Dot-Com Bubble’ That Dra- Matically Burst in April 2000

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Entrepreneurial CEOs with Hubris: Heroes or Villains?

Dr Alan Benson Senior Lecturer in Management The University of Exeter Business School Streatham Court, Exeter, EX4 4PU Email: [email protected]

Dr William Forbes Professor of Finance School of Business & Economics, Loughborough University, Ashby Road, Loughborough, LE11 3TU Email: [email protected]

Dorothée Zerwas Research Assistant, University of Koblenz-Landau, Campus Koblenz, Institute for Management, Informatics Faculty, Universitaetsstraße 1, 56070 Koblenz, Germany Email: [email protected]

ABSTRACT

We explore the myths and realities of hubristic CEO managerial behaviours and their impacts by means of a themed case-study of the ‘dot-com bubble’ that dra- matically burst in April 2000. By adopting an ‘Entrepreneurial Characteristics’ approach, we seek to provide, through multiple cases, an empirical examination into both favourable and adverse behaviours of founding-CEOs; revealing further theoretical and practical insights into how best to recognise dysfunctional hubristic behaviour, before it manifest as ‘value-destroying’ for primary stakeholders of new ventures. Our research design is that of an inductive study based on three well- publicised deep case studies, provided from ‘popular literature’ sources. It is a qualitative study, which will also refer its readers to some empirical quantitative findings. These, much discussed in finance, published papers chronicle the beneficial effects of hubristic CEOs; with particular regard to Initial Public Offers (IPOs) which requires facing up to the extremely task ambiguous nature of launching an internet-based new venture Pricing of IPOs for such new ventures is a major issue to be addressed by the founders; interestingly Google’s share price was determined by an auction. See Hand’s paper for further discussion of this area. Our paper debates both the positive benefits of hubristic CEOs (‘Heroes’) and the negative consequences of firms having dysfunctional CEOs (‘Villains’), during the formative years of their nascent commercial ventures. The specific dot.com bubble-year examined occurred in the period August 19951 - April 2000. During the late 90’s

and especially 1998-1999, the consequence of the ‘dot.com experience’ was the

myopic attraction of naive and often first-time investors; resulting in a major surge

of equity participation. A prevailing investment evaluation of: ‘winner-takes all’

(Hand, 2001) profits, dictated that sales and profits in the formative years would

not be the primary drivers for investment. Indeed, a very ripe scenario for herd

instinct to become rampant. “It was accepted that by many that the rules of the old

economy did not apply in the new dot-com world” (Timmons and Spinelli 2004:

p.188). Investors had entered the ’Digital Sublime’ (Mosco, 2004) with business

plans that were little more than clever ideas that might get funded with millions of

dollars. The outcome of these new ventures being incapable of true risk assess-

ment. The outcomes of these Internet ventures were unknown and therefore

unpredictable with algorithms.

Keywords: Relationship investing, banks, entrepreneurial personality traits, self-

efficacy, hubris, control systems, fraud.

1 On August 9th 1995 Netscape, the first mass use Internet browser company, successfully went public. cite Lewis (2000) The New New Thing. 1 PageRank’s original version was BackRub and asked the question which sites references forward to other sites. If we reference Hersh Shefrin’s behavioural finance textbook site (Shefrin, 2002, p. 8) that is clear from the face of my website. But if Hersh Shefrin referenced the Forbes’ site we would not even know he had done so. But to work all these links out is pretty data search intensive job. We contribute to knowledge and the development of conflict management theory highlighting practical issues for improving Corporate Governance. In particular, the recognition of much fuller consideration to the design of Management Control

Systems, to better address extreme executive dysfunctionality. Early detection systems (perhaps invoking ’signalling theory’) could hopefully provide better detection of and prompt managerial corrective actions, to deal with seriously dysfunctional CEO-dominated, executive boards. Smith and Smith (2000) cited in

Han, Benson et al (2012) define a signal as: “A credible demonstration that obvi- ates the need to convey the information itself”. Venture capitalists are known to use such data in their screening of client requests for funding and are regarded as a means of averting adverse selection of client applications. This would facilitate more effective management of cognitive and affective executive conflicts, for firms operating in dynamic market environments. Cognitive (functional) conflict tends to arise from differences in judgement or individual perspectives, whereas affective

(dysfunctional) conflict arises more from incompatibilities and/or disputes. An idealised rational decision-making process, within the top team, will inevitably be distorted by the CEO’s ‘personality characteristics’ and his/her position power and alliances. A related area that we explore is to determine the reasons for encourage- ment and tolerance of such potentially dysfunctional CEO executive behaviours.

Why are they recruited, or retained by the board and tolerated by their peers despite their clear hubristic nature? Are they really entrepreneurial and visionary leaders, with high self-efficacy? Or, are they serial entrepreneurs who enjoy the adrenaline rush of a new start-up? or simply ‘dissidents’, who are wholly disruptive to the required status quo? If the CEO is inexperienced, or is lacking in human capital, there is a good argument for adult supervision to be in place at critical periods of the firm’s development. Indeed, Google’s founders subsequently recruited Eric

Shulz to be their CEO.

