Narcissistic CEOs Can Mean Big Legal Bills

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CAP Big personalities in the corner office can lead to big legal headaches for companies.| iStock/Diane Labombarbe

Charles A. O’Reilly III recalls the time that his wife encountered Apple cofounder Steve Jobs in the Whole Foods market parking lot in Palo Alto. “She was walking out when he was walking out, and when he climbed in his car and pulled out, he had parked in a handicapped spot,” recounts O’Reilly, the Frank E. Buck Professor of Management at Stanford Graduate School of Business and an expert in organizational behavior.

That same self-entitlement and willingness to ignore rules — detailed at length by Jobs biographer Walter Isaacson — was part of what enabled Jobs to disrupt multiple industries and transform everyday existence with an innovation called the iPhone. But, O’Reilly explains, some of the same traits that we exalt in visionary business executives also are characteristics of narcissists. In that personality disorder, a sense of superiority and overconfidence are accompanied by low empathy and a tendency to take advantage of others.

“Narcissists like and want admiration,” O’Reilly explains. “There’s evidence that they seek out positions where they can demonstrate to others how great they are.”

At first glance, it might seem worth it for a company’s shareholders to tolerate a narcissistic CEO’s abusive personality, given the outsized success that Jobs and others like him have achieved. But narcissistic CEOs’ rampant hubris also has a serious downside, O’Reilly notes. Studies indicate that they’re more likely to engage in questionable tax-avoidance schemes, to manipulate accounting data, to overpay for corporate acquisitions, and to seek excessive compensation.

In an article published in Leadership Quarterly, O’Reilly and colleagues Bernadette Doerr and Jennifer A. Chatman of the University of California, Berkeley, show that narcissistic CEOs subject their organizations to potentially ruinous legal risks as well. Not only are they more likely to become embroiled in protracted litigation, but their personality traits make them less sensitive to objective assessments of risk. Narcissists are less willing to take advice from experts and to settle lawsuits — even when it’s likely that the company will lose.

Narcissism and Lawsuits

In one part of their work, O’Reilly and his colleagues utilized a confidential survey of employees of 32 large technology firms, in which respondents answered questions about their CEOs’ personalities, with the understanding that neither the individuals nor the firms would be identified. In addition to analyzing that data, the researchers gleaned information about major lawsuits — i.e., those in which damages might exceed 10 percent of corporate assets — from the companies’ annual reports. The result: a significant correlation between the level of CEO narcissism and the length and duration of lawsuits.

O’Reilly and his colleagues also ran experiments. They recruited subjects to take personality assessments and had them pretend to be CEOs during role-playing exercises. Some had to decide whether or not to proceed with a new product launch, which had either a 20 percent or 80 percent chance of triggering a lawsuit. Others had to choose whether or not to settle an ongoing suit, with either a 20 percent or an 80 percent chance of losing.

The results were striking. When the probabilities of losing were low, narcissists and non-narcissists were equally likely to take the sure bet, O’Reilly says. But when faced with a high probability of losing, when most people refuse to gamble, narcissists were more likely to take the risk.

“Narcissists are less sensitive to avoidance of punishment and more sensitive to possibility that they’ll win big,” he says. “When the risk goes up, what they see is that if they win, they’re going to be heroes. Now most of us say, ‘Ah, the probability of losing is high, so I’m not going to do it.’ But the narcissist says, ‘Yes, the probability of losing is high, but look at what happens if I win!’”

Why VCs Like Big Egos

Dangerous as it is, that same excessive confidence is what often helps narcissists rise to the top in the first place. “Venture capitalists like narcissists,” O’Reilly explains. “Imagine you’re a venture capitalist and you’re thinking about which of two companies to fund. Let’s say, for the sake of argument, that both have the same technology and the same market risk. But one is headed by someone who is confident that she’s going to change the world, who thinks people who disagree with her don’t know what the hell they’re talking about. The other is headed by some introverted engineer. Which are you going to pick?”

Narcissists also are hard to turn down, because they’re often skilled manipulators, adept at spinning falsehoods. “They’re often quite good at reading other people,” O’Reilly says. “And they don’t have a problem making promises they can’t keep. If I lie to you, and you find out about it, I’ll feel terrible. A narcissist doesn’t feel terrible.”

Once they’re ensconced in the C-suite, narcissists’ self-aggrandizing ways can lead to business breakthroughs, but their tendency to be control freaks can wreak havoc and make subordinates’ lives miserable. “They want control, so they create these corporate environments full of fear, where people are afraid of what the boss is going to say,” O’Reilly says. “There tends to be less collaboration.” And because narcissists are rule-breakers, that lowers the bar for integrity in the organization itself.

Unfortunately, when narcissist CEOs get their companies into trouble, they often manage to avoid consequences. “If they fail, they get a golden parachute,” O’Reilly notes. “It’s others who pay the price.”

O’Reilly urges corporate boards to take a harder look at CEO candidates’ personalities before they make a hire. “This is a governance problem,” he says. Rather than perform psychological testing on potential executive hires, he says, companies should interview people who worked for a candidate at various levels of a previous organization.

In the end, though, companies have to decide how much narcissism they’re willing to tolerate in a leader. “Narcissism is a spectrum,” O’Reilly says. “We all have varying degrees of it. Some level of it is a good thing, because at the low level, you have people who lack self-confidence and don’t like to take risks, and they’re unlikely to perform well. It’s at the very high levels, the malignant narcissist, where these negative tendencies come through.”