News Flash: CEOs Are Human Too

So you say a super-smart, superstar, maybe even superhuman CEO runs the business of a stock you own? That's great, but I hope you haven't relaxed too much about that stock's future performance. Solid, smart management (and visionary leaders) are legitimate elements of positive investment theses, but even the best chief executive officers are as human as the rest of us and can make mistakes -- sometimes even massive ones.

Further, chief executives who practice the quiet, far less celebrated art of humility may actually be the best corporate stewards over the long haul.

Tripping over ego trips
Deep discussion about Netflix's (Nasdaq: NFLX  ) recent high-profile blunders has ventured far beyond stock-watching circles to mainstream water-cooler conversation. Netflix founder and CEO Reed Hastings is renowned as one of the smartest corporate leaders out there; that aspect made the timeline of events that have alienated and angered so many Netflix customers even more surprising.

The Netflix controversy -- and subsequent subscriber exodus -- should remind us of the dangers of CEO hubris. Commentator Felix Salmon recently penned his thoughts on the Netflix situation for Wired, stating that Hastings let the $300 stock price "go to his head" and said certain "big-money deals" to outbid Time Warner's (NYSE: TWX  ) HBO for early access to DreamWorks (Nasdaq: DWA  ) content illustrated arrogance more than business justification.

Recent bungled decisions made on Hastings' watch have raised consumer ire, but at least they're not nefarious. However, another corporate leader who could use a serious dose of humility is News Corp.'s (NYSE: NWS  ) Rupert Murdoch; his recent statement that he was facing "the most humble day" of his life in connection with News Corp.'s phone-hacking scandal rang false when he made it clear he wasn't even thinking about stepping down.

Downward spiral
We Americans adore the superstar CEO ideal, following a flashy and iconic figure who can do no wrong (and surely will lead our companies' stocks to outperform the market and everybody else!). However, the less exotic truth is that more-humble chief executives who keep their egos under control often do a better job at their posts.

In 2001, Jim Collins' Good to Great examined 1,435 companies. It observed that the 11 corporate entities that had made the jump from "good to great" over a 40-year period were headed up by relatively unknown chief executives as opposed to "the one genius with 1,000 helpers."

In addition, Collins argued, "We found that for leaders to make something great, their ambition has to be for the greatness of the work and the company, rather than for themselves ... Celebrity CEOs, at those same decision points, are more likely to favor self and ego over company and work."

Researchers from John Molson School of Business at Concordia University in Montreal are currently expanding on their 2009 study that reveals a disturbing conclusion: Management ego is a better indicator of the possibility of financial fraud than corporate governance practices. They connect "managerial hubris" to bad corporate decisions that destroy value.

Hubris vs. humility
Granted, it takes a fair amount of ego to be a chief executive, not to mention summoning the cojones to actually found a company. The late, great Apple (Nasdaq: AAPL  ) CEO and founder Steve Jobs certainly was no humble guy, after all; Walter Isaacson's recently published Jobs biography "is full of juicy tales about Jobs' ego," according to Slate.com.

Regardless, the individuals who are able to keep their egos at healthy levels and under control, and remember their own humanity and lack of perfection, probably have a better chance of surviving all kinds of economic storms and corporate misfortunes over the true long haul.

Take Starbucks' (Nasdaq: SBUX  ) Howard Schultz, who recently penned Onward, a memoir detailing the major challenges he and his coffee business faced over recent years. According to The New York Times, "Friends and colleagues say this hellish experience left Mr. Schultz a changed man. Starbucks, these people say, is no longer 'The Howard Schultz Show.' The adjective that many use to characterize his new self is 'humble' -- a word that few would have applied to him before."

Schultz's new humility hasn't hurt Starbucks one bit; in three years' time, the stock has more than quadrupled.

As investors, we should admire the smartest chief executives, and entrusting our investments to the best of them is often part of building a winning portfolio. However, we need to beware the siren song of the cult of personality. Chief executives are people too; if ego seems to be careening out of control into unbridled hubris, it's time to wonder if these people really are the best people to be stewards of our hard-earned money. In many cases, they may not hold up to the scrutiny.

Check back at Fool.com every Wednesday and Friday for Alyce Lomax's columns on environmental, social, and governance issues.

Alyce Lomax owns shares of Starbucks. The Motley Fool owns shares of Starbucks and Apple. Motley Fool newsletter services have recommended buying shares of Apple, Starbucks, DreamWorks Animation, and Netflix, as well as creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On October 30, 2011, at 2:54 PM, cattywampus wrote:

    I thought it was unusual when Reed Hastings openly addressed Whitney Tilson on his short position in Netflix. Don't get me wrong, I jumped on the opportunity. I just wish he had telegraphed the downside as well. So much for the cult like adoration of super-heros. To err is human, well, you know the rest. Might take awhile. Like Liz Taylor said, "There is no deodorant like success".

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