When hubris is good for a leader

03 July 2020

By Hossam Zeitoun

Known variously during his rise to corporate stardom as ‘Fred the Shred’ and a ‘Corporate Attila’ Fred Goodwin was not the average banker.

With no public school or Oxbridge background, the son of an electrician had risen to CEO of the Royal Bank of Scotland (RBS) by the age of 43 and proceeded to transform it from a small-time UK player to the fifth largest bank in the world by market capitalisation.

Goodwin did it through dozens of takeovers, including NatWest, a bank, at the time, three times the size of RBS. In creating synergies in the huge takeover of NatWest, Goodwin cut 18,000 jobs and saw the bank’s profits rocket over the ensuing years. He was the darling of the FTSE 100 by the time RBS had posted pre-tax profits of £9.2 billion in 2006, even though his lavish lifestyle, which included a 20m long penthouse luxury office and a private jet paid for by RBS, drew stinging criticism in the press.

But with the financial crash enveloping the world in 2007 Goodwin over-reached, leading a consortium of financial institutions to buy ABN Amro for £55 billion, outbidding close UK rival Barclays in the process. The Dutch bank was heavily exposed to the US subprime mortgage crisis, as was RBS with its many US subsidiaries, and as the liquidity crisis took hold Goodwin was forced into write-downs of £16.1 billion and a record corporate loss of £24.1 billion as the bank was effectively nationalised by the UK Government to save it from collapse.

Goodwin was forced to resign and had his knighthood stripped in an amazing fall from grace. The decision to buy ABN Amro, despite a plethora of warning signs, has since been described in the media and in academic research as an extreme act of hubris.

Indeed, the history of mergers and takeovers is littered with CEOs and boards overestimating their abilities, so much so in fact, that the ‘hubris hypothesis’ is now a common explanation for seemingly illogical and unfathomable acquisitions, with it generally acknowledged by researchers that most takeovers destroy value for the acquirer.

There is evidence that Goodwin was in fact treading a well-worn path, where, after an initial spell of successful acquisitions, hubris develops and the CEO takes on more and more ambitious takeovers until disaster strikes. As 19th century MP and historian Lord Acton famously said: “Power tends to corrupt, and absolute power corrupts absolutely.” Thus, people can start as a leader with great humility but often develop hubris over time, especially when left isolated and in sole charge.

Yet defining hubris as a concept can be tricky, and so identifying it early enough in leaders can be hard for company boards looking to guard against it. But it generally manifests itself in an over-confidence in one’s ability that may border on the arrogant, a high degrees of self-centredness, and it may induce leaders to believe they are right when all evidence confounds them. Thus, hubris leads to disastrous mistakes with the sufferer eventually meeting their nemesis.

Having said all that, in certain situations hubris is needed in a leader. When leading a start-up the odds of succeeding are stacked against the CEO, so they need over-confidence and an unedifying amount of self-belief in order to even take on the task of setting up a new venture.

Research shows that people leading start-ups over-estimate their probability of being right, generalise from their own experience, are less likely to engage in counter-factual thinking and are very confident in their view of the world. These are all classic symptoms of hubris, but they are also all the reasons why somebody takes the decision to start a business.

Indeed, it is positive for society that hubris exists; some sufferers will meet their nemesis and fail, but others will go on to lead a successful business, creating thousands of jobs in the process, and making a fair packet for themselves.

In innovation circles as well, hubris is often necessary. When investing in new products or services there is a certain leap of faith, and research has suggested that those with hubris spend more on research and development. They are more confident, perhaps over-confident, that they will find new products and inventions that will be adopted and become profitable.

Moreover, those CEOs with hubris are more likely to convince investors to part with their cash on a risky project because of the confidence they inspire in others. So companies who are in an industry that has a high level of innovation, such as technology firms, will need a leader who is bold and confident to the point of hubris, to inspire confidence in employees and investors.

A modern day example is Elon Musk, whose over-confidence sees him sail close to the wind, courting controversy in the media with his comments on Twitter, such as when he declared Tesla’s stock price was too high, which saw $14 billion wiped off the company’s value on the NASDAQ exchange. But his apparent hubris has been pivotal in bringing investors, employees and customers along with his high-tech vision for Tesla, Space X and The Boring Company.

Indeed, the inspiring nature of an over-confident leader can galvanise a workforce and have a positive effect on employee motivation. There is evidence that hubristic managers also put more effort into their work to achieve their vision. Thus, employees may see their boss as highly motivated and committed, prompting them to follow suit, and so boosting a company’s productivity.

The over-confidence that hubris brings can also be helpful when companies are facing a high degree of uncertainty and complexity, especially when it will take a long time before it is known if decisions taken now are the right ones. In these highly complex environments it may be better to be overly confident of one’s abilities and judgements than to procrastinate for too long.

Thus, it is not as simple to root out leaders displaying hubris to alleviate any potential disastrous decisions. While, also, there is no point in tying managers in regulatory knots and policy straight-jackets. This may quell any over-ambitious moves by the company, but will also strangle the upside of hubris – the risk-taking and confidence.

Tackling the dark side of hubris requires striking a fine balance because under certain conditions hubris can also deliver value. Companies need to understand the type of leader they require, at what stage they are in the business life cycle and how much hubris they need.

If hubris needs to be kept in check, then employing a strong leadership team around the CEO, who offer diverse opinions and aren’t afraid to voice concerns, can be a strong mitigating force. That cognitive diversity can be achieved by picking people with different cultural backgrounds and from different functions.

Instigating distributed leadership across the organisation, where middle managers are given greater autonomy, can also diminish the effects of a hubristic leader. Making sure the company has an independent board is helpful and will have a mollifying influence on a CEO, while also being able to steer them towards the upside of hubris in entrepreneurial activities and innovation. Plus, research has found exercises in counter-factual thinking - that is deliberately going through different outcomes from decisions and alternative scenarios - can help moderate CEO decisions.

Another possible route is increasing the engagement of shareholders and other stakeholders. A recent policy agenda in many countries advocates investor stewardship, where shareholders take a collaborative approach instead of the usual aggressive behaviour of activists, and promote good governance and long-term value decisions.

So mitigating structures can be put in place against hubris from leaders, but companies need to be wary of not destroying the upside of such a leader – after all, for a while, Goodwin turned RBS into the largest company in the world with £1.9 trillion of assets.

Further reading:

Zeitoun, H., Nordberg, D. and Homberg, F. (2019) "The dark and bright sides of hubris : conceptual implications for leadership and governance research", Leadership, 15(6), 647–672.

Zeitoun, H. and Pamini, P. (2017) "Relational ownership and CEO continuity : a property rights perspective", British Journal of Management, 28, 3, 464-480.

 

Hossam Zeitoun is Associate Professor of Behavioural Science & Strategy and teaches Strategic Advantage on the Executive MBA and Executive MBA (London) plus Strategic Thinking: Strategic Evaluation and Analysis on the Full-time MBA.

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