INTRODUCTION

Entrepreneurship scholars increasingly are attempting to determine essential or desirable qualities that facilitate successful entrepreneurship. The prevailing view is that there are two significant primary qualities, these being: ‘Need for Achieve- ment’ (Ach) and ‘Self-efficacy’ (Se). However, authors (see Tables A-F) recognize certain ‘essential qualities’. Nevertheless is that there is a lack of objective measurement techniques that truly address the fundamental questions of: How much of these ‘primary qualities’ is required for success and is there a minimum level needed to maintain? When do such qualities reach a critical level such that their behaviours become dysfunctional to the firms? Most importantly, how might we recognise ‘out of control’ CEOs, who maintain and sustain a dangerous level of hubristic (excessive self-efficacy) behaviour, endangering the organisation? When does a requisite level of self-confidence tip over into a destructive hubris? There seems little doubt such self -seeking ‘grandiose’ behaviour, by opinion-leaders, damaged returns to dot.com investors. The ability of internet ventures to do this reflects their rise to almost mesmeric fascination for (often small) investors at the close of the last century. ”The excitement of association with the Internet appears to have quite overcome any detailed thinking about companies’ real prospects’.

[and] ‘When enough people perceive investment opportunities to offer the chance to possess ‘phantastic objects’ and the kind of excitement just described is generat- ed, it seems unconscious wishful phantasies can appear to be self-fulfilling”

(Tuckett and Taffler 2007, p.397).

The main focus of our study is: The Dot.Com Bubble period (from 1995 to 2000) which created a series of correlated economic shocks, demonstrably creating immense disruption to national and international economies. But the .com bubble is simply one of many ‘value-destroying’ events yet to come, within important industry sectors, particularly evidenced within the banking sector. The financial alchemists at the start this Century continued the weary tradition of their .com forebears. Indeed, the CEO of Leman Brothers was dubbed to be the epitome of hubris by Partnoy, in the Financial Times (September 14, 2008). Considerable negative influence over markets causes value-destruction at the firm and even national level. Yet some academic evidence still jars with this unjust condemnation of CEO optimism, see Hirshleifer et al. (2011) and Malmendier and Tate (2005).

Others have seen such huge losses to those knowledgeable to the potential of huge gains as the inevitable result of investor exuberance for stocks with substantial right-hand skew offering a small chance of massive gains, but a much larger chance of moderate losses, constrained by limited liability Barberis and Ming

(2008). Hubristic CEOS have been involved in the successful creation and launch of many nascent entrepreneurial ventures; attracting a critical mass of financial and non- financial resources from the markets. There is empirical evidence that the success, of many IPOs, is attributable to the founders being strongly involved within the executive team; during the formative years of the new venture and frequently beyond its start-up. Benabou and Tirole (2011) portray beliefs as assets that charismatic individuals might create and channel to release others’ creativity, or tenacity in performing difficult tasks under tight deadlines. So part of an Internet-

Entrepreneur’s function was perhaps to a serve as a ’norm entrepreneur’ revealing new possibilities for social interaction and the dissolution of boundaries between work and play (Kuran and Sunstein, 2000). Such a reshaping or invention of identity is already well documented by Akerlof and Kranton (2010) for the mili- tary, church and some professional groups; where a sense of community is a key requirement. Our concern is that common objectives are not truly shared amongst teams with hubristic leaders, who have seen no value in ‘a collective vision’ and can thus be responsible for the implementation of strategies that are, far too often, predominately value-creating for themselves and their elite ‘followers & syco- phants. Ensley et al. (2006a) argue that entrepreneurs are by definition leaders, because entrepreneurial opportunities cannot be exploited without the facilitation of individual and collective efforts. Arguably, ,the effects of leadership will be intensified in an entrepreneurial setting; because unlike in established organiza- tions, there are fewer structures and norms surrounding appropriate behaviour (Ensley et al.2006b) cited by Ucbasaran et al (2011). Hence the norm creating role of entrepreneurs is enhanced in such start-up contexts. In organisations where founder-CEOs have, and exercise, ‘unbridled’ power and influence, there could be a range of polarised consequences, ranging from value-creating to value- destroying. There are indeed deeply divided views in the media regarding the impact of a charismatic leader, on the primary stakeholders of the organisation that they head. At one end of the spectrum they are defined as catalysts of necessary corporate change (in corporate systems, organisational hierarchies, corporate cultures and business models). At the other end of the spectrum are ruthless CEO- founders who have been variously described as ‘dissidents’ and disturbingly as clinically ill, see ‘The Psychopath in the C Suite’ Kets de Vries (2012).

Kets de Vries expresses a strong view of a dysfunctional CEO as a ‘Seductive

Operational Bully’ (SOB) in his INSEAD working paper. ‘SOBs don’t usually end up in jail, [although some do such as Bernie Madoff] or psychiatric hospital, but they thrive in an organisational setting.’ He continues: ‘outwardly normal, appar- ently successful and charming; their inner lack of empathy, shame, guilt, or re- morse has serious interpersonal repercussions, and can destroy organisations.’ His article includes ‘SOB identification criteria’ and suggests ways of dealing with their ‘Machiavellian dispositions’ and provides means for corporate intervention, following clinical diagnosis. An example of such a convicted fraudster follows:

SECTION 1: Methodology

Research data for this paper is derived from case studies, previously discussed in

Forbes (2008), focusing on seemingly attractive ‘dotcom’ investment opportunities.

