It seems like every week there is a new company on the death watch list.
FTX, which has so far been the worst of the worst, seemed to lack any meaningful financial controls as its CEO appeared to strip the firm of its operating cash.
Under Musk’s control, Twitter is an operational trainwreck with layoffs and both voluntary and involuntary terminations stripping the firm of the people it needs to operate. Right now, the only amazing thing about Twitter is it is still operating, sort of.
It isn’t coincidental that there is increased reference to the Dunning-Kruger effect at this time because this seems to be the overwhelming constant. In fact, you can likely place both Disney and Amazon loosely in this group, as well, given Disney just replaced its leadership and Amazon just missed its numbers, both shortfalls due to CEOs who were and are ill-suited to running their respective firms.
While I’m going to focus on the Dunning-Kruger effect for much of the cause of these failures, I’m also going to talk about the overall poor work boards are doing to assure a competent executive succession which clearly exacerbates the problem.
Let’s start with Dunning-Kruger.
The Dunning-Kruger Effect
The Dunning-Kruger Effect is an observed behavior where the less someone knows about something the more expert they think they are at it. Consider Musk’s approach to Twitter. He had no idea how to run a company that lived off of ad revenue but believed he could fix it in as little as a weekend. In an impressive effort over a period of days, he has largely turned that company into a train wreck that is rapidly approaching bankruptcy, trashing his reputation as a CEO in the process and putting both SpaceX and Tesla at increased risk in the process.
Companies often struggle to continue operations with layoffs approaching 10% of the workforce because they often lose too many critical resources. Through a combination of layoffs, terminations for cause, and voluntary terminations, Musk is responsible for more than a 50% loss of Twitter’s workforce. And his operational decisions have alienated and driven off users and advertisers, forcing him to pull resources from Tesla to help with operations, and co-opt money from Space X to cover revenue shortfalls as he continues to throw good money after bad to keep Twitter from going under.
This could create a cascading failure across his companies like what just happened with FTX, which also showcased an incredible lack of financial experience by a CEO that didn’t seem to have any but made highly questionable financial decisions anyway. At Meta/Facebook, Zuckerberg figured he could run the company without Sheryl Sandberg, and look how that turned out. Running a firm of Facebook’s size isn’t easy and now he seems to be operating in a panic, trying to cut Facebook out of its problem, forgetting Andy Grove’s advice that you can’t cut a company back to success.
So, the enemy of good operations is a combination of lack of experience and false confidence, yet, as an industry, we aren’t addressing this core problem well at all, which is why more and more firms are failing.
The Lack of CEO Mentoring and Fear of Losing Credit
Thanks to IBM, I went through formal CEO training along with a large pool of potential future candidates. I was rotated across a variety of functional areas that included finance, accounting, law, manufacturing, marketing, competitive analysis, audit, security, and operations. I didn’t do HR, but I have a degree in Manpower Management which likely covered that area adequately.
As a result of this training, I have a good grasp of the skills a CEO should have but rarely does, and I realized that I really didn’t like being a senior manager, hated politics, and would rather advise than execute (you get less credit, but there are far fewer people trying to stab you in the back on your way up).
While my experience should be the norm, getting this kind of experience has become more the exception than the rule, and IBM does it better than most. In most cases, CEOs aren’t properly trained in breadth, which means they have little understanding of most of what makes their companies work and yet feel very motivated to make decisions in these areas because they don’t realize how little they know.
This is exacerbated by policies that tend to place getting credit for advancement, which leads managers to take credit for others’ work or work to cause a more experienced peer to fail so they are less of a career threat. This was driven home when I was in Competitive Analysis at Siemens. We talked them out of an expensive project three times by showing successfully that the effort would fail catastrophically. They disbanded our unit, did the project anyway, and the division went under pretty much as we’d projected in what may have been a near-historic level of incompetence.
Fixing the overall problem is multi-faceted. First, we need to assure that CEOs have a broad understanding of the fundamentals of the companies they run. That should be the board’s job. This means CEOs need to focus with their boards on succession planning and mentoring for multiple candidates so the firm has a deep pool should something happen to the leader who’s in place or any of those in line for succession. Those in the succession plan need to be protected so the CEO doesn’t, as many CEOs eventually do, see them as a threat and force them out of the company.
Second, there needs to be a great deal more rigor to ensure credit goes where it is deserved and that people legitimately advance by doing great work, not by gaming company policy and politics. In addition, ensure that executives are credited when they use qualified advisors in areas where they lack deep knowledge rather than attempting to cover up what they don’t know with ill-conceived decisions and arguments based on their authority (“because I said so”) rather than competence.
Executive leadership is broken and getting worse. Companies like ARM, FTX, Twitter, Meta, Disney, and Amazon are current poster children for poor management, but they are hardly alone. The lack of competence at the top is creating an increasing drag on overall corporate performance. To address this issue, boards need to focus on creating and protecting strong succession plans, assuring top executives are truly experts in what they need to know and use qualified resources to make decisions where they lack that expertise. Finally, the focus needs to go to assure that the competent advance, not just the politically astute. Only by focusing on creating a more competent class of CEOs will we return competence to leadership. Unless we do this, there will be many more FTX and Twitter-like catastrophic failures in our future.
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