ryne Sherman, PhD, chief science officer, and Blake Loepp, PR manager, spoke with Aiyesha Dey, PhD, associate professor of business administration at Harvard Business School, about how CEO personality influences CEO behavior.
By researching the personal lives of CEOs and their behavior outside of the workplace, Aiyesha has identified data that can be quite predictive of how they may perform on the job.
Let’s dive into how the personality characteristics of materialism and rule breaking can affect CEO behavior.
CEO Personality Matters
Even with systemic fixes and the right incentives, not everyone will behave the same. That’s why corporate scandals still occur despite layers of regulation. Individual managerial styles matter.
“We know managers matter, but what about them is important?” Aiyesha asked. “What should we care about, and how does it matter for corporate outcomes?” Those questions inspired her research into about 1,000 public companies and executives in the US. Her findings? Certain personality characteristics, observable in off-the-job lifestyles of executives, correlate with actions executives take within organizations.1
Regulators can step in and uncover fraud and scandals after they’ve already taken place—after shareholders have lost resources and employees have lost jobs. The goal of looking at lifestyles of executives is to know some indicators of risk beforehand. Stopping these actions before they take place by using an empirical measure of character is the underlying motivation driving the research.
Understanding CEO Risk Factors
Aiyesha’s research has shown two characteristics that could lead to major corporate blunders: materialism and an inclination toward rule breaking. However, organizations often ignore evidence of these values when hiring CEOs, especially for internal hires. Why?
First, there’s no need to dismiss a CEO candidate because they have multiple luxury assets or a few speeding tickets. They likely bring many other desirable strengths to the table, such as innovation, creativity, and a certain comfort with risk.
“But leaders can be a strong force in establishing the culture of the firm,” Aiyesha pointed out. Someone who breaks rules might inspire a culture that rewards rule breaking, for instance.
Most firms focus on education, experience, and accomplishments in selection. Including behavioral attributes in selection criteria can add to the educational and professional qualifications already in consideration. “Boards can definitely take more cautionary measures in their hiring practices, like expanding background checks for internal candidates,” Aiyesha added.
Repeated legal infractions or a lifestyle of conspicuous consumption are not reasons to dismiss a candidate. Candidates with these behavioral attributes bring very strong upsides to the table, but the attributes can be warning signs about questionable behavior or values. Knowing what strengths and potential shortcomings a person brings to the role is the first step in establishing a system or process to mitigate the individual’s risks.
CEO Behavior: Materialism
Measuring materialism in a CEO can be a challenge. For one, the signs must be observable. For another, the signs must be indicative of values, which is more difficult to discern.
When psychology researchers talk about materialism, they mean a set of values that define how individuals weigh intrinsic motivations, such as spirituality, benevolence, or community, relative to extrinsic motivations, such as image, status, or material possessions. “A very materialistic person will seek material acquisitions at the cost of community values,” Aiyesha said.
Merely possessing a lot of luxury goods is not sufficient to make one materialistic. “When someone has a zeal to pursue material possessions at the cost of the welfare of others and potentially themselves, they are exemplifying a materialistic value system,” Aiyesha said. The observable assets of executives like houses, cars, and yachts compared to their wealth level shows how intent they are on acquiring material possessions. If someone possesses five times the value of luxury assets as another person at the same wealth level, then it’s safe to say they probably have a tendency towards materialism.
Materialism is potentially a problem in a corporate setting if a CEO is willing to waste shareholder resources or damage the welfare of others to get material goods. This value held by a leader affects the values of the organization, as well.
CEO Behavior: Rule Breaking
Like materialism, external rule-breaking behavior speaks to internal values. The underlying construct is a lack of self-control and disregard for rules and laws. If you believe rules don’t apply to you, you’ll be more likely to violate them to achieve your goals.
In looking at executives’ legal records, Aiyesha found that executives with legal infractions had a higher propensity to commit fraud and manipulate earnings numbers than those without. The results were true even for executives with only traffic or speeding violations. “Even minor violations can give an indication of deeper personality differences,” Aiyesha observed.
Here’s a twist: executives with prior legal infractions tend to be involved in committing the fraud themselves, while materialistic executives tend to create a culture where other people are implicated in the fraud.
Given that corporate fraud is an extremely rare event, Aiyesha also looked at the tendency to profit from insider trading. Rule-breaking CEOs profited more; the outsized profitability and lucrative timing suggest that they could have benefited unfairly. There also seems to be a correlation between these profits and the severity of the legal infraction—the more severe, the more profitable.
So, what should organizations do?
How to Hire a CEO
Based on Aiyesha’s research findings, these are the steps that organizations hiring for C-suite positions can take.
In general, boards should not dismiss a candidate simply due to luxury possessions or speeding tickets. They should, however, be aware of the risks that could point to a red flag.
Expanding selection criteria to include background checks and looking at behavioral attributes in addition to professional successes could be useful. Where necessary, organizations can also implement risk management and compliance measures as guardrails. Lastly, organizations can also help executives to develop strategic self-awareness and encourage them to define personal guardrails to manage their behavior.
A Vote for CEO Frugality
“I want to end on a positive note and celebrate another characteristic that is linked to materialism. The opposite of materialism is frugality,” Aiyesha said. “Our research shows very strong consistent results of how frugal executives benefit companies in terms of stewardship of shareholder resources.”
The values of leaders set the culture of organizations. Materialistic or rule-breaking CEOs can tacitly foster an environment of materialism and rule breaking. Frugal CEOs, on the other hand, tend to have tighter controls and risk management systems. They tend to take a long-term focus and shape ethical cultures. These CEOs tend to focus on socially responsible activities.
“Creating a culture of frugality in organizations, either through hiring that mindset or by celebrating such an attitude so that it inspires everyone to have this notion, can take companies a long way in creating shareholder values,” Aiyesha said.
