Friday, June 29, 2018

How Do You Respond to Bad News?

Source: Flickr stock photo
As a leader, you should be creating an environment where people feel comfortable sharing bad news.  You don't want them hiding problems, or worse yet, manipulating data to make it seem as though things are proceeding smoothly.   When people do surface issues and concerns, leaders face a moment of truth.  How should you respond?   You only need to shoot the messenger once to poison the organizational culture for years to come.  People have long memories.  They will remember if a prominent leader reacted poorly to the messenger who delivered bad news.   

What is the right way to respond to someone brings forward a key risk or problem with potentially damaging ramifications for the business?   

  • First, leaders need to express their gratitude and praise the courage that it took to raise the issue.  
  • Second, they need to point out the harm that hidden risks can pose to the organization, and encourage others to come forward in the future with similar concerns or problems.  
  • Third, leaders have to avoid the natural instinct to ask, "Why did this happen, and who is responsible?"  Certainly, there will be time to delve into the causes of this problem.  However, in the moment, leaders want to avoid finger-pointing and assigning blame.  Instead, they must focus on bringing people together to solve the problem.  They need to ask, "How can we resolve this problem?  What do we need to do moving forward?"  Naturally, answering these questions will require some investigation as to the cause of the problem.  However, the focus on problem solving rather than "investigation and interrogation" will mean a world of difference moving forward.  
  • Fourth, leaders must encourage the team to look systemically at the problem, rather than individualistically.  They can't focus on the individual(s) involved, but instead must address the systemic issues that led to this failure.  It's not about the one rotten apple usually... it's about the damaged barrel that caused the apples to spoil.  
  • Finally, leaders must look inward.  How did their behavior, leadership style, goal-setting tactics, and means of rewarding employees lead to this problem?  Acknowledging your own role in the situation not only helps the organization improve and avoid making a similar mistake again, but it makes others more comfortable discussing the mistakes and errors that led to this failure.  

Thursday, June 28, 2018

Jimmy Kimmel on Shark Tank

As I was looking for some creative ways to teach my students about building new business models, I came across this hilarious Jimmy Kimmel video.  In this clip, he takes his "bold" ideas to Shark Tank and pitches to the panel.  Let's just say he doesn't receive an overwhelmingly positive response.  

Wednesday, June 27, 2018

The Value of a Decision Journal

Source: Wikimedia Commons
Village Global, an early-stage venture capital firm, recently posted some excerpts on Medium from a talk that Pinterest CEO and co-founder Ben Silbermann gave at the company.   In particular, I was intrigued by this suggestion that leaders keep a decision journal.  Here's Silbermann explaining the concept and why it's valuable for leaders: 

Write down decisions you make — and your rationale at the time — into a “decision journal.” Next time you hire someone, cut a partnership deal, decide on a key product spec — or make any hard decision — write down your reasoning in a journal. Later, you can see how the decision played out relative to your reasoning at the time you made the decision. You can learn whether you should have trusted your gut at the time or not.

Ben has been doing this for awhile and swears by the technique: I feel like if you don’t write down a decision you made and why, there’s so many things going on that it’s very hard to remember exactly what you were thinking at the time, because you have this kind of running dialogue that’s being updated along the way. So that’s been really helpful for me.

I love the concept because it provides leaders a structured opportunity for reflection and learning.   I think it has additional value though.  For many leaders, performance suffers not because they made a poor decision, but because they communicated it ineffectively to others in the organization.  Why can the decision journal help?  By forcing themselves to write down the rationale for their decisions, leaders then have an opportunity to improve the clarity of their explanation.  They can clarify their own thinking about the criteria they used to make critical choices, and consequently, they can explain that rationale clearly and concisely to their team members.  Before people commit to and support a decision, they want to know more than just WHAT the plan is... they want to know WHY leaders chose those particular actions and strategies.  The decision journal can help leaders clarify their own thinking about the WHY behind their decisions.  

