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Overcoming Hubris

Succession and Exit

Overcoming Hubris

By , July 18, 2016
hubris

The origin of hubris descends from the ancient Greeks in describing a belief that one was more powerful than the gods thus leading to a fatal result.

The Greek example of hubris that has always struck a chord is the story of Icarus. His father created a pair of wings made from wax so his son ould escape from King Minos prison. The father told his son to use this tool just for the purposes of escape. Icarus escaped but did not want to heed his father’s advice. As he climbed higher and higher, Icarus thought that he was above advice and became increasingly arrogant. His hubristic attitude led to him getting too close to the sun thus melting the wings and causing Icarus to fall and perish into the Icarian Sea.

Hubris can be thought of as a state of overconfident pride and arrogance. For Ancient Greeks, hubris was unforgivable. It was a heinous crime, a great sin, because unchecked arrogance led always to irrational acts, ultimately dragging toward tragedy not only the presumptuousleader guilty of it, but also a whole society.

Here, I outline situations and examples where hubris typically manifests in contemporary business practice. I consider possible warning signs of when a leader’s own confidence is bordering on hubris and conclude with suggestions based on best practice and observation on how to safeguard against it.

 

1. Management Hubris and Overpaying

Management hubris is generally associated with bidding firms in the belief that they can manage the assets of a target firm more efficiently than the target firm’s current management. As a consequence, they make valuation errors and become too optimistic about the potential synergies in a proposed acquisition. They over pay for the target firm to the detriment of the bidding firm and its stakeholders.

A recent and remarkable example of this is Slater & Gordon’s acquisition of its UK listed peer, Quindell. Both had grown aggressively via an acquisition strategy, but Slater & Gordon’s decision, led by its CEO to pay $1.3 billion for the acquisition, when all around them were condemning the deal has ended with the company writing-off over $800 million in goodwill. Now, with falling profits and high debt levels, Slater and Gordon is on its knees and in negotiations with its bankers, which have appointed receivers and managers as advisers. Slater & Gordon however, is not an isolated example.

 

2. Management Hubris and Disrupting Innovation

A second and subtler, but no less devastating form of management hubris is a strident commitment to past successful business practices in the face of inevitable change. Clayton Christensen in his book, The Innovator’s Solution, defines disruptive innovation as an innovation that creates a new market and value network and eventually disrupts an existing market and value network, displacing established market leaders and alliances.

Significantly, he differentiated between technologies which he recognised as not being intrinsically disruptive or sustaining and business models that the technology enables that creates the disruptive impact.

What we observe is that with continual advances in digital technologies the pace of disruption is accelerating. This is because digital technologies democratise new technology by providing greater access. More access and speed supports greater scale and scope of market penetration.

Perhaps Australia’s most noted example of successful disruptive innovation is Qantas’ Jetstar.

Unsurprisingly, the most disrupted businesses are B2C, with media being the most disrupted (think printing, directories and ‘lean forward’ media generally) and telecoms (phone devices) and consumer financial services (stockbroking) close behind.

The most disrupted industries typically suffer from a perfect storm of two forces. First, low barriers to entry into these sectors lead to more agile competition. Secondly, they have large legacy business models which often generate the majority of their revenue. These organizations, tend to have embedded cultural and organizational challenges when it comes to changing at the pace required.

Part of this cultural challenge rests with challenging and changing the views of business captains. Management hubris in the form of stringent adherence to a model and way of business that may have been successful in the past in the face of disruptive innovation is a sure step toward disrupting innovation and business failure.

 

3. Warning Signs

Many leaders veer into hubristic behaviour without realising their shortcomings. Leaders may be well intentioned, but can suffer from blind spots. Some warning signs for leaders when their own confidence is verging on hubris include:

• Making many key decisions independently. While dithering is not good, bosses who make all of their own decisions without speaking to others invite trouble.
• A failure to listen to and heed customer choice and preference. Failure to discover what people think about what their business offers is not only foolhardy, it’s a recipe for future failure. Customer feedback should be automatic, regular and ongoing.
• Reluctance to solicit wide counsel. A leader who seeks out familiar company and who socializes only with select peers cut themselves off from people who might offer alternate views.
• Team unanimity. If no one has contradicted the leader in a while, the leader may have inadvertently created a ‘no bad news’ culture. Leaders who surround themselves with people who can only do one thing — nod — is an invitation to disaster.
• A blame culture. A business culture that seeks to attribute blame when things go wrong is most likely a culture that preferences accountability ahead of problem solving. This has a tendency to concentrate power in the leader while stifling employee participation and creativity.

