Legitimising the Sinister Side of Authority

The researchers collected data in two countries – China and the U.S. In the Chinese sample, they tracked almost 3,000 full-time workers in a large manufacturing factory in Tianjing for nearly two months after COVID-19 peaked in China in February 2020. In the U.S., they sampled over 300 workers across two time periods using an online platform. They measured two personal values: self-transcendence and conservation. The former is about the willingness to self-sacrifice for the greater good while the latter is related to self-restraint and protection of order.

First, the researchers asked the participants how closely they had followed COVID-19-related news and information. They also asked survey respondents to rate the level of importance they attached to the two types of aforementioned personal values, as well as whether they had donated money to help fight the pandemic. After a period of time had passed, the participants were then asked how often they had seen their co-workers engage in behaviour to help others, as well as their level of tolerance for abusive supervision, authoritarian leadership, or exploitation at work.

It found preliminary indication that employees in general may come to feel more vulnerable when the world becomes more uncertain, which can happen during public crises, be they related to health or the economy. “This can lead to them becoming more inclined to look to their leaders for authoritative instructions and security,” says Prof. Liao.

More worryingly, the results further revealed that workers became more willing to tolerate or even legitimise the more sinister side of authority, which can manifest in the form of abusive supervision, exploitation, or authoritarian leadership. This itself gives way for “bad actors” to arise who take advantage of employees in their vulnerable state. Moreover, the researchers say that the results of the study suggests that the wide-ranging impacts of the pandemic may prompt people to question and ultimately update their values.

Evolving Values Under COVID-19

The researchers found that exposure to COVID-19 news and information led to an increase in both self-transcendent and conservation values in both samples. In addition, there was a positive correlation between an individual possessing prosocial values, that promote the concern and welfare of others, to a tendency to make more charitable donations and engage in helpful behaviours. Meanwhile, survey respondents who self-reported higher conservation values that emphasise restraint and submission, were more likely to tolerate abusive supervision and exploitative behaviours in the workplace, such as being ridiculed by supervisor and working above and beyond required hours.

The researchers theorised that it is possible that workers in both countries became more tolerant of workplace mistreatment because they were pessimistic about the future as the pandemic raged on around them. Therefore, they may become more willing to endure mistreatment in order to keep their jobs. However, Prof. Liao and his co-authors found that even when they took this factor into consideration, COVID-19 was still the main reason that increased workers’ conservation value.

“It was quite surprising for us to find that both samples showed a consistent pattern because we always assumed that Americans, given their individualistic culture, are less likely to subject themselves to authority and to tolerate its abuse,” Prof. Liao says. “It shows that COVID-19 affects workplaces similarly regardless of culture, causing workers everywhere to be more collectivistic and supportive of order and harmony.”

“In and of itself, order and harmony are qualities that workplaces should aspire to have more of. But the question is whether the pandemic has skewed workplace behaviours so much that it’s become too much of a good thing, which we argue could be very dangerous and lead to negative outcomes.”

Too Much Harmony?

For instance, it would have been considered unacceptable for employers to require workers to test for communicable diseases (like COVID-19) before going to work or making vaccination part of compulsory job requirements, but these are now considered a necessity in the new normal. Although this is important during the pandemic, the concern is that as workers become more tolerant of increasingly tough corporate policies, companies may take advantage of this collective goodwill to their sole benefit. “We all need to do our part to fight COVID, and some changes are necessary, but we would urge companies and their leaders not to interpret increasing tolerance of new practices as an endorsement or excuse to eschew ethical responsibilities,” says Prof. Liao.

“On the contrary, leaders within companies should look to the pandemic as an opportunity to raise their ethical standards to create healthy and sustainable workplaces for everybody,” says Prof. Liao, adding that notable companies such as Costco and Alibaba have sought to push the envelope in terms of worker protections, for example, by going even as far as continuing to pay employees despite the fact that they are unable to physically attend work.

Overconfidence, or the tendency to underestimate risk and overestimate returns, is often cited as a leading factor behind some of the biggest corporate failures in history, from the Enron scandal at the turn of the millennium, to the spectacular collapses of investment banks Bear Sterns and Lehman Brothers during the global financial crisis of 2007 to 2008. With the world now in the grip of a new crisis brought about by the COVID-19 pandemic, a recent research study is challenging the stereotypical discourse on overconfident business leaders and suggests that a touch of conceit in CEOs may help to lead their companies through the storm.

The study CEO Overconfidence and the COVID-19 Pandemic was co-conducted by Maggie Hu, Assistant Professor of Real Estate and Finance at the School of Hotel and Tourism Management and the Department of Finance; Desmond Tsang, Associate Professor at the School of Hotel and Tourism Management at The Chinese University of Hong Kong (CUHK) Business School; and PhD candidate Wayne Wan Xinwei at the University of Cambridge. The researchers theorised that overconfident CEOs could be beneficial to their firms during unprecedented times of crisis, and the COVID-19 pandemic provided a perfect backdrop for them to test their theories. They found that companies with exceptionally confident CEOs performed better in the stock market during the COVID-19 pandemic.

