Dangers of a corporate ego
The consequences for a company can be dire when highly confident executives fall victim to hubris. By Anthony Black. |
When ego becomes a dirty word
Confidence is needed for success in business and in life. But the line that separates supreme confidence from an out-of-control ego can be crossed in an instant with devastating results.
Business school professor Mathew Hayward, of the University of Queensland points to the string of recent failures and historical corporate catastrophes to illustrate that measures of success often boil down to senior management ego.
He says hubris - excessive pride, presumption or arrogance is pervasive in the corporate world, 'It is quite difficult to find a business today that has not been materially damaged by out-of-control egos.'
The symptoms of raging ego, although numerous, are unremarkable. Simply getting caught up in one's own publicity is enough for a confident chief executive to cross Hayward's 'razor-thin line' and ruin the company. Luck can also get senior managers over the line.
Executive ego and hubris were clearly conspicuous when Hayward was working as an investment banker during the 'greed is good' decade of the 1980s. It was the corporate raider era, Hayward recalls, when company executives armed with almost limitless credit paid exorbitant premiums for overvalued assets.
In particular, he is referring to Bond Corporation's purchase of Australia's Nine Network from Kerry Packer for about A$1 billion in 1987, and the failure of debt laden firm Qintex directed by Christopher Skase. Packer's Publishing and Broadcasting Ltd (PBL) bought the Nine Network back from Alan Bond for about $250 million in 1990 amid the collapse of Bond Corporation.
Bond's access to credit and his America's Cup success in 1983 didn't necessarily qualify him to run a television network.
Hayward asks: 'What did Bond know about broadcasting, what did he know about television? But it didn't stop him buying Packer's network for an exorbitant price. It was classic hubris. Bond had no business buying Nine, or the amount he paid, and we all saw the end result.'
Skase was also way out of his depth. His multi-billion dollar spending spree included buying the Seven Network, and building fabulous Mirage holiday resorts in Queensland. Before his Qintex empire collapsed, Skase was particularly conspicuous, using a private jet and throwing lavish parties, all in front of the cameras.
Hayward says Skase's ego was well and truly out of control before he became a fugitive by fleeing to Majorca to avoid prosecution.
'If you look back at that time, a lot of high-flying businessmen were either convicted of criminal offences, died, went bankrupt or fled,' says Hayward. Some even went to jail.
US car industry bosses made headlines with their over confidence when, in November 2008, they flew to Washington in private jets to plead their case for billions of dollars in taxpayer-funded industry rescue packages.
Using private jets outraged Congress and the US nation to the point that the three car industry bosses returned to Washington a month later in hybrid cars. A lot has happened since then, including General Motors filing for bankruptcy and the resignation of the chairman and chief executive Rick
Wagoner, who presided over staggering multi-billion dollar losses in the past four years.
In an interview last year, Australian tyre magnate Bob Jane expressed outrage over the behaviour of US car bosses. Jane said General Motors, Ford and Chrysler LLC in the US are now paying the price for years of mismanagement, lack of vision and poor planning. He said rewarding executives with outrageous multi-million dollar salaries for poor performance, combined with car company bosses travelling on private jets to Washington, shows just how much they are out of touch with the real world.
'The three big car makers in the US clearly lost their way,' Jane said. 'Henry Ford would be turning in his grave over what has happened at Ford. The business fundamentals Henry Ford created have been discarded. Henry Ford hated to borrow money from banks. He made money from perfecting the assembly line.
'I have read his book My Life and Work many times. I live by his message of working hard and thinking smart, but it's been lost on US car makers.'
On the flip side, Hayward acknowledges the world is filled with top executives with enviable performance records in good and testing times. Packer, who long held the mantle of Australia's richest man before dying on 26 December 2005, served as a prime example of a successful businessman who could hold his ego in check, according to Hayward.
He recalls when Packer, in the 1980s and early 1990s, would never conduct a big merger or acquisition deal without the approval of his principal adviser James Wolfensohn, 'Prior to deal discussions, one party believed they would be dealing with Packer; no they'd be dealing with Wolfensohn,' Hayward says.
'Wolfensohn was a man of spectacularly good judgment. He kept Packer's ego under control.'
Wolfensohn would later become president of the World Bank between 1995 and 2005.
Global media mogul Rupert Murdoch is another example of someone with his feet firmly planted on the ground. 'Murdoch is fundamentally a journalist, a newspaper man,' Hayward says.
'Murdoch's seen the changes in the media industry and moved with the times. He's remained pretty true to his vision of building a global media empire after starting with one newspaper in Adelaide.'