It examines the way in which hubristic relationships may have impacted on the provision of innovative investment vehicles, through entrepreneurial ‘influencing skills’ of the CEO-founders. However, the level of embeddedness of the beneficial relationships, between fund managers and their clients, is not within the remit of the paper. There is scope here for further research, as there has been an under- investigation of the impacts of external assistance provided, especially that of client support, via ‘relationship-investing’. It is well reported that financial constraints have a major impact on the ‘survivability’ of investment vehicles and ultimately are a significant causal factor of their market failure. However, existing literature in this tradition lacks an ‘in depth’ examination of the role of the entrepreneurial

‘locus of control’ Entrepreneurs’ tendency for ‘self-selection’ in their investment behaviour (perhaps based on complex variables such as: intuition, mind-sets, cognitive abilities and individual paradigms), is conditional upon on their ‘private information’ sources, received in their CEO role or from their professional advisors. In this context ‘private information’ is described, by the authors, as being discrete and often subjective data used by financial institutions in evaluating

‘investor-worthiness’ in addition to evaluating levels of ‘investor trust’. This information is rarely full priced, creating the opportunity for large rents to those well placed to exploit such private information. Finally, contributing to the literature of relationship– investing’, future research could provide evidence whether some ‘unregulated markets’ could and do facilitate ‘herd instinct’ within the investment community, when investors follow the lead of ‘opinion-leaders’, or

“lead analysts” such as hubristic CEO-founders, investment analysts and academic gurus (see Survey evidence on diffusion of interest and information among investors (Shiller and Pound, 1989).

The three research questions that we are attempting to address in this paper are: a) When is hubristic CEO behaviour ‘value-creating’ or ‘value-destroying?’ b) Do certain entrepreneurial personality characteristics provide indicative signals of an emerging ‘out of control’ (dysfunctional) CEO? c) Should there be monitoring systems, of CEO decision-making, as a feature of a formal management control system? This might provide a mechanism for “legitimate dissent” in the face of an autocratic leader (Morck, 2008) [perhaps with specialist Non-Executive Directors (NEDS) on the Board with more industries being regulated or subjected to monitoring]?

THE STRUCTURE OF THE PAPER

The remainder of this paper is as follows. Section 2 examines extant adjunct literature on network relationships observed between funding institutions and their agents with their corporate clients. Section 3 describes the methodology used and data employed in this paper. Section 4 presents the research project’s findings.

Section 5 concludes and considers the implications for overcoming the inertia of government agencies, in both seeking and responding to market signals that could be indicative of ‘bubble mania’ and importantly to assess the economic risks arising from the aftermath from the bubble bursting. Finally, in section 6, we make some generic suggestions for the implementation of rational management control systems and executive performance appraisal systems.

SECTION 2

Literature Review

Asymmetric information is central to gaining a greater understanding of the particular relationships between investment institutions and their CEO-clients. An informational asymmetry occurs because the investors are generally assumed to have less meaningful information, about individual investment opportunities, than the founder-CEOs. Where the ‘information problem’ is acute, small investors may be ‘knowledge–rationed’. Pivotal to this is a general conceptual awareness of the importance of relationships, between investment institutions and their high net worth CEO-clients in financing information-opaque ventures. Indeed, there is a generally accepted belief that highly embedded and long-term relationships play a key role in private information acquisition (Berger and Udell, 1995; Uzzi, 1999) and capital fund raising Han and Benson (2012). However, there is no clear une- quivocal evidence supporting the value of the role of embedded client relationships in reducing risks associated with innovative investment opportunities (Benson and

Han 2012). Could concentrated ‘relationship-investing’ alleviate the problems of moral hazard and adverse selection for investors? Indeed, empirical research has provided some evidence to support this viewpoint. Available evidence points to the importance of relationships in improving the availability of finance (Petersen and

Rajan, 1994; Harhoff and Körting, 1998). Fund managers are seemingly strongly committed to client relationship development, by being observed to be actively involved with facilitating the improvement of clients’ financial decision-making.

Important aspects would include being sensitive to discrete advice as being very useful, while ignoring such advice may result in ‘self-selection’ behaviour of entrepreneurs (Davidsson, 2002). According to resource-based theory (Barney,

2001), in order to develop a sustainable competitive advantage, which are necessary for a firm to earn above-normal returns in the long term (Conner, 1991), firms are organised to exploit valuable, rare, and imperfectly imitable assets (Barney,

2001). This approach can be applied to individual CEO-founders who can be observed as ‘game changers’ creating new markets, or serving existing markets better through applied technology. In this process, the stocks and flows of resources acquired would play an important supporting role (Dierichkx and Cool,

1989). Outsiders, who can provide support, advice and assistance, have the potential to help CEO-entrepreneurs to obtain control over valuable, rare knowledge resources, which are difficult to imitate (Chrisman and McMullan, 2000). Indeed, it has been found that external assistance has a strong positive impact on initial business performance (Chrisman et al, 1987) and long-term ability to survive, grow and innovate (Chrisman and McMullan, 2000). The importance of entrepreneurial demographics and business characteristics, in the use of external assistance, has also been acknowledged by existing research. It has been found that the use of external advice is associated with business size, growth, innovation activities (Cosh and Hughes, 1998), information transparency, (Petersen and Rajan, 2002); Benson and Han (2010). To some extent, protection of stakeholders from the most serious

‘excesses’ of a hubristic CEO-Entrepreneur, will lie with the individual CEO’s personal and business network-advisors (minders). We provide an indicative schedule that includes some ‘network-advisors’ [within TABLE I] as well as entrepreneurial artefacts and pursuits that arguably tangibly symbolise the hubristic.

SECTION 3 –Methodology

Introduction:

This paper uses some popular literature, much of it produced during the height of the creation of the Internet Company, during the ‘dotcom’ boom. We examine through three deep case studies the relevance of the ‘psychological trait’ approach on the personality characteristics of E- entrepreneurs; to help explain the success and failure of entrepreneurial ventures, within the setting of the New Economy.

