Overconfident, filled with hubris, set in their waysthis describes the strategic behavior of most CEOs. But there is a special category of CEO, a subspecies if you will: superstar CEOs. These are the CEOs on talk shows and the covers of the business press holding forth on the issue of the day. The ones who appear at the World Economic Forum at Davos. The ones seemingly more worried about global carbon emissions rather than their company's immediate future. Although it is clear they are concerned global citizens, what is less clear is if they are good for business: How does having a superstar as CEO affect company value?
Superstars exist in other arenas than business, of course; they aren't unique to the corporate context, so we can look elsewhere at the long-term performance of stars. There is the nagging suspicion that being pronounced a "superstar" only sets up the star in question for subsequent disappointment and outright failures. "The Sports Illustrated jinx" refers to the setbacks and worse that inevitably follow being on the cover of Sports Illustrated. In documentary films, the winner of the Oscar always seems to spend the next year unemployed. Academics refer to the "Nobel prize disease." After winning a Nobel, the academic (who at this point often divorces his first wife) spends the rest of his life crisscrossing the globe, "preaching to the world on ethics and futurology, politics and philosophy," to quote Paul Samuelson, never producing any important work again.
Economists, who like to view themselves as hard-headed types, might argue these "jinxes" are just a statistical illusion. What is driving the bad luck is really just a case of reversion to the mean, a return to the average. Athletes get on the cover of Sports Illustrated following a fantastic year, but in following years they just revert to their average and more typical performance. In the same way, you can't expect a Nobel Prize winner to have a great discovery every year. And similarly, superstar CEOs, those on the cover of business magazines, could be expected to have a few bad or at least average years following stellar performance.
But the story isn't so simple. The story is actually worse. Superstar CEOs underperform by a substantially larger margin than can be accounted for by mean reversion alone, with dire consequences for their shareholders. Ulrike Malmendier, the University of California, Berkeley behavioral economist who studied CEO overconfidence, has done the math: CEOs who win big awards from business magazines, such as "Best Performing CEO" (Forbes) or "Best Manager" (Business Week) do appear to be jinxed. The stocks of their companies declined an average of 60 percent over the next few years. For good measure, Malmendier looked at successful CEOs who could have been a contender for superstar status, but failed to win the actual award. The stocks of their companies declined, too, but not as much, only 45 percent on average. It is also worth pointing out that as their company's performance suffered and shareholder value was destroyed, superstar CEOs got raises, with a jump in pay to match their new public status.
It is hard to disentangle why exactly superstar CEOs stumble so badly once they hit star status. Maybe they believe their own press, and at some point morph from a human to a brand, always a mistake. Malmendier offers another possibility: They get distracted. Once they reach superstar status, the CEOs have a lot of other claims on their time than running their business. There are more press interviews and talk shows, keynote speeches around the globe, plus the opportunity to serve on the board of lots of prestigious organizations. And then there is golf. The golf handicaps of superstar CEOs are excellent (14.29 compared to 15.46 for their nonsuperstar peers). Malmendier formally writes of her finding: "These cross-sectional patterns are consistent with powerful CEOs spending time on the golf course that shareholders would prefer them to spend on firm business."
Last but not least, superstar CEOs write books, lots of them, while still allegedly working as CEO. These are usually variations on the theme of "how I did it," but there are different subgenres at work: memoirs of a difficult childhood, overcoming adversity, how to fix the planet, and so on. Malmendier found superstar CEOs were three times more likely to write books than regular CEOs, and the more awards the CEO has received, the more books written. Al Dunlap, of Sunbeam fame, was in the middle of promoting his book Mean Business: How I Save Bad Companies and Make Good Companies Great, when he was fired.
The timing of Martha Stewart's business book was even more embarrassing. She achieved her success in part as an author but she departed from her usual food display advice to offer business tips in The Martha Rules: 10 Essentials for Achieving Success as You Start, Grow, or Manage a Business. The book was released the same year Stewart was released from prison. My rule: Next time you see a business bestseller by a CEO who is still working, read it if you like but by all means sell the stock.
David E. Adler is a producer of a forthcoming PBS documentary on behavioral finance and is the high-net-worth writer for Financial Planning magazine. This article is an excerpt from Adler's book, Snap Judgment. Click here for more information about his book.