Don’t ruin a good story, even if it’s wrong

I like stories.  They give me an easy way to remember things.  Storytelling is an art I hope to get better at – l know lots of people feel the same way.  Stories can also have negative, unintended consequences.  Psychologist Daniel Kahneman wrote “confidence is a feeling, one determined mostly by the coherence of the story and by the ease with which it comes to mind, even when the evidence for the story is sparse and unreliable.  The bias toward coherence favors overconfidence.”[i]  In other words stories are good at preserving ideas, even bad ideas.

Bad stories can lead to destructive business decision making.  One example is the story that companies can only become “great” if they have humble CEOs – as proffered by author Jim Collins in Good to Great[ii].  As far as I know, this theory has been thoroughly and exhaustively discredited by every objective empirical evaluation it’s been subjected to.  For starters, it was based on a statistically insignificant sample, its definition of humility or “Level 5 Leadership” was critically subjective and porous, it’s consistently failed predictive testing, it suffered debilitating hindsight bias,[iii] of the 11 companies the theory relied on – two went bankrupt, three posted negative stock returns over the next ten years and eight survivors returned an annual combined average 6% over the decade (if you ignore the bankruptcies).  That’s okay, but hardly “great.”

Meanwhile Apple, with CEO Steve Jobs of legendary non-humble flamboyance returned an average exceeding 300% per year over the same period.  If you think this would be enough to slow down Good to Great’s story, you’d be wrong.  Hundreds of thousands of copies continue to be sold each year.  It’s still one of the ten most popular business books on Amazon.com.  Executives continue to make decisions by it.  The story lives on.

Good to Great isn’t alone.  In fact, it’s part of a much bigger story that’s been told since ancient times.  This is the myth that “nothing matters more than leadership.”  Venture capitalists and managers alike consistently cite the quality of leadership as a top criterion for investment.  Leadership sections burst at the seam in every bookstore.  This… despite empirical evaluations that tend to find the impact of leadership to be relatively small.

For example, the impact of changes in leadership were studied across 167 companies over a 20-year period, concluding that company and industry have far larger effects on sales and profits than leadership.[iv]  Leadership studies of large samples of CEOs, University Presidents and managers of sports teams showed organizational performance to be largely determined by factors beyond leadership control.[v]  More studies show changing CEOs has no statistically significant effect on organizational survival or death[vi] and a wide review of leadership research as far back as 1977 found that, while leaders have some impact, their actions rarely explain more than 10% of the performance difference between the best and worst organizations.[vii]  Despite their voracity and empirical weight, the popular management reaction to these studies has largely been… so what?  Don’t ruin a good story.

We like stories because they simplify things.  Once simplified, we like to keep it that way.  Just pause to consider how easy it is to misattribute the success or failure of a business to its most obvious, simple, anthropomorphic manifestation – the leadership team.  Whether reading about Washington crossing the Delaware or seeing Elvis in a piece of toast, we’re drawn to human-centric interpretations of the world.  We like our stories, especially when they have heroes and villains.  Such stories give us a feeling of coherence and easily come to mind.  Yet stories can do as much harm as they do good.  Don’t be a sucker for cute stories that fly in the face of fact.  If business is to advance as a science it must abandon charming myths when they conflict with reality.  That’s my story and I’m sticking to it.

 


[i] Kahneman, The Surety of Fools, New York Times (October 23, 2011)

[ii] Collins, Good to Great; Why Some Companies Make the Leap… And Others Don’t (2001)

[iii] See Rosenweig, The Halo Effect… and the Eight Other Business Delusions That Deceive Managers (2007)

[iv] Lieberson & O’Connor, Leadership and Organizational Performance: A Study of Large Organizations, American Sociological Review 37 (1972)

[v] See Pfeffer & Blake, Administrative Succession and Organizational Performance:  How Administrative Experience Mediates the Succession Effect, Academy of Managemnet Journal 29 (1986); Pfeffer & Sutton, Hard Facts, Dangerous Half-Truths & Total Nonesense; Profiting from Evidence-Based Management, (2006); Pfeffer, The Ambiguity of Leadership, Academy of Management Review 2 (1977)

[vi] Carroll & Hannan, The Demography of Corporations and Industries, Princeton University Press (2000)

[vii] Pfeffer & Sutton, Hard Facts, Dangerous Half-Truths & Total Nonesense; Profiting from Evidence-Based Management (2006)

This Post Has 5 Comments

  1. I think the real point of the “10% difference due to leadership,” really illustrates the resilience of most organizations. IMO, the real test is in small organizations, where it can make a greater difference. In big corps there is so much inertia that it becomes resilience.

  2. Thanks Thomas. Your text helps define intellectually why I bought shares in Lloyds this week. The cult of the chief executive is definitely exaggerated. If we could know which myths believed in society are wrong, the world would be a better place. One thing is true, outside of finance, most are coming to believe star executives are replaceable. Let us see how Tim Cook does at Apple. If Lloyds and Apple flourish, perhaps executive compensation will fall?

  3. “CEOs has no statistically significant effect on organizational survival or death”… exception Apple. Steve Jobs resurrected a nearly dead company in the mid/late 90s due to leadership. Leadership without vision or desire beyond financial gain is doomed to fail. Don’t chase money!

  4. Yes but… The study was of mature or large corporations. Intuitively, in the startup and adolescent phases of a company the leadership (good or bad) has a profound effect in establishing not just the company but the culture, vigor, and confidence (again, good or bad) of the company and its stakeholders. I’d be interested in seeing a broader study of ‘Founder Flounder’, and when during the adolescent-teenage phase the impact of leadership diminishes.

  5. Great thought Mike. I haven’t seen a study specifically on that topic (change in leadership importance as a function of firm maturity) but there’s a great study by Gompers, Kovner, Lerner and Scharfstein called “Performance Persistence in Entrepreneurship.” This study measured the extent to which startup leaders impact firm performance.

    I saw 3 key findings: (1) successful entrepreneurs do indeed tend to do better in subsequent startups than first-time entrepreneurs or those whose prior ventures failed, (2) however this explained no more than 10-12% of the difference between their performance and that of first-time entrepreneurs or those who previously failed; and (3) it’s perhaps the perception of past success (a kind of halo effect) that creates a virtuous cycle for successful entrepreneurs (it’s easier for them to raise capital, get agreements, customers, etc) because they’re seen as “winners.” Success breeds success. Yet keep in mind that even this study found the percentage impact of leadership to be smaller than many people would assume.

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