I invest a lot of time in the space between ownership and management: assessing, recruiting and training GMs and CEOs. For me, humility and credibility are paramount qualities for a CEO. I define humility as the willingness to be known for who you really are, and credibility as the willingness to follow through on your word. The opposite of these is hubris: excessive self-confidence or unbridled intuition (Claxton et al., 2013).
There is one possible exception to the hubris rule… In the technology industry, CEO hubris can sometimes lead to innovative breakthroughs resulting in patents and other intellectual property assets, but these are still very high-risk-high-reward innovations and require a higher-than-healthy amount of initial investment. Steve Jobs and Elon Musk are good examples of CEO hubris working out well, but these are anomalies, not the norm.
I’ve found more than a thousand research articles addressing the effects of CEO hubris on business outcomes. CEO Hubris has been a known issue in business research since Roll’s (1986) study on the “winner’s curse”. Overconfident CEOs routinely overvalue acquisitions/investments; but if the market/investors do not accept the price-tag, the result is often an exodus of investors. Overconfident CEOs also tend to prefer debt over equity, commonly end up with crippling cashflow problems, invest a lot in R&D, and take higher investment risks too (Malmendier and Tate, 2005, 2011). These outcomes are the norm, so it’s important to know how to identify and treat this issue.
The American Psychological Association lists 5 unique traits of hubris, which business researchers use to identify overconfident CEOs (Petit and Bollaert, 2012):
Grandiose sense of self: they overestimate their competencies or position,
Overestimates his/her likelihood of success: usually revealed by poor decision making quality and unjustifiably large or risky projects,
Considers him/herself the only person that can run the company,
Considers him/herself above their community, routinely ignoring advice and rejecting criticism,
Considers him/herself above the law, manipulating information to subvert policy, rules, or regulations.
Listen up, Board Members & Owners! If you see a combination of any 2 of the above traits in your CEO, your company may be in serious trouble. So what should you do if you’re worried about CEO hubris? Here’s my advice:
Get an independent audit: Make sure you are judging the financial situation based on facts, not feelings or opinions. Analysts: Look for red flags in R&D/Net Revenue, debt/equity ratio, and WACC. And double-check those acquisition valuations!
Ask a leadership specialist to interview your CEO: tell them your concerns and ask for their opinion, a good executive consultant can usually figure this issue out quickly.
Don’t wait for things to get better. It doesn’t matter how much time goes by or how much money is lost, an overconfident CEO will likely never resign on their own.
Demand numbers: An overconfident CEO will always be ready to put an optimistic spin on the situation to mask the facts behind feelings. They’ll talk about destiny, vision, and faith. A good CEO can defend their strategy with numbers.
Remember the community: Get advice from those around you, and act on behalf of the company as a whole. There are perhaps hundreds, or thousands of stakeholder families who rely on your company’s success for their personal economies. One person’s pride is not worth risking the whole community’s health.
And to all you CEOs out there, if you think this might be you, it probably isn’t. CEO hubris is rarely self-diagnosed. This kind of OD issue is usually identified by an intrepid analyst or OD specialist, and it’s always a painful thing to identify.
Personally, I’ve dealt with a few overconfident CEOs in my consulting career. In my experience, these CEOs often have strong internal followers, speak in visionary language, and use words like ‘destiny’ and ‘faith’ when they are criticized. This makes them very difficult to uproot from the organization, after all, who wants to be an enemy of faith? The appropriate treatment is financial transparency followed by a very quick exit plan. The cost of keeping them in power is much higher than the cost of transition. And keep an eye out for their disciples, they can cause problems long after their leader is gone.
Pride goes before the fall, so if the Board doesn’t address it, the market likely will.
Claxton, G., Owen, D., Sadler-Smith, E. (2013) Hubris in leadership: A peril of unbridled intuition? Leadership, 11(1), 57-78.
Malmendier, U., & Tate, G. (2005). CEO overconfidence and corporate investment. Journal of Finance, 60(6), 2661–2700.
Malmendier, U., Tate, G., & Yan, J. (2011). Overconfidence and earlylife experiences: The effect of managerial traits on corporate financial policies. Journal of Finance, 66(5), 1687–1733.
Petit, V., & Bollaert, H. (2012). Flying too close to the sun? hubris among CEOs and how to prevent it. Journal of Business Ethics, 108(3), 265-283.
Roll, R. (1986). The hubris hypothesis of corporate takeovers. Journal of Business, 59(2), Part 1, 197–216.