Smartest guys in the room … what could go wrong?

What could go wrong?  Plenty it seems.

Commonwealth Bank (‘Which bank?’) is just the most recent example of overconfidence in the ‘intellectual capacity’ of a leadership team to steer the organisation through the ‘white water’ of modern corporate life.  In its recent report on failures at CBA APRA reportedly found:

  • The board relied too heavily on senior management’s ‘high IQ’ and their ability to take care of all things
  • That their risk management processes relied too heavily on ‘raw intellect over comprehensive analysis’

This is a pattern that we see repeated too often and yet we still fall for it.  We’re a bit like Charlie Brown and Lucy (in the old Peanuts cartoon).  Despite Lucy repeatedly pulling the ball as Charlie goes to kick it, each time Charlie imagines 'this time it is different'. 

There’s been a host of studies on team performance and team dynamics over the years that show that teams full of ‘really smart people’ don’t perform as well as teams which might have 1-2 really smart’ players (and not necessarily the CEO).  But somehow, we too often assuming that the answer to complex problems is ‘smart people’.    

This has proven to be a very expensive assumption. 

Perhaps the doozy of them all was Long Term Capital Management.  LTCM was a hedge fund that boasted two Nobel laureates (Merton & Scholes, famous for options valuation theory), multiple PhD’s, and fund management veterans.  LTCM grew to over US100B in funds within 4 years, showing 40% annual returns.  But for all that, the Asian financial crisis triggered a collapse that saw LTCM facing US1Trillion in default risks.  Ultimately the US Treasury had to step in to stablise the global financial system.   So much for genius. 

A close second: Enron.  From a pipeline company in the 1980’s, Enron grew into the world’s largest energy trader.  The collapse of Enron is told in a documentary ‘The Smartest Guys in the Room’.  It traces the rise and fall of Enron, which grew to be the darling of Wall St, until it collapsed.  The Chairman and Chief Executive of Enron at the time were Kenneth Lay and Jeff Skilling.  They have been described[1] as ‘two supremely arrogant and belligerent men who believed they were the smartest guys in the room: that through sheer cleverness and creativity they had brought into being the most innovative corporation in the US’.  Indeed, Enron was named ‘America’s most innovative company’ by Fortune for six consecutive years.   The collapse was triggered, at least in part, by investigative reporter Bethany McLean who was undistracted by the glossy brochures and glitzy premises.  It seems she didn't drink the Kool Aid.  

As the dominoes began to fall a pattern of appalling behaviour emerged.  For example, when the power markets were deregulated in California, Enron shut down energy generation to create power shortages and drive up energy prices.  According to The New York Times, the top brass at Enron realised what was happening ‘but like a mad and dysfunctional cult, everyone carried on’.  This description has parallels to the revelations of the current banking royal commission.

My final example is closer to home.  The CEO of one of Australia’s leading companies had a reputation for his prodigious intellect.  The company prided itself on capturing the best talent available in the sector.  Despite this, with his powerful intellect, he developed a reputation for intellectual bullying.  But in the years prior to his retirement he was persuaded to introduce a values-based leadership development program.  In a post-retirement interview he observed, with a sense of profound insight, that he had recently come to the realisation that ‘it was all about the people’.  One got the impression the interviewer was nodding approvingly at such wisdom. 

I was bemused.   How is it possible that the CEO of a major company, with a reputation for a prodigious intellect, took until his late 50’s to realise ‘people matter’?  This is Management 101 on any MBA.  Tom Peters, management guru, author and former McKinsey partner, has been telling us this for as long as I can remember. 

The simple reality is that intellect can only get you so far.  Perhaps intellect is a bit like money: more is better up until you reach a point at which the upside plateaus.  At this point, other factors – wisdom, emotional intelligence, and the collective intelligence – begin to play a much bigger role.


[1] Oppel, R. A. and A. R. Sorkin (2001). Enron's collapse: The overview.  Enron collapses as suitor cancels plan for merger. The New York Times.