On March 2, 2016, co-founder and CEO of Chesapeake Energy Corp. (NYSE: CHK) Aubrey McClendon was found dead inside his 2013 Chevy Tahoe. The car had slammed into an underpass wall and caught fire. McClendon, also a part-owner of the Oklahoma City Thunder NBA team, had recently come under pressure from investors, regulators and sports fans alike over allegations of rigging bids for drilling rights to energy reserves.
In 2011, McClendon had been called "America's most reckless billionaire." The New York Times called him a "restless and reckless wildcatter." In many ways, McClendon epitomized the high-stakes personality found across the CEO landscape. When risk-taking is combined with stress, the result can be dangerous for the person and his or her business.
There is plenty of evidence, anecdotal and otherwise, that a risk-seeking personality can be a positive inside of a business environment. Risk-taking is a defining characteristic of entrepreneurship and innovation. This suggests that investors should not automatically run from any company with a senior-level manager who enjoys risks. Moreover, there is not a lot of evidence that risky personal behavior necessarily leads to poorer business performance. Even in extreme cases, such as untimely death, stocks may react positively to CEOs with a risky lifestyle.
CEO Is a High-Stress Job
Investors might see red flags if a corporation's CEO responds to stress by engaging in risky behavior, such as thrill seeking or substance abuse. Problematically, however, these signals are not always easy to spot. Consider the McClendon death — the Oklahoma medical examiner's office reported McClendon had traces of doxylamine, an antihistamine used in sleep aids, in his blood when he died. Sleep aids are not inherently dangerous, but they can be abused to compensate for a high-stress job.
"Probably two-thirds of CEOs are struggling," according to Steve Tappin, researcher and author of a book on the secrets of CEO lifestyle. Tappin teamed up with a neurologist to conduct physiological and neurological tests on chief executives. "The major emotions a CEO has are frustration, disappointment, irritation and overwhelm," he continued. "There should be a health warning."
Some warning signs are more obvious. Former Micron Technology Inc. (NASDAQ: MU) CEO Steve Appleton, a notorious daredevil and stunt-man, died when his airplane crashed in 2012. According to the National Transportation Safety Board, Appleton was flying "an experimental, self-assembled, single-engine plane." At the time, Micron Technology was a $7.85 billion company with 26,000 employees.
Social Class Matters, Too
Even if a CEO stays out of the headlines, investors may have a clue as to which business leaders are more likely to take risks based on their upbringing. A 2016 survey of 265 CEOs by the University of Arkansas suggests that chief executives raised in "relative wealth and privilege turned out to be the biggest risk takers," and individuals from upper income classes generally "perceive the world as safe."
According to the study, CEOs raised in lower socioeconomic stratus are less likely to take risks than those born to economic privilege, but middle-class CEOs are the most risk averse. The research staff theorized that low social class CEOs might maintain a "less to lose" mentality in business than their middle-class counterparts. While this study explicitly discusses financial risk-taking, additional research from the University of Notre Dame suggests that risk-takers exhibit behavioral consistency — the same patterns apply on vacation as in the workplace.
Effect of a CEO's Death on Stock Performance
It may sound counterintuitive, but news of a CEO meeting his untimely end is often followed by an increase in the company's share price. This was the case in 2015 when Melvin Gordon, then-CEO of Tootsie Roll Industries Inc. (NYSE: TR), suddenly passed away. Share prices for Tootsie Roll rose almost 13% during the following week.
According to research from the University of Notre Dame and the University of Georgia, approximately half of unexpected CEO deaths are followed with positive stock performance. Researchers looked at 60 years of stock history in the United States between 1950 and 2009. Excluding deaths resulting from long-term illnesses, there were 240 instances of CEOs suddenly dying while operating as chief executive.
In the 20 years between 1990 and 2009, the average return posted by stocks that responded positively was 8.5%. When the stocks reacted negatively, the average loss posted was negative 7.4%. Over the 20 years between 1970 and 1989, the average gain was 6.1% and the average loss was negative 4.7%. Those figures were 3.5% and negative 2.7%, respectively, between 1950 and 1969. This suggests that investors have responded with increased volatility over time.