The Narrative Fallacy – How CEO’s crash companies

02 Dec

Every time a company crashes, it is the employees or workers that stand to loose the most. Loosing a job is not just about a paycheck but also about identity, self esteem and dignity.

But what is the causal linkage between a company crashing and workers? Well, in all my experience, I have never seen a company crash because of its employees but I have seen so many crash because of its leaders. End of the day the buck stops at the CEO.

Then how come the CEO is not the first to go?

A lot of it has to do with this phenomenon called the narrative fallacy, a tems used by Nicholas Taleb in “The Black Swan.”  To understand Taleb’s thinking, this is what he said in 2006:

Warning of the Global Banking Crisis

In 2006, in The Black Swan[16]

Globalization creates interlocking fragility, while reducing volatility and giving the appearance of stability. In other words it creates devastating Black Swans. We have never lived before under the threat of a global collapse. Financial Institutions have been merging into a smaller number of very large banks. Almost all banks are interrelated. So the financial ecology is swelling into gigantic, incestuous, bureaucratic banks – when one fails, they all fall. The increased concentration among banks seems to have the effect of making financial crisis less likely, but when they happen they are more global in scale and hit us very hard. We have moved from a diversified ecology of small banks, with varied lending policies, to a more homogeneous framework of firms that all resemble one another. True, we now have fewer failures, but when they occur ….I shiver at the thought.

The government-sponsored institution Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry: their large staff of scientists deem these events “unlikely”.

So he says of the narrative fallacy,is that our brain is so good at looking at an event post-hoc or after the event and then creating good explanations for the event. Prior to the event happening, its occurrence is seen as improbable or impossible but after the event – the explanations provided make the event seem so predictable. Our brain works very hard to ensure it mitigates any form of cognitive disonance:

A powerful cause of dissonance is when an idea conflicts with a fundamental element of the self-concept, such as “I am a good person” or “I made the right decision.” This can lead to rationalization when a person is presented with evidence of a bad choice. It can also lead toconfirmation bias, the denial of disconfirming evidence, and other ego defense mechanisms.

So when a company hits a crisis, the brain of the CEO does two things, a: it quickly works to justify all the actions that the CEO had taken prior to the event  and to make the crisis an external event and b: it quickly looks for possible solutions of how to overcome the crisis.

Have you ever sat with a bunch of CEOs or senior leaders and here them talk about how they were the cause of their organizations problems? I bet you not. They all will speak of others being the problem but not themselves. (Actually this is true for everyone, we are never the problem).

So why do the CEO’s stay and employees get fired? In crisis, a CEO has 2 key tasks, that is to convince the Board that a: the crisis was a result of an external event and b: that he has a solution.

The Board really has 2 tasks: a. to protect as many jobs as possible and b: to look for a new CEO.

I am sure as the US led financial crisis is sinking companies around the world, you must be thinking that I am nuts to be suggesting that a company which fails as a result of an indirect impact of the crisis should also fire its CEO.

Well think about it for a moment – if the CEO should not be fired then why should the employees?

The answer is, “we have to lay off the employees because of cost and there is no work”. I think  the real solution for layoff’s is to lay off from the top. Assuming the company needs to shed USD5 million in manpower cost, it should do it from the top. First the CEO, the management team, and keep working down the ranks till USD5 mil is achieved. Sounds ridiculous doesn’t it? 

Well it does sound ridiculous because it  runs against all conventional wisdom, the very same wisdom that got the company into trouble.

Let’s look at FORD and GM,  it would be far better to remove all the senior leaders who over the last decade have only puled the company down to mediocrity then to keep them there and close down lots of plants, putting Mainstreet Joe out of work.

So who will run the company – well its a crisis, markets have shrunk, production is down to a crawl, so its a good time to  look for a new cadre of leaders from the more junior ranks to step up and give management a shot. In all likely hood they probable have an equal if not better chance for success…..





1 Comment

Posted by on December 2, 2008 in Business, Leadership, Transformation


One response to “The Narrative Fallacy – How CEO’s crash companies

  1. Zain

    March 9, 2009 at 11:13 pm

    As a fair amount of mental conditioning or programming that happens to leaders as they move up the corporate laddder.

    Along that journey, a number values / skills get strenghten such as confidence, leadership, strategic thinking , creative thinking , problem solving etc…

    That journey also offers a host of negative values / skills such as arrogance , ignorance, self centered ness, greed, overconfidence etc….

    So just like everthing in life, leaders have to stay away from the fries and coke when they are ordering that filet-o-fish.

    Just to add (my personal belief, there is a greater disparity of this value system in certain cultures.

    If i bring us back to the visual of the million dollar CEO’s from the domestic 3 flying in with the corporate jets holding out tin cans to the senate, i would agree that the first “thing” that had to go was them.

    Historically it was those mentioned CEO’s that got their organisations in the current uncontrollable skid and eveidently (based on today’s news), they are still in that skid and it may crash soon….


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