Tuesday, June 26, 2018

Lessons from the Theranos Debacle

Several years ago, journalists far and wide heralded college dropout Elizabeth Holmes for her bold vision, innovative strategy, and charismatic leadership at her well-funded startup, Theranos. Holmes proclaimed that she had invented an entirely new blood testing regimen for patients.  Journalists drew parallels to Steve Jobs, even noting that she dressed in a similar fashion. Holmes did not only fool journalists though.  She allegedly managed to deceive an array of investors and board members with extensive experience in industry and government.   Of course, the governnent now charges that the entire organization turned out to be a massive fraud. Last week, Elizabeth Holmes and her firm's former president, Ramesh Balwani (also her boyfriend at one point), were indicted for engaging in an elaborate scheme to defraud investors, patients, and doctors.   

What can we learn from this debacle?  Dr. Greg Licholai, a Yale faculty member and biotech entrepreneur offers the following advice regarding how to prevent another Theranos from occurring:  

So what can we do? First, investors should maintain a “trust but verify” attitude toward companies. We want to enable innovation by providing appropriate resources to creative people—but simultaneously scrutinize their claims, especially when it comes to technology that affects patient safety. Second, companies should foster open cultures and allow for feedback and safe environments for whistleblowers when necessary. Third, industry must continue to embrace transparency and recognize that in the long run, those companies that listen to their constituents achieve sustainable success.

These lessons are highly valuable.  I think there's a broader point though.  We have to be careful about becoming too enamored with a bold and highly appealing vision.  We fall in love with dreams.  We have to ask: Is this vision technically feasible and economically viable?  Sometimes, we find the vision and the desired end state so desirable, and the leader proclaiming that vision so appealing, that we begin to put too much faith in their ability to do the highly improbable.  We stop asking tough questions.  We want to believe that the vision will become reality, and that fervent belief erases some of the natural skepticism that would be healthy in scrutinizing the organization.   Does this make you think of any other visionary leaders these days pursuing what are perceived to be very socially beneficial outcomes?  Hmm... 

Monday, June 25, 2018

Are There Too Many All-Stars on Your Team?

When an important project must be completed, do leaders assign the best players to a team? Do they look for the superstars who can tackle this challenge? Research by John Hildreth and Cameron Anderson suggests that teams can suffer when too many all-stars are assembled together.   These scholars conducted a series of experimental studies in which they examined the creativity of groups consisting of high-power individuals versus groups with a mix of people with differing levels of power.  Here's the conclusion from their research, published in the Journal of Personality and Social Psychology in 2016:  

Source:  Wikimedia Commons
Our research posed the question of how leaders’ power affects their ability to work with other leaders. The answer we found was disheartening. When individuals with power are assembled to work as a group on difficult issues, their power had a negative effect on their group’s collective performance. Groups comprised of more high power individuals, be they students given temporary power or executives endowed with actual organizational power, perform worse than groups comprised of neutral or low power individuals. And, these detrimental effects of power on group performance are explained in part by members of these groups experiencing higher levels of status conflict, being less focused on the task at hand and sharing information less effectively with each other compared to other groups. 

Writing about this research and other studies similar to it, David Rock and Mary Slaughter of the NeuroLeadership Institute conclude that, "While a few a-players can be enormously helpful, it’s possible that success is not about out-hiring the competition for these people. It is more about how you form teams, and then how people work together as teams." Indeed, their conclusion parallels the insights from Google's Project Aristotle, where the company tried to identify the attributes of the "rock-star teams" at the search giant. At Google, researcher Julia Rozovsky concluded that, "Who is on a team matters less than how the team members interact, structure their work, and view their contributions."  I could not agree more with this insight.  Talent is a necessary, but not sufficient, condition for team success.  Moreover, much like any great sports team, role players are important. Not everyone can be LeBron James.  

