The Fear Factor in the Corner Office
The threat of getting fired can sharpen a CEO’s judgment. Can boards achieve the same results without the fear?
Key Takeaways:
- A new study shows that CEOs who witnessed a peer in their professional network being fired changed their acquisition activity dramatically over the following year.
- The study comes at a time when CEOs are facing enormous pressure to reinvent their businesses, often through expansive acquisitions.
- Establishing what success looks like before an acquisition, then actually following through after the fact, could help boards support a CEO in appropriate risk-taking.
How CEO Overconfidence Shapes Acquisition Decisions—and What Boards Can Do About It
The news hit the CEO hard: a peer, another CEO in her professional network, was unexpectedly fired, despite steady earnings numbers. Suddenly, everything on her agenda now seemed riskier. That acquisition? Perhaps it deserved more analysis. The aggressive expansion strategy? Maybe it could wait. Her job security felt a lot shakier—which prompted her to take a clear-eyed look at just how much risk was worth taking.
It turns out that fear may be good for business. A recent study in the Journal of Empirical Finance, “Shocks to CEO Overconfidence and the Deflation of Hubris in Acquisitions,” found that when CEOs witnessed a peer in their professional network being fired—specifically, an unexpected dismissal not tied to poor performance or misconduct, and not necessarily in their own industry—their acquisition activity changed strikingly over the following year. In the surveyed group, the total value of acquisitions fell by 45%, acquisition spending declined 25%, and the number of deals dropped 18%. More strikingly, however, the acquisitions they did make generated significantly better returns for shareholders. This effect, which suggested that a temporary reminder of job vulnerability can improve a CEO’s judgment, disappeared after about a year—but it raises an intriguing governance question: If the threat of dismissal makes CEOs better decision-makers, are boards doing enough to hold them accountable?
A fellow CEO’s unexpected firing can be a powerful reminder that even when things seem to be going well, leadership can still be precarious.
“When CEOs see something happen to a peer, there’s a heightened sense of awareness: ‘That could have been me,’” says Jane Edison Stevenson, global vice chair of board and CEO services and global leader of board and CEO succession at Korn Ferry. A fellow CEO’s unexpected firing can be a powerful reminder that even when things seem to be going well, leadership can still be precarious. This may explain why CEOs become more selective about acquisitions, at least temporarily.
But is job precarity truly necessary to achieve these shifts? For board members, the question is whether it’s possible to help a CEO sharpen their judgment absent the fear of sudden dismissal. More rigorous performance expectations and defined milestones could create similar discipline without the upheaval of a CEO changeover—but those practices aren’t universal. “Historically, boards are mixed on holding their CEO accountable for performance, and they often don’t set clear expectations up front,” says Jennifer Williams, a senior client partner at Korn Ferry. “Rather than just ‘we want you to grow the company,’ it’s more helpful to give actual numbers, actual timelines.” Establishing what success looks like before an acquisition, then actually following through after the fact, could help boards support a CEO in appropriate risk-taking.
Meanwhile, CEOs are facing the challenge of an increasingly blurred distinction between running a successful company and continually transforming one. “Today, transform is the new perform—like ‘orange is the new black.’ CEOs are expected to transform a company all the time, every day, which makes for a tough intellectual game,” says Williams. Under that pressure, making acquisitions can become a way of demonstrating progress, even when restraint might produce better results. Williams says the challenge is distinguishing between strategic opportunities and distractions: “The hardest part of prioritization is focus—deciding what you’re going to do, and therefore what you’re not going to do, which is the part nobody talks about.”
To be sure, bold acquisitions can be essential to growth, and confidence is hardly an undesirable quality in a chief executive. CEOs face enormous pressure to reinvent their businesses, often through expansive acquisitions. “When you fold in a new company, all of a sudden you’re much bigger, you have a different story, and your profile changes—so there’s a lot of upside for CEOs to do that,” says Jamen Graves, global leader of CEO and enterprise leadership development at Korn Ferry. The danger comes when ambition outstrips careful analysis. “When a CEO’s confidence is high and the board’s mandate is clear, a sense of hubris can lead to the feeling of ‘I know what’s working, and I can throw this money around’—but in some cases, that focus might be too aggressive and too short-term,” says Graves.
Ultimately, the lesson may be less about instilling fear than about making accountability a continuous part of the CEO-board relationship. A peer’s dismissal may sharpen a CEO’s judgment for a year, but effective governance needs to endure considerably longer. As Stevenson puts it, “Every director should ask themselves: ‘Is my CEO better because I’m on this board? Does my presence help them perform better?’”
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