It’s hard to get to the top without being confident and ambitious, but some CEOs take this to an extreme and exhibit signs of narcissism.
A paper by J. Scott Judd of the University of Illinois at Chicago, Kari Joseph Olsen of Utah State University, and James M. Stekelberg of the University of Arizona investigated the relationship between a measure of CEO narcissism and various indicators of a company’s accounting quality. They found that companies with more narcissistic CEOs tended to have more questionable bookkeeping practices, and more expensive audits.
Directly measuring the level of narcissism of a particular CEO is difficult, and so Judd, Olsen, and Stekelberg used two publicly observable proxies: a combination of how much more the CEO is paid than the next highest paid executive at the company and the prominence of the CEO’s picture in the company’s annual reports.
The basic idea behind these measures is that CEO pay relative to other executives could reflect on a narcissistic person’s selfishness, ambition, and greed, while taking an entire page in the company’s annual report for the CEO’s picture might capture excessive vanity and self-promotion.
Judd, Olsen, and Stekelberg performed a standard regression analysis on a sample of 972 CEOs at 793 companies going back to 1991 to test whether or not CEO narcissism had an effect on the quality of the companies’ books.
They found that increased narcissism went along with higher levels of discretionary accruals, or accounting tricks unrelated to the underlying state of the business used to improve how earnings look. High levels of discretionary accruals are often viewed as an indicator that the business’ earnings statements could be misleading and not as strong as they appear.
CEO narcissism also was associated with a greater likelihood of earnings restatements, another measure of accounting quality. A company that needs to restate its earnings presumably had something go very wrong in the initial statement.
As an extra indirect measure of accounting quality, Judd, Olsen, and Stekelberg also found a relationship between narcissism and higher external auditing fees. This works as another sign that narcissistic CEOs go along with shoddier accounting, since accounting firms coming in to audit a company might be charging more for having to do more work investigating questionable records. Outside auditors may also charge higher fees to protect themselves against the possibility of audit risk, where they don’t catch something shady in the company’s books.
Judd, Olsen, and Stekelberg note the limitations of this study. They are measuring historical relationships and so it’s not possible to strictly conclude that narcissistic CEOs cause bad bookkeeping. Further, while their measures of narcissism have been used in similar studies in the past and appear to be valid, they are still indirect and not as ideal as actually running personality tests on CEOs would be.
Putting these indicators together, the authors conclude that there appears to be a relationship between having a narcissistic CEO and having shady accounting practices, representing yet one more problem with narcissism at the top of the corporate ladder.