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Why CEOs Make Bad (and Great) Decisions

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Pity the poor CEO. He (yup still overwhelmingly a he, albeit a tad less than ten years ago) works like a dog for thirty years, then by virtue of sheer talent and application shows enough to pull ahead of his contemporaries to become the Big Kahuna.

Then what? A few years at the top, with every decision second-guessed by the Board; dealing with a squabbling executive committee, half of whom want your job; shareholders who buy in and sell out at the drop of a hat and only care about the next earnings round; media who delight in conducting an in-depth interview, then leading with the obviously light-hearted comment you made in the elevator on the way down[1]; and policymakers who are grandstanding in front of their constituencies. And please, please do not get me started on the customers.

All before being unceremoniously pushed out with an insincere compliment in the Chairman’s letter in the annual report or the like. We all wince when we read, “notwithstanding Antony’s significant achievements, it became clear to all of us that a new set of skills were required for the period ahead.”[2]

Add in a relentless 16-hour, seven-day week schedule; a punishing time zone-hopping itinerary that would reduce the average Joe/ Jane to a gibbering wreck; and holidays spent hanging out of a window desperately searching for cell reception.[3]

And all this for what? A mere couple of hundred million.

We are familiar with the modern morality tales of corporate folly. Of titanic folly. Hubris followed by nemesis. (In)famously, Kodak invented the first digital camera, but did not have the vision to see what they had and ultimately paid the price with Chapter 11. Xerox created all the elements that go to make up the modern personal computer, which they then basically gave away to a young guy called Steve Jobs. DaimlerChrysler lost over half its market cap within a year of closing the merger.

So what makes what seems so obvious to so many of us, so hard for them? Why do CEOs make such bad decisions?

Well, having worked closely with dozens of them, the truth is that they don’t. They battle the slings and arrows of outrageous fortune every day. Then they make pretty good quality decisions, almost certainly better than you or I would do in the same position –and for sure with a better strike rate.

We don’t say it aloud, but we don’t like CEOs because they are better than us. Most of us spend our lives working in businesses, many of us in large corporations. There can only be one CEO and it isn’t me. So that says someone thinks this other guy has a better combination of qualities to lead the organization than I do. Being the self-absorbed egotist that we all are I am, I find that quite annoying. Even though rationally I will admit that I am completely unsuited to the job and would be a complete disaster.

Did I mention that CEOs earn over 200 times the average employee? And also that, oftentimes, they are actually talented, smart and charismatic. What’s not to hate?

We all love a disastrous decision; large helpings of schadenfreude all round. And even the best CEOs can get it wrong. So what is it that actually gets in the way of getting it right? How can you avoid joining the role of dishonor? Turns out there are several things that can be thrown in the mix:

CEOs are Human Beings Too

Humans make mistakes. As biological organisms, we are prisoners, to a greater or lesser degree, of our genetic inheritance. As Popeye the Sailor Man informs us, “I yam what I yam.”

So fight or flight is hardwired in. But so are more subtle mechanisms like risk aversion, where decision processes play out in complex, non-linear ways. Offer me double or quits on $1 and I’ll take it. Offer me the same for a million dollars and I will run a mile. Somewhere in the middle (and your middle is not mine), there’s a tough decision.

If you keep up with management literature or even just buy those books at the airport, you’ll be familiar with the evolution of Homo economicus to the far-more nuanced creature – Homo sapiens redux – that we recognize today.

We have been introduced to the theory of decision-making, a strange world of game theory, bounded rationality and satisficing. Based on the original insights of Kahneman and Tversky, we all know now that we are nudged along, that we are predictably irrational and that we can make decisions in the blink of an eye. Evolutionary psychology has even shown the same supposedly irrational decision making exists in other animals[4].

I say supposedly irrational. Turns out that much of what we do unconsciously is pretty logical. Researchers at Rochester University found that “once we started looking at the decisions our brains make without our knowledge, we found that they almost always reach the right decision, given the information they had to work with.”[5] Of course, the get-out is that qualifier, ‘given the information they had to work with’.

The study of how we go about solving problems is heuristics. And our decision-making processes are complex, paradoxical even. One definition of heuristics is that it is “a method of problem-solving that uses math to achieve solutions without understanding why or even how the math works.”[6] So when you’re standing on first base, you don’t need to know the speed the earth is travelling around the sun, the laws of Newton or Einstein, the wind speed, ball speed, rotation, or any data at all. You just catch the damn ball.

