As the Chief Executive Officer, your shareholders, your board, your employees and your customers expect you to make the right decisions and execute well against them. Your company’s success depends on it.
There is a problem however; you could be your own worst enemy. By nature most CEO’s are optimistic and confident they can succeed. You are, by definition, bullish on your company. But these characteristics can lead to an illusion of understanding and a considerable reduction in the objectivity needed to ensure the best decisions are made.
Typically the management team shares the CEO’s optimism and commitment to a direction. This is a good thing if it is the best direction but potentially disastrous if not.
Here are a couple of illustrative tales that come from personal experience:
1. CEO Confidence: The Big Order Just Around the Corner
The CEO of a venture-backed networking company, was convinced the enthusiastic reactions of two very large global carriers to their products spelled future market success. Buoyed by this confidence, a significant fund ($50M) was raised. Marketing and development efforts continued at a rapid pace. Efforts to pursue other customers where constrained by the significant costs of supporting these large carriers’ trials. Yet as true believers they ‘knew’ it was only a matter of time before massive orders started to roll in.
But time is never on your side in a competitive market. The two large carriers dragged out their decision making. New funding slowed and management was forced to sell the company for substantially less than the original investment. Because of the CEO’s optimism they were unable to acknowledge the lack of concrete buying signals from their lead customers and failed to recognize the need to broaden their market development until it was too late.
2. CEO Objectivity: Being Open to Strategic Alternatives
Contrast this to the West Coast networking start-up that grew in just 7 years to a $250M company with a strong cash position. Eventually others matched their competitive advantages, margins shrunk and shareholder confidence waned. Yet the Chairman and most of the founders remained convinced that the path that had driven early success required no more than tweaking to restore past glory.
A new CEO was brought in and immediately met with their largest customers. It was apparent that customers respected the company, but increasing competition put at risk future business at acceptable margins. As a single product range company, continued decline was inevitable.
Since the CEO was not constrained by corporate history he recommended that the company market itself to a larger firm that would value its account position and product developments. The Chairman and some founders initially disagreed, convinced that they could still find a way forward. However the CEO’s objectivity as an outsider free from “founder delusion”, backed by feedback from its largest customer, carried the day. The result was the company merged with a much larger company at a shareholder-pleasing valuation of more than 10 times revenues.
Avoiding the CEO Delusion
These two stories illustrate two sides of CEO delusion. One in which the CEO’s conviction and optimism led to a fatal over-reliance on a single path forward. The other in which a Chairman and founder blinded by their own past success were saved by a more objective “outsider” CEO.
The issue is captured well in Daniel Kahneman’s book Thinking, Fast and Slow which delves into the illusion of understanding and control that can result in poor, even fatal, decisions. This is particularly acute for CEOs with a successful track record. Their overconfidence creates a “halo effect” where others trust their decisions implicitly with little push back.
The hard earned lesson for this CEO is recognizing the value of an unbiased, objective view and engaging advisors outside the management team to gain a fresh, experienced perspective. It can be tough for a successful CEO to seek outside help yet it could be one of the most important decisions to make.