One intriguing aspect of the Internet boom is the string of ‘larger than life’ characters it produced as Entrepreneurs. The Internet seemed to have had a democratising and almost revolutionary effect, upon the market for start-up capital. Suddenly university ‘drop-outs’ could start a new venture, destined to make them billionaires from the comfort of their Hall of Residence. Jerry Yang and David Filo, co- founders of Yahoo, reported that “They are on a leave of absence from the Stanford

University PhD. program” in their corporate biographies, provided to investors.

Jeff Bezos, founder of Amazon, had a successful career, as a hedge-fund manager, behind him when he founded Amazon. Bezos (Cohen 2003) started the venture in his garage, which makes its history even more captivating. As one venture capitalist quipped, to Michael Lewis (2000) “In what other age could a guy like Bill Gates become the most powerful man on earth?”

This paper exploits the presence of a wealth of corporate biographies and hagi- ographies to shed light of the on the personality traits of the E-Entrepreneurs who founded successful Internet ventures. A stream of ‘popular literature’ essentially forms the data source for this study. This paper draws upon the history of three

‘legends’ of the Internet economy, being two successes that of eBay and Google - the third (Boo.com) being a spectacular post-launch failure. The stories of these founders were easy to access because of the availability of corporate biographies and histories written for the popular business market. We have used these sources extensively in the latter part of this paper. For further examples of the genre see

Stross (2000), Wolff (1998) and Spector (2000). Before focusing on particular entrepreneurs some general traits of an entrepreneur, capable of heading an Internet venture, are discussed. We examine various typographies of successful traits of entrepreneurs suggested by several respected academics and compare our case study individuals to these distillations of entrepreneurial success. In the final table

(G) at the back of the paper we attempt to provide a summarised version of hubristic entrepreneurial traits and qualities. We further suggest that hubristic CEO- founders skillfully disguise their dysfunctional impacts (those that they are aware of and have some control over). The emergence of the Internet entrepreneur comes in an era where the whole economy may be seen to “dematerialise”, with human capital coming to the fore, at the expense of physical capital (Zingales, 2000). As

Zingales (2000) further states: “Employees are not merely automata in charge of operating valuable assets, but valuable assets themselves, operating with commodi- ty-like physical assets” (Zingales 2000), p. 1641).See Bisir (2004) for a deeper discussion on the importance of Human Capital for ‘Relational Investing and Firm

Performance’

A large-scale study of the effect on US corporate performance of retaining the

‘founding CEO’ seems to confirm their value (Fallenbrach, 2004). Fallenbrach’s

(2004) findings show that firms retaining their founder-CEOs exhibit higher levels of research and development expenditure, invest more in tangible fixed assets and undertake more focused mergers and acquisitions in companies, than do against comparable firms that do not. He also concluded that investment in companies, which had retained their founding CEO, would have shown a higher return to investors than in those companies that had not retained them. This study arguably confirms the advantages of retaining hubristic CEO- entrepreneurs, but this is not an advantage that is generalisable to a wider population of CEO- founders. Lessem

(1986), commenting on the re-emergence of the entrepreneur in the late 20th century, following a decline in such businesses in the 1950s and 60s, asserts that:

“In our haste to welcome the entrepreneur back into our midst, we have made the mistake of indulging in ‘hero- worship’. Having worked with more than a thousand individual entrepreneurs, I have become acutely aware of the misplaced adulation.”

(Lessem, 1986, p.5). His view, which still has face-validity, represents the counter- claim that hubristic behaviour is ‘value-destroying’ which certainly is non-heroic!

Perhaps this extreme adulation, of E-entrepreneurs, contributed towards the herd instinct witnessed with the 2000 stock market ‘bubble’ in Internet stocks? We seek evidence of this potential ‘cause and effect’ relationship below. How well do these paragons of E-entrepreneurship fit conventional portrayals of success? Are any deviations, from the stereotypical success story, indicative of weaknesses in the

‘received wisdom’ about the merits of entrepreneurship, or of those individuals involved?

Characteristics of the newly emergent entrepreneurial firm

The E-entrepreneur is the central actor in a new and fluid type of enterprise. The key characteristics of the newly emerging type of firm, where human capital takes centre stage, include: intensity of worldwide competition, with a surge in demand for process innovation and quality manufacture/service, requiring skilled, educated staff, even at a relatively junior level. Simultaneously, an individual firm’s ability to ‘corral’ human capital has declined. Firstly, increased access to venture financing means ‘star employees’ will consider their own start-up prospects more intent- ly. Secondly, the opening up of world trade and corporate finance means independent suppliers are more plentiful and thus likely to offer attractive prices for their products. This opens up many more opportunities for ambitious/entrepreneurial employees. Finally, in the intermediate goods sector, a breakdown in the vertically integrated firm has commenced. As stronger and leaner competitors have emerged benchmarking has revealed the full extent of corporate resource wastage, especially in larger more diversified, organisations. The need to effectively manage key human resources is not unique to Internet start-ups, having already been found highly problematic in research-led biotechnology start-ups (see Lieberskind, 2000) for example.

The Making of an Internet Entrepreneur

Whilst the Internet changed the nature of those receiving funding for business start- ups, it has not radically altered the traits required for launching a successful new venture. (Bhide 2000) conducted an extensive study into the origin and evolution of new businesses. This section draws on his path- breaking study for insights into the traits necessary for success as an Internet entrepreneur. Bhidé (2000) portrays businesses as lying along a potential profit/irreducible uncertainty continuum.

