It is a fair bet that many people would place a lot of the blame for the collapse of the investment bank Lehman Brothers and the subsequent financial crisis on the overconfidence of executives. More recently, the disastrous 2016 acquisition of the U.K. hardware chain Homebase by Wesfarmers of Australia is another example of managers apparently being convinced of their ability to succeed where others had failed. More recently still, the case of Elon Musk and his unconventional behavior for a chief executive of a company listed on the stock market looks a six he considered his position unassailable. Not unreasonably, then, there is a widespread belief that overconfidence in CEOs is a bad thing – leading to over-expansive and ambitious strategies and often a rather toxic atmosphere within the business.
Barry Oliver, associate professor in finance at the University of Queensland Business School in Australia, has looked at the effect of overconfident CEOs for some time. Research he and his colleagues have carried out suggests that overconfident CEOs have more short-term debt, even though this brings a liquidity risk to their companies and that the more confident the CEO, the less their organization invests in activity that has a positive impact on society such as community involvement, support for charities, corporate governance, workforce diversity, employee relations, the environment and human rights.
However, in a recent interview Professor Oliver stressed that it was a complex area with psychological and financial aspects closely linked. He also pointed out that overconfidence was “not always a negative thing.” For instance, highly confident executives could be invaluable in innovative businesses where there was a need for hard decisions to be made. He conceded that it might be a case of “horses for courses,” with businesses needing people with different levels of confidence and different sets of skills at different times. The problem, however, was the difficulty of accurately identifying whether candidates for senior roles would fit into the overconfident t category or not.
The positive aspect of overconfident CEOs is also highlighted in research published in the Harvard Business Review earlier this year. In it, the team from Singapore explains how it found that firms led by such executives were associated with significantly lower employee turnover and that employees at these businesses allocated a greater fraction of assets in their retirement benefit plans to company stock. The findings also showed that overconfident CEOs were more likely to develop relationships with key suppliers and that these relationships tended to last longer than average. Moreover, such leaders were found to be better able to secure commitments from suppliers when they were particularly valuable to their companies. This ability to induce suppliers to carry out R&D specific to their companies’ needs was consistent with research elsewhere suggesting that overconfident CEOs are better innovators than others.
T. Mandy Tham, an assistant professor of finance (education) at the Singapore Management University, produced the paper with Chishen Wei, an assistant professor of finance at the same university, and Kenny Phua, who received a PhD in finance from Nanyang Business School at the Nanyang Technical University in Singapore. She explained that there was a natural tendency for people leading businesses to have strong self-belief and underneath this strong self-belief there was a steely determination to succeed. Tham added that this strong self-belief could be contagious. Leaders who could inspire people to share their vision could keep key employees even when things were not going well because the staff believed in them and were prepared to put up with the long hours and initially poor rewards because they had been convinced it would be worth it.
The idea that overconfident CEOs inspired greater loyalty was probably not totally expected, she conceded. Such leaders could be difficult to work for. When asked further for her thoughts on why employees were willing to follow difficult leaders, she suggested: “There will always be a group who feels it is worth putting up with things to be part of a bigger legacy that is being crafted. This group is also end-goal-oriented and believes in the goals of the CEO. This group may not be loyal to the CEO as a person but at the minimum, they are loyal to the goals of the CEO because of alignment of beliefs in the end goals. The strong self-belief of the CEO further reinforces their beliefs that the end goals can be reached by following this leader and hence, inspires the greater loyalty.”
So, given what Professor Oliver saw as the need for balance in selecting executives, how do professional recruiters set about finding the right people? Michael Morcos is managing partner in the Middle East and North Africa for the leading global search firm and leadership consultancy Heidrick & Struggles. He said: “Boards are looking for leaders who are agile and confident in their ability.” The ever-quickening pace of change meant that agility and the ability to both anticipate things that were not in the five-year or even two-year plan and to make the decisions that stemmed from these changes were in high demand. Inevitably, people with these sorts of skills and qualities would be confident. The trick for boards was to guard against overconfidence. Whether this confidence stemmed from experience of seeing organizations through ups and downs or whether it is something innate in an individual’s personality, “you need the right support for them,” said Morcos.
A key way of providing this support was by ensuring there was diversity of thinking around the leader. There could, however, be too much concern about governance. In a fast-moving world, it was not desirable to have lengthy discussions about everything. Nor could the non-executive directors be expected to rein in management because the executives had control of the information. It was more effective to have “the right mechanisms” in place in the guise of other strong personalities or at least people with complementary skills.
Boards should look for a CEO “who is confident but willing to seek assistance.” He added that self-awareness was important because it helped a leader know their strengths and weaknesses and as a result realize when they needed support.
On the question of whether female leaders were better equipped for this, there was some evidence that women have tended to have to manage more stakeholders and convince more people on their way up organizations, Morcos said, “They have gone through slightly more hoops and as a result have the skillset to better understand others’ viewpoints.”
I am a U.K.-based journalist with a longstanding interest in management. In a career dating back to the days before newsroom computers I have covered everything from popular music to local politics. I was for many years an editor and writer at the “Independent” and “Independ… MORE
I am a journalist with a special interest in all aspects of management, but especially leadership.