Winning by Failure

It is the year of the Lord 2002, and corporate executives are being accused of fraudolent behavior left and right. And if it is not outright greed that pushes men and women over the edge, it seems that there is a whole world of incompetence that has pushed to the top and has been wreaking havoc over the past years.

Every day, it seems, another multi-billion conglomerate implodes in a conflagration that will leave entire cities without jobs, causing pain and suffering to large populations, but seemingly not harming those who caused the problem.

How is it possible that, despite being the first stone to tumble, the CEO and the other executives can parachute themselves out of trouble, reaping benefits of what is their failure, while those who worked hard and did a good job have to suffer through misery?

Trusting the Unknown

The startup I worked for must have had its fifteen seconds of glory on fuckedcompany.com, I am sure. I never checked, but there was little that was more reliable in 2001 than the excellent reporting of catastrophic failures on that site.

We had the best money, the best pedigrees, the best ideas, the best space. And yet we miserably failed - and what is worse, we instinctively knew it while we were going.

The problem was clear: we had lost one of the founders, and the new CEO, though studded with the best of pedigrees, struggled to understand the space. A series of wrong decisions, and we were doomed. Our CEO, to be fair, did not leave with a gigantic parachute. But the downside for him was much less relevant than to us. He feared for his reputation, where some of us feared deportation to our native countries.

He failed early on. Very early on. He listened to the wrong people, he hired the wrong friends, he never quite understood the difference between his former company with its hundreds of thousands of people and the lean and mean startup he was handed over.

And yet, those were things that anyone could have seen. Why was he then chosen?

The Axiom of Cascaded Choice

My father, who worked in the Air Force in some unspecified country, complained about the selection of new pilots. They would have five thousand applicants for one hundred positions each year, and could choose from the best and the brightest and the most reckless in the country.

They would start a series of tests, and only those that got culled out through the rigorous selection process would make it to the end. Each examination, each test, would be final - meaning that who didn't meet the minimum criteria would fail the whole exam.

The first test to pass was the health test. The candidates were sent through all medical checks to make sure they would be actually physically able to fly. Then there were personality tests, to see how they would behave under pressure. A set of intelligence test determined whether they had the intellectual make-up required to understand a complex piece of machinery. A knowledge test would grill them on trivia, to see whether they had the foundational cultural basis to succeed. A political background check would finally clear them from the doubt they might have terrorist or communist potential.

Sounds good? Well, there was a problem. The medical examination was strict enough that only three percent of the candidates succeeded it. This means that of the five thousand candidates, only one hundred fifty actually made it through the first step.

Try to select on intelligence, now. If you allow only the best ten percent, you end up with fifteen candidates. So you have to relax the selection and allow two thirds of the candidates to go through all tests. That can't be called selection, any more, it's avoiding the worst.

I am sure that selection methodology changed. But it illustrates a fundamental point very well: if you restrict selection artificially, you will end up with an unfit candidate pool. Let's call this the Axiom of Cascaded Choice.

Choosing Your CEO

Imagine your CEO. Think about, well... Him. He is white, in his fifties, has a pe-degree from a fancy Ivy League college, worked for a similar company before, in a similar position (CEO, COO, GM), has a network of connections to potential customers, a network of potential hires to draw from.

Wonderful, isn't it? He has to be a man, because many people (not you, of course!) have prejudice against women leaders. He has to be in His prime years, because too young makes Him too cocky and too old makes Him too out-of-touch. He has to have a fancy degree because anything less reads ugly on the web site bio. He has to have worked in a similar position for a similar company before, because that's the only way we know He can do the job. He has to have a network of connections because that makes sales so much easier. He has to know people to hire, because that allows us to grow faster.

And yet, you look around, and fewer and fewer of these guys are successful. And more and more of those that did catastrophically ill are from a background like this.

Being Successful

What is it that makes a CEO successful? We know the talents required: charisma and leadership.

Of the two, charisma is probably the more important, the ability to convince and to drive. Charisma comes from confidence, and confidence is an elusive mix of knowledge and assertiveness. Knowledge comes from understanding and experience. Understanding comes from competence in the field, experience from, well, experience. Assertiveness comes from character.

After charisma comes leadership. Don't confuse the two: where charisma is about appearance, leadership deals with action. A good leader is open, fair, flexible, critical and driving. Open means the leader is willing to listen and ponder; fair that she is capable of treating equals equally and unequals unequally; flexible that she can react swiftly to changes in the environment; critical that she constantly judges the work of herself and of those around her (the basis of fairness); driving, finally, that she is willing to push those around her to achieve more, want more, need more.

The critical nature of the good leader and her openness create an environment in which ideas can percolate up. A good leader is able to listen, and will find those that have better ideas in certain fields than her. Thus, the good leader doesn't need to be perfect, or even well-rounded. All the good leader needs is a set of competent people that know they will be heard, they will be trusted.

Look at the Rich and the Powerful

Check them all out, the billionaires of 2002. They are a bunch that widely varies in style and personality. You have the humble ones and the arrogant ones; you have the reckless and the meek; you have the white male and the non-white female. The aristocracy of money is united only by charisma and leadership.

How did two persons as different as Jerry Yang and Larry Ellison gain prominence at the same time? Why did Bill Gates succeed and Jim Clark in the end succumb? And more importantly, what lessons can we derive from their successes and failures?

Choosing

We saw before what some of the criteria are that end up being decision-makers for the choice of executives. Most people will deny that the choice favors white males in their mid-life years, with excellent academic records and a history of pursuits similar to the position to take on.

And yet... show me the company that doesn't actually have an overhang of this type of person in executive roles, and I'll be surprised to my core. Go check your own company, look who is at the top of the organizational charts, and report back to me.

And yet... Does a title from Harvard give you any charisma? Is a position of CEO of a company that spectacularly failed a good sign of leadership?

We choose executives based on a set of criteria that will make their success superficially easier. Sure, if you have potential customers in your pocket, you are more likely to succeed than if you didn't. If you have people that are dying to work for you, you will solve staffing issues better.

By choosing according to this set of criteria, we fall prey to the Axiom of Cascaded Choice: we select too restrictively on certain items, and the pool of candidates shrinks to a puddle right before our eyes. And by the time we give people a chance, it's too late, we lost the best to their shifting careers or uncertainty in the past.

Other than in the Academy, in the world of industry and commerce the Law of Supply and Demand is very much in effect. The natural reaction to diminished supply is higher prices. And that's how we end up with people with dubious qualification and horrible business ethics being able to command and demand salaries and conditions that are beyond any reason.

Conclusion

I cannot tell you who to choose as your CEO. I cannot even tell you who not to choose. The only thing that comes out of this paper is that there is a good way to choose and a bad way.

Sit down with your peers and find out what skills are needed to succeed in the job. Find out where the team is strong, and where it needs bolstering. Choose a complement, not a supplement. And focus on the two traits that make and break an executive: charisma and leadership.

And if you listen to me just a little... Don't even look at the academic track record, the languages spoken, the companies in the portfolio. Make your first choice based on the person, look at the minutia after the fact. If you have to choose between two leaders with equal charisma and leadership, choose the one with the better pedigree and job title.

But whatever you do, never end up choosing between two candidates with equivalent pedigree and job title. If it happens to you, you know you did something wrong. Fastow wrong.