“Companies should think twice before turning down any overconfident CEO candidate because they can be highly beneficial in curbing stock price crashes at crisis times.”

Prof. Maggie Hu

“The COVID-19 pandemic has brought an unrivalled level of uncertainty to our world. It has also become a test for CEOs in whether they can keep their companies intact,” Prof. Tsang says. “We found that overconfident CEOs actually provided strong leadership and kept both their employees and investors positive during a crisis.”

Overconfidence and Abnormal Returns

Using data from the U.S., the research team looked at companies’ stock market performance from January 22, 2019, to March 23, 2020. Only companies with the same CEOs since 2018 were included in their sample to control for any possible haphazard performance of newly appointed CEOs.

The researchers measured the level of CEO overconfidence by investigating CEOs’ options holdings. As senior managers, CEOs typically are vested in their companies’ stock options which they can exercise anytime. A CEO is considered more confident by researchers if they are willing to wait for a later date to exercise their stock options, as it may mean the CEO is confident enough to seek a higher payoff somewhere down the line.

According to the results, companies with more self-assertive CEOs displayed significantly higher abnormal returns, defined as returns that are unexpectedly and unusually large, during the COVID-19 period compared with companies with CEOs that have relatively less confidence. Given that COVID-19 brings negative impact of 0.52 percentage point in terms of daily abnormal return and 1.57 percentage points in terms of three-day cumulative abnormal returns, the overconfident CEOs mitigate the negative impact of the COVID-19 by about 37% on abnormal returns, and 33.7% on cumulative abnormal returns over the period studied, respectively.

“The COVID-19 pandemic has brought an unrivalled level of uncertainty to our world. It has also become a test for CEOs in whether they can keep their companies intact.”

Prof. Desmond Tsang

The researchers then looked at whether the positive effect of overconfident CEOs would differ among different firms, specifically those highly affected by the pandemic. They measured how much the sampled companies suffered from the COVID-19 pandemic. They looked at companies’ exposure to the pandemic by calculating the frequency of the COVID-19-related keywords used when the management discussed their results in their quarterly reports. They found that the positive effect of overconfident CEOs was even more pronounced in firms that suffered more from the pandemic.

“Super confident CEOs had a crucial role in mitigating negative market reaction due to the COVID-19 pandemic because their positivity helped them to manage investor perception,” Prof. Tsang says.

The ‘CEO Magic’

So how did self-assured CEOs successfully manage investor perception during the crisis? The researchers explain that while the market sentiment was generally pessimistic for all firms, super confident CEOs tended to be more effective in managing public perception, which then influenced investors’ perception of their firms. As a result, investors maintained a positive attitude towards the companies’ stocks. This ability to keep a positive image of the company was extremely important for companies that faced high uncertainty and lack of resources during the pandemic, according to the study.

Another area that overconfident CEOs excelled at is withholding bad news and accentuating good news, according to the study. While it’s an activity that may be deemed questionable by some, it turns out to be quite valuable during a crisis. According to the study results, overconfident CEOs indeed withheld more bad news, which resulted in less negative stock price reactions during the pandemic.

However, despite the marginal edge gained by companies who are helmed by overconfident CEOs during the pandemic, the researchers found that even a highly overconfident CEO would not be able to save companies with inherently higher risk or weaker foundations from going under. For firms with a high risk of failure and bankruptcy, rational investors simply would not be swayed by any amount of spin-doctoring conjured up by overconfident CEOs.

“Our study shows that extremely confident CEOs can make a difference for the survival of a firm during a crisis, but they are not all-powerful. If a company is fundamentally unsound, then no matter how confident the CEOs are, it’s going be hugely difficult for them to pull a rabbit out of the hat and save the day regardless of how much smoke and mirrors they employ,” Prof. Hu says.

All in all, the beneficial impact of conceited CEOs only worked for companies with more cash holdings, lower leverage, higher ROA (return on assets) and larger market capitalisation before the crisis. In addition, the study highlights that this positive effect only lasted during the crisis period. This impact was no longer notable in the post-crisis recovery period when companies started to bounce back following government interventions and aids.

The researchers believe the study has strong implications for companies searching for the right leader. “Companies should think twice before turning down any overconfident CEO candidate because they can be highly beneficial in curbing stock price crashes at crisis times,” says Prof. Hu. “But they should also bear in mind that when the storm is over, then the magic of overconfident CEOs could vanish immediately.”

“It’s not who I am underneath, it’s what I do that defines me,” so says the titular hero from the 2005 blockbuster, Batman Begins, starring Christian Bale as the billionaire caped crusader. Instead of the hero Batman, a group of academics were inspired by what is probably one of the more profound lines in modern cinema and sought to find out whether people, as the quote suggests, do shape fundamentally who they are.

