Narcissism, Director Selection, and Risk-Taking Spending

Abstract

Building on social psychological theories on narcissism, we explain why CEOs tend to favor new directors who are similar to them in narcissistic tendency or have prior experience with other similarly narcissistic CEOs. Because more powerful CEOs are more able to select such individuals onto their board, CEO power is predicted to be positively associated with the above characteristics of a new director. We further propose that these associations will be stronger when the new director is more different from the CEO in salient demographic characteristics. We then explain why new directors favored by CEOs may indeed be more supportive of the focal CEO’s decision making, strengthening the positive relationship between CEO narcissism and risk-taking spending. Our findings provided strong support for our theory. This study introduces theories on personalities into governance research on director selection and CEO-board relations. It also offers a theoretical explanation for why efforts to increase board independence often fail to improve independent board control over CEOs’ excessively risky decisions.

Keywords: Corporate Governance, Board of Director, CEO, Personality, Narcissism, Power, Demography, Risk Taking