Uncertainty and CEO Overconfidence
Photo by Priscilla Du Preez via Unsplash.com
While no one likes a Negative Ned or a Debby Downer, research coming out of the University of Chicago’s Booth School of busines shows that CEOs may be wise to avoid over-promising. “[O]verly optimistic earnings guidance” was shown to be “negatively correlated with many individual [CEO] characteristics” including CEO ability (p. 3). It is likely no surprise that bad leaders over-promise and under-deliver. However, in addition to being overconfident, less talented CEOs have been shown to be more sensitive to investment cashflows, meaning that they are both more likely to make value-destroying investments in pursuit of diversification and quicker to abandon them when short term results fail to live up to expectations. These lackluster leaders also tend to exhibit inferior listening skills and seek feedback less frequently than more talented executive leaders. In good times, a growing economy and robust consumer spending can hide many leadership sins. Recessions, depressions, and economic contractions are much more revealing.
With more than 90% of the US population under some sort of shelter in place order as of April 2020, the White House Council of Economic Advisors’ August report showed that the average number of hours that U.S. small businesses are open is down by more than 20% since January. So if your firm is not one of the few sectors of the economy (such as EdTech, e-commerce, and home improvement) that are surging in the wake of the pandemic, what lessons can you learn from overconfident CEOs that you can use to benefit your business?
Innate talent is less important than you think
The top three indicators for CEOs’ general ability include measures of proactivity, high standards, and efficiency. Skilled CEOs understand that success may come down to being among the first players to identify a need or enter a market and bringing higher standards and lower unit costs than the competition.
The next closest group of CEO ability indicators include follow through on commitments, ability to make quick decisions, aggressiveness, ability to hold others accountable, and persistence. While it is tempting to view these as character traits, I argue that these are more closely related to the systems, processes, and procedures that CEOs use to make decisions and lead their people. CEOs with access to good data and empowered staff understand their capacity. They know how to commit to only those things on which they and their staff can follow through. Timely data, clear priorities, and a well thought out decision-making process allow for quick decisions and bold moves when opportunities arise. These systems provide the mechanisms for accountability discussions and set the table for persistence by matching leading indicators and long-term metrics to long-term value creation.
Talent insights to lead through the current crisis:
Worry less about getting the right answer or perfect strategy to see your organization through current challenges.
Focus instead on identifying issues related to your customers, employees, and stake holders. Address them proactively before they force your hand.
Put a premium on ensuring that your systems, processes, and procedures are working properly. Use them to make informed decisions quickly and lead your people through inspiration, challenge, and accountability.
Search for better ways to create and deliver value (high standards & commitments) and challenge your people to find cost savings (efficiency) that allow you to retain and redeploy staff to increase company and customer ROI.
Relationships matter
Skilled CEOs rank high on interpersonal skills such as measures of respect for others, openness to criticism, listening skills, and teamwork. By contrast, overconfident CEOs tend to be scored as too aggressive, have a propensity to rush to judgment, frequently blame others, and are relatively poor at holding people accountable in productive ways. They often score high for narcistic tendencies and tend to dismiss advice from others that they assume are less competent than themselves. It should come as no surprise that overconfident CEOs have shallower social networks and more often fail to search for indicators that challenge their assumptions and ideas.
Relationship take-aways to lead through the current crisis:
Quality relationships make work feel meaningful and CEOs are no exception. However, unlike employees, CEOs must typically look outside their own organization to find relationships that will challenge their assumptions, ideas, and allow them to polish their interpersonal skills free from the influence of organizational power dynamics.
Actively seek out industry peer groups, trade association committee work, peer-advisory groups, and other ways to build your professional network. CEOs that are content to stay comfortably within their sphere of influence will not progress in their leadership and relationship-building ability.
Focus on substance over style
Overconfident leaders tend to score lower on analytical skills and cognitive ability. They often rely on their charisma and develop a cult of personality to compensate for intellectual shortcomings. They tend to persist too long at unproductive activities and ego-driven vanity projects while abandoning long-term value creation when short term setbacks occur. Skilled CEOs by contrast understand how to develop themselves, no matter what base level of skills and abilities they started with. As a result, they tend to be perceived as smarter, more aware of their own limitations, and they place greater importance on logic and the law of large numbers. They have learned to thoughtfully consider whether luck provided a tailwind to skill in past successes and they understand destructive power of the “hot hand fallacy” (p. 13). They refuse to assume that the business model that grew their organization will be sufficient to grow the organization forever.
Personal development insights to lead through the current crisis:
Be a lifelong learner. No matter how good you are, look for ways to grow your cognitive abilities and develop your analytical skills
It does not matter how skilled you or your people are, there are always factors outside of your control. Luck ALWAYS has a role no matter how good (or how bad) the results may be.
Push your people to find new ways to win. Do not assume that what worked before will continue to work orever.
Give credit and take responsibility. Praise your people when they find new ways to succeed. When they fail, hold them accountable in ways that protect them and create organizational knowledge that will become a future asset.
Delegate management and focus on the big picture
Overconfident CEOs often fail to delegate managerial functions, reducing their capacity to focus on strategic concerns. While it may be tempting to get into the weeds and start managing, especially in times of crises, CEOs need to focus on strategy (what the firm will do next) in response to the current business climate and customer needs. Focus on that bigger picture rather than allowing yourself to be distracted by taking on managerial tasks (how the firm will accomplish the strategy).
Delegation and focus take-aways to lead through the current crisis:
CEOs with a hero complex are toxic to the long-term health of their organizations. If you believe that you are the only one that can do the day-to-day work in your organization, then you have either failed to hire the right people, or failed to inspire, equip, and support the team you have. Either way, the CEO is responsible for ensuring that they are never the only person who can do what needs to be done.
Striking the right balance between securing first-mover advantage and rushing to judgement is hard. Hubris, organizational myopia, and simple bad luck can leave you blind to the dangers ahead. Striking the right balance to proceed confidently into an uncertain future is not easy but outside perspective can help.
Let’s get to work!