Thursday, June 21, 2018

Immediate Regret: Why Did I Take This Job?

Joann S. Lublin recently wrote a Wall Street Journal column titled, "What to Do When That Shiny New Job Isn't the Right Fit." Actually, the article mostly focuses on why and how people end up in that difficult predicament. Lublin recounts the story of one tech executive who discovered soon after landing a new job that it would not be the opportunity that he anticipated. Here's an excerpt from Lublin's column:

Technology industry veteran Puneet Goel says he wishes he had done greater due diligence a few years ago before taking charge of product management at a midsize tech company He never reached out to his immediate predecessor who no longer worked there. He says the firm’s CEO and founder asked Mr. Goel to draw up a road map for a more competitive version of its software—and promised him autonomy to devise product strategy. But once Mr. Goel joined, the company chief promised potential customers product capabilities that didn’t exist and weren’t part of his new road map.

“He wanted to do what I thought was my job,’’ Mr. Goel explains. “I just couldn’t be successful in that way.’’ According to Mr. Goel, the CEO defended his approach by telling him, “‘This is the way I have always done it and this is how we are going to do things here.’’’ Concluding “there are no good options here,’’ Mr. Goel resigned after seven months. He’s now a product manager for Google. an Alphabet Inc. unit.

Many reasons exist for this type of regret after landing a new job.  The example above identifies a common problem for new hires - the lack of expected and promised autonomy.  Leaders often do not want to let go, and though they might promise a new hire a degree of autonomy during the recruiting process, they simply cannot avoid the desire to micromanage.   Naturally, some good due diligence will help in this case, but you have to be a bit skeptical of the promises made to you.  You have to learn about the decision-making style of those for whom you will work.   Don't be foolish and believe people when they tell you that they are suddenly going to change their spots.  A candidate might hear, "I've managed this function tightly in the past, but I'm ready to provide the new manager much more autonomy."  Be careful!  It's highly unlikely that someone with decades of micromanagement in his or her past will suddenly shift leadership style.  

Wednesday, June 20, 2018

Are You Signaling a Desire to Cooperate?

Emma Levine, Alixandra Barasch, David Rand, Jonathan Berman, and Deborah Small have published an interesting new paper titled, "Signaling emotion and reason in cooperation," in the Journal of Experimental Psychology.  They conducted a series of experiments to examine how people decide whether to cooperate with another individual.   The experiments used two-player prisoner dilemma games to examine what might cause someone to be more or less cooperative with another party.   Their findings identify an interesting distinction between emotional and rational cues.  Here's an excerpt from NYU Stern's concise summary of the article

The experiments revealed that people infer that emotional actors are more likely to be prosocial, or altruistic, than rational actors. That is, people assume that individuals who make their decisions emotionally are more likely to cooperate, and then respond accordingly by cooperating more with them. “We find that people associate one’s reliance on emotion with prosocial motivations and feelings such as empathy and compassion, rather than selfish emotions, such as greed,” says Professor Barasch.

In addition, reaction to these signals depends on how people themselves make decisions. While people who rely on emotion themselves are quite responsive to signals of emotion and reason, people who rely on reason do not respond as strongly to these cues, instead making their decision to cooperate through calculated self-interest. “We show that people see emotion as a signal of cooperation, and will cooperate more with individuals who make their decisions emotionally. However, signals like this are less important to people who make their own decisions using reason – they cooperate less overall, and are not responsive to these social cues.”

The study has important implications as we work on new teams or with new partners on a project or initiative.   We not only need to be aware of the cues that we are emitting, but we must understand how others make decisions.  Are they more rational or emotional? What does that mean for our ability to engage in cooperative behavior?   Naturally, we also need to be careful not to put ourselves in a precarious position, where others might try to take advantage of our altruism.   Finally, we need to think carefully about our own behaviors that might suggest a powerful desire to pursue self-interests.  Those cues might harm our ability to elicit cooperation from the very people we need to work with to achieve our personal goals as well as the broader organizational objectives.  

