Exceptional leadership creates exceptional organizational cultures. A good leader’s behavior sets the tone for the entire organization where the values they reinforce and the attitude they project generate a ripple effect that translates into the team dynamics. Why does that matter? Because positive organizational culture is the foundation of any organization, the secret ingredient in the recipe of success for any business. Leaders influence their teams by connecting them to three factors; purpose and meaningful work, accomplishment, and each other.
Even a company’s accounts are affected by its leadership culture. In their recent paper, Ahmed Abdel-Meguid, Jared N. Jennings, Kari Joseph Olsen, and Mark T. Soliman take a closer look at that relationship by studying the impact of the CEO’s personal narcissistic traits on non-GAAP earnings; earnings reported in a different method than the Generally Accepted Accounting Principles (GAAP). Non-GAAP earnings exclude revenues and expenses that are not expected to recur in the future of the business. As the paper reads, investors tend to consider non-GAAP earnings to be a more telling measure or signal of a company’s health and financial wellbeing. This form of reporting is legally accepted and serves a purpose, but could also be misleading.
CEO narcissism refers to certain leadership qualities and personality traits that the authors examine whether or not are directly correlated to excluding expenses from non-GAAP earnings and whether these exclusions are actually larger. The results of the study show that narcissistic CEOs are, in fact, more likely to opportunistically exclude expenses when defining non-GAAP earnings, creating a more positive and successful projection of the business’s financial performance. The paper states that narcissistic CEOs do so to improve their firm’s appearance and enhance their self-image, which manifests a significant link between leadership qualities and business outcomes.
Leadership comes in all shapes and sizes; there is not a one-size-fits-all approach. On the contrary, different leadership styles are what create dynamism in the business environment. Different leadership styles either come naturally to individuals, or they choose to follow a particular style for a specific reason or purpose. The narcissistic style of leadership, as the study mentions, involves various facets. Narcissistic leaders brew with confidence and charisma, possessing a massive desire for achievement, power, and status. As a result, they are more likely to reach the highest positions in the corporate world. However, the paper reveals that narcissist leaders embody entitlement, superiority, self-sufficiency, exploitation and exhibitionism. Evidence from the authors’ research shows that they are in constant need of external self-affirmation, motivating them to create ways of earning the admiration of others.
So how does that affect the business? Organizational choices and performance reflect those different leadership styles and personality characteristics of the firms’ management. According to the study, companies with narcissistic CEOs see real-activities manipulation in earnings. They are more likely to use corporate tax shelters, have lower effective tax rates, and report higher uncertain tax benefits (UTBs). Auditing patterns included in the paper also reveal that higher audit fees are charged to firms with narcissistic management and CEOs.
Additionally, Accounting and Auditing Enforcement Releases (AAERs) from the U.S. Securities and Exchange Commission (SEC) reveal that corporate leaders who are described as narcissistic manipulate accounting numbers, financial reporting features, and disclosures to make the firm appear in a better position, hence, make themselves look better. While this creates a risk of the company appearing to mislead analysts and investors, narcissistic CEOs’ aggressive, risk-taking behavior and preference for bold moves give them enough courage to conduct such actions. They perceive higher rewards and better outcomes from the higher risk. The paper shows that given the potential rewards of garnering higher valuations and the favorable attention received by reporting higher financial performance, narcissistic leadership in corporations are likely to be more aggressive in defining non-GAAP earnings.
The impact of narcissistic leadership on companies’ performance-related outcomes is significant. According to the authors, narcissistic CEOs satisfy their desire for respect and attention by achieving a superior performance ranking within their company’s industry. The study also points to another equally important point, which is that companies with that type of leadership usually beat analyst expectations because of using non-GAAP exclusions. However, investors often look out for and monitor unexpected or inexplicable corporate activity to spot managers using non-GAAP exclusions opportunistically. That is where this study comes in handy as its findings demonstrate the impeccable effect that individual executives’ personality traits can have on firms’ strategic and accounting-related outcomes and choices. It can help track this specific type of leadership and personality traits of CEOs to identify which firms are more likely to improve the appearance of their performance.
Click here to read the full paper “The Impact of the CEO’s Personal Narcissism on Non-GAAP Earnings,” published in The Accounting Review.