In 2019, The New York Times dubbed personality tests “the astrology of the office”. Two years later, HBO Max and CNN documentary “Persona: The Dark Truth Behind Personality Tests” characterized them as “ableist, racist, sexist, and classist”.

This prevailing skepticism around and mischaracterization of personality testing in the workplace exists despite an extensive and robust body of scientific evidence demonstrating that personality tests, which should form one component of a broader selection assessment process, predict job performance.

But does personality matter for chief executives, whose success in-role extends over longer time horizons and is mediated by their executive leadership team?

In a study published in the Academy of Management Journal, the researchers found that CEOs’ conscientiousness, neuroticism, and extraversion predicted their firms’ stock volatility and the probability that the increasing risk would materialize into greater returns for shareholders, even when factoring in other relevant CEO, firm, and industry variables.

The results are based on a machine learning analysis of personality traits of nearly 3,000 S&P 1500 CEOs between 1993 and 2015 via transcripts of quarterly earnings calls with equity analysts –

• The disciplined and dutiful CEO: Firms with more conscientious CEOs had 2.59% lower stock risk, and increasing risk generated greater shareholder returns by 3.83%. In contrast, increasing risk at firms led by less conscientious CEOs reduced shareholder returns by 1.70%.
  
• The impulsive and emotionally unstable CEO: Firms with more neurotic CEOs had 2.04% higher stock risk, and increasing risk did not generate any shareholder returns. In contrast, increasing risk at firms led by more emotionally stable CEOs generated greater shareholder returns by 2.68%.
  
• The enthusiastic and outgoing CEO: Firms with more extraverted CEOs had 2.40% higher stock risk, and increasing risk reduced shareholder returns by 3.30%. In contrast, increasing risk at firms led by more introverted CEOs generated greater shareholder returns by 5.43%.

While these percentage points might seem trivial, the average market cap of the study sample was $7 billion, making a 1.70–5.43% change in shareholder returns associated with $119 million to $380 million in value created or destroyed for the firm.

Here are some considerations –

Personality is not the be-all and end-all.

“It’s important to emphasize that the insights gained from a personality test are only one piece of the puzzle,” says Dr. Aleka MacLellan, principal at Kilberry, who specializes in assessing and developing executive leaders. “They should be used alongside other assessments of CEOs’ cognitive horsepower, critical-thinking abilities, and relevant experiences, and must be interpreted by a trained professional when predicting leadership.”

Beware the loudest voice in the room.

Too often, boards are charmed by the charisma of CEOs, and while extraversion and its accompanying charisma may predict who seems like a leader, it is important not to conflate this with who is effective as a leader. In the context of CEO succession, boards and other stakeholders involved in the process need to be aware of highly charismatic candidates.

“Every selection or CEO succession process needs to begin with a blueprint that outlines the type of person needed for the role in this specific context. In certain industries or market cycles, you may need a very bold CEO, but this requirement must be aligned with objective criteria that’s established before any candidates are in mind.”

Think of personality as your dominant hand.

“Results from personality tests reflect your natural tendencies, much like your dominant hand’s natural ability to write easily,” Dr. MacLellan says. “Studies show that personality is quite stable, which is why we consider it in a selection scenario”. (Here is one of those studies).

“At the same time, people also learn new behaviours and surround themselves with people who can offset their personality’s natural tendencies. Having that self-insight helps shift people’s mindset from so what, to now what.”