Rarely does a week pass without a newspaper or magazine offering a tale of the mistaken path of a fallen business executive, quoting critics who explain the errors that led to the failure.
However, investors and boards of directors responsible for selecting a CEO don’t have the luxury of hindsight. They should, ideally, identify any shortcomings in their prospective CEO before there is trouble, not after the fact. This is no easy task. Is there some predictable fatal flaw that distinguishes responsible risk taking from something reckless or even sinister?
One field of academic research suggests an answer: executive hubris. Hubris, defined as excessive self-confidence or pride, leads CEOs to make overly risky bets, or to ignore relevant warning signs and fail to invoke contingency plans. The problem, of course, is that the difference between justifiable and excessive self-confidence generally becomes evident only after the damage is done. And most chief executives have pride and self-confidence well above normal levels, and with good reason. A typical CEO has a decades-long track record of superior performance and an elite education background.
The challenge for an investor, a board of directors, or an advisor to executives is to recognise when the CEO (and perhaps the whole management team) is about to cross a line — from making bold strategic bets with warranted assuredness, to risking the enterprise through reckless and dysfunctional overconfidence. Four early signals can help in navigating these muddy waters. The first two, narcissism and dismissiveness, are warning signs of hubris. The other two, humility and inquisitiveness, are promising signs of justifiable confidence.
The Narcissism Warning Sign
Signs of narcissism offer the most critical indicator of hubris ahead. In the classic Greek myth, Narcissus perished after becoming captivated by his own image reflected in water. Psychologists characterise a narcissist as someone with a grandiose view of his or her own talents and a craving for admiration. Narcissists exhibit these qualities to the point where they lose perspective and begin to make unreasonable, destructive decisions.
A narcissistic CEO becomes focused on his or her ego rather than the company’s stakeholders. This trait is all too prevalent among executive leaders, as Arijit Chatterjee and Donald C Hambrick, of Penn State University, showed in a wonderfully titled 2007 paper, It’s All about Me: Narcissistic Chief Executive Officers and Their Effects on Company Strategy and Performance. Their study of 111 CEOs in the computer industry found that those who demonstrated narcissistic traits tended to make more and larger acquisitions, which led to “extreme and fluctuating organizational performance". other studies have tied acquisition premiums explicitly to media praise and relative pay for the CEO.
High self-esteem is not narcissistic but an ego incessantly demanding external confirmation should send a warning flag.
Dangers of Dismissiveness
A second negative sign among potential CEOs, dismissiveness, represents a subtler but equally important indicator of trouble. A dismissive executive is one who takes on unwarranted risk by ignoring input from others.
Often the root cause of dismissiveness is in-group bias, a concept credited to psychologist William Sumner. Although Sumner was not intending to describe business groups, his assertion, made more than a century ago, sounds eerily descriptive of some corporate cultures: “Each group nourishes its own pride and vanity, boasts itself superior, exists in its own divinities, and looks with contempt on outsiders.” Pride and confidence, when exhibited either in a group or in an individual, are not inherently problematic. But those attitudes can be destructive when they lead business executives to ignore competitive threats or conflicting opinions. A dismissive attitude suggests overconfidence and potentially a lack of healthy debate.
Humility as a Success Predictor
On the opposite end of the spectrum, positive signals in prospective CEOs can offer investors and board members great comfort. For example, visible signs of personal humility suggest that an executive will not fall victim to hubris.
Humility may seem rare among successful people and companies, but it is more prevalent among veteran executives than you might think. They know that it can offer a powerful counterpoint to narcissism and dismissiveness. Indeed, it takes great self-confidence to not use power and influence to force compliance, and to humbly expose one’s opinions to open debate. Humble executives focus on the larger vision and a broad set of stakeholders rather than their own ego. They listen to others, consider multiple points of view, and do not assume their own opinions are infallible. To be sure, nurturing humility requires patience. It often takes time for a CEO to reflect on a decision rather than leaping to the expedient solutions and self-serving explanations so common in narcissistic or dismissive cultures.
The Power of Inquisitiveness
Even more powerful than humility in reducing hubris is a culture of inquisitiveness. Inquisitiveness provides the greatest defense against risky business bets. The best chief executives lead with high confidence this way. They combine intellectual curiosity with a passionate pursuit of facts. They don’t accept assertions but instead challenge their people to support recommendations with rigorous evidence. An inquisitive executive typically has a great gut instinct and strategic mind-set and treats all assumptions — including his or her own — as hypotheses to be tested rather than bold, strategic visions to be imposed. Inquisitive leaders can be inventive and they will make big bets, but only when they have built the organisational confidence that the opportunity is worth the risk.
In Silicon Valley, the 'lean startup' movement has established inquisitiveness as a day-to-day practice, through a focus on releasing products rapidly, observing real-world customer response to them, and changing direction as needed. The lean startup movement frames failure as a positive output of experimentation and encourages 'pivoting' to a better path when a trial fails. By aspiring to fail fast, inquisitive cultures focus on “what have we learned?” not “who was wrong?”
An inquisitive nature leads to ongoing learning and offers the best defense to hubris. Inquisitive people and companies broadly and explicitly look for solutions to the problems no one has solved. They do not accept the status quo, nor do they waste time trying to convince others that they have all the answers.
Eliminating corporate hubris ultimately demands a culture that keeps confidence in check. Company leaders must not believe they are infallible, particularly when making 'bet the farm' decisions. Truly innovative leaders don’t assume they know, better than anyone else, how to handle every situation. Instead, they seek to learn by making small bets and constantly adjusting to the findings.