We may well be hardwired, but we also have an operating system with a couple of different programs running. And given that being human encompasses emotions and intelligence, it’s not surprising we have apps for both gut and mind.

As Nobel winner, Daniel Kahneman, put it, we have two types of decision-making processes going on, one intuitive and one rational. And intuition is “indeed the origin of much that we do wrong… [but]… it is also the origin of most of what we do right – which is most of what we do.”

Trust your Gut, Unless It’s Wrong 

CEOs are often super-smart, successful humans – which brings its own pitfalls.

Mac Davis and the Muppets sang, “It’s hard to be humble (when you’re perfect in every way).” McKinsey put forward the idea that there are two particular types of human bias that weigh heavily on business decisions: confirmation bias and overconfidence bias, suggesting that these account for bad decisions roughly 75 percent of the time.

Confirmation bias happens when we overvalue information that chimes with what we know or believe and undervalue information that doesn’t.

Overconfidence bias is just that. “No, you can’t! You think you can do these things, but you can’t, Nemo!” (Marlin, Finding Nemo).

Or you think your company has the capability and it doesn’t, which explains why over-confident CEOs are 65 percent more likely to make an acquisition.

There are two ways that confirmation bias plays out in companies. First, there’s Groupthink, where the team wants to see things only one way and discounts any data that contradicts.

Then there’s selective bias, where people consciously or unconsciously hide or ignore the bad stuff and only the good confirming stuff gets sent up the chain.

McKinsey used Blockbuster as an example of these biases in action when it turned down a chance to buy Netflix for $50 million. Netflix is now worth over $40 billion. Blockbuster filed for Chapter 11 bankruptcy in 2010 (re-emerging as a brand).

Smart operators acknowledge these biases and do something about it. That is why Warren Buffet invites a hedge fund that is shorting Berkshire Hathaway to ask real questions at its AGM, and also why the mighty Warren quoted Thomas Watson, founder of IBM in his last shareholder letter, “I’m no genius, but I’m smart in spots and I stay around those spots.”

Overconfidence is bad. Do not fall prey to the Lake Wobegon effect – that idyllic (fictional) community where ‘all the children are above average’. But conversely, you must also back yourself. J.K. Rowling got rejected by 12 publishers before getting into print.

And let’s not forget that CEOs actually have to make real-time decisions – no 20/20 hindsight allowed. Hindsight is such a wonderful thing. We can all see Apple is a superstar today with a share price over $120, but not many of us bought in at a tenth of that when the first iPhone was launched only eight years ago.

Sometimes the decisions you make after the mistake are the ones that matter. JPMorgan Chase bank Chief Executive Officer Jamie Dimon almost got himself harpooned by the London Whale incident, which cost JPMorgan Chase over $6 billion in 2012. After steering the bank through the global financial crisis he had achieved what Bloomberg described as rock star status; there were plenty ready to see the mighty fall.

Credit then to Dimon. After initially getting it wrong by dismissing the incident as ‘a storm in a teacup’, he addressed it head on in a barnstorming letter to shareholders. He wrote that he wanted to deal with the issue ‘up front’ (which really meant on page seven after some stellar figures for business performance and shareholder returns on his watch – just saying).

He apologized and told shareholders that it was ‘critical that we learn from the experience’. He then showed that he had taken his own advice by listing a dozen life lessons (and resulting actions) from the incident that the bank had taken on board.

You’re not allowed to mention this in polite company, but if you’re a banker you are going to lose money sometimes if you’re any good, you’re just going to make more along the way. The chairman of one of the world’s largest banks used to tell me that it isn’t making mistakes that mattered in banking. Mistakes are certain; it was how you deal with them. Dimon passed that test.

News Corporation wrote down its digital investments by several hundred million dollars in 2015. Does this make Rupert Murdoch a bad investor? He is the last of the moguls, a man who built a global business empire from transformative deals (literally dozens of newspapers in Australia; the Sun and The Times in the UK; 20th Century Fox, HarperCollins and Dow Jones/The Wall Street Journal in the U.S.). And what that has taught us is sometimes it’s not the one deal that matters, it’s the cumulative impact. Like Richard Branson, Murdoch entered and exited several businesses in search of new revenues. You win some decisions and you lose some (although to be honest it really helps if you are the founder, or an investment banker).

