Does CEO narcissism matter? An examination of the relationship between board structure and earnings management in Kenya

doi:10.1108/prr-07-2022-0089

Study

Innovation & DesignRecentStrong effect

CEO Narcissism Compromises Board Oversight, Increasing Earnings Management

The presence of narcissistic CEOs can undermine the effectiveness of corporate governance structures, leading to increased manipulation of financial reporting.

PSU Research Review · 2023

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Key Findings

01Board independence, board tenure, and board size negatively impact real earnings management.
02CEO duality (CEO also serving as Chairman) positively correlates with real earnings management.
03CEO narcissism moderates the relationship between CEO duality and real earnings management, suggesting compromised board monitoring.

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Application

Design takeaway

When designing governance structures or evaluating leadership roles, consider implementing safeguards against the potential negative influence of narcissistic tendencies, particularly in dual-role positions.

How to apply

In organizational design, consider incorporating psychological assessments or behavioral observation during leadership selection and board appointments, especially for roles with significant oversight responsibilities.

Project actions

01When researching leadership, consider how personality traits might interact with formal organizational structures.
02Explore how to measure or identify potentially detrimental leadership characteristics in a design context.

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Method & Evidence

AimTo investigate how board structure influences real earnings management and the moderating effect of CEO narcissism on this relationship in publicly listed firms in Kenya.

MethodQuantitative analysis of secondary panel data.

ProcedureCollected financial data from publicly listed firms in Kenya between 2002 and 2017. Employed hierarchical regression analysis to test hypotheses regarding the impact of board independence, tenure, size, and CEO duality on real earnings management, and the interaction effect of CEO narcissism.

SamplePanel data from publicly listed firms in Kenya (2002-2017).

ContextCorporate governance and financial reporting within publicly listed companies.

Variables

IV["Board independence","Board tenure","Board size","CEO duality"]

DV["Real earnings management"]

CV["CEO narcissism (as a moderator)"]

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Strengths & Limitations

Strengths

+Uses a longitudinal dataset (2002-2017).
+Examines the interaction effect of a key leadership trait (narcissism) with structural variables.

Limitations

Measuring abstract concepts like 'narcissism' can be challenging and may rely on indirect indicators. The specific cultural context of Kenya might influence the findings.

Reliability & validity

The use of hierarchical regression and panel data analysis provides a robust statistical framework. However, the validity of measuring 'CEO narcissism' through proxies or specific indicators needs careful consideration.

Think critically

How might the cultural context of Kenya have influenced the relationship between CEO narcissism and board effectiveness, and how could this relationship differ in other cultural settings?

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Design Principles

"Leadership personality traits can significantly alter the efficacy of designed organizational structures."

Understanding the psychological traits of leadership is crucial for designing robust governance and oversight mechanisms. This insight highlights how individual leader characteristics can significantly impact organizational behavior and financial outcomes, influencing trust and investment.

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What This Means for Your Design

Bosses who are very self-centered can make it harder for the company's board to keep an eye on things, leading to more ways of fudging the numbers.

How to use in your project

1.Use this research to justify the importance of considering human factors and psychological influences when designing governance or management systems.
2.Cite this study when discussing how leadership traits can affect the success or failure of organizational designs.

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Add to My Project

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Quick Cite

(2023). Does CEO narcissism matter? An examination of the relationship between board structure and earnings management in Kenya. PSU Research Review. https://doi.org/10.1108/prr-07-2022-0089 Retrieved from https://designdex.org/study/b7adbb79-89ae-464f-9bf1-87d09540c0ef/ceo-narcissism-compromises-board-oversight-increasing-earnings-management

Paragraph starter

Research indicates that leadership personality, such as narcissism, can significantly impact the effectiveness of corporate governance. Studies have found that narcissistic CEOs, particularly when holding dual roles as chairman, can compromise board oversight, leading to increased instances of earnings management. This highlights the critical need to consider psychological factors in the design of organizational structures and leadership selection processes to ensure robust accountability.

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Source

PSU Research Review

Does CEO narcissism matter? An examination of the relationship between board structure and earnings management in Kenya

journal · 2023

View source

Questions about this research

What does the research say about ceo narcissism compromises board oversight, increasing earnings management?: When designing governance structures or evaluating leadership roles, consider implementing safeguards against the potential negative influence of narcissistic tendencies, particularly in dual-role positions. Evidence: PSU Research Review (2023).
Why does "CEO Narcissism Compromises Board Oversight, Increasing Earnings Management" matter for design?: Understanding the psychological traits of leadership is crucial for designing robust governance and oversight mechanisms. This insight highlights how individual leader characteristics can significantly impact organizational behavior and financial outcomes, influencing trust and investment.
How can designers apply this research?: When designing governance structures or evaluating leadership roles, consider implementing safeguards against the potential negative influence of narcissistic tendencies, particularly in dual-role positions.
What were the main findings?: Board independence, board tenure, and board size negatively impact real earnings management.. CEO duality (CEO also serving as Chairman) positively correlates with real earnings management.. CEO narcissism moderates the relationship between CEO duality and real earnings management, suggesting compromised board monitoring.
What research method was used?: Quantitative analysis of secondary panel data. with Panel data from publicly listed firms in Kenya (2002-2017)..
How strong is the evidence?: Evidence strength is rated Strong effect, based on a 2023 journal from PSU Research Review.
What should I do differently in my next project?: In organizational design, consider incorporating psychological assessments or behavioral observation during leadership selection and board appointments, especially for roles with significant oversight responsibilities.
What are the limitations?: The study is specific to Kenyan publicly listed firms, and the measurement of CEO narcissism might rely on proxies or specific methodologies that could be subject to interpretation.
Is there evidence that earnings management affects design outcomes?: Independent, long-tenured, and larger boards reduce financial manipulation. However, when a CEO also chairs the board, earnings management increases, and this effect is exacerbated if the CEO exhibits narcissistic traits, indicating a breakdown in oversight. Understanding the psychological traits of leadership is cruci Source: PSU Research Review (2023).
Where does this ceo narcissism research apply?: Corporate governance and financial reporting within publicly listed companies. It sits within innovation & design research on designdex.org.