Investors prefer modest and friendly CEOs according to research published this month by Rotterdam School of Management in its RSM Global Analyst and Investor Survey. The main findings of the RSM research are:
- Majority of analysts and investors trust CEOs and CFOs.
- CEO personality traits that receive the most trust from investors are: modesty, friendliness, and confidence.
- Investors hardly have a preference for male or female CEOs, but do have a preference for more feminine personality traits.
- About one third of investors have less trust in the CEO, and CFO, than three years ago.
- Behaviours that have the largest impact on investor trust are: offensiveness (negative) and empathy (positive).
- Much more trust can be lost with bad behaviour than gained with good behaviour.
- Trust of investors in the auditor leads to a higher perceived reliability of all public disclosures, whether audited or not.
Personality traits and trust
The researchers asked analysts and investors worldwide which CEO they would trust most. Although it appeared that investors hardly have a preference for either a male or female CEO, it turned out that they do have a preference for more feminine personality traits. The leader of the research, Erik Roelofsen observed “Investors perceive friendliness of the CEO as one of the most important personality traits to gain trust. In psychological tests, women score higher on friendliness than men. From that perspective, more women than men can count on the trust of investors.” More important than friendliness is modesty. CEO arrogance is the shortest route to losing trust. Confidence, however, is perceived as a positive personality trait.
The majority of analysts and investors generally assume that the CEO and CFO are trustworthy. A mature and native CEO was preferred over a young and foreign CEO. About one third of investors has less trust in the CEO and CFO than three years ago. This decrease in trust is not surprising in light of the credit crisis. Potentially, the call for a more sympathetic CEO is also related to the credit crisis.
Effect of behaviour on trust
Apart from personality traits, the researchers also looked at CEO behaviour. They found evidence that the loss of trust due to bad behaviour is far bigger than the trust that is gained with good behaviour. CEOs appear to lose the most trust with offensive behaviour, such as complaining about investors, refusing to take questions, and belittling investors or analysts. In contrast, empathic behaviour results in increased trust. Showing interest in the background of analysts and investors and asking them for their views, will stimulate trust. The biggest gain in trust is, however, still obtained by reporting good performance of the firm. Interestingly, small good news gains just as much trust as material good news, whereas material bad news results in a much larger loss of trust than small bad news.
Furthermore, it is striking how much trust is lost by changing accounting policies. Roelofsen: “This is alarming for firms since standard setters are proposing large changes in accounting standards that will becoming effective over the coming years. Firms that are not able to appropriately explain what they are changing, may struggle with negative perceptions and the loss of investor trust.”
Reliability of information
The impact of investors’ trust in auditors on the perceived reliability of information was also analysed by the researchers. Investors and analysts that have high trust in the auditor perceive all public disclosures by the firm as more reliable, whether they are audited or not. “We know that many investor do not carefully study the audit opinion”, said Erik Roelofsen, “however, the fact that a trustworthy auditor has thoroughly examined the firm, enhances the perceived reliability of all public disclosures by the firm, whether audited or not.”
About the research
The research is based on data that was obtained in the RSM Global Analyst and Investor Survey. This global survey is conducted each quarter amongst sell-side and buy-side analysts and portfolio managers. This research is based on the survey that was conducted between 18 and 24 October 2010. Its purpose is to collect opinions and expectations about global economic developments, relevant economic indicators, and topical issues that might affect the current and future state of the economy. The survey is a joint initiative of the Rotterdam School of Management, Erasmus University and PwC. The survey was initiated by Dr. Erik Roelofsen, researcher at the Rotterdam School of Management and director at PwC, and Professor Gerard Mertens of the Rotterdam School of Management.