A Mirror Can Be a Dangerous Tool for Some CEOs
Call it the curse of the chief executive.
Powerful, visionary chiefs can create billion-dollar brands. Steven Jobs at Appleand Mark Zuckerberg at Facebook are often-cited examples. But we’ve recently seen some illustrations in the takeover world of the dark side of the chief executive. Being powerful and visionary, or at least thinking you are, can lead corporate chieftains to great heights, but also to extreme narcissism. And the victims are often shareholders.
The trait is on display in the pending $2.7 billion buyout of the insurer Delphi Financial by Tokio Marine Holdings of Japan. The chief executive of Delphi Financial, Robert Rosenkranz, controls a 49.9 percent voting interest in the company. Despite restrictions in Delphi Financial’s charter, Mr. Rosenkranz demanded in negotiations that he be paid over $110 million more than other shareholders, a number that a special committee of Delphi Financial’s board negotiated down by about $50 million.
Mr. Rosenkranz has also reportedly tried twice to negotiate side deals with Tokio Marine that would deliver him an additional payout of up to $57 million. When the board committee discovered this, it forced Mr. Rosenkranz and Tokio Marine to repudiate the deals.
All the parties have been sued by shareholders as a result of Mr. Rosenkranz’s conduct.
“The allegations being made against Delphi Financial, its board of directors and Robert Rosenkranz in this suit are entirely baseless,” Delphi Financial said in a statement.
Despite its statement, Delphi Financial doesn’t appear to vigorously defend its chief executive in the litigation. Instead, in a legal filing, Delphi states that one of its directors thought that Mr. Rosenkranz had a “competitive” personality and a “great sense of entitlement.”
Delphi Financial’s litigation documents also tell of Mr. Rosenkranz’s response to the board’s attempt to prevent him from obtaining a premium over other shareholders. They describe Mr. Rosenkranz as being “upset,” “angry” and “depressed” and as thinking that he had been “treated harshly” at the negotiations.
In an opinion released on Tuesday, Vice Chancellor Sam Glasscock III, the judge hearing the litigation, permitted the deal to go forward but stated that the plaintiffs had a reasonable chance of proving in the litigation that while Mr. Rosenkranz felt “morally” entitled to his premium, he was not so permitted under Delaware law.
Mr. Rosenkranz may want to get some perspective on life. He will still be worth hundreds of millions of dollars. Unfortunately, his attitude is not uncommon among top executives.
Arijit Chatterjee and Donald C. Hambrick said in a 2006 paper that narcissism among chief executives encouraged more volatile company performance. In a study of 111 chief executives in the technology industry, the authors found that indicators of narcissism correlated not only with company performance but also with the pursuit of deals.
The study was criticized for overstating the power a chief executive has over a company. But additional research has shown that a top executive’s personality can have powerful effects on how a corporation is operated.
For example, Henrik Cronqvist, Anil K. Makhija and Scott E. Yonker found that the level of debt for a company was related to how much a chief executive was willing to borrow to buy a house. Matthew Cain and Stephen B. McKeon looked at chief executives who had pilot licenses. Flying small planes is viewed as thrill-seeking behavior. Professors Cain and McKeon found that chief executives with pilot licenses were more prone to engage in acquisitions, with the theory that takeovers are risky, yet exciting ventures.
These effects are exemplified when a company is sold. Narcissistic chief executives are apt to argue that they should be excessively compensated, even if it comes at the expense of shareholders, because the company would not have succeeded without their efforts.
That attitude can found in the $21.1 billion buyout of the El Paso Corporation by Kinder Morgan.
The chief executive of El Paso, Douglas L. Foshee, appeared to insist on negotiating the sale personally, and was criticized by a Delaware court for folding quickly when Kinder Morgan lowered the price it was willing to pay in a buyout. The court speculated that this was because Mr. Foshee was more interested in buying the exploration and production business of El Paso after Kinder Morgan completed its buyout.
In a memo to employees on Monday, Mr. Foshee said that in the Kinder Morgan deal, “I firmly believe that I’ve acted at all times in a manner consistent with our values of stewardship and integrity, and always conducted myself in the best interests of El Paso, its employees, and its shareholders.”
Narcissistic chief executives can’t let go because they believe that the success of their businesses is dependent on them. They also are incapable of believing that they are wrong.
This trait is also on display in a management buyout proposed late last month in which Kenneth Coleoffered to take his fashion company private. Mr. Cole cited the challenges of working in the “public markets” as a reason for a buyout, but it appears that Mr. Cole also wanted to be free of the criticism of the company’s lackluster performance in recent years.
To be sure, a narcissistic personality can serve companies well. It can instill an almost cultlike loyalty. The self-belief of the chief executives can lead them to take gambles that would cause others to hesitate. Again, Apple is a terrific example of narcissism’s positive side.
Lately, however, the courts have struck a blow against this narcissism, calling out chief executives’ misconduct in takeovers. A Delaware court severely criticized Mr. Foshee last week for his conduct, calling El Paso’s sale process “disturbing.” Late last year, Millard S. Drexler, the chief executive of J. Crew, was chastised by the same court for the “icky” steps he took in the retailer’s buyout to benefit himself at the expense of other shareholders.
It can’t be just the courts that put pressure on chief executives. Boards also need to act. We now have a back-of-the-envelope test courtesy of Mr. Rosenkranz of Delphi Financial. When a chief executive complains he is “depressed” because he can’t get everything he wants, we’ll know the board is at least trying to negotiate properly.
Narcissism is not just an issue in takeovers. One of the reasons for spiraling salaries is this type of behavior. Some chief executives can’t believe that they could be paid anything less than their peers.
This behavior is a hard to control, but perhaps acknowledging the problem openly is the first step. Corporate chieftains of America, it is not all about you.