CEO Hubris - A recipe for takeover disaster
The Financial Times on 29 July carried the story of how Bank of America would be shedding up to 10,000 jobs in an effort to clear up the issues surrounding its merger two years ago with NationsBank. In a commentary, the Lex column described the Chairman and CEO of Bank of America as 'acquisition-mad'.
The story might be a perfect illustration of the point made in an article three years ago by two researchers from Columbia University (Mathew Hayward and Donald Hambrick). They predicted that the size of premium paid for a take-over target would be related to the hubris - or inflated ego - of the CEO effecting the take-over. The size of the premium has been shown to be inversely related to shareholder returns four years after the acquisition and so CEO hubris is potentially damaging to shareholders' wealth.
The prediction that hubris gives rise to take-over premiums is based on the idea that CEO's with hubris over-estimate their ability to manage the acquisition. They used three indices of hubris:
-
Recent organizational success. They assume that success will boost the CEO's stature.
-
Media praise. The media tend to attribute success to leaders. This praise will increase the CEO's hubris.
-
CEO's self-importance. They measure this by the premium of their pay relative to other executives. A premium that is above the normal 30 to 50 percent indicates hubris.
They say that hubris is more likely to be exercised if there is weak board vigilance. They include the following two indicators of this weakness:
-
Consolidation of Chair and CEO positions. This seems to be just the case with Bank of America.
-
A high proportion of insiders on the board.
Studying a sample of major acquisitions, they found that the sizes of premiums were indeed related to the three indicators of hubris. They also found the two indicators of weak board vigilance to be related to the exercise of hubris.
Furthermore, they also found that the three indicators of hubris were related to poor performance after an acquisition.
Implications
The obvious implication is for shareholders and non-executive directors to question very carefully the motivation for a take-over. Is it to boost further the CEO's inflated ego?
More generally, both shareholders and non-executive directors should be very wary of the CEO with hubris. He or she might be setting them on the road to decline. Failed mergers will be compounded by the departure of people who are truly talented from the organization. They will cease to believe the strategy of the organization and will feel crowded by the prima donna CEO.
References
Hayward, M.L.A. & Hambrick, D.C. (1997). Explaining the premiums paid for large acquisitions: Evidence of CEO hubris. Administrative Science Quarterly, 42 , 103-127.
Newsletter: 2003