John Graham: CEOs’ traits

Posted: January 8, 2014 by jennroig in English, Interviews
Tags: , , , , , , ,

This is the original, unedited English version of my interview to prof. John Graham, publish in Spanish by AmericaEconomia on July 27, 2013.

John Graham, professor of Finances at Fuqua

John Graham, professor of Finances at Fuqua

John Graham is professor of finances at Duke’s Fuqua School of Business, where  he is also the head of the Duke/CFO Magazine Global Business Outlook. Along professors Manju Puri and Campbell Harvey, Graham was part of the team of researchers that conducted a study to find out the most common and representative traits of executives at the C-Suite, specially CEOs. The investigation was published with the title “Managerial Attitudes and Corporate Actions”, and the researchers surveyed more than 3 thousand participants from all over the world who answered questions related to personality traits.

Graham offered a unique perspective over relevant data and criteria found during the analysis of the data, concerning the financial, economic and corporate landscape in Latin America and the USA.

What’s the goal of the study?

The study was conducted to see what happens with a premise, with an idea that has been out there. The notion tells that executives have a tendency to show very cautious visions once they have become established, once they have become successful. Then their main goal is to preserve their jobs rather than to necessarily take on more innovation and being entrepreneurial.

Some of that turned out to be true. There is always some force working for that, there’s always going to be a possibility for an executive whose goal becomes to protect his job and act very cautiously. But it turns out as well, when you are actually trying to hire your CEO, you are trying to look for someone who has different characteristics, someone more optimistic, a little less risk averse, somebody willing to take risks.

I want to get around here that even to say someone is overconfident, or someone too optimistic, it may sound bad. But it might actually have some benefits to it, because it might get them to take on risks on projects that might otherwise wouldn’t, and stop being as worried about preserving the way things are today.

Among the characteristics you would look for in a CEO there is for instance how much risks is he willing to take, how confident is he, or she, how optimistic are they, and even how patient are they.Whether they can demand results today or whether they can be patient and willing to wait.

Different research papers, including some of my own, have tested whether these things can affect the decisions companies made. For example, in the paper that was published about it, we performed a psychological test to CEOs and found out which ones are willing to take more or less risks, depending on whether they are more risk tolerant or more risk averse. If they are more risk tolerant, they are more likely to make acquisitions, which is to buy other company, they are more likely to use more debt, more likely to work in companies that are growing faster. In other words, they sort of make decisions that lead to more growth in a more aggressive mode.

Another thing is whether they are very confident, or perhaps even overconfident. We found out that if you are very confident in your company, what you might do is not to pay as many dividends, instead you would hold on to the money for the company and do more investing. If you are a very confident executive you are going to think your company has all these great outcome possibilities, you are not going to pay back to your investors and you are going to hold on back to the cash and you will invest that on projects.

These things can go both ways. You can have people making too many acquisitions, or getting too much debt. But again, this is not necessarily something bad, because some of the best companies are those willing to take chances, willing to invest in things and acquisitions.

So back to psychological traits, there is a tendency to observe that people who are CEO are more optimistic, confident, and more willing to take risks. What may sound dangerous might be good characteristics for an executive, because he/she might be the type of person who can lead the company and be very successful, more than someone who prefer to sit back and be cautious all the time.

There’s a very famous list of professions that are supposed to be preferred by psychopaths. CEO makes the top of that list. And this condition tends to be related to a tendency to self deception. Isn’t there a chance that this sense of optimism could be a mask for not seeing reality, in a self deceptive way?

I don’t think we can make a blunt statement that all CEO are too aggressive or too oblivious of the true risks. That’s probably true for some. On the other hand a little bit of that is probably a good thing. Think of an athlete, star athletes are almost always very confident, too confident in a way yes, but that helps them get through the difficult times because they know they will succeed. Also the soldier, a SEAL, you don’t want them cowering because of lack of confidence. And with a CEO is a bit similar, you want them to evaluate and make tough decisions. But yes, for sure there’s a risk they can be a bit diluted in overconfidence. And they do make mistakes. There’s no doubt.

