The "Oracle of Omaha" and famed investor, Warren Buffett, once compared corporate mergers to the fairy tale of the The Frog Prince by the Brothers Grimm. He was a little off (we will forgive him for that), but he basically said that corporate CEO's often believe that they are like the princess in the fairy tale and that their kisses can turn a toad into a handsome prince. In other words, the CEO believes that he or she has the leadership skills necessary to turn a failing company into a successful one. Buffett went on to say, "We've observed many kisses but very few miracles."
What Buffett is talking about here is something called "hubris" (defined by good ole Merriam-Webster as "exagerrated pride or self-confidence"). Hubris - particularly a leader's hubris - has been studied in a number of contexts in the business literature. Consider a 1997 research study published in the journal, Administrative Science Quarterly by Matthew Hayward and Donald Hambrick. These two investigators reviewed all pairs of publicly traded firms involved in mergers and acquisitions from 1989 and 1992 and found that, on average, the premium that firms paid to acquire or merge with another firm was positively correlated with the acquiring company's recent performance (as determined by the previous 12 months shareholder returns), media praise (as determined by magazine, television, or newspaper coverage of the CEO), and CEO hubris (determined by the pay of the CEO relative to peers). In other words, the greater the CEO's degree of confidence in his or her leadership abilities, the more likely the degree of confidence that the CEO can "turn things around" at the other company (and hence the higher the company ends up paying for the acquisition).
A more recent study in the Journal of Business Ethics reviewed over 160 Korean companies from 2001 through 2008 and found that the greater the degree of CEO hubris, the worse the company's financial performance! An article in Forbes magazine suggested that CEO hubris damages a company's brand! Hubris leads to bad decisionmaking, and bad decisions lead to all kinds of other problems.
As the writer and historian Erik Larson has said, "Where there is hubris, there is tragedy." Overconfidence - or arrogance - can and will get people killed. Just take a look at some of history's most famous disasters and you will find a common thread - hubris. It's almost as if organization leaders say to themselves, "This could never happen to us because we are so great!" Case in point - just look at what happened with the RMS Titanic, which was called the "unsinkable ship." Captain Edward Smith, Titanic's first (and only) captain, said, "I cannot imagine any condition which would cause a ship to founder. I cannot conceive of any vital disaster happening to this vessel. Modern shipbuilding has gone beyond that." An unknown crew member famously said, "God himself could not sink this ship!" Everyone knows what happened to the Titanic in the end.
The bottom line here is that you don't have to be a CEO of a "Fortune 500" company or the captain of a cruiseliner to be at risk for hubris. There is a fine line between being confident in your own abilities and being overconfident. Fortunately, hubris is a learned trait, which means that you can unlearn it!
If you are making a major decision and find yourself justifying that decision with your leadership ability ("I know this seems like a risk, but I got this!"), you should probably think twice. You may stick with your original decision, but good practice dictates that you should at least make a more critical evaluation of your rationale. It's always good practice to have a so-called "devil's advocate" - an individual who feels empowered to provide a good rationale for the counterdecision. Leaders should welcome alternative viewpoints and encourage members of the team to speak up for alternative decisions.
With a little practice and focus, we can learn to avoid hubris. As the writer Mark Twain said, "Human pride is not worthwhile; there is always something lying in wait to take the wind out of it." Don't let that something take the wind out of your sail, and don't ever try to kiss a toad to make a prince!
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