Established corporations, such as BT, lie at one low irreducible uncertainty/low potential profit end. Internet Entrepreneurs lie at the other end, with a spectrum of possible commercial forms lying somewhere in the middle. Entrepreneurs in effect purchase a lottery ticket offering a small probability of becoming seriously rich. As

Bhidé (2000, p. 4) argues we can imagine a company like Microsoft following the whole path of a vector from high irreducible uncertainty/high potential profit in

1975 in Gate’s garage, to low irreducible uncertainty/low potential profit in 2002 as Microsoft battled to mitigate the impact of antitrust litigation. E-entrepreneurs and their financial backers may form one part of the large constituency of investors who prefer investments with lottery like characteristics (Barberis and Huang 2005).

Investors buy a contingent claim, created by E-Entrepreneurs, on a project with a much ‘skewed’ return, offering a low probability of great riches, but far greater possibilities of either a low or no return. Internet entrepreneurs occupy a market with a high degree of irreducible uncertainty, but as a consequence face few competitors. Any competitors they do face are likely to face the same capital constraints. Venture capitalists are unlikely to be attracted to untested technologies being implemented largely by young and inexperienced entrepreneurs. It was only as the Internet boom gathered pace that venture capital firms, such as Click2think, expressed interest in the embryonic market. Prior to venture capital firms’ entry young inexperienced entrepreneurs, with little to lose but youthful pride, faced each other on an equal footing. As Michael Dell, another college ‘drop-out’, put it:

“The opportunity seemed so attractive, I couldn’t stay in school. The risk was small-I could lose a year at college.”

Internet entrepreneurs fulfill many of the same functions noted by classical econo- mists; these include: Innovation, co-ordination, arbitrage and bearing uncertainty.

See, for example, Parker (2004, p.39-41) for a wider discussion. Below, the way in which these characteristics are demonstrated, by the particular entrepreneurs we have studied, is explained. But one characteristic, worthy of particular comment in relation to Internet entrepreneurs, is what Bhidé (2000, p.36) terms an “unusual tolerance for ambiguity…compared to founders of popular businesses [such as hairdressing or gardening]” see (Einhorn and Hogarth 1982). Internet entrepreneurs face great uncertainty in almost all dimensions of their business life, technology, financing and the regulatory/legislative environment. Boo.com teetered repeatedly along the edge of failure, with Boo going over the edge in early 2000. But the very turbulence and fluidity of the market for Internet services opened up copious opportunities for cross-supplier and inter-customer arbitrage. As Bhidé (2000, p.

43) states, profit derives from “buying inputs cheap from uninformed suppliers and selling them dear to uninformed customers”.

Another key characteristic of successful entrepreneurs is opportunistic adaptation and responsiveness to customer need, or the opening up of niche markets. For example, Hewlett Packard began with production of an audio oscillator, before limited demand pushed them towards printers and calculators, before, finally, entering the computer market. Each stage of their evolutionary path was traced by response to customer need in a rapidly changing technological terrain. Which leaves the final (and to the academic mind the most frustrating) element of success for an aspiring entrepreneur, pure luck. With the window of opportunity being so narrow every entrepreneur needs an element of luck. Many chronicled stories of

Internet Entrepreneurs documents the role of bravado, hustling, if not outright fraud. One could surmise that hubristic behaviour, or at least a certain level of reckless chicanery was a pre-requisite of launching an Internet-based new venture in the pioneering years!

SECTION 4: Case Studies

The three case studies, discussed below, illustrate the role of ‘chance events’ in the development of their internet enterprises and further acknowledges the influencing skills of the ‘founder-directors’ in acquiring substantial IPO funding, often with

‘due diligence’ being short-circuited by the investors.

What makes for successful entrepreneurship?

Despite the difficulty of isolating the precise ingredients of success as an entrepreneur, a number of academics have been brave enough to attempt to provide check- lists, or typographies of entrepreneurial success. There is considerable literature on factors affecting an individual’s success: gaining professional qualifications, achievements in the workplace and so on. Studies have examined the links between biographical data such as age, family background, education, work experience and career history and success, as well as personality, attitudes and values. In the specific context of entrepreneurial activity, Markman and Baron (2003) identify five factors (see Table A) that, from their review of previous literature, seem to distinguish successful entrepreneurs. High on the list of requisite attributes are self- belief, inventiveness in adversity and persistence, all being attributes displayed by our case-study exemplars. A key limitation of their work, for our purposes, is that success is often judged in terms of establishing an enterprise – as compared with those who may have an idea, but whose venture does not mature. Clearly, the successful establishment of a business is no guarantee of its longer-term success, and therefore the value it commands in the market. In particular, the authors have not considered the importance of the entrepreneur bringing to fruition a “liquidat- ing event”, such as an IPO or acquisition, which allows them to reap a return on their investment. However, this work seems to provide a useful starting point for comparison with other studies. Baum and Locke (2004) studied six personal variables of entrepreneurs and the growth of their ventures over a 6 year period – see Table B. An additional crucial factor entering the schema here is the “passion” of the founding entrepreneur required for commercial success. The first three factors were found to be directly related to the growth of the venture and to the others indirectly. This research was carried out in a specific sector in one country

(North American specialist woodwork firms) so its generalisability, for our purpose, may be questionable, but there are some similarities between the variables identified here and those used by Markman and Baron (2003).

An aspect that is strongly emerging is that the founders, of our case study new-start businesses, clearly were visionaries. They were not exploiting existing assets but creating new business models and new product markets.

One interesting aspect of Lessem’s (1986) typology is the dominance of creative and artistic traits over specific technical knowledge. One would imagine Internet founders would be largely computing geeks with a strong technical bent. See

Tables C.1 and C.2 Timmons & Spinelli (2003) assert that ‘a consensus has emerged around six dominant themes’ in previous work, which they describe as ‘Desirable and acquirable attitudes and behaviours’ (See Table D.) Of these, they identify ‘commitment and determination’ as more important than any other factors’ (2003, p.249). Again, similarities can be identified between the attributes and those specified by others.