Eighteen months into the worst global financial crisis since the Great Depression, shareholders can easily assess the performance of senior executives running their listed companies.
While most senior executives and their companies are weathering the storm, albeit with much lower share prices and market capitalisation, the global financial crisis (GFC) is showing no mercy to those who designed or pedalled flawed boardroom strategies. The GFC casualty list is growing daily with what Hayward calls 'big heads and fat cats.'
Hayward says it's almost natural for senior executives to be overly optimistic about the future - to provide a level of conviction to stakeholders.
After all, who wants to invest in a company with a subdued outlook? But as the global financial crisis is showing, a subdued, considered, careful and conservative outlook is undoubtedly preferable to an overly optimistic one built on too many assumptions.
'The challenge is to understate forecasts in difficult times,' Hayward says. He says it's best for companies to take their medicine early when it becomes clear that a projection is going to miss the mark. Then everyone knows the score. 'Take a hit if the value of an asset has fallen, otherwise it's just delaying the inevitable.'
Executive hubris not only affects company performance, but also perceived future performance projections. Forecasting is difficult at the best of times, but overestimating company prospects is akin to setting up stakeholders for disappointment.
Hayward says Lehman Brothers in the US posted a record earnings report 12 months before the investment bank failed. The global financial crisis cut a swathe through company projections that made one question the competence of senior executives. Projected and actual earnings of many financial institutions had no correlation when the real value of sub-prime assets emerged.
Hayward would like to see auditors play an integral role in company projections as a safeguard against senior management being too optimistic. Call it checks and balances on behalf of stakeholders. But Hayward acknowledges that such an initiative would meet stiff resistance on several fronts, particularly from managers. who perceive auditors as being removed from the daily running of the business.
But Hayward says it's a concept deserving of serious consideration from company boards across the world, particularly in light of the company carnage during the global financial crisis. 'I would like to see auditors reviewing the veracity of projections.' Hayward says.
Hayward says a company projection model used by Michael Chaney when he was chief executive of industrial conglomerate Wesfarmers has merit. Hayward argues that under this model, a senior divisional manager was likely to get more funding after producing a 17 per cent return or more on capital employed during the past 12 months.
A manager would be eligible for new funding after proving a return of between 10 and 17 per cent on existing capital, while returns below 10 per cent on capital put an existing operation in jeopardy, with little hope of new funding
'This model tries to remove projections from the decision-making process,' Hayward says. 'It's based on data.'
Raw and recent data is what counts with Hayward as opposed to what 'might be'.
Hayward says senior managers of small-to-medium sized companies face the same ego and hubris challenges as their listed counterparts. Poor and reckless decisions made by a partner whose ego is out of control can ruin a firm.
Ego has for so long fascinated Hayward that he wrote a book on the subject, Ego check: Why executive hubris is wrecking companies and careers and how to avoid the trap in 2007, before the emergence of the global financial crisis. He says his fascination with the topic began in the 1980s when working as an investment banker and a venture capital investor in Australia.
Advising high-profile CEOs on mergers and acquisitions enabled him to see first hand the damaging effects of executive hubris.
He is now working on a follow-up book, Get real: Facing up to the truth in business. Hayward says his new book will focus on 'straight talking' as a solution to the ego problem that infects chief executives and senior managers across the globe.
Hayward says Asian executives are widely respected, almost worshiped for the positions they hold so they are also susceptible to losing control of their egos. Asian firms are extremely powerful and chief executives attract a lot of press as the public face of their companies.
'What I am trying to do is get business to institute a process for checking egos before making decisions,' he says. 'It's often difficult for senior management to admit they may lack the capability to handle a transaction, and it's something that in general we humans have to work very hard at as we are very prone to self-enhancing behaviours.
But in the end, if you're going to have a successful career and life, you are also going to have to learn how to check your ego.'
Senior executives who acknowledge their limitations and shortcomings are acting in the best interests of the company. They seek the best advice on solving a problem rather than attempting a 'quick fix' that may or may not work. Smart executives know when a problem is beyond their expertise. Importantly, they are not insecure and welcome advice from other parties because they don't feel caged in, impeded or threatened.
They are able to step outside their comfort zone, and the end result is invariably better for the company, according to Hayward. He says senior executives with an open mind to alternative views and solutions are confident managers - they trust their own judgment and the proven abilities of others.
The entire company doesn't revolve around the activities of one person. Supreme confidence, kept in check, is a welcome, rewarding and reassuring quality.
'After all, you want the surgeon who is performing your operation to be confident,' Hayward says
Source: CPA Australia.
