3 April 2010
Hubris gets a bad press, and deservedly so. The reckless arrogance of the leaders of Enron and WorldCom not only destroyed their businesses but took some of them to jail. Many feel that bankers deserved a similar fate after ludicrous levels of overconfidence spurred them to take on unprecedented levels of debt, speculate in markets they did not understand and lead their businesses to insolvency.
But capitalism depends on irrationally optimistic entrepreneurs, most of whom fail without doing enormous damage to others. The line between supreme self-confidence and dangerous arrogance is a fine one, invariably invisible to those who have crossed it. The most hubristic follies are committed by those who have previously made risky bets that paid off against the odds, and come to believe they are invincible. At the time they make their fatal last bet they are mostly hailed as heroes, which is a big part of the problem. Wise counsel, if only to remind masters of the universe that they are mortal, can make a big difference.
Not all hubris leads to catastrophic folly and nemesis in the classic pattern of Achilles and Oedipus, but sudden success made nearly all the market creators I studied believe there was no limit to what they could achieve. At the end of the 1990s, hubris reached epidemic proportions:
• Nokia had created the market for digital mobile phones pretty well single-handedly and its revenues had rocketed from 3.4 billion Euros to 30 billion in eight years. It had reason to think it knew it all, refusing for years to believe that there was a market for clamshell designs and slow to spot demand for camera phones and smart phones. Although it still has the largest market share, it has never recovered its reputation as the leading innovator in the industry.
• Cisco was the company every other manufacturer wanted to imitate and it proudly gave lessons on how to streamline supply chains and become a super-efficient e-business. Between 1993 and 2000 it acquired no fewer than 73 companies, mostly successfully, but by 1999 it was throwing millions and sometimes billions at companies it had only cursorily examined. This profligacy came to a shuddering halt in 2000 when NASDAQ crashed and Cisco’s inflated share price, which had financed all these acquisitions, lost 60 percent of its value. The supply-chain supremo also found itself stuck with hundreds of millions of dollars of unwanted inventory when sales stopped growing.
• In 1999 Amazon, which had only gone public two years earlier and was a long way from showing a profit, embarked on a frenzy of expansion and acquisitions in every conceivable form of web commerce. When eBay suggested collaborating, Jeff Bezos told them he would crush their little operation and bought a stake in Sotheby’s. The next year Amazon’s share price plummeted from $115 to $15, most of its external investments went bust and it had to lay off 1,300 people.
These are exceptionally talented businesses who managed to avoid disaster and went on to achieve great things. Webvan was Louis Borders’ literally fantastic scheme to make supermarkets redundant, ‘the first back-end re-engineering of an entire industry’. He had previously revolutionised book retailing with the chain that still bears his name in the US, but this was a vastly more ambitious venture. An unproven, immensely expensive operation was taking on a highly efficient, competitive industry. When Webvan failed to win enough customers to cover its enormous fixed costs and the funding dried up it folded, with the distinction of having burned more money than any of the thousands of other dotcoms that bit the dust in 2000.
Most hubristic of all Internet businesses was AOL, whose market capitalisation of $175 billion owed more to stock market hysteria and dubious sales and accounting practices than to genuinely distinctive capabilities or loyal customers. Its ‘acquisition’ of Time Warner turned into a nightmare once its true value became apparent. When the merger finally unravelled a decade later, the market valued AOL at 1.5 percent of what it had ten years earlier.
All these cases followed meteoric rises, and success so stupendous and adulation so intoxicating that it would go to almost anyone’s head. Something similar happens to sporting heroes and celebrities who think they can get away with the most outrageous personal behaviour. History is littered with the death and devastation caused by men of destiny, worshipped by millions and accountable to nobody. Napoleon, Hitler, Stalin and Mao are the most appalling examples, but idealists with inflated egos and a mission to save the world can be almost as dangerous. Woodrow Wilson redrawing the map of Europe in 1919 and Neville Chamberlain appeasing Hitler in 1938 were convinced they were saving the world from another war, though they actually helped to make it more likely and more terrible than the first one. Intelligent US Secretaries of Defence, from McNamara to Rumsfeld, have believed they knew how to deploy military superiority to bring peace and democracy to other countries.
Hubris can never be eliminated – it is part of the human condition. The key to preventing the worst excesses both in business and politics is devising effective forms of governance. Bureaucracies are all too effective at crushing hubris, but at the price of inhibiting innovation and stifling success. The challenge for businesses is closely related to disciplined entrepreneurialism: Apple and Google make two surprising cases.
Steve Jobs’ hubris played a big part in almost destroying Apple in the 1980s. The big difference between that ‘insanely great’ era and his infinitely happier reign since 1997 is that he is now surrounded by colleagues who complement him and whom he listens to, and he does not try to take most of the glory himself. Apple is now extremely well managed as well as immensely innovative.
The founders of Google have never lacked self-confidence and some have found them arrogant, but they have shown few of the symptoms of monstrous egos. Almost certainly they have tried to do too many things too quickly, but they do not so far seem to have made catastrophic errors. (It is too soon to tell whether they will ever make a commercial success of YouTube.) What they have managed to do is establish a form of governance with Eric Schmidt which works. As at Apple Mark 2, leadership is shared, one of the best ways of guarding against megalomania.