Parker (2004) also discusses the characteristics used by various authors to define and describe entrepreneurial functions and traits, using ‘self-employed’ as his working definition of the entrepreneur (Parker, 2004, p.68). Whilst there are some aspects of this assessment that are not directly relevant to our case studies (for example, discussion of earnings differentials as a primary motivator of self- employment, or the impact of ill-health and disability on the decision to be self- employed), this work nevertheless identifies a range of features that broadly match those specified by others. See Table E.

In Table F, we therefore attempt to synthesise the features identified by these authors. One obvious problem is that some of the descriptors incorporate more than one trait or characteristic. Furthermore, the words used to describe or explain the factors and associated behaviours display overlap. However, despite this and the other limitations noted above, there appear to be common themes emerging from this literature which we believe forms a useful basis for the next stage of our research. Amongst these are: strong self-belief; passion for success; ability to adapt under adversity; and perseverance. These are the qualities of a majority of hubristic CEOs .In our case studies that follow we chronicle the way in which each of the E-

Entrepreneurs studied exhibited these traits, or failed to do so.

Tenacity as a requirement for Entrepreneurial success

More than anything the E-entrepreneur, like his peers in other sectors, requires tenacity. He sees himself as: “One of those cartoon characters, who occasionally gets blown up by dynamite, or flattened by ten-ton anvils, but always miraculously manages to pull themselves together” (Malmsten et al 2001, p. 237). The E-

Entrepreneur is almost required to engage in ‘reality denial’ to retain the necessary confidence to make a loss-making venture viable. This cycle, of a brash obsessive entrepreneur being inevitably ousted from the enterprise s/he founded, is almost the norm. The differing needs of the Internet venture as it travels the spectrum, described by Bhidé (2000), from high irreducible uncertainty/high profit to low irreducible uncertainty/low profit are seemingly best served by ousting the founder.

Perhaps an exemplar of this trend is Jim Clark who sequentially founded and left,

Stanford Graphics, Netscape and Healtheon/WebMD. Lewis (2000) commenting on the evolution of Silicon Graphics: “This is how it always went with one of these new Silicon Valley software companies; once it showed promise, it ditched its visionary founder, who everyone deep down thought was a psycho anyway, and become a sane, ordinary place” (Lewis, 2000, p. 47).

Getting rich and keeping control –can both be achieved? Wasserman (2006) reduces primary objectives of entrepreneurs to two conflicting goals. One objective is to get rich and the other objective is to retain control, of the venture they created. The problem is these two objectives conflict and therefore need to be traded off. Venture capital and equity capital funding is attracted by seats on the board and/or voting stock for the shareholders’ AGM. Ultimately, the retention of the founding Entrepreneur is brought into question and further growth/funding often requires his or her departure. Wasserman points out (Was- serman 2003) that it is the very success of the founding entrepreneur that is often the springboard for his or her removal. Success in two key areas often presages the demise of the founder in the new-economy start-ups Wasserman (2003) studies; these are product development and attracting venture-capital funding. Successful product development often renders obsolete the creative-technical skills that were the founder’s main asset. Funding from venture capitalists often is conditional upon the founder bowing out in favour of more “professional” and perhaps less personal- ly charismatic management team. The perceived contribution an E-Entrepreneur can make seems to vary over the life cycle of the Internet start-up. This cycle potentially takes the company through the following stages (Damodaran 2001, pp.14 f.); (a) start-up, (b) expansion (c) high-growth (d) mature growth and (e) decline. At some point between stages two and three the founding Entrepreneur often starts to look like a liability to external investors. This point of inflexion might be captured by a study of the stock price response to retaining the founding entrepreneur after the IPO process has been completed (see for example, Forbes,

(2005) and Fallenbrach (2004 above).

Case Studies

This section attempts to apply the models discussed above to some of the most charismatic entrepreneurs of the New Economy. The late 90’s boom is often remembered for the hubris at those at its helm. But it is often forgotten that, along with the surface dross, many credible businesses are still thriving (although sometimes in a transformed state) and were formed during the last frantic years of the last millennium. In this section we discuss the emergence of and success of such iconic figures in light of the models of Entrepreneurship we have discussed above.

We begin with our one relative failure, that of Boo.com.

Case Study 1: Leander and Malmsten (Boo.com)

The rapid rise and ignominious fall of Boo.com reveals many of the brutal demands on the would-be E-Entrepreneur. The founding members Kaja Leander and

Ernst Malmsten were respectively a model and an arts impresario. Both had history of serial entrepreneurs. An earlier foray into retailing of books over the web in

Sweden gave them a taste for E-tailing that they were to develop on a gigantic scale via Boo. Having ridden the Internet bubble to the point where, in late 1999, they were being considered by Goldman Sachs for an IPO; at a valuation of $ 390 million, but the company collapsed by April 2000. Strangely, in Ernst Malmsten’s (2001) account of Boo’s demise there appears little evidence that Boo’s basic business model was flawed. Sales and margins continued to rise steadily from the site going fully live in on November 3rd 1999. The fatal blow perhaps was the evaporation of investor confidence in Malmsten’s ability to implement the vision of Boo as the premier on-line retailer of sport/fashion-wear (Malmsten, 2001, p.

