Friday, June 7, 2013

Why shareholders might want to petition Forbes NOT to write puff pieces on their CEOs….

The Heath Bros. new book, Decisive, is in line with the great stuff they’ve been putting out for several years now: based on sound research, easy to read, full of great stories, and relevant to just about everybody, their new book is subtitled “How to Make Better Choices in Life and Work.” They have a mnemonic for remembering their 4-step process for implemented their strategies: WRAP [Widen your options; Reality-test your assumptions; Attain distance before deciding, and Prepare to be wrong].
Jump-starting their discussion of “reality testing your assumptions,” (pages 92-94) they tell the story of two business school professors (Hayward and Hambrick) who were puzzled by the number of CEOs who make expensive acquisitions that rarely pay off.  Buying another company is a risky business, but the number of managers who did it suggested otherwise. Their theory? “…[A]cquiring CEOs were being led astray by their own hubris.”  Looks like they were right: they tested three factors to see if managers’ overconfidence was leading them to overpay.

They were [here I quote directly]:

1.       Praise by the media.
2.       Strong recent corporate performance (which the CEO could interpret as evidence of his/her genius
3.       A sense of self-importance (which was measured, cleverly, by looking at the gap between the CEO’s compensation package and the next-highest-paid officer—a CEO must think a lot of himself if he’s paid quadruple the salary of anyone else).

And they were right on all counts. They discovered a decided correlation between CEO ego (thus measured) and the acquisition premium.
This may not be so surprising (at least if you’re not a CEO). But it’s a bias that emerges for all of us non-CEOs as well when we think we know something. The antidote is surprisingly simple—and effective. Disagreement—and encouraging it in the people around you. Don’t believe it? Go ask your spouse.

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