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Beauty is in the Eye of the Shareholder

beautiful beauty A study by two economists, Joseph T. Halford and Hung-Chia Hsu, showed that investors perceive companies run by attractive chief executive officers (CEOs) to be “better” than those run by their not-so-good-looking CEOs. “Better” was defined by higher stock prices.

The study revealed that, “A good-looking C.E.O.’s appearance had “a positive and significant impact on stock returns surrounding the first day when the C.E.O. is on the job,” worth about 43 basis points in increased stock value compared with a C.E.O. 10 percent less attractive.”

The study was an eye opener for me. I do not know about you but having a CEO who looks like Brad Pitt or Zoe Tay is certainly not in my list of investing criteria. The good-looking CEO may cause the stock price to increase in the short-term but in the long-term, it would usually be a non-event. At the end of the day, the fundamentals of the business – whether the company has a sustainable competitive advantage, whether the company has low debt, whether the company is generating copious amounts of free cash flow – certainly matter more than whether a Miranda Kerr-lookalike is steering the ship.

Companies such as Jardine Matheson Holdings (SGX: J36), Dairy Farm International Holdings (SGX: D01) and Jardine Strategic Holdings (SGX: J37) have given investors returns of 1000% or more for the past ten years. They were able to do that due to their strong underlying fundamentals such as earnings growth and most likely not due to the presence of an eye-catcher at the top. (Sorry Ben Kenswick!).

I do not think the Oracle of Omaha, Warren Buffett and the other prominent investors, like Peter Lynch, had invested in a company just because the CEO was good-looker. One of the criteria Warren Buffett looks for is an honest and competent management. Honesty and competence are not shown physically. Good-looking CEOs may be perceived to be more trustworthy. However, the converse may also be true. Attractive CEOs, knowing that the other party is likely to think he or she is trustworthy, may be inclined to cheat as they can easily get away with it.

When investing, we should always concentrate on the fundamentals of the business and not on superfluous factors like the attractiveness of the top echelon. There is a well-known saying that goes, “Don’t judge a book by its cover”. You should certainly not judge a company by a CEO’s attractiveness.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.  Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.