342). Again and again throughout the Malmsten account of Boo’s life one is made aware of the need for Malmsten to conjure up faith in the face of contradictory evidence. This is the central trait of an entrepreneur’s self-belief as discussed earlier. Malmsten recounts the bizarre nature of briefing Tony Blair on the economic importance of E-commerce, while unbeknown to the world he presides over the engulfing crisis at Boo. Malmsten’s background in the Arts gave him little hope of coping with the detailed financial and technical problems Boo faced. This leads him and his co-founder to rely on others, whose own ability they learn to doubt.

Boo suffered from poor cost control and subsequently too high a “burn rate” of investment. An inability to produce a reliable Internet platform, capable of serving a worldwide mass fashion market, plagued the firm for its five months of on-line trading. This reflects the technical weakness of the founders who previously tested their entrepreneurial drive in the Arts and Literature. The original founding Entre- preneurs, Leander and Malmsten therefore invited a third equal partner, Patrik

Hedelin, to join them because of his background in merchant banking. The problem being they had sought a “bean counter” but got a “dealmaker” reluctant to accept their constraints. Similarly the initial appointment to the vital role of Chief Tech- nology Officer, Steve Bennet, failed to focus sufficiently swiftly on emerging bugs in the platform (in Malmsten’s view at least). This illustrates one of the central dilemmas of the E-Entrepreneur. To be a success one requires the “visioning” of a generalist. But, this very fact can blind the leader to the practical problems of implementing that vision. Perhaps more “hands on”, less visionary, senior managers were already too well compensated elsewhere to take a risk on joining Boo. The introduction of those with a vital “new resource skill” (see Table 2) weakened the founders ability to control the evolution of the business. A primary role of the E- entrepreneur, as personified by Malmsten, is to maintain the patchwork of expertise required to implement the corporate plan. A would be E-Entrepreneur must be capable of synthesising the contribution of other creative, sometimes unstable, contributors to the enterprise while retaining his own or her own driving vision. So

Malmsten tried to referee disputes between Kaja Leander and the advertising agency (e.g. Malmsten, 2001, p. 137) and those between Patrik Hedelin and the merchant bank J.P. Morgan (e.g. Malmsten, 2001, p. 305). Similarly, the Entrepre- neur needs to deal with egotistical shareholders and their esoteric demands, such as those of Bernard Arnault of LVMH, or Lucianno Benetton. But his role is more than that of merely coordinator, as envisaged by economic theory, but more of an inspirational visionary, able to make the whole greater than the sum of the parts.

Sadly for Boo.com, Malmsten’s vision was not enough to allow the venture to survive, at least under the current management team. The diminishing social capital of the E-entrepreneur (see Table 5) in weaving together a productive coalition proved decisive in resolving Boo’s fate. Boo’s afterlife has been as an acquisition by a U.S competitor Fashionmall.com. Not surprisingly the new CEO Catherine

Buggeln has stated: “I was quite proud to tell people I was a 39 year old and had 17 years in the industry and that we were focused on profitability." Nevertheless,

Buggeln recognised the resurrected company benefited from the $135 million spent building public recognition of Boo, by the founding entrepreneurs, even if a certain infamy now attaches to that name.

Case study 2: Pierre Omidyar (eBay)

Pierre Omidyar gave birth to perhaps the holy grail of the new economy, an

Internet start-up that consistently made profits from the first day of operation. In

June of 1995 monthly revenues hit $10,000 (Cohen, 2002, p. 29). Omidyar stated: it “I had a hobby that was making more money than my day job. So I decided it was time to quit my day job”. Omidyar was an E-Entrepreneur with a largely a computing/technical background. After graduating in Computing from Tufts, outside Boston, he worked at a series of software houses, Claris, Ink Development,

Pen Computing and, finally E-shop developing on-line commerce applications.

Two of the start-ups he joined prior to starting eBay had a goal of producing a commercially viable pen/stylus based computer, eliminating the need for a bulky keyboard. This technology held out the prospect of liberating the computer from the office environment, taking the benefits of computer access literally “to the streets”. This same democratising vision underpinned the driving vision for eBay.

His on-line auction site Auction.web, later renamed eBay, simply facilitated trade between buyers and sellers, without taking possession of the goods. Omidyar’s simple vision was of an online village ‘fair’ at which individuals could trade, unimpeded the oppression of existing monopoly capitalism, which renders its customers into atomistic, passive, consuming dots. eBay had no inventory, few employees and profit margins in the mid-eighties. Omidyar’s basic vision was producing an enabling technology to empower the small trader relative to multina- tional corporations. Omidyar reflected upon this later as follows:

“If you come from a democratic, libertarian point of view, having a corporation just cram more and more products down your throat doesn’t seem like a lot of fun.

I wanted to do something different, to give the individual the power to be a produc- er as well as a consumer” (Cohen, 2002, p. 7)

As we will see maintaining this vision under the pressures of the market character- ised the evolution of eBay as a corporation. Hence eBay emerged from a desire to subvert existing market institutions rather than to create a new commercial enterprise as such. Despite his later multibillionaire status Omidyar makes an unlikely

E-Entrepreneur. In many ways Omidyar fulfilled ones worst fears regarding a

‘computing obsessive’, including a strong interest in UFOs and extra-terrestrial life (Cohen, 2002, p. 16). An ex-colleague of Omidyar at e-shop, a prior internet startup at which Omidyar gained experience, claimed in retrospect:

“Pierre was always very serious, very deliberate and very good at finding the cutting-edge. But of all the people at e-Shop, I never would have said he was the one who would make the most money.” Cohen, (2002, p.150). Furthermore,

Omidyar was a venture capitalist’s fantasy - an Entrepreneur who actually wanted to exit once the business was financially stable. He enjoyed life outside work, went home at five o’clock and took regular vacations. He neither had obsessive drive nor tried to feign it. From the start Omidyar augmented his limited business acumen by a succession of trusted lieutenants with a greater appetite for profits. Jeff Skoll, a

Stanford MBA who had worked on Knight-Rider’s attempt to move classified advertisements to the Web, was such an early appointment that he became regarded as a co-founder of eBay with Omidyar (Cohen, 2002, p. 30). Skoll focused upon writing the business plan that would form the basis of the planned IPO. Later Meg

Whitman would be brought in from Playskool, a subdivision of Hambro Toys, as

CEO for her expertise in brand building and building a management team.