Specifically, it led Li Wendong, Associate Professor at the Department of Management at The Chinese University of Hong Kong (CUHK) Business School, to team up with seven other academics to examine whether taking on a leadership role — along with the added job responsibilities — can actually change people’s personality traits.

Prof. Li and the other researchers involved in the study, Can Becoming a Leader Change Your Personality? An Investigation With Two Longitudinal Studies From a Role-Based Perspective, hoped to find evidence that, rather than personality traits remaining relatively stable as traditionally assumed, they could change and develop during a person’s adult years.

“One of the crucial factors in driving adult personality development is taking on new roles at work,” he says. “As they take on wider responsibilities and play more important roles in organisations, novice leaders are expected to be more conscientious than when they were employees – more efficient, organised, vigilant, achievement-oriented, and dependable to subordinates.”

“Fulfilling the expectations and responsibilities required by leadership roles also means leaders must deal effectively with uncertainties and changes. Therefore, leaders need to be able to remain calm, and handle negative emotions in response to stress.”

The Big Five

The academics looked for changes in two of the so-called “Big Five” personality traits: conscientiousness, the tendency to be dependable, achievement oriented, reliable, organized, and to carry out one’s job or duty well and thoroughly – one of the best predictors of both leadership and job performance – and emotional stability, another desirable trait among leaders, which means a person can remain calm and deal with stressful situations and handle adversity effectively. The other traits in the Big Five are openness to experience, extroversion and agreeableness.

Prof. Li carried out the research alongside Prof. Shuping Li of Hong Kong Polytechnic University, Prof. Jie Feng of Rutgers University, Prof. Mo Wang of University of Florida, Prof. Michael Frese of the Asia School of Business and Leuphana University of Lueneburg, Prof. Chia-Huei Wu of the University of Leeds, as well as CUHK Business School PhD candidate Hong Zhang.

They tested their ideas in two studies using publicly available U.S. and Australian databases, which compared the personality development of individuals at different stages over lengthy periods. People were split into a “becoming leaders group”, for employees who were promoted into leadership roles, and a “non-leaders group” for those staff who remained as employee across time.

The research found that moving into leadership roles led to an increase in a person’s conscientiousness, and found no significant changes in people’s emotional stability in either study.

“After becoming leaders, individuals enhanced their levels of conscientiousness and became more dependable, organised and efficient.”

Prof. Li Wendong

“The results of the two studies supported our hypotheses regarding the relationship between becoming a leader and the subsequent small, but substantial increases in levels of conscientiousness over time and the mediating effect of changes of job demands,” Prof. Li says.

They shed light on what, how and why personality traits change over time after a person takes on a supervisory role, and why the characteristics develop after people take on jobs where they face increased demands.

Prof. Li said insights gained from this research will help businesses better manage career development and plan leadership succession – a crucial issue for the sustainability of organisations.

“We suggest organisations consider assigning staff with informal leadership roles as a way to encourage them to develop management capabilities,” he says. “This may help them to develop the types of behaviour and traits associated with conscientiousness and prepare them for their future tasks. ”

“We also encourage organisations to broaden the scope and content of training to include personality development and also focus on more holistic forms of leadership development.”

Personality Shifts

One study consisted of 61 people in the becoming leaders group and 128 in the non-leaders group and used U.S. data selected from three different time periods – firstly between 1995 and 1996, then after 10 years and finally after 20 years. The other study comprised 342 people in the leaders group and 675 in the non-leaders group, and used Australian data selected at four-year intervals from 2005, 2009 and 2012.

“Consistently, results from both of the studies showed that after becoming leaders, individuals enhanced their levels of conscientiousness and became more dependable, organised and efficient,” Prof. Li says. “For them to carry out these leadership roles successfully over time may lead them to become so used to adopting such behaviours that they become a habit and then ingrained as personality traits.”

He says the study could stimulate further research into the idea that “people are both producers and products of social systems”.

Earlier studies had examined influences of major life events, such as nailing a first job, marriage, and unemployment on personality development, and the influences of job satisfaction, characteristics, insecurity, income and occupational status. But the latest study extends this line of research by examining personality development after becoming a leader and, more importantly, a change in job demands, Prof. Li says. “Although personality traits are relatively stable, they were also prone to change – even if the transformation is not always dramatic.

“Not all people react to a change in the same way and what we discovered in this paper was a general trend. Future research can examine individual differences in the speed, timing, and magnitude of personality changes.”

The researchers highlighted two concerns. Firstly, previous research suggests that highly conscientious staff may not be able to adapt well to new environments and will lack the necessary creativity. Secondly, companies may need to provide training to leaders to help them balance the benefits and possible disadvantages – such as a more volatile working environment and reduced flexibility – associated with increases of conscientiousness.

The latest research, therefore, has important implications for employees when managing their future careers. “People need to weigh up the benefits and costs of taking on a management role,” Prof. Li says.

“Although promotion will lead to them developing greater levels of conscientiousness at work over time, it can also see them become less adaptable and creative. Taking on extra job demands may also increase the levels of stress they face and have a detrimental effect on their wellbeing.”