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BofA and the stuff of CEO hubris

By Jeffrey A. Sonnenfeld,

In light of Bank of America’s recent woes, this piece is part of an On Leadership roundtable exploring the root causes of the corporate ‘urge to merge’.

Earlier this month, Bank of America CEO Brian Moynihan pledged that the financial behemoth would get smaller even as it continues to choke on the troubled mega-mergers it gobbled up during the financial crisis. Several days later, Tyco’s announcement that it was dissolving its sprawling empire of acquired businesses was met with market enthusiasm. That news came on the heels of corporate break-ups at Sara Lee, Fortune Brands and Kraft; earlier in the year, talk of conglomerate I.T.T. splitting up for good sent the stock soaring 17 percent.

The old Yogi Berra admonition “it’s déjà vu all over again” well fits this recent stream of news about poorly conceived business pile-ups and M&A deals gone bad. It’s hardly the first time we’ve seen the fascination with conglomerates fade, or the “big is always better” philosophy of management proven wrong. But somehow, we’re still re-learning it.

Obviously, prudent growth in complex global markets is necessary. Economies of scale are vital, especially with the need to reach across global markets. But as always, there can be too much of a good thing. As another chapter of the big-is-better era appears to be drawing to a close, it’s important to ask: Just what drives the CEOs who staple these random enterprises together?

Such “serial acquirer” CEOs see their jobs primarily as expanding corporate holdings, rather than managing their companies to produce better products and services. They often see regulators as adversaries and accounting rules as inconvenient barriers to fulfilling their plans. They binge on acquisitions in the name of size, even if they’re not necessarily savvy. Ken Lewis’s purchases while leading Bank of America come to mind.

Serial acquirers seem to run their businesses as if their very complexity will make it hard to hold them immediately accountable. No single financial analyst can track the sort of dizzying array of business lines they venture into, and rapid growth without a focused corporate mission makes it harder to judge the performance of these chief executives by conventional yardsticks. Rather than exhibiting skill in producing new products, offering better services or inspiring employees, these executives are usually judged by investors and analysts by the swelling size of their empires.

What drives such thinking may not be able to be helped. In a decade-old survey of 130 prominent CEOs conducted by the Yale School of Management and the Gallup Organization, respondents were asked whether or not they agreed with the idea that “great leaders are born and not made.” Only 26 percent of respondents said yes.

What’s telling is that when their responses were matched up with their real-life strategies, those who did believe in greatness at birth turned out to be the serial acquirers. They tended to invest less in their existing businesses through expanding factories, developing new products and the like, and were far more likely to prefer growth through acquisitions. On the other hand, those who believed that great leadership is developed through experience were less likely to come from the big-is-better school of thought. In other words, serial acquisition isn’t just a business strategy. It can be a sign of CEO hubris.

Jeffrey A. Sonnenfeld is the senior associate dean for executive programs and a professor at the Yale School of Management.

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