Beware of charismatic business leaders

From Article in November 2009 Organization Science

Charisma is undoubtedly a coveted trait in business, especially for those in (or aspiring to hold) leadership positions. A charismatic leader can rally customers, employees, shareholders, board members, and key constituents, around his or her vision and take a company to great new heights. In times of trouble, a charismatic leader is almost a necessity.

But what about the downside of charismatic leadership? What happens when charisma misleads? This topic is addressed (primarily in context of CEO communication and its effect on financial analysts) in an interesting article entitled, “In Charisma We Trust: The Effects of CEO Charismatic Visions on Securities Analysts,” by Angelo Fanelli, Vilmos F. Misangyi, and Henry L. Tosi in the November 2009 edition of Organization Science.

“Analysts covering firms with higher CEO charismatic visions were more prone to misestimating future performance than those following firms with less charismatic CEO visions.”

While the study goes on to quantify the effect of CEO vision statements on analysts (“one-standard deviation increase in the use of charismatic language results in approximately a tenth-of-a-point increase in analyst recommendations”), we are more interested in how analysts mitigate the effect of charisma to get to a truer portrayal of the business and viability of strategic direction.

In effect, the authors write, investors may sustain losses as a result of analysts succumbing to the charm of charismatic CEOs and doing a less than thorough job examining other significant measures of a company’s performance.

The authors found that more skilled analysts were less likely to make these errors.

It sounds pretty obvious — focus on the facts, first and foremost, when analyzing a business or business plan. Or as I was advised early in my career, “Suck out all of the emotion when analyzing a business or business case — look at it purely in a clinical manner. Like an insect under a microscope.”

However, it is always amazing to see how often poor business plans and ideas get “green lighted” or funded by senior management, boards of directors, venture capitalists, or other investors, primarily due to a presentation heavy on charisma but light on fundamentals.

“[The authors] warn that analysts’ careers could be damaged by these misjudgments.”

Don’t let this be you — focus on the facts, not the sway of the messenger.

- A.B.