Even Ted Williams struck out. You will get it wrong sometimes so learn to deal with it. “I’ve made lots of dumb decisions. That’s part of the game.” Warren Buffett.

Timing Timing Really Matters 

Take Chuck Prince, ex-CEO of Citigroup, who had the misfortune to be the man on point in 2007 as the GFC was about to steamroller the financial services industry. He famously said, “as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

Which afterwards (key word), everyone takes as evidence that man was oblivious. But you don’t get to run the biggest bank in the world by being dumb. In the same interview, he told the Financial Times that the party would end at some point, and “when the music stops, in terms of liquidity, things will be complicated.”

Truth is I’m not sure Citi, Chuck or Buddha could have done much else in July 2007, although, it is interesting that Citi was quietly trying to reduce its leveraged lending – albeit too little too late – as he spoke.

For those of you long-in-the-tooth enough to remember the dotcom-fuelled crash at the turn of the century, you will also recall some fairly average analysts getting super-famous on super-bullish calls and some very smart and respected ones getting killed as the market defied gravity.

Being right is not always enough. As Keynes taught us, the market can remain irrational longer than you can remain solvent. Timing is everything. Jack Welch was CEO of GE at the same time as the longest bull market in U.S. history. Jeff Immelt took over the day before 9/11 and went through the GFC. Both great CEOs at a truly great company, but please don’t compare them by the numbers. The right decision at the wrong time can be much worse than the wrong decision at the right time.

CEOs Make Bad Calls Because They Get Bad Advice 

Leaders need help. It’s a tough job. They know they need all the help they can get. And in the immortal words of Ghostbusters, ‘who ya gonna call’? Your Chairman? Yes, but remember he (again almost always a he) is the one who will likely fire you one day and his job is to be supportive, but it is also to oversee you and hold you accountable. Your direct reports? Yes, sure, but likewise you might be sacking them one day too, and it’s not an equal relationship. That confirmation bias can creep in from below as well as above.

Your general counsel - sure. Your finance officer or accountant. Your investment banker. Truth is they all play a key role in some very specific issues. But if you take legal advice on the way to a senate hearing, you will (probably) stay out of jail but you might end up a laughing stock.

And if you don’t take proper advice, you might fly there in a private jet when you’re in the middle of laying off thousands of American workers and asking for taxpayer dollars. (More generally, here is my free advice: Never ever arrive at a hearing in a chauffeur-driven car. Get a cab, stop around the corner and walk in.)

CEOs need to listen to an alternate point of view otherwise they end up buying MySpace. So choose someone you trust completely; who brings an independent perspective; and gets and supports what you’re trying to do.

So where does all that leave us? Most of us are just fine and dandy because all we have to do is sit on the sidelines and kvetch. Backseat driving is fun and most of us enjoy it, not least CEOs on other CEOs. Truth is: very few of us would be comfortable wielding power. As the Bard reminds us, “Uneasy lies the head that wears a crown.”

CEOs are a special breed, like it or not. There is no template. Extrovert or introvert; intuitive or analytical; colourful or grey. Good, bad or ugly (or any other rule of three). They come in all shapes and sizes. So there may be science in becoming the great CEO, but there is also art.

By the way, when Blockbuster was offered Netflix for $50 million, it was a loss-making DVD mail-delivery company and didn’t actually get into streaming content for another seven years. Amazon, Apple or Google, all of whom are in that business now, didn’t do that deal either.

And the digital camera presented to the Eastman Kodak execs was a mash-up of a super-8 camera, a cassette player, a digital/analog converter and several circuit boards. It took a minute to show the picture. When its inventor was asked how long it would take to compete with existing cameras, his answer was 15-20 years. Kodak made billions from the patents and its bankruptcy came 37 years after the demo.

Hand on heart, how would you have called those two? So to all the CEOs out there, I leave you with these words of Theodore Roosevelt: “It is not the critic who counts…. the credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood... who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.”

[2] Barclays press release July 2015
[3] ‘If you absolutely must check your emails or make a phone call at Burning Man, then you really shouldn’t be at Burning Man’.


The views and opinions in these articles are solely of the authors and do not necessarily reflect those of Teneo. They are offered to stimulate thought and discussion and not as legal, financial, accounting, tax or other professional advice or counsel.

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