Executive Ego: Juggling a Double-Edged Sword

By Dr. Danny WANG

From Enron’s downfall to the collapse of crypto exchange FTX, we are well aware of the risks posed by CEOs blinded by their ego. Yet, many larger-than-life CEOs like Elon Musk and Steve Jobs, not known for their modesty, have built highly successful businesses that revolutionised entire industries. Is being led by a CEO with a big ego good for business?  A new paper[1] examines the impact of executive hubris on attracting and retaining customers. 

Executive hubris – the tendency of executives to overestimate their abilities – is a psychological trait commonly observed among corporate leaders. Unsurprisingly, it has been shown to significantly impact firm performance and strategic decisions, whether overpaying for acquisitions or engaging in socially irresponsible activities. Nevertheless, flamboyant corporate leaders can also drive innovation, boost sales, and turn around businesses. Since a firm cannot survive without generating revenues, assessing the impact of executive hubris on how firms acquire and retain customers is crucial.

Acquiring new customers and keeping old ones happy both hinge on the effective use of information and data. Attracting new customers is costlier, requiring external information and significant marketing efforts. In contrast, retaining customers tends to be cheaper as firms can leverage internal data to create relatively inexpensive and low-risk initiatives such as loyalty programs.

Applying insights from upper echelons theory – which suggests senior executives view situations through lenses shaped by their unique experiences, values and personalities – researchers surveyed executives from 196 distributor firms in China’s Guangdong province and conducted a series of experiments using business students from Hong Kong. The results?  Executive hubris does markedly influence customer acquisition and retention strategies. Specifically, executives with higher levels of hubris are more inclined to take bold strategic actions, launch aggressive marketing campaigns, and embrace risk-taking behaviors to attract new customers, but often neglect the more mundane task of improving customer satisfaction. 

Interestingly, this tendency is amplified when executives face higher market uncertainties, as the thrill of conquering new markets proves irresistible to managers convinced of their superior abilities. Conversely, a firm's experience in a specific market helps moderate the ambitions of more hubristic managers. Additionally, findings suggest that a strategy balancing customer acquisition and retention improves overall firm performance.

While hubristic leaders’ audacious approaches may capture the attention of new prospects, they can also breed overconfidence. There is a negative relationship between executive hubris and a firm's ability to retain its customers. By overlooking customer needs, disregarding feedback, and making decisions that erode customer loyalty, hubristic leaders may come across as arrogant, especially in highly competitive markets. 

What should firms do? While start-ups in new industries may benefit from more hubristic leadership, firms in more mature markets should seek to harness the ego of their leaders if their objective is to up-sell or cross-sell to existing customers. In addition to implementing robust checks and balances, firms should encourage open communication channels while fostering a customer-centric culture. Supporting humble executives with additional marketing resources may also be necessary when they are tasked with attracting new customers.

As for budding CEOs, try to keep your ego in check, especially if you don’t want to end up like the many disgraced executives who once thought they were the smartest people in the room!

Reference:

[1] F.F. Gu, F.F. Leung, D.T. Wang et al., “Navigating the Double-Edged Sword: Executive hubris and its impact on customer acquisition and retention”, International Journal of Research in Marketing. https://doi.org/10.1016/j.ijresmar.2023.12.002