TheJakartaPost
Please Update your browser
Your browser is out of date, and may not be compatible with our website. A list of the most popular web browsers can be found below.
Just click on the icons to get to the download page.
The societal costs of CEO overconfidence
Corporate Social Responsibility (CSR) often loses out when it comes to resource allocation, since itâs far from guaranteed to generate high quarterly returns for shareholders
Change Size
C
orporate Social Responsibility (CSR) often loses out when it comes to resource allocation, since it's far from guaranteed to generate high quarterly returns for shareholders. Yet many top firms apparently sense that CSR holds some value for them over the long term.
CSR initiatives when done properly can help companies solidify relationships with key stakeholders, creating moral and emotional capital that can be cashed in later.
So, the depth of a firm's commitment to CSR largely depends on management's ability to foresee situations down the line where stakeholder cooperation might be necessary, regardless of the firm's short-term prospects. This competency has more to do with personality than with core business skills. Research shows this is one of the blind spots common to hubristic or overconfident personalities. As a result, firms led by overconfident CEOs tend to shortchange CSR participation.
Measuring CEO hubris
We looked at media coverage of 464 unique CEOs and noted how often words such as 'confident', 'overconfident', 'optimistic' or 'optimism' were used to describe them, as opposed to words suggesting the opposite, e.g. 'reliable', 'cautious', 'conservative', and 'practical'. Based on this, we were able to calculate a 'hubris score' for each CEO, compared to CSR ratings information for his or her company. CEO hubris leads to a lower level of company participation in socially responsible activities and a higher level of participation in socially irresponsible ones.
Mitigating factors
The link between CEO hubris and CSR activity isn't impervious to context. When we accounted for firm size, cash flow, market competitiveness, and market uncertainty, we saw that the link became more or less important depending on whether the firm's situation was stable enough in the short term to support the CEO's sense of invulnerability. If a hubristic CEO is steering a mighty ship through relatively calm waters, chances are he or she will be complacent and engage less in CSR activities.
The perils of CEO hubris
We hypothesized hubristic CEOs are more likely to attribute their firm's success to their own abilities. Hubristic CEOs think that as long as they're at the helm, things can't help but continue as they are, so why bother sinking resources into CSR? This ocan be dangerous because it ignores all the other key stakeholders on whom the ultimate fate of the business depends.
Narcissism vs. hubris
CEO hubris and CEO narcissism are related concepts with very different implications for CSR participation. While hubristic CEOs regard others' opinions and feelings as unimportant, narcissistic CEOs crave external validation. For that reason, narcissistic leaders are more likely to embrace CSR so they can receive the positive publicity that comes with it. This isn't necessarily an improvement, as CSR initiatives undertaken for self-glorification don't always end up benefiting the firm.
It should not surprise anyone that many CEOs are overconfident. Making it to the very top of the corporate ladder requires excessive self-belief at times. Plus, a charismatic leader's hubris can be contagious, so that others come to see him or her as a corporate savior who can do no wrong. If investors and company directors fail to provide an effective counterweight to CEO hubris, firms are likely to be ill-prepared should a reversal of fortune be lurking in their future.
________________________________
The writer is INSEAD associate professor of Strategy.
This article is republished courtesy of INSEAD Knowledge (http://knowledge.insead.edu) Copyright INSEAD 2014.
