Ram Charan and Jerry Useem on Why Companies Fail

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June 13th 2002 notes on leadership, business and economics

Why Companies Fail is a persuasive article: It speaks to the fundamental fallibility of the human psyche, and despite the fact that the CEO is the powerful head of a company, his or her psyche is no less fallible than yours or mine.

Here are authors Ram Charan and Jerry Useem's take on the failure factors: 

1. Softened by success
2. See no evil
3. Fearing the boss more than the competition
4. Overdosing on risk
5. Acquisition lust
6. Listening to Wall Street more than employees
7. Strategy du jour
8. A dangerous corporate culture
9. The new-economy death spiral
10. A dysfunctional board

Why is it that very smart, highly accomplished individuals fail to appreciate the import of negative signs? In part, it is because they are smart (and successful) that they can read a sign, and flat-out rationalize it, minimize it, deny it.

Cognitive Dissonance argues that people will work to reconcile discrepant information in ways that shape their beliefs and perceptions powerfully. They come to believe their reconciliation because it removes the discrepancy.  It reinforces not only of the re-formulated belief, but also the very process of cognition, because it removes the highly discomforting tension, anxiety, or other dysphoric emotion.

Another way of explaining it: It is a failure of the ego to do its function as reality check and the executor of adaptive behavior. It is also a failure of, or a squelching of, the superego to put the ethics-transgression check on the decisions and actions of the ego.

What makes these two important psychic agents fail? 

• Too powerful id impulses (greed, aggression, pleasure).
• Weakened states of ego and superego, due to high stress, constant pressure, little rest and recovery.
• Fundamental deficits in the ego and superego, arising from missing or insufficient nurturing of these agents in an earlier life stage.
• Defensive mechanisms deployed to guard against some underlying, unconscious anxiety, and the intensity and the endurance of the anxiety necessitate an equally entrenched set of defense mechanisms. These defense mechanisms serve its purpose of keeping the ego at some level of comfort and equilibrium, but at the expense of its optimal functioning.

Charan and Useem’s quick fixes:

• Re-engineer the board
• Turn employees into corporate governors
• Banish EBITDA

The CEO can certainly engage in ego- and superego-strengthening activities. Also, the CEO can install key people who can effectively assume ego and superego functioning for the the CEO.

This sort of people installation really ought to be a group that can withstand the powerful pathological forces that swirl around the CEO. Alternatively, it can be a group that is outside the CEO’s organization altogether.