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Hints of charisma in CEO letter to shareholders have undue impact on stock analysts

August 1, 2004

For more information, contact: Benjamin Haimowitz,

Considerable evidence in recent years suggests that corporate America has come to attach great importance to charisma in CEOs. Now research presented on August 9 at the Academy of Management 2004 annual meeting in New Orleans suggests that stock analysts are equally sold on charismatic company chiefs -- so much so that they are all too receptive to hints of charisma in annual-report messages of new CEOs.

Such is the conclusion of Angelo Fanelli of HEC School of Management, Vilmos F. Misangyi of the University of Delaware, and Henry Tosi of the University of Florida.

In earlier studies, these same researchers had gathered evidence of CEO charisma through anonymous surveys of managers who worked for the chiefs in question. In this study, they seek evidence in something more remote from the source -- namely, the CEO letter to shareholders that is a staple of corporate annual reports.

Even at that remove, they find, evidence of CEO charisma proves enticing enough to have a significant effect on ratings issued by stock analysts.

"The letter to the shareholders is the most widely read section of the annual report," the authors write, "and presents several characteristics that make it suitable to study symbolic management: it is relatively free from legal restrictions about its form or content, communicates both facts and beliefs in a form that is directly approved by the CEO, reflects managerial attributions, locus of attention and framing strategies."

The study draws on the text of CEO letters to shareholders in the annual reports of 367 companies selected from among the largest corporations in 30 industries. So that CEO charisma would not be mixed up with company performance, the sample was restricted to new CEOs, whose message to the shareholders would represent the chief's first direct communication with that constituency.

To measure the amount of charisma in the letters, the professors assigned individual sentences in each letter to one of three themes -- 1) assessment of the past, 2) vision for the future, and 3) shareholders, employees, and organizational capabilities. Then for each sentence related to one or another of the themes, they made a count of particular words that conveyed the theme in strong, decisive, or emphatic ways and thereby conveyed an impression of charisma. In doing so, they were able to draw on thematic lists of words compiled in earlier linguistic research by other management scholars.

-- In sentences relating to the past, the words that project a charismatic image would be clearly negative or suggestive of crisis.

-- In sentences relating to vision for the future, the words would be moral, ideological, or emotional.

-- In sentences referring to employees, shareholders, and organizational potential, the words would convey outreach, approbation, optimism.

By this process, the professors obtained a measure of the frequency of charisma-projecting words for each of the 367 CEO messages to shareholders. They were then able to assay the relationship between this measure and the ratings that stock analysts assigned to the individual companies on a scale ranging from 1=strong buy to 5=sell. To get a true picture of that relationship, the professors controlled for an array of factors that affect such ratings, including prior firm performance, CEO reputation, and analysts' previous records of stock recommendations.

Other things being equal, the study concludes, the more charisma the CEO's letter projects, the more favorable a company's ratings from stock analysts are likely to be -- and the more uniformity there is likely to be in those ratings.

The professors find no evidence, though, that picking up on charisma makes for better stock-picking. Analysts turn out to be no more accurate in their assessment of companies with dynamic-sounding CEO letters than of companies with dull ones.

But what is that the analysts are responding to -- real charisma or simply the skills of company wordsmiths adept at making an impression on investors? Prof. Misangyi considers the latter alternative unlikely, since the letter is the CEO's first communication with shareholders and is likely to reflect the new chief's true vision. But he adds: "Whether the analysts are responding to real charisma or just a skillful simulation, the point is that the impression of charisma influences the way they rate the companies. The CEO charismatic image, as we call it, accounts for six percent of the variance in analyst ratings, and that's a sizable amount."

He continues: "Two years ago, my colleagues and I reported to the Academy of Management annual meeting findings to the effect that charismatic CEOs do little or nothing to enhance company performance that low-key CEOs don't do and yet make far more money. Our conclusion was that their high pay reflects the excessive valuation people in the corporate world assign to CEO charisma.

"The findings in this study suggest that stock analysts are buying the same bill of goods."

The Academy of Management, founded in 1936, is the largest organization in the world devoted to management research and teaching. It has about 15,000 members in 90 countries, including some 10,000 in the United States. The academy's 2004 annual meeting drew some 7,000 scholars and practitioners to New Orleans for more than 1,000 sessions on a host of issues relating to corporate organization, the workplace, technology development, and other management-related subjects.

Media Coverage:
Wilmington News-Journal. Charisma of top CEOs just hype. (Tuesday, September 07, 2004).

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