CEOs are not machines

Source: Management Team (28/01/2019); Author: Bjorn Cocquyt

Do CEOs really take decisions differently from other people? Is it true that they tend to look more to the future and have a broader view of reality, or is it simply in their character to make bold decisions? Professor Kerstin Fehre explains that we often forget that CEOs are, first and foremost, human beings. We have a tendency to see them as machines that take very rational decisions, which obviously they are not. CEOs are only human and have limited cognitive filters and rational capacities. Professor Fehre conducts research into CEOs’ cognitive processes to see how these influence their decision-making and consequently impact on corporate strategy and results.

Limited rational capacities

A CEO – or by extension any human being – having limited rational capacities does not imply they take irrational decisions. We all take decisions based on the available information. “Day in, day out, we need to process large amounts of information. Nowadays, people complain about it, but things were no different in the past. We have never been able to process all the information we are faced with. When we make choices or take decisions, we need to filter all this information. And to do this, we use cognitive filters”, Fehre explains. In her interpretation of a ‘limited rational capacity’, ‘limited’ refers to the information we filter.

“My research shows that our cognitive filters are mainly determined by our personality. Some people are more open to change than others, and some focus more on the future while others prefer to look to the past. Some are more eager to learn from experiences than others, and some question themselves more than others.”

Threats and opportunities

Our experience and ability to learn have an impact on our cognitive filters and therefore on our decisions. Every CEO is influenced by both positive and negative past experiences and thanks to the expertise they have built up, they know what works and what does not. As such, they can try to make well-thought-out predictions about what the future will bring.

As a CEO, it is very important that you anticipate future ‘threats’ well ahead of time and see opportunities in them for your organisation. In other words, that you turn threats into opportunities. Fehre explains, “In one of my research projects, we looked at how CEOs perceive time. We looked at the content of their annual letters to shareholders, such as those included in the annual report, and we thoroughly analysed them to find out whether they focus more on the past or the future. We then asked ourselves why organisations see major challenges – our research focused specifically on the water scarcity we will be facing in the future – as a threat or as an opportunity.”

CEOs with a more future-oriented outlook want to change things and are convinced that they can have an impact on the future. It is important that first of all, they identify and recognise something as a problem or a challenge. Future-oriented CEOs do not simply throw in the towel. They have the drive to tackle the problem and at the same time, they ask themselves whether they can maybe even turn it into a competitive advantage.

CEOs who focus more on the present are generally more defeatist about the future”, Fehre explains. “To them, the future is something they cannot change and over which they have little influence.  However, one is not better than the other a priori. In some situations, it is better to focus on the present or look back at what you have done in the past. Recent cognitive research also shows that all of us are future, present and past-oriented to some degree. No one is exclusively one of the three.”

Issue identification and issue interpretation

Fehre highlights an important point in the decision-making process, namely recognising challenges, problems or opportunities. Taking decisions is all about issue identification and issue interpretation. Just think of major corporations that failed to see the opportunities new technologies could bring, and consequently became completely obsolete – Kodak, Blackberry and Nokia to name but a few.

It all starts with issue identification: you need to be aware of any upcoming changes and their possible impact on your business. “For example, for years I had the impression that the automotive sector did not realise how technology companies like Google were overtaking them, because they simply did not see them as competitors”, Fehre explains. Once you have identified those issues, you need to interpret them correctly. “Needless to say, the way in which you interpret issues influences the way you respond to them. If you see something as a threat, you will do your best to minimise that threat and you will prepare to endure it. Many studies have shown that people tend to react rather passively and defensively to threats.”

“However, if, as a CEO, you see something as an opportunity, you will take action more quickly and try to integrate that challenge into your strategy. Take the example of water scarcity, where the decision as to whether or not to take action can have major consequences for the well-being of future generations. Organisations that install extra filters to reduce drinking water pollution or that try to lower their water consumption are responding to the challenge, but in a passive way. Organisations that develop chemicals to purify polluted water or technologies to make salt water drinkable, on the other hand, are adopting an active approach.” It goes without saying that the latter are the ones developing a competitive advantage.

Decision-making and communication

All too often, a long series of seemingly endless meetings concludes without any decisions being taken and all participants feeling somewhat defeated. As a CEO, you need to be aware of the fact that it is your task to take decisions and assume responsibility for those decisions. After all, that is what leaders do. And the key to taking better decisions lies in taking account of the interests of your staff, board of directors, fellow managers, trade unions, investors, shareholders and so on”, Fehre says.

