How cocky CEOs are sued into submission
Study reveals the price companies pay for over-confident leaders, and gives tips on how to keep them in check
Overconfident CEOs are 33% more likely to be sued by shareholders than those of normal confidence, and in response they dial back risk-taking behaviour, a new study of 1,500 top global companies has found.
CEOs are rewarded for being bold, proactive and adding value to their firm – often by taking risks. Vision backed by confidence is a winning formula as leaders such as mining magnate ARM chief executive Patrice Motsepe and Discovery Holdings CEO Adrian Gore have shown.
If CEOs overstep the mark, however, lawsuits can follow, said lead author of the study Professor Suman Banerjee, from the Stevens School of Business in the US.His team found that about half of the 1,500 CEOs who had lawsuits initiated against their companies made “overly positive statements” not yet substantiated by the facts.
They analysed the leadership rosters of 1,500 leading companies and a Stanford University dataset tracking nearly 1,400 shareholder-initiated class-action lawsuits against firms. The team, from four universities, studied the period 1996 to 2012.CEOs were viewed as overconfident when they held on to underperforming shares because “they believe their own leadership is so superior and innovative that they will soon overcome market forces and gain a higher return anyway”, he said.
After the initial lawsuit, CEOs began taking more conservative actions with the stocks of their firms. If not already compliant with securities law, they took steps to comply with this.“It’s a dynamic, self-correcting system,” Banerjee said. “If shareholders are willing to use their power to rein in over-optimistic CEO behaviour, CEO performance and compliance, as well as company operations, can improve.”
Incoming CEOs inheriting companies from CEOs who had been sued showed less cocksure stock-option behaviours. “The new CEOs learned from the mistakes of the past,” said Banerjee.
University of Missouri finance professor Stephen Ferris advised potential investors to “determine the personality of the CEO” when deciding what to do.
For this study, researchers analysed mergers and acquisition because they can “either strategically position companies or they can bankrupt them”.
“If the CEO appears to be overconfident, it’s important that the board of directors is independent,” said Ferris. He recommended potential investors find out:
Who is looking over the CEO’s shoulder and determining if decisions are being made too fast?
Is the board asking good questions before major decisions are made?
Does the CEO follow the board’s direction or make decisions without any consultation with board members?
Among the tips Stanford Graduate School of Business has for new CEOs are not being arrogant and pretending to have all the answers, but being prepared to find solutions with top managers, and effective reporting to their boards.In South Africa CEOs at the top 10 JSE-listed companies earned on average R24.9m in total renumeration packages last year, PWC reported last month.
Only 2.2% of JSE-listed firms CEOs were women and Absa CEO Maria Ramos is the only female CEO in SA’s top 40 companies...