For example, when you look at mergers and acquisitions, only about 1/3 of them can you look at after the fact and say it was a good acquisition, it made sense, and it worked well. Most of the time you think they paid too much, and what were they thinking, why did they do that? Wouldn’t be better for them not to do anything at all? In some cases probably yes but other cases probably don’t.

It is a bit of a mixed bag. Even politicians for that matter, typically they like to see themselves on TV and else. Unfortunately along with that comes some baggage… And sure CEO can fall under that category as well.

Culturally speaking…?

We did some of these tests to CEO as well as CFO. For the CFO, not only from the USA but also from other parts of the world, we found that US CEO are the most optimistic and confident, more so than US CFOs. It’s almost like in order to become a CEO you have to be a really confident person. CFO in the US were less optimistic, but compared to Asian CFO, US CFO were more optimistic than Asian CFOs. That is probably one of the cultural influences, rather than the job description item.

If you think in Japan, a classic culture, they are basically brought up to be modest people, who tend to not overstate things, not publicly overstate about their skills and confidence levels. It is not the case in the USA, here if you are a winner is allowed to talk about that. There are cultural differences here.

Usually it makes sense to operate within your own culture, to operate your business where you can be successful. If you would transplant a US CEO to Japan, that person wouldn’t necessarily be successful. You have to operate within the context where your business is located.

Having said that, you look at Japan, for the last 25 years, they basically had a very stagnant, zero growth economy, I’m not blaming that on culture, but they should definitely take some actions and changes like to consolidate some of their industries, they should merge companies to have fewer competitors in certain industries, they would be more powerful within the world economy, but they don’t do that because it’s not part of their culture to make this aggressive acquisitions or to give up their own company to an acquisition. And that can be part of the reason why they haven’t changed because they are more cautious, which on the other hand under the light of the financial crisis this may look smart.

We also compare the optimism level of CEO to the optimism of the average person. We found that only about 10% of the people in the US are risk loving. And 80% of CEO would be characterized as risk loving. This can be caused by cultural differences, but it is a very dramatic difference to be just that.

Gender gap in CEO position: how women tend to take risk in comparison to men?

In terms of women CEO, they are more risk averse. They’re more likely to be methodical decision takers, they take more time before taking the decision. Although this is a result from other more general research not ours. Sadly the representation of women in CEO position is still scarce for this study. So it is hard to draw strong conclusions.

What we did find difference: women are more risk averse, it’s not like women need to act like a man, and once she become CEO she needs to be more of a risk taker.

I really don’t know how this affects the odds of becoming CEO, if you are a more cautious person whatever your gender is. But once they become CEO there is a tendency to be more risk averse as a woman in that role.

For example, there is research that shows that men have a tendency to trade more often in the stock market and women tend to buy and hold, stick to the investment for longer. And this is something that should be studied because I’m not implying that any behavior is best, considering for instance that every time you trade in the stock market you have to pay a fee. So it could even be considered as bad strategy to make a lot of trades. Women could actually win better by sticking with the investment. Though I haven’t seen research that proved this point, it’s only my take.

Is there a difference between CEO of startups and really big corporations?

Typically you would like to have the startup person to be a more entrepreneurial person. To succeed you would have to be able to take risks, mortgaging their houses and stuff like that to get by. I don’t know about the large firm vs small firm, but in relation to overconfidence and optimism, it seems to be that the bigger the company gets the more optimist and confident the CEO seems to be.

There’s a psychological occurrence that if you have been involved in a lot of good outcomes and successes, you attribute them to yourself, you are on the winning team. I think it may be probably what’s going on. The higher up, the more important the CEO becomes, it kinds of builds up their confidence and their ego. And maybe the CEO of a startup hasn’t been yet so related to a big success to there hasn’t been that chance to really boost the ego.

How to keep control over the excessive confidence and optimism of CEO? How to tie their benefits to the company’s benefits?

After the crisis, it has been more frequent to find a type of contract stating the CEO’s payment is tied to the performance of the company, often the stock market. Not just for the current year, they are going to make them wait for 3 or 4 years. If things go bad over the next 3 or 4 years they are going to lose whatever they gain on a good year. This is getting popular because of what happened with the financial crisis.

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