Why Smart Executives Act Stupidly

What are some of the causes of CEO failures that we see today? In reading Robert J. Sternberg’s Why Smart People Can Be So Stupid, I’m reminded of several spectacular failures that really leave you scratching your head and asking “how can that happen?”

And I think that paying attention to these foolish behaviors at the top can make all of us more aware of certain traps to be avoided at all levels of our careers. Who among us hasn’t slipped up from time to time or stretched the rules a bit?

Anyway, I think reading about spectacular failures of once successful people can forewarn us and teach us to make wiser decisions.

CEOs are now lasting just 6.5 years in office on a global average, down from 9.5 years in 1995, according to consulting firm Booz Allen Hamilton (2011 report). Two out of every five new CEOs fail in the first 18 months (HBR, January 2005).

Sidney Finkelstein, author of Why Smart Executives Fail (2003), researched several spectacular CEO failures and their causes over a six year period. He found several patterns that explain what went wrong.

Enron, Iridiuim, Webvan, WorldCom, and Tyco are the more obvious examples. Other CEOs at GM, Motorola, Rite Aid, Mattel, Quaker, and Saatchi & Saatchi have led their companies to the brink of collapse at one time. What’s notable is that these companies were led by executives with stellar track records of previous success. Here’s what Finkelstein concludes:

At some point, every successful organization is a victim of its own success stemming from a distorted view of reality. Many executives saw the signs — competitors or customers were asking for a change — and yet they chose to ignore them.

Why did they fail? What are the patterns? How can we detect the warning signs in organizations before it is too late?

Four Explanations for CEO Failures

Finkelstein offers four explanations for CEO behaviors that lead to failure:

  1. Executive mindset failures – Breakdowns in how executives perceive reality for their companies
  2. Delusions of a dream company – How people within an organization face up to their reality
  3. Lost signals – How information and control systems in the organization are mismanaged
  4. Patterns of unsuccessful executive habits – How organizational leaders adopt unsuccessful behaviors

In the CEO failures he studied, Finkelstein emphasizes that it was not unforeseeable events that brought their companies down. In all cases, these CEOs of failed companies knew there was trouble coming, but they chose not to act.

In many cases, the CEOs were ambitious to the point of greed and dishonesty. But in more cases than not, these leaders were respected with successful track records. I think that if you examined their careers carefully, some of the signs of unwise behaviors might have already been noticed.

But as long as an executives brings in results, how they do it is often overlooked. What do you think?

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