- Investors might actually respond better if a CEO is candid about flaws, a new working study from the University of Maryland found. The findings reveal that CEOswho show vulnerability are more likely to gain investors’ trust, even if they later share bad news like below-expectation forecasts and earnings. CEOs like Microsoft boss Satya Nadella have espoused the importance of opening up as part of their leadership philosophy.
When Uber CEO Dara Khosrowshahi left his post as chief executive of Expedia to take the helm of the rideshare giant, he left a candid message for his employees: “It’s with truly mixed feelings that I am writing this note to you today…This has been one of the toughest decisions of my life,” Khosrowshahi said in an email about his decision to leave Expedia.
“I have to tell you that I’m scared,” he added.
Researchers believe there’s something to Khosrowshahi’s admission. A little candor can go a long way, not just in helping to ease a company through a transition, but also in gaining the trust of investors. A new working study from the University of Maryland Robert H. Smith School of Business found that CEOs who show vulnerability to investors are more likely to gain their trust. That vulnerability can even soften the blow of poor earnings.
The UMD researchers recruited 249 adults in the U.S. with college degrees to act as investors evaluating a tech company. When a fictional CEO exhibits vulnerability in an interview transcript shown to investors—admitting he is a poor public speaker and gets nervous before presentations— those investors are more likely to trust him compared to a group of investors shown a similar CEO interview, where the CEO instead says he is a confident public speaker. In addition to building greater investor trust, the vulnerable CEO also made investing in the company more attractive, according to the study.
When investors were shown positive or negative earnings forecasts after viewing one of the two CEO interviews, investors who saw the vulnerable CEO had a less negative response to the lackluster earnings forecasts compared to investors who viewed the confident CEO.
“CEOs are expected to show dominance, power, that they know everything, that they have everything under control,” study co-author and UMD doctoral student Farzaneh Mahmoudi told Fortune. “But we are shifting from that.”
Leadership paradigm shift
Previous research has shown team members are more receptive and eager to work when bosses offer authenticity, transparency, and trustworthiness—traits they can demonstrate through vulnerability, Mahmoudi said. Her study indicates bosses letting their guards down can extend to positive outcomes like investor confidence.
CEOs are beginning to take emotional intelligence seriously as a leadership strategy, touting honesty as instrumental to their businesses’ successes. Microsoft CEO Satya Nadella even credits empathy for sparking company innovation.
“Empathy is not a soft skill,” Nadella said in an interview with Axel Springer’s CEO Mathias Döpfner in 2023. “In fact, it’s the hardest skill we learn—to relate to the world, to relate to people that matter the most to us.”
“In fact, innovation is about meeting the unmet, unarticulated needs of customers,” he added. “What’s the source of that? Some would say design thinking. But design thinking is empathy.”
When vulnerability goes too far
The results of the study indicate that investors’ faith in vulnerable executives isn’t indefinite. In a similar experimental design with 237 participants in the same study, groups of investors were presented with earning news—either good or bad—before or after they saw the vulnerable CEO transcript.
The study found that investors had more trust and greater likelihood of investing in the company if they were shown the vulnerable CEO interview before getting bad earnings news, but not after. The results of this experiment suggest that just spilling your guts does not make an effective leader, according to co-author and UMD Smith School of Business associate professor of accounting Nick Seybert.
“You have to have build the trust somehow,” he told Fortune.
Developing vulnerability skills has been a tried-and-true way for leaders to connect with employees and investors, but it’s also in vogue, Seybert said, with executives turning to unconventional retreats and coaching to learn the skills espoused by bosses like Nadella.
Practicing vulnerability isn’t a hack CEOs can learn or start implementing overnight, Mahmoudi and Seybert argue. It’s a long-term practice rather than a trick CEOs can use if they’re looking for certain reactions from investors.
“The dark side of this, in my view, is CEOs exploiting the trustworthiness of investors,” Seybert said.