Tuesday, June 19, 2018

Busting Myths about Successful Tech Entrepreneurs

The typical successful startup founder in Silicon Valley is in his or her twenties, right? Millennials have the creativity and fresh thinking required to disrupt entrenched incumbents in industry after industry, right? A comprehensive new study debunks this popular myth.  Kellogg Insight describes new research by strategy professor Benjamin Jones and his co-authors.   Here's a quick summary of their findings:

In a new study, Jones, along with Javier Miranda of the U.S. Census Bureau and MIT's Pierre Azoulay and J. Daniel Kim, use an expansive dataset to tackle that question. The researchers find that, contrary to popular thinking, the best entrepreneurs tend to be middle-aged. Among the very fastest-growing new tech companies, the average founder was 45 at the time of founding. Furthermore, a given 50-year-old entrepreneur is nearly twice as likely to have a runaway success as a 30-year-old.

Here are a couple more intriguing statistics from their research:

  • The average age of the founder of one of the fastest-growing tech companies in their massive sample was 45 years old.
  • The average age of the founder of firms that achieved successful exits either through IPO or acquisition was 46.7 years old.  
Why is it important to debunk the popular myth about millennials and successful tech startups?  First, we have to consider the biases that might shape investor decisions.  Might some be inclined to think that the best ideas come from founders in their 20's and perhaps find themselves biased against older entrepreneurs?  Second, we have to consider how the myth might discourage older individuals from taking the risk to launch a startup.  I applaud the authors for such an extensive study that shines a light on the actual experience of successful tech startups and their founders.  

Friday, June 15, 2018

Building Trust: Admitting When You Screwed Up

Wharton's Adam Grant recently interviewed Daniel Coyle, author of The Culture Code: The Secrets of Highly Successful Groups.   They focused at the start of the talk on the issue of building trust.  Grant explains what he learned from reading Coyle's book:

A huge theme in [The Culture Code] is trust. I’ve always thought about trust as the willingness to be vulnerable and take a risk together, but you convinced me that I had it backward. I always thought, “Once we trust each other, then I can go out on a limb, because I don’t have to worry about you harming me or taking advantage of me or letting me down.” You said, “Actually, you take risks together first, and that’s how you build trust.” 

After Grant shares this lesson, Coyle goes on to explain this process of building trust by first becoming vulnerable and acknowledging mistakes.  Coyle tells Grant:

One of the places I saw it first was with Ed Catmull, the president and cofounder of Pixar. We’re walking around Pixar’s new Brooklyn Studio, and it’s a $20 million building, the coolest building I’ve ever been in. I say to Ed, “This building is really cool!” He goes, “Actually, this building was a huge mistake—the hallways are too narrow, the atrium is too small, the cafeteria is in the wrong place. But the real mistake we made was that we didn’t realize we were making a mistake.” [There was] this moment of total candor and openness, and he does this all the time.

Then I would go to the [Navy] SEALs, and the commanders there are doing the same thing. They’re saying, “The most important words a leader can say are, ‘I screwed that up.’” It’s not that we’re going to slowly build trust and then have the willingness to be vulnerable—it’s actually this exchange of vulnerability between two people that creates that closeness.

Take risks and become vulnerable together first, and in so doing, build trust with colleagues and team members.  That's the core lesson here.  As a leader, how can you put this lesson into practice with your team?  What will the benefits be?  Trust clearly leads to higher team performance, more engaged employees, and better talent retention.   Building trust takes time and effort, but the payoff is substantial.  

Wednesday, June 13, 2018

Layoffs at Tesla: What Does It Mean?

