"Lend Me Your Wallets:" Research on the Link Between Charismatic CEOs and Stock Price, Featuring Steve Jobs

I was exchanging emails the other day with Dave Ulrich, my co-author on Asian Leadership, and asked him what he was working on. He answered that he was pretty interested in the link between CEO actions and stock price. Dave's interest reminded me of a delightful and imaginative 2004 study of such links by Frank Flynn (co-author of the narcissism study I discussed last week) and Barry Staw. It is called "Lend Me Your Wallets: The Effect of Charismatic Leadership on External Support for an Organization." Flynn and Staw did two studies on charisma in this paper, which they defined as follows:

Such individuals exude confidence, dominance, a sense of purpose, and the ability to articulate a vision for followers to grasp (House, 1977; Conger, 1991). Charismatic leaders are able to communicate this vision to their followers, and by the force of their own excitement and enthusiasm, induce their followers to support this vision (Yukl and Van Fleet, 1992). In this sense, charismatic leaders are said to have remarkable influence over subordinates who internalize the leader's vision of what can be achieved through collective effort (Bass, 1985).

Steve JobsThe first was a field study, where they compared 46 firms led by CEOs who were identified as charismatic (a total of 44 CEOs— it appears two were used twice) who led Fortune 500 firms between 1985 and 1994. They found that, independently of objective financial information, firms led by charismatic CEOs enjoyed higher stock prices. Moreover, this effect was magnified during difficult financial conditions—during economic downturns, charismatic CEOs had an even stronger effect on stock price. (Perhaps when people are under duress, they especially gravitate to the hope and energy that such leaders exude).

This first study was used to set the stage for a second study using Steve Jobs. Note that although this study was published in 2004, the data collection was actually done years earlier (things move slow in academia), in late 1998, barely a year after Jobs had returned to Apple. There was a lot of hype and hope about Jobs, but he was not seen as the magical CEO heis now. This research was done in the very early and uncertain days of the turnaround.

The set-up of the study was as follows (I am simplifying): 150 students were asked to imagine they had inherited $10,000 from a relative and were asked to alocate the money among three investment options: an indexed mutual fund, a money market certificate, or Apple stock. All were shown objective fiancial information about Apple's recent performance (and the performance of money markets and mutual funds too). Half were given information suggesting that Apple's prospects for a turnaround were bright and half were given information that Apple's prospects for a turnaround were dim. Then came the big manipulation: Half were shown a videotape of Jobs doing a 20 minute presentation at a trade show (I am pretty sure I loaned this to them for the experiment, Jobs talks about all the ways things are getting better and is his usual compelling self) and half did not see the video.

The results were pretty interesting. The subjects who saw the film rated Jobs as considerably more charismatic than those who did not. And those who saw the film were willing to invest more money in Apple than those who did not. This effect was driven primarily by people who were presented negative predictions about Apple's future. Those who did not see Jobs invested an average of $1329 but those who saw Jobs invested an average of $3327 (compared to a $400 bump for those who saw the film but were presented information suggesting that Apple's future was bright).

This study is imperfect, as all studies are. But I find it fun, imaginative, and intriguing. For starters, it shows both the dangers of charismatic leaders—because they can distract people from the facts or at least color the ways those facts are construed (especially when fear and pessimism are in the air). This research also shows how charismatic leaders have the potential to start a positive self-fulfilling prophecy. And in the specific case of Jobs, it is intriguing to think about the astounding long-term success of Apple under his leadership the last 13 years or so, especially in light of Jim Collins dim view of charisma in both Built to Last and Good to Great. I have complained about Collins' mediocre and over-hyped methodology before (seehere andhere) and the fact that he elected to ignore literally hundreds of past studies (including many studies on charisma and performance) and to simply rely on two very small samples to make sweeping claims. As I have also said before, I find his books to be compelling in terms of the writing and despite this specific complaint about charisma, I generally agree with his claims and could point to many other studies that support them.

What do you think? Is Jobs' charisma an important part of the Apple turnaround? And what are the virtues and dangers of charismatic leaders?

Reprinted from Work Matters

Robert I. Sutton, PhD is Professor of Management Science and Engineering at Stanford. His latest book is Good Boss, Bad Boss: How to Be the Best...and Survive the Worst. His previous book is The New York Times bestseller The No Asshole Rule: Building a Civilized Workplace and Surviving One That Isn't. Follow him at twitter.com/work_matters.

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