One result of these trends is that researchers are now
looking more closely at CEO personality, because in both the smallest and the
largest firms any departure from rational decision making is very
consequential. It can destroy a small firm, and it can wreak havoc on the world
around a large firm. A paper in Administrative Science Quarterly by Malhotra, Reus, Zhu, and Roelofsen has now
examined the extraversion of CEOs and how that influences mergers and
acquisitions done by their firms. Extraversion is a personality trait and is
one that we understand well and like a lot, at least at parties. Extraverts
liven up the world around them because they are sociable, active, and very
likable. This is a good thing, but also something that is hard to connect to
management.
The connection lies in the less well known side of that personality trait. Extraverts are also agentic – it is very important for them to take care of their own interest and to get ahead of others. Sociability and likability are parts of that trait, because extraversion means that they get to dominate their surroundings. And outside of parties, the same agentic traits can be reflected in them having clear goals to benefit themselves as much as possible, possibly at the expense of others, and of being skilled at persuading others that their initiatives are good. Does the extravert sound less appealing now, but also more consequential as a manager?
Acquisitions are a great way to test the consequences of
extraversion because they eliminate the acquired firm and usually harm the
acquiring firm, because on average, acquiring firms lose money by over-paying
for the acquisition. As a result, a CEO with the firm’s best interest at heart
will be very selective about when to acquire another firm and will typically
focus on smaller acquisitions that help the firm acquire important technology,
market access, and other missing pieces, while being relatively inexpensive
because small firms are often overlooked, or even not listed in the stock
market. But small firms are also boring, and not something an extravert wants
to acquire in order to grow the firm fast and look good doing it.
So what did the authors find? Indeed extravert CEOs acquire
more often, and they acquire larger targets. They are especially likely to do
so when they have freer hands, such as when they are in less competitive
industries or when they are powerful relative to the board of directors. Turn
extravert CEOs loose, and you will see firms around them get eaten up. Of
course, all of this would be OK if the acquisitions turned out to be a good
thing. Do we know if they did? Well, extraverts got a more positive immediate
reaction from the stock market than others, but let’s not believe that this
means a lot. First, keep in mind that investors are just another set of people
to impress, and extravert CEOs are good at that. Second, better reaction to one
acquisition than others does not say much because most acquisitions are not
welcome. Third, immediate reaction is very different from the long-term benefit
of an acquisition.
So we know that extravert CEOs benefit themselves by getting
attention from acquisitions, and by growing the firm so that they in turn can
get paid more – a larger firm means better pay. We don’t know whether that
helps the firm. And somehow, I can’t help but wonder whether our not knowing is
something that the extravert CEO likes a lot.
