When the Going Gets Tough (1) - Ensure Your CEO is Self-Critical
Does your CEO gaze out the window or into the mirror when difficulties arise? This question holds significant weight, particularly as more companies find themselves navigating through turbulent times and facing critical strategic decisions.
A recent study by Shi, Chen & Li (2023) sheds light on why self-critical CEOs are more capable and motivated to deal with performance shortfalls and downsizing. One of the toughest decisions CEOs face is whether to engage in corporate downsizing during periods of performance shortfalls. For obvious reasons, CEOs usually hesitate to downsize companies. Downsizing can negatively affect the company’s image, it may be perceived as an admission of poor strategic decisions in the past, and it will likely meet resistance from employees. Furthermore, downsizing can have a negative impact on CEO compensation, as their pay often correlates with company size. The same applies to the CEO’s social status.
The study uncovers a crucial distinction: CEOs with a strong internal attribution tendency, who take personal responsibility for outcomes, are more likely to initiate downsizing when performance falters. Conversely, CEOs with a weak internal attribution tendency, who blame external factors, are less inclined to pursue downsizing.
Beyond the ability to downsize, historical examples show how CEOs lacking self-criticism generally makes things worse in difficult times:
- Enron: Once among the world’s largest energy companies, Enron’s collapse in 2001 resulted from accounting fraud and corporate misconduct. CEO Jeffrey Skilling’s relentless pursuit of profit, coupled with his failure to acknowledge the company’s financial issues, played a pivotal role in its downfall. Skilling’s lack of self-reflection and accountability for Enron’s unethical practices had severe consequences.
- Volkswagen: The 2015 emissions scandal tarnished Volkswagen’s reputation when it was revealed that illegal software had been installed in diesel vehicles to cheat on emissions tests. CEO Martin Winterkorn’s initial denial of involvement only exacerbated the situation, leading to significant financial losses and damage to the company’s integrity.
- V&D: Facing financial troubles and increased competition, Dutch department store chain V&D struggled to adapt. Despite calls for significant cost-cutting measures or store divestments, CEO John van der Ent opted for turnaround strategies that ultimately proved ineffective. In 2015 V&D filed for bankruptcy, underscoring the consequences of leadership’s failure to recognize the need for strategic changes.
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These examples highlight how a lack of CEO self-reflection can lead to disastrous outcomes for companies. Unfortunately, this problem often becomes apparent when it is too late – at low tide you can tell who is not wearing swimming trunks. When assessing a problem, CEOs need to acknowledge their own role too. Only then can they contribute to a solution.
Understanding the biases that leaders may have is crucial for corporate boards and executives. We need self-critical leadership, especially with major challenges and tough decisions ahead.
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