Yesterday, Elon Musk announced substantial layoffs at Tesla (9% of its workforce).  Successful, high-growth companies typically do not let go of that many employees.   What's wrong at Tesla?  Clearly, the company has struggled with production of the Model 3.   Many analysts have said that Tesla will need to raise significant amounts of capital in the near future.  Musk has denied that such a move is necesssary.  His recent announcement regarding the scaling back of capital expenditure spending plans, and now the layoffs, suggest an ambitious effort to conserve cash.   Tesla's challenge is not the lack of profitability (it has not been profitable for 15 years).  Instead, it's problem is cash.  Many investors clearly have not been worried too much about the lack of profitability.  However, they would become very concerned if the company started running out of cash and then faced challenges raising new capital at attractive terms. 

"Still, sizable layoffs and moves to conserve cash typically are not the acts of growth companies that are having just a little trouble achieving their goals.And there is a danger for Tesla if it starts to behave like a normal company: Investors may start to value it as one, and its highflying stock may tumble.

Eaves' point is that investors have ignored the lack of profitability for years.   They have expressed profound belief in the growth story, and they have been willing to fund huge capital expenditures in pursuit of that growth.  If investors suddenly started valuing the company differently, then the stock price would face significant pressure. 

Tesla's competitors must watching this situation with much curiosity.  After all, the incumbent car companies have faced their own dilemma for years.  Consider a company such as BMW.  Investors have valued the strong profitability it has generated over the years.  It cannot simply persuade investors to absorb hugeTesla-like losses for years in pursuit of an electric vehicle future.  Somehow, BMW has to invest in the future while still maintaining enough profitability to placate investors.  In some ways, Tesla has had a huge advantage over firms such as BMW, because investors have given Musk essentially a license to lose money for years in pursuit of an EV future.   Is that changing now, and will it change the competitive dynamic in the industry?   We will learn a lot more in the coming months, as we see whether Tesla can ramp up Model 3 production successfully without raising more capital.  

Tuesday, June 12, 2018

Sudden-Death Aversion: It's About More Than Football

Your favorite National Football League team is trailing 31-24 with 30 seconds remaining in the game.  The star quarterback throws a 35 yard touchdown to the tight end, and the crowd goes wild.  The score sits at 31-30.   The coach has a decision to make.  Your team can either kick the extra point to tie the game, or go for the two-point conversion and the victory.   If they tie the game, it goes to overtime.  What does almost every coach do in this situation?  They kick the extra point.  It's the safe strategy in the moment; after all, kicking the extra point has a higher chance of success than going for the two-point conversion. However, have you ever asked yourself: Does kicking the extra point give you the best chance of winning the game eventually? 
Source: Wikipedia

Scholars Jesse Walker , Jane Risen , Thomas Gilovich , and Richard Thaler have examined this decision-making situation.  They describe the typical coach's behavior as exhibiting "sudden death aversion."  Here's the crux of their argument:  

We argue that sudden-death aversion reflects a common bias that can lead to non-optimal decision making in a great many contexts, some far removed from the gridiron. When decision makers face a choice between a “fast” option that offers a greater chance of ultimate victory but also a non-trivial chance of immediate defeat, and a “slow” option with both a lower chance of winning and a lesser chance of immediate defeat, they often opt for the slow option because of their aversion to sudden death. In so doing, they lower their chances of ultimate success.

The researchers found that 89% of NFL coaches took the safe strategy of kicking the extra point to tie the game over a ten-year period.  However, those teams often did not end up winning the game in overtime.  In fact, the percentage that won the game eventually was lower than the average success rate of two-point conversions in the NFL.   These data suggest that sudden-death aversion ends up leading to a sub-optimal outcome. 

The scholars turned to the NBA to conduct further research.  Do teams go for the two-point shot to tie the game, or the three-point shot for the victory?   Coaches tend to prefer to tie the game, but again, that appears to be the sub-optimal outcome.  

The scholars have studied this phenomenon in other settings as well, and they discover a similar "sudden-death aversion" that shapes decision making.  Do business leaders face the same problem?  Surely, they do.  The researchers argue that managers experience "sudden-setback aversion" and thus take what appears to be the safer option in the here and now to avoid a loss in the moment, even if that risk-averse strategy is suboptimal in the long run.  

