Valuing a company's stock isn't just about earnings, cash flow and revenue growth. Investors can gain insights into companies by studying the chief executive officers’ body language, specifically examining how leaders carry themselves. Such unspoken communication can offer clues into questions investors might have about the person at the top, such as how this leader acts in a time of stress or what are the individual’s priorities.
Here are five ways to read a CEO’s body language before you invest in the company.
1) When Bluster Can Look Like Panic
It’s crucial to observe how a CEO behaves in a stressful situation. Does he or she inspire confidence -- or questions? The most trusted leaders in families, politics, sports or business are invariably at their best in demanding times. Yes, it is essential to establish that you are in charge. But a CEO can go too far and overreact in a fashion that might smack of panic.
Consider, for instance, the saga of Tim Armstrong of AOL Inc. (NYSE:AOL). Recently, one day after telling Wall Street analysts that AOL would reduce to 600 from 900 the number of Patch websites, he sensed the unease throughout his organization and sensibly called for a morale-boosting, all-hands meeting.
But when AOL Creative Director Abel Lenz started taking photos at the gathering, Armstrong instantly reacted by saying, in front of all of the company’s staffers: “Abel, put that camera down – now,” Without pausing to take a breath, Armstrong added: “Abel, you’re fired. Out.”
What started as a productive move by Armstrong quickly dissolved into what Yahoo Finance called “probably the most intense moment you’ll ever hear during a workplace conference call.”
Nobody remembers that Armstrong tried to engage his charges in a team-building exercise. Instead, people have an indelible memory of a CEO who seemed to lose his cool at a critical moment. Yes, Armstrong subsequently apologized for his impulsive act, but the damage had been done to his reputation.
AOL’s stock fell 3.2% the day after, on August 13, and dropped 8.1% during the next week, through August 19. Armstrong’s outburst drew heavy coverage on the Internet. “He’s a telegenic guy who usually carries himself well, so the burst of anger at an internal meeting did not play well, compared to his usual well-scripted media outings,” said Chunka Mui, a partner at the Devil’s Advocate consulting group.
2) The Benefits of CEOs Who Keep Their Own Counsel
A wise portfolio manager gave Nell Minow, co-founder of the Corporate Library, a good tip many years ago: Pay attention to how many people a CEO brings to a meeting. "The more they bring, the bigger the red flag," says Minow. "Worst of all is when they insist on knowing how many people you are bringing so that they can bring one more. If you ask the CEO a question and he or she can’t answer without looking at the GC (general counsel) or CFO, it’s a short sell. Also a bad signal: If they start the meeting or shareholder-question time by telling you how much time you have. That means they’re not listening. They’re just running out the clock.”
3) Charisma May Not Be the Best Indicator of Success
Once, John Akers was the golden boy of IBM (NYSE:IBM). A former fighter pilot who landed airplanes on aircraft carriers, he had steel blue eyes and gave observers the impression that he would have no qualms about pulling a trigger and launching a rocket at the enemy. His tough-guy body language helped catapult him on a path that had him running the company in 1985, at the age of 50.
Trying to streamline a bloated colossus, he decentralized the company from “Big Blue” into “Baby Blues.” Still, Akers crashed and burned and was forced to resign after IBM recorded a $5 billion annual loss, then the largest in corporate history.
“Remember,” says Mui, “that almost every large strategic failure was led by a charismatic leader.” Especially in times of major change, investors may do well to ignore charisma, he says. "Judge companies on the strength of their strategy and execution capabilities. For example, every Kodak CEO for the last 30 years said that he understood digital photography, and many investors believed them, and none stemmed Kodak’s slide into bankruptcy.”
4) Intensity Doesn’t Automatically Translate Into Dynamic Leadership
Steve Ballmer, who has been Microsoft’s (Nasdaq:MSFT) CEO since 2000, announced on Aug. 23 his plan to resign from the company in the next year. The biggest criticism about Ballmer’s tenure is that he didn’t follow the record of innovation of his predecessor, Bill Gates. When you consider Ballmer’s demonstrative way of speaking, though, you may expect to encounter a dynamic CEO.
“Ballmer is sometimes known as ‘Boom Boom’ because his voice is so loud and his presence so overwhelming,” notes Paul Carroll, the co-author of “Billion-Dollar Lessons: What You Can Learn from the Most Inexcusable Business Failures of the Last 25 Years.”
Ballmer “actually had to take voice lessons to learn to bellow without damaging his vocal cords,” Carroll says. “He could win just about any argument, in the short run, but his force of personality wasn’t even close to enough to keeping Microsoft innovating.”
5) You Don’t Have to Be Slick to Be Successful
All too often, we judge a CEO by how well he or she appears on television or dresses or exhibits a movie star’s style. But long-time Wall Street titan Sanford Weill didn’t look like the kind of CEO who stepped off the pages of GQ magazine. A CEO who habitually gained weight when he was working on big deals, Weill was more about substance than form. I once interviewed him for a Sunday Business feature in the New York Times, and he spent most of our conversation focused not on me but instead on the ticker located directly in front of where he was sitting. All he cared about was following the stock market.
It is a fair question of whether Weill should ultimately be judged as a success or a failure over his long Wall Street career. President of American Express in 1983, he eventually transformed Citigroup into a “financial supermarket,” where consumers could purchase all sorts of financial investments under one roof.
But the concept failed, partly because it was so unwieldy to manage Says Mui: “I think Weill was successful because he sold the Street on his ‘consumer financial supermarket’ strategy. But that strategy ultimately failed because of strategic overestimations of customer synergies – as almost every ‘consumer supermarket’ strategy has failed.”
A.G. Lafley, who returned to be CEO of Procter & Gamble (NYSE:PG) in May after retiring in 2010, has demonstrated that a very large consumer-oriented company can be run successfully. Lafley is notoriously low key. His watchword is “Consumer is Boss,” and he has concentrated P& G's resources on huge brands such as Crest, Tide and Pampers.
Notes Carroll: “By contrast (to Weill), Lafley has done a great job at P&G. He tells a wonderful story about trying to build what he calls a ‘masstige’ skin cream, masstige being a portmanteau of ‘mass’ and ‘prestige.’ Diligent testing convinced him that he could build on Oil of Olay. P&G wound up with a market share many times as large as it thought it could win for its new product."
Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.