Throughout the transition of eBay from back-bedroom hobby to multi-billion pound corporation a distinct change in the prevailing E-culture took place. The old community-based, technologically driven, culture was championed by Omidyar and Mike Wilson, the Chief Technology Officer, initially appointed to stabilise a fileserver creaking under the growing load. The newly ascendant, profit driven, instrumental, culture was championed by Steve Wesley, Vice-President of market- ing and business development (especially business alliances) and Meg Whitman herself. In recalling Wesley’s group arrival an insider said “They wanted to know why this whole community thing was important. They just did not buy into it at all.” (Cohen, 2002, p.80). The transformation of culture took place against the background of an IPO process that made millionaires of the majority of eBay’s employees and a 22 hour power-outage in May 1999, which gave a convenient excuse to remove Mike Wilson and replace him with a more commercially driven alternative. By early 2000 Omidyar was largely disengaged from day-to-day management, preferring to absent himself to work with European versions of the eBay site. Omidyar is a willing semi-retiree, carrying away a few billion dollars, thus fully recognising his limitations.

“We were (sic) Entrepreneurs and that was good up to a certain stage. But we didn’t have the experience to take it to the next level” (Cohen, 2002, p. 110). The very success of eBay meant Omidyar’s retention of control was no longer appropriate for its future development.

Case study 3: Larry Page and Sergey Brin (Google)

The inception of strong businesses, by effective pairings, seems pretty common in the new economy. Bill Gates and Paul Allen at Microsoft are an archetype followed later by Steve Jobs and Steve Wozniak at Apple and Jerry Yang and David

Filo at Yahoo! A similar pairing gave rise to the well- known Google search engine. Larry Page and Sergey Brin met in the PhD student accommodation of the

Gate’s building at Stanford’s Computer Science department. From their meeting in

1996 and working all hours as graduate students, the pair went on to form Google and entered the Forbes 400 rich list, at jointly 43rd position, having an estimated personal wealth in excess of $10 billion dollars each Vise (2005 p.274). Similar to

Jim Clark both men combined strong mathematical-scientific backgrounds with a strong sense of optimism and self- worth. Addressing Israeli college students at his old high school Page stated:

“Optimism is important. You have to be a bit silly in the goals you are going to set.

There is a phrase I learned in college called ‘Having a healthy disregard for the impossible’ Vise, (2005 #323, p. 11). In a similar vein, an ex-teacher commented upon the pair’s non-conformist streak as follows:

“They have a somewhat sceptical view of authority. If they see the world going one way and they believe it should be going the other way they are more likely to say

‘The rest of the world is wrong’ rather than ‘Maybe we should reconsider’. They were confident in their approach and would tell you everyone else was wrong’

Vise, (2005 #323, p. 42).

Such attitudes seem very consistent with a theorisation whereby optimism enables an intense focus on the job at hand. Such focus was very much needed as their business concept took shape in Room 360, of the Gates Building, in Stanford; from Brin’s original ‘PageRank’ search algorithm. Initial attempts to sell the PageRank algorithm to Excite and Yahoo were unsuccessful. The quality of the search product was then seen to be less important, than its ability to generate cash flow from advertising. Brin and Page had many things in common: the academic nature of their parents, their attendance at Montessori schools which emphasise the self- expression and self-motivation of pupils as the basis of learning, as well as their mathematical skill. These family backgrounds may have helped to induce a well- calibrated sense of self-control in the pair. Indeed, it was the combination of their dissertation projects that informed the Google search engine. Page was seeking to download the whole contents of the web onto his personal computer. Brin was developing an algorithm to rank web pages, initially by the number of citations.

For ‘PageRank’- Brin’s algorithm- to work effectively it needed to swallow as many web pages as possible. Thus Google’s search power comes from the combination of the discriminatory power of Brin’s algorithm, combined with the vora- cious appetite of Page’s acquisition of material for it to search. This combination of comprehensiveness with relevance required vast amounts of computing power, as

Google’s use spread beyond the confines of the Stanford campus. This would force

Brin and Page into hardware, as well as software, development at an early stage.

But it was their complementary strengths that seem to have made them a winning team. A friend from their Stanford graduate days commented:

“They were brilliant in different ways. Sergey was practical, a problem solver, an engineer. If something worked it worked. He was also mathematical, lightning fast and outgoing. ‘He was the brash young man, but he was so smart it just oozed out of him’. Page on the other hand was a deep thinker. He wanted to know why things worked. Possessed of boundless ambition, Page had a more reserved demeanour.’

If there was a group meeting of 20 people, Sergey would be holding court. You wouldn’t notice Larry if he was in the crowd, but then afterwards he would say,

‘Hey, what do you think of this idea?” (Vise, 2005), p. 34). Another contemporary of theirs in the Gates Building said: “Larry was a good teacher. He could find the key idea in something and express it in a non-technical way so that everyone understood.” (Vise 2005), p. 34) As well as forming a coherent team, Brin and

Page were able to motivate