 

4. Safeguards

History would suggest that hubris has plagued mankind forever, it is so deeply ingrained within our human psyche that we are unlikely to ever be free from it. It is a latent force within each of us. The best way of dealing with it therefore, might be to recognise its potential but establish strong measures of control to prevent it from taking over.
For businesses, both public and private of all sizes, some measures of control to combat hubris might be conveniently grouped under governance, culture and strategic planning.
These measures are perhaps particularly profound for private companies in the small to mid-market space whose businesses typically experience a greater concentration of ownership and authority and generally do not have the same level of disciplines and resources as their listed counterparts.

  1.  Good governance through diversity. We know from public listed company practice, that having a high proportion of independent directors on the board mitigates against CEO overconfidence and dominance reducing the probability of bad decisions. For private companies, having an independent director or business mentor is critical. So too is a disparate makeup of skills and balanced gender composition on boards/advisory committees and senior executive teams.
  2. Positive affirming corporate culture. Research into business high-performance over the past 100 years has established a direct correlation between financial results and the communication habits that drive its workplace – i.e. its culture.
    To minimise risks from ‘cultural failings’, business owners and directors alike should:
    • Demonstrate culture is important. Ask the right questions; look for evidence that management is actively focusing on organisational culture; and enthusiastically participate in the culture program that management is leading.
    • Monitor whether the organisation has the appropriate ‘cultural traits’ for its business. Organisational transparency (sharing the right information with the right people); accessibility (anyone being able to talk to anyone); accountability (the right reports from the right people at the right time).
    • Include cultural aspects with the other decision criteria that drive M&A decisions – financial, strategic, operational – during due diligence, the overall decision formulation process, and the post-deal business integration process.
  3. A longer-term strategic focus. In commenting on the need for corporate bosses to push back against fund managers’ focus on short-term performance, Richard White, the CEO of global software group WiseTech Global, which listed on the ASX in April this year, said:
    “Australia has a ‘problem’ with the way it views risk. We treat failure very badly in this country. It’s an absolute death knell where it should be a learning experience. I’m not talking about the Alan Bond, Christopher Skase type failures. I’m talking about hard-working entrepreneurial people that make a mistake. They get killed for the mistake and can’t recover. That’s not how it works in the US and that’s not how it works if you are going to be an innovator. We have to allow people to take risk but not too much risk.”
  4. Real strategy incorporating digital. In a period of great uncertainty and great change, it is more important than ever to have real strategy. This is not just a plan and a set of priorities and initiatives. It is real strategy based on an understanding of fundamentally how value is going to get created and what a business needs to do to win. Three key aspects:
    • Set appropriate targets embracing strategic innovation. Unless targets are set that are unachievable without disruption, people will not embrace them and they will not innovate disruptively.
    • Appoint a suitable digital officer with appropriate authority and power in the business that examines ways to either disrupt others or themselves.
    • Develop new business models that address serving new markets at a lower cost.
Craig West

Craig West

Managing Director | Succession Plus

Craig West is a strategic accountant who has over 20 years’ experience advising business owners. His background as a CPA in public practice, provided invaluable experience in the key issues of concern to business owners. Following 6 years of study to gain two masters degrees, Craig focused on Capital Gains Tax (CGT) for business sales advising on strategic management of tax issues. This experience formed a very strong view that business owners (and often their advisers) were unprepared and unaware of the steps required to prepare a business for exit.

Craig now acts as a strategic mentor for mid-market business owners and has written four critically acclaimed books on employee incentives, succession planning, asset protection and exit strategies. Craig has conducted numerous seminars and keynote presentations throughout Australia & internationally, including adviser education programs for the Institute of Chartered Accountants and CPA Australia.