05/01/2009 05:12 am ET | Updated May 25, 2011

Why Do CEOs Do Such Stupid Things? It's Their Nature

A scorpion asked a frog to take him across a river. The frog refused, saying, "You will sting me."

The scorpion replied, "It would be foolish for me to sting you because then we would both die."
The reassured frog agreed to carry the scorpion across the river. At the halfway point, the scorpion stung the frog. The dying frog asked, "Why did you sting me? You will die too."
"It's my nature," replied the scorpion.

We have witnessed the CEOs of the major car companies flying to Washington on private jets to ask for billions to rescue them from their own bad management decisions. Next came the bank CEOs begging to be rescued from their foolish, almost criminal, behavior with subprime bonds. Vikram Pandit, the CEO of Citigroup, assured Congress that he "gets it." A few months later, he authorized the expenditure of 10 million dollars to redo executive office suites for top Citigroup executives. And the list for AIG is long enough to fill this essay. The latest was that they awarded "retention" bonuses, totaling tens of millions of dollars, to employees of the very division that brought them to the brink. Many of these valued employees have left so that the bonuses designed to retain them are instead rewarding them for jumping ship. The excuse? Contractual obligation. Suddenly the corporate world has discovered obligation and responsibility, at least when the object of said values are themselves. And now, one of these CEOs, Rick Wagoner of GM, has become a sacrificial lamb to our anger.

How do we explain this? Stupidity? Greed? Arrogance? Callous indifference to the opinions and feelings of others? To a degree, all of the above. But there is more going on and that more is part of human psychology. These people acted exactly as people who hold such positions can be expected to act. It was their nature.

People do not become CEOs by accident. They want to run major corporations. In addition to hard work, sacrifice, intelligence, connections, and luck, research has shown that there is a personality type that strives to climb to the top rung of the corporate ladder and is more likely to get there. Such a person is high in what is called Power Motivation. Power motivation refers to the desire to have an impact on the world and/or others. When it is poorly socialized, power motivation can result in being a mob boss or a boxer who bites off ears. When it is well socialized, it can result in rising to the top of an organization, to becoming an executive, even a CEO.

People high in power motivation have certain characteristics that go along with their need to have an impact. They are competitive with others and assertive in their interactions. They need to be top dog. They crave prestige. Thus, they value corner offices, keys to the executive washroom or even private bathrooms, exclusive country clubs, chauffer driven cars, private jets, and well-appointed offices. They own high performance cars, wear expensive suits, and have their initials monogrammed onto their shirt cuffs. The more such prestige items, the better. Consider the impact of walking into a spacious, corner office with a magnificent view. Although such an office has no bearing on the quality of work done in it, it screams importance and prestige. This is just what the high power personality lives for. Bonuses are important because they bestow immediate prestige. They show how important you are and how much more important you are than your fellows. They are better than high salaries because they can be repeated every year.

High power people also are prone to taking risks, especially when their choices are public. This is both because big risks have more impact than small risks and because they do not want to be seen as "wimpy." An important person with high prestige needs to be at the forefront and show high competitiveness and nerve. Taking risks shows "balls," something a powerful person needs to have. Leaders, people of high impact, top dogs, cannot be timid. And, they get a charge out of having the kind of impact a high-risk decision can bring.

What this means is that CEOs are just behaving in accord with their personalities, their natures. They are about prestige items, being splashy, and looking important. They must take big risks and are especially likely to do so when others, especially competitors, are watching. That they would behave in a manner consistent with their natures should not be surprising. Even their inability to anticipate the public outcry their behavior engenders in our current economic climate is related to power motivation. Much of this motive (and others) is not fully conscious. People high in power motivation do what they do without really thinking about it. These behaviors come naturally to them. Only if something is clearly pointed out, would such a person become aware of the negative impression he or she is making. This accounts for the "blindness" such people sometimes have to their foolish and callous acts.

What to do? First, demonizing, unless the law has been broken (as with Enron or Madoff), does no good. These people are just being who they are. And who they are can results in positive consequences for their companies. They work hard. They are devoted to their companies. It is only when their need to show off, to display, to be top dog, adversely affects business that we have the meltdowns we are now experiencing.

The good news is that these people, unlike mafia dons, are generally well socialized. They want to do the right thing. If socialization pressures change, if what confers prestige changes, so will their behavior. In order to reduce negative risk taking, outrageous bonuses, and out of line perks, the contingencies that support them have to be changed. CEOs have to be made aware of the negative impact of some of their behaviors. This changes their reward values. The big three auto CEOs drove to their next congressional hearings instead of jetting there. Many of the AIG bonus babies gave back their bonuses. These items no longer conferred prestige. Instead, they conferred shame and ridicule. Top dogs do not want shame and ridicule. They will do almost anything to avoid them. The new prestige item may be $1 salaries. Such a person is taking huge risks, making tremendous sacrifices, and garnering favorable publicity. Such a person is having a real impact and is being admired.

Those monitoring CEOs can also keep the potential negatives of power motivation in line. (I wouldn't count on boards since they are likely to be high in power motivation themselves.) If they do not, the CEOs will revert to their former behaviors once their companies are no longer in trouble so that their self-sacrificing behavior no longer has impact or creates prestige. (We also cannot expect highly skilled people to work for nothing indefinitely.) If stockholders know that high power people are liable to these excesses, they might keep a closer eye on them, especially when things seem too good to be true. Make certain that perks and bonuses reflect the company's performance rather than a competition for prestige items between a small group of competitive individuals with power. Since stockholders can be shortsighted, focusing on immediate payoffs, government has a place as well, as watchdog. These checks may be necessary. If we disregard the nature of power motivation, we are likely to be stung again.
But the stockholders, society, and government also need to realize what makes high power people tick. They need prestige. They need to have impact. They need the thrill of competition and of risk. They need an outlet for these needs or they will obtain no fulfillment from their jobs. They will have no incentives to work hard or even to seek employment in the corporate world. They then won't do the good they can do in our economic system. If we don't respect their nature, we will not benefit from it.

So, the solution is to allow, even encourage, the search for prestige and impact but to keep a watchful eye out for the excesses high power motivation people are prone to. In a nutshell, monitor, but do not straitjacket, corporate CEOs. Don't throw the baby out with the bathwater through mistrust of the societal concerns of those high in power motivation (a left-wing excess) and don't give free rein to unbridled power motivation in order to unleash the free market potential of talented people (a right-wing excess).