CEOs: The Favorite Child?
Something about Tiger Woods’ press conference last Friday was very familiar. I felt as though I had heard those words before. “I knew my actions were wrong. . . . But I convinced myself that normal rules didn’t apply. I felt I was entitled.” (See here for this quote and an interesting comparison of the Woods and Toyota situations.) I then heard an interview yesterday with author and psychologist Ellen Weber Libby, who is promoting her new book, The Favorite Child (video description of book here). After listening to Libby’s interview, I realized that the hubris evident in Woods’ statement is similar to that we often hear in the comments, or see in the conduct, of corporate managers. Consider Ken Lay’s statement regarding the Enron scandal: “I take full responsibility for what happened at Enron. But saying that, I know in my mind that I did nothing criminal.” (See also description of allegations in complaint against Bank of America here.)
Libby explains the “favorite child” scenario as one where a child makes her parents feel good and in exchange the child receives special privileges. Libby herself used Tiger Woods as an example in the interview and uses her brother-in-law, Scooter Libby, as an example in the book. Although treating a child as a favorite can promote positive characteristics, such as self-confidence, it also can impair a child’s ability to recognize the consequences of her actions, according to Libby. I cannot help but notice similarities between these natural family tendencies and those we observe in the corporate “family” context. (Notably, the overconfidence and failure to appreciate consequences sometimes apparent in the corporate context might be a combination of the two; a corporate manager raised as a favorite child in her natural family and then further enabled by her corporate family. Indeed, personality traits such as narcissism are identified by some commentators as indicative of an overconfidence bias in corporate managers. See here and here for discussion of overconfidence in the current and past economic downturns.)
The analogy is not perfect, but I think it fosters valuable analysis. Corporate boards may overlook or be more lenient with respect to scrutinizing the conduct of corporate managers when times are good and the managers’ performance is making the board feel good about the company. The same arguably can be said about oversight from shareholders, regulators and the markets. But this leniency obviously is troublesome when exceptional corporate performance is based on inappropriate risk-taking or illegal conduct. So the challenge then becomes how to motivate appropriate oversight and encourage a healthy dose of skepticism into corporate governance. I touched on this issue in a prior post, and I come back to it here because I think it is an extremely challenging task. Creating a legal rule is not difficult, but designing a rule to change human behavior in an effective manner and without unwanted side effects is. And then you have to consider how best to implement that rule—e.g., legislation, best practices, etc. This difficulty may explain our long history of corporate scandals (for just a portion of this history, see here and here), but it should not discourage us from continuing to try.