CEOs: The Favorite Child?
posted by Michelle Harner
Something about Tiger Woods’ press conference last Friday was very familiar. I felt as though I had heard those words before. “I knew my actions were wrong. . . . But I convinced myself that normal rules didn’t apply. I felt I was entitled.” (See here for this quote and an interesting comparison of the Woods and Toyota situations.) I then heard an interview yesterday with author and psychologist Ellen Weber Libby, who is promoting her new book, The Favorite Child (video description of book here). After listening to Libby’s interview, I realized that the hubris evident in Woods’ statement is similar to that we often hear in the comments, or see in the conduct, of corporate managers. Consider Ken Lay’s statement regarding the Enron scandal: “I take full responsibility for what happened at Enron. But saying that, I know in my mind that I did nothing criminal.” (See also description of allegations in complaint against Bank of America here.)
Libby explains the “favorite child” scenario as one where a child makes her parents feel good and in exchange the child receives special privileges. Libby herself used Tiger Woods as an example in the interview and uses her brother-in-law, Scooter Libby, as an example in the book. Although treating a child as a favorite can promote positive characteristics, such as self-confidence, it also can impair a child’s ability to recognize the consequences of her actions, according to Libby. I cannot help but notice similarities between these natural family tendencies and those we observe in the corporate “family” context. (Notably, the overconfidence and failure to appreciate consequences sometimes apparent in the corporate context might be a combination of the two; a corporate manager raised as a favorite child in her natural family and then further enabled by her corporate family. Indeed, personality traits such as narcissism are identified by some commentators as indicative of an overconfidence bias in corporate managers. See here and here for discussion of overconfidence in the current and past economic downturns.)
The analogy is not perfect, but I think it fosters valuable analysis. Corporate boards may overlook or be more lenient with respect to scrutinizing the conduct of corporate managers when times are good and the managers’ performance is making the board feel good about the company. The same arguably can be said about oversight from shareholders, regulators and the markets. But this leniency obviously is troublesome when exceptional corporate performance is based on inappropriate risk-taking or illegal conduct. So the challenge then becomes how to motivate appropriate oversight and encourage a healthy dose of skepticism into corporate governance. I touched on this issue in a prior post, and I come back to it here because I think it is an extremely challenging task. Creating a legal rule is not difficult, but designing a rule to change human behavior in an effective manner and without unwanted side effects is. And then you have to consider how best to implement that rule—e.g., legislation, best practices, etc. This difficulty may explain our long history of corporate scandals (for just a portion of this history, see here and here), but it should not discourage us from continuing to try.
February 27, 2010 at 9:24 am
Tags: Corporate Law, Current Events
Posted in: Corporate Law, Current Events
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Responses (3)
Ken - February 27, 2010 at 12:43 pm
Michelle — For a law professor, you certainly have a knack for raising non-law issues that are very complicated. And of course, since there is an overlap with legal issues, it illustrates just how complicated it is to figure out a simple law to accomplish a simple objective.
In the current topic, I note that a subtle semantic distinction might give us two separate issues. You point out that according to Libby “Although treating a child as a favorite can promote positive characteristics, such as self-confidence, it also can impair a child’s ability to recognize the consequences of her actions.” The semantic distinction I would point out is between the phrase “ability to recognize the consequences…” and the alternate, close but not identical, “ability to assess the likelihood of the consequences.”
I think what Tiger Woods and Ken Lay had in common was not that they didn’t know what the consequences were supposed to be, but rather that they were unable to accommodate the notion that they might actually have to pay the consequences. That, I think, is the adult carryover of the *over-confidence* infused by the doting parents, and later, the doting stockholders/board or doting sponsors/fans.
If that’s the case, then perhaps an answer to the quandry (I seldom say “the answer”) must include lifelong correlation between actions and consequences, not just between results and consequences. I strongly believe that parents should have that orientation. Had my parents demanded better work habits, irrespective of my school grades, then perhaps I would not have had to reinvent myself in my middle years. Likewise, had Enron’s Board of Directors paid more attention to what its executives were doing, not just how they were doing, then their peak profitability would have been lower, but their sustained profitability would have been a valuable tradeoff.
Returning to the statement I quoted, I think the “legal” issue is creating easily recognizable consequences and enforcing them. “Legal,” in that sentence, may refer specifically to the law, or it may refer to the rules and procedures imposed by the Board on its executives, or by managers on their employees, or by sponsors on their athletes. The challenge is to create a system where actions are assessed, and consequences assigned, and to make the star athlete, or star executive, *believe* that the consequences will truly come to pass.
The other consideration, how best to shape the attitudes and behaviors of favored children, is surely a precursor to the actions/consequences subject. The more extreme the privilege accorded in childhood, the harder it may be to accept the likelihood that the consequences might actually affect ME.
And just for the record, I personally have a real hard place with adults who continue to blame their upbringing for the messes they create. We reach a time in our lives when we should be able to take responsibility for our actions, and not claim to be simply “organisms subject to prior conditioning.”
Tiger Woods said “I knew my actions were wrong, but …” Ken Lay, OTOH, said “I accept responsibility, but I didn’t really do anything wrong.” What the heck is THAT all about. If I were a corporate Director, or a sponsor, I know which one of them I’d be inclined to give another shot.
Michelle Harner - February 27, 2010 at 2:38 pm
Ken:
As always, thanks so much for the comment. I really like the distinction you draw between “actions and consequences” and “results and consequences.” I also agree that any effective legal or social rule needs to focus on the former. My struggle is that we currently do have such rules, but in many instances, they are ineffective. Perhaps the weakness in existing rules is their focus on the actions of, and consequences for, the alleged wrongdoer; they do not necessarily encourage monitors and gatekeepers to focus on that link. Rather, as you note, I think monitors and gatekeepers tend to focus on results and consequences.
I also want to note my suspicion that Libby’s thesis is more complex than my summary based on her public radio interview. Her book sounds very interesting, but I have not yet had an opportunity to read it. I was simply intrigued by her analysis of the Woods’ press conference, which raised several red flags for me.
As we have discussed before, I think it is important that we try to understand all of the data points, including cognitive biases, that might contribute to illegal conduct. Without such a complete analysis, I believe our solutions will continue to fall short. I think that drives my search for these interesting human reactions to situations that are at least analogous to the complex legal issues we face in the corporate governance context.
Best regards, Michelle.
Tony - February 27, 2010 at 10:32 pm
Hahahaha, it’s like a most favored nation clause, but sexier…
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