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Overconfident CEOs Risk Failure By Ignoring Poor Performance

Overconfident CEOs have been found to hold a dangerously optimistic outlook of company financial performance
Overconfident CEOs have been found to hold a dangerously optimistic outlook of company financial performance
  • Dangerously overconfident chief executives could be putting their businesses at risk
  • Study finds overconfident CEOs too optimistic in the face of financial underperformance
  • Male CEOs overwhelmingly falling foul of the overconfidence trap

When it comes to leadership, confidence is a must-have. The world’s most iconic business leaders have often oozed confidence – a sureness in both the products and services they sell as well as their own abilities. It’s this unwavering self-confidence that has catapulted many to highest echelons of the business world.

Take Elon Musk, for example. The eccentric Tesla boss is known worldwide for his larger-than-life persona and unending self-confidence, and has racked up a whopping 47 million followers on Twitter because of it. And, his confidence has seemingly paid off, having had an eye-wateringly successful 2020, adding more than $150 billion USD to his personal fortune after shares in the electric carmaker rocketed up 740%. While his cockiness has managed to give shareholders a fright from time-to-time – such as in May of 2020 when one of his tweets wiped $14 billion USD off Tesla’s value in the space of 24 hours – this hasn’t affected the performance trajectory of the face of Tesla and Space X. 

But, what about those CEOs whose confidence does do more damage than good? Take the case of Richard Fuld, for example. The former (and final, I might add) Chairman and CEO of Lehman Brothers, a US investment bank that, after having been in operation for over a century and a half, collapsed during the 2008 Financial Crisis, was cited in Time Magazine’s “25 People to Blame for the Financial Crisis” list. He’s been widely criticised for his role in the financial crisis and the collapse of Lehman Brothers, with many accusing his alleged hubris as contributing factor to the demise of what was the fourth largest US investment bank at the time. According to some, despite receiving warnings, Fuld downplayed the threat of the crisis, and in September 2008, a year after the firm saw a 5% net increase in profit to $4.2 billion USD, Lehman filed for bankruptcy.

So, is the ability to remain unfazed, irrespective of the circumstances, good for business? A study has revealed that CEOs with an exaggerated sense of self-confidence can actually do more harm than good to their firms, being less likely to listen to performance feedback. 

Overconfident CEOs have been found to maintain a dangerously optimistic outlook on their company’s financial performance and react less to negative feedback, according to research from Vienna University of Economics and Business (WU Vienna).

It’s commonplace for businesses to evaluate the impact and success of their business strategy by comparing their current financial performance to that of previous years or competitors. BP, the multinational oil and gas company famous for its role in the 2010 Deepwater Horizon oil spill, recently reported its first annual loss in a decade and its worst financial loss since the oil spill crisis. Responding to BP’s performance, chief executive, Bernard Looney, said that it had been ‘a tough quarter at the end of a tough year’.

Looney offered a reserved response, yet a frank assessment of the situation. But how would an overconfident CEO respond to financial issues? According to Christian Schumacher, the study’s lead researcher, their response is likely to be insufficient – doing too little, too late.

“Although the financial situation in the company is possibly very bad and would require a change in the company’s strategy, these CEOs interpret the precarious situation much more positively and only react with a change when it might already be too late – which can of course have devastating consequences for the company,” says Schumacher.

According to the researchers, the study highlights the role that CEO personalities plays in the financial performance evaluation process, and provides evidence that an exaggerated sense of one’s own ability can pose barriers to rational decision-making.

However, when undertaking the study, which saw Schumacher and his team examine all firms included in the S & P1500 Index – made up of the 1,500 largest American listed companies – from 1992 to 2014, the researchers discovered that the notion of the overconfident CEO was an overwhelmingly male phenomenon.

“Women are less often overconfident about their own abilities, which is also reflected in our study. This more accurate assessment means that female CEOs are much more sensitive to different types of feedback about their companies’ current business strategy,” Schumacher says.

This finding joins a growing list that points towards the value of female-led business leadership. A recent study from gender diversity business, The Pipeline, found that London-listed firms, where at least one-third of the bosses are women, have a profit margin 10 times greater than those that don’t. This comes a year after a report from Credit Suisse revealed similar findings, suggesting that a correlation exists between number of female executives in company and revenue growth/profit margins.

So, are female CEOs the safer bet for a more financially secure business? According to Schumacher’s research, among others, the answer could well be a ‘yes’.

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