My previous article for the CEO failure modes series was about the Roman Emperor CEO, who uses company coffers to fund lavish personal expenditures. The Budget Blower CEO also spends a lot of company money, but for so-called legitimate investments. He just can’t help himself. Every shiny object draws his attention.
The biggest chunks of money usually go to acquisitions with a new corporate headquarters and jet thrown in for good measure. It is amazing to me how companies that on one hand will pinch pennies and subject every expense report to the most detailed review will then decide to do an acquisition at a price of hundreds of millions or even billions of dollars.
Of course, these kinds of shopping sprees can’t occur unless the company is throwing off a significant amount of cash. It may be because of this success that the CEO feels the company can generate returns from any asset. A 2006 study by Geoffrey Tate and Ulrike Malmendier found that overconfident CEOs were 65 percent more likely to make an acquisition. The effects are stronger if they have access to internal financing. Their results showed the market reaction at merger announcement was significantly more negative than for non-overconfident CEOs. They stated: “Our results suggest a significant subset of CEOs is overconfident about their future cash flows and engages in mergers that do not warrant the paid premium.”
What often drives the Budget Blower CEO is a feeling that the company is being left behind by some new technology wave. Of course, every CEO should be constantly concerned about disruptive forces in their industries, but the basic math has to make sense.
I once had a Fortune 500 CFO try to justify his CEO’s buying spree by asking me how I liked the deal, ignoring the price? I wasn’t sure how to answer that question, since price is inherent to any deal. In almost all deals there are prices that make the deal work and other prices that make the deal stink. He followed up my quizzical look by stating that $350 million wasn’t really very much money for a company their size. At the time of this conversation, the CFO’s company was laying off people in order to meet budget numbers for the new year.
A CEO can’t allow hubris, fear or the pressure to do something override his or her fundamental business sense of profit and loss.
Are you a Budget Blower CEO?
- Does your team do an objective cost benefit analysis before a decision is made on any major expenditure?
- Do you often decide on major expenditures that are a surprise to most of your team?
- Is there a consistent culture from the top of the organization to the bottom on how company money is spent?