“I also conducted research into diversity management and I found that there are two sides to diversity in terms of age, culture, gender, industry, experience, personality etc. The positive side is that we take better decisions when we take account of diversity, of differing views and opinions, because it gives us a diverse set of cognitive filters and a wider perspective. On the other hand, overthinking and focusing too much on past events and others’ opinions, as well as all advice – both solicited and unsolicited – often results in a lengthy decision-making process and rather mediocre decisions.”

As a CEO, there comes a point when you need to take a stand and make that decision; that is your role. It is also your duty to decide whose opinion and advice you consider in doing so. And once you have taken your decision, you need to explain the reasoning behind it, according to Fehre. “That does not mean everyone will suddenly approve, on the contrary. Research into change management shows that before taking major decisions, there is nothing wrong with putting people under some more pressure. That will make them realise the need for change, and get them to jump on board. However, you have to be careful not to exaggerate, because if you do, they may start thinking the organisation cannot handle the situation, which can be demotivating. The key is both to exert some pressure and to propose a solution, so that people can instantly see you have the situation under control and everything will be OK. Last but not least, you should not worry about whether or not people will like you for it. That should not be an issue.”

Commitment to the status quo

Fehre also conducted research into the so-called ‘commitment to the status quo’ – simply put, the conviction of CEOs that the strategic profile of their organisation is the right one and should not be changed because it has been successful for so long. She analysed whether or not there is a link between the length of time a CEO has been in charge and the rigidity of their decision-making. “The cliché is that when CEOs have held their role in the same organisation for a long time, they are so convinced of their approach that they are no longer open to change and fail to see what happens around them. However, for now, my research has not provided any proof for this, but it should be further investigated. Long-standing CEOs have led their organisations through many changes, because nowadays, the world is changing at a fast pace and organisations have no choice but to jump on the bandwagon. A good reason why they are still CEO after many years is their open-mindedness and successful approach to change.”

However, it is striking that when a new CEO is appointed, more strategic changes are introduced in the organisation. The explanation is the new CEO’s lower commitment to the status quo, because they do not want to feel responsible for any decisions taken by their predecessor and because they have no emotional or psychological investment in the previously taken decisions.

“That is the traditional explanation, but in reality, no one has ever studied whether this assumption is actually correct", Fehre explains. “I analysed whether new CEOs really do have a lower commitment to the status quo, and I found that this is not always the case. As a result, we made a distinction between forced and voluntary CEO turnover, and internal and external succession. Following the forced departure of a CEO, the commitment to the status quo was clearly lower. And that is logical, because the forced departure of a CEO is generally an indication that something was seriously wrong within the organisation. In that case, the new CEO is given a clear mandate: it’s time for change.”

Fehre’s research does not show whether or not there are fewer strategic changes when a CEO’s successor is appointed internally. “Although in that case, the new CEO was, to some degree, involved in the decision-making process and is therefore partly responsible for the decisions taken. On the one hand, this can mean that the situation is too complex for the new CEO, who therefore decides not to rapidly implement all the necessary changes the mandate calls for, but instead prefers to familiarise themself with the situation and get access to all the necessary information. On the other hand, we may need to question the role of the senior management team: was it truly a team that took decisions jointly, or was it chiefly the CEO who took decisions?”

The CEO effect

The latter largely depends on the CEO’s view of their own role and position within the organisation and the management team. CEOs often see themselves as working in tandem with the president of the board of directors. Sometimes the CEO is nothing more than a member of the senior management team, on an equal footing with the COO and CFO, for example, and with their same decision-making powers. However, some CEOs see themselves more as team leaders. At the end of the day, it all depends on the corporate governance within the organisation.

“Ultimately, there is a good reason why the senior management team has a person who is responsible for finance, another for HR, and still another for operations...”, Fehre explains. “They are experts in their fields. A CEO, on the other hand, cannot and does not need to be aware of everything down to the smallest detail. The experts should be the main decision makers, while the CEO should watch that their decisions are not in conflict with the general strategy and the organisation’s long-term goals.”

Regardless of who is jointly responsible for the decisions taken, research shows that on average, 17 per cent of a company’s success is attributed to the CEO – the so-called CEO effect. Fifty years ago, this effect was much smaller, but it is slowly growing. “After WWII, industries grew and the world had to be rebuilt, so to speak. Growth was more or less self-evident. Decades later, however, growth became less obvious, which resulted in a search for new growth strategies. Innovation became a must. Organisations were also faced with more complex dynamics, which highlighted the importance of the CEO’s role”, Fehre says. That also explains why you cannot talk about an organisation without mention of the CEO leading it, and why so many CEOs enjoy an iconic star status. “CEOs have become modern-day heroes", Fehre concludes.

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