Friday, June 08, 2018

Learning from Your Customers

Our family loves games produced by a Massachusetts-based company named Gamewright.  The copmany's hit products include Sleeping Queens,  There's a Moose in Your House, and Rat-a-Tat-Cat.   Our latest favorite is Qwixx, a simple dice game that all ages can enjoy.  When we first purchased the game, though, we were frustrated with the fact that we were using up the colored scoring sheets rather quickly.  You could order additional sheets.  However, to save money, we simply laminated the scoring sheets, used dry-erase markers, and wiped them clean after each game.  As it turns out, other customers did the same.   Amazon customer reviewers apparently noted the same thing online.  Recently, we purchased Qwixx Deluxe, a new and more complex version of the game.  Immediately, I noticed a change to the scoring sheets.  Gamewright now makes them out of a dry-erase board that can wiped clean after each game.  

What's the lesson of this story?  Designers can learn a great deal from workarounds - i.e. adaptations invented by customers to address a pain point or unmet need (think tennis balls on the bottom of an elderly person's walker).   I don't know for sure, but it seems that Gamewright learned from the customer workaround (laminated score sheets), and they adapted their product based on observing that adaptation.  Well done!  

What workarounds do your customers employ?  What pain points or unmet needs do these adaptations address?  How can you modify your product or service to alleviate these pain points?

Wednesday, June 06, 2018

Clinging to Old Mistaken Assumptions

Why do leaders cling to assumptions that are outdated, and/or long since proven untrue by reams of data?   Many reasons exist for this cognitive trap.  However, one common reason is that flawed decisions and strategies have resulted from those mistaken assumptions.  Leaders don't want to acknowledge those failures, and thus, they somehow convince themselves that the assumptions are actually true despite the evidence to the contrary.   They rationalize away the data that demonstrates the failed outcomes of strategic choices that have been made.  

Of course, leaders also confuse facts with assumptions all the time.  Consider the following statement:  We need X units of volume to cover our fixed costs.  That seems like quite a reasonable statement, presumably grounded in the data about revenues, contribution margin, and the like.  However, the statement contains a powerful hidden assumption.  It presumes that those fixed costs are set in stone, forever unchanged.  What if the organization could reduce those fixed costs over the longer term?  Of course, that would change the breakeven volume level, perhaps by a considerable degree.  Asking the what if question is critical.  It often opens up new possibilities.  

Of course, asking the what if questions about critical assumptions can be threatening to leaders.  Consider the example above once again.  Asking the what if question might mean initiating a dialogue about a pet project or favorite strategic initiative endorsed or perhaps even created by the leader.   Eliminating that project or initiative might reduce fixed costs considerably, and change the breakeven level.  However, the leader doesn't want to have a debate about that possibility.  Thus, they never ask the what if question about this assumption.  

Tuesday, June 05, 2018

Rethinking the Job Interview

Professor Tomas Chamorro-Premuzic wrote a terrific Fast Company column recently titled, "What If We Killed The Job Interview?"  He summarizes the argument against relying so heavily on interviews to evaluate job candidates: 
The most comprehensive scientific study to date on the predictive power of different recruitment tools suggests that the typical job interview provides very little valuable information over and above psychometric tests, which tend to be both quicker and cheaper to administer.

For example, once you know a candidate’s score on a test of general learning ability, a typical job interview will only improve your ability to predict their performance in a given role by 4%, the analysis found. Interviews are more useful when they’re totally structured and standardized, to the point of resembling a multiple-choice questionnaire; this can increase their accuracy by up to 13%. Yet very few real-world interviews follow a rigorous format. Interviewers usually prefer to go with the flow, stubbornly relying on their own intuition.

Most of the attributes interviewers try to evaluate by gut feel–a candidate’s competencies, skills, personality, values, “culture fit,” and so on–are more rigorously inferred from other data like resumes, simulations, tests, and past performance ratings. Interviews certainly create opportunities for candidates to make claims about these qualities, but as I argue in my latest book, there’s little reason to believe them. Indeed, there’s not much overlap between the talents people saythey have and the ones they actually possess. (Plus, interviewers often use the idea of “good culture fit” to justify hiring people from their own in-groups.)

As Chamorro-Premuzic points out, though, many business professionals can't let go of the interview as a principal tool for evaluating job candidates.  Why?  People THINK that they are awesome talent evaluators, and that they can conduct an interview much more effectively than most others can.  Our supreme self-confidence clouds our judgment about the validity of interviewing.  If we kill the interview, though, how can we judge talent?  We have to find other ways for people to demonstrate what they have actually accomplished, rather than simply asking them to describe their skills and capabilities.  We have to see them in action, rather than letting them simply talk about themselves.  It's time to rethink the hiring process from start to finish.  

Monday, June 04, 2018

The Strategic Chief Human Resource Officer

Adam Bryant, formerly of the New York Times, continues to conduct fascinating interviews with senior executives. He now posts them on LinkedIn on a regular basis. In a recent interview, he spoke with Jorge L. Figueredo of McKesson Corporation about the role of the Chief Human Resource Officer in an organization. Here's an excerpt that I found particularly illuminating: 

Question: What would you say to a CHRO who called you looking for advice because they were frustrated that they weren’t getting the strategic role they were promised?

Answer:  I would tell them, first off, you’re not alone. This is not a unique situation. Many CEOs say they want a strategic CHRO, but they often don’t think through what it really means.  People should see this as an opportunity to educate and help your CEO to understand what it actually means. But whatever you do, do not whip out an article or book about it. You need to personalize the discussion to your company – not offer generic advice. Start by talking about the most important and critical people and organizational issues that you need to tackle as the CHRO in order to achieve the strategic goals.

Figueredo's comments offer an important reminder to all of us.  In many cases, CEOs and other business leaders articulate a strategy, and they focus on allocating the appropriate financial resources to enact that strategy.   A key question, though, is whether the organization has the right human resources in the right positions to be able to implement that strategy effectively.   A good chief human resource officer can help inject that critical talent management question into the strategic planning conversation.  Does the organization have the talent and capability to make that strategy work?  Will new talent have to be acquired?  What development must take place for the existing people in the organization?   How might people have to be shifted into new roles?  Many strategies fail not because of a lack of  effective financial resource allocation, but because the human resource question has not been addressed effectively.  

Friday, June 01, 2018

CEO Power: How Does It Affect Performance When an Industry Experiences a Downturn?

Vishal K. Gupta and his colleagues have published a new paper titled, "When Crisis Knocks, Call a Powerful CEO (or Not)." One of the co-authors, Vikram Nanda, explains the core research question examined in their study: "When you have concentrated power in the hands of the CEO or a small group of decision-makers, does that lead to better decision-making or worse?”   One could argue that a concentration of power helps during a crisis or downturn, because it speeds up decision-making processes.  On the other hand, the organization may suffer because the CEO does not gather information and advice from a diverse range of voices, and because poor governance leads to insufficient oversight and control.    

Gupta, Nanda, and their colleagues studied 3,724 CEOs over a 17 year period.   They examined various measures of CEO power and the relationship to firm performance.  The scholars discovered that, "For innovative firms with powerful CEOs, an industry downturn results in a notable decrease in the firm’s value, or book-to-market ratio, relative to a less powerful CEO, the study found. For firms with powerful CEOs in competitive industries and high-discretion industries, a downturn results in a decrease in firm value."  

The lesson here is straightforward:  Urgency or crisis is no excuse for autocratic leadership or micromanagement.  Inclusive leadership, done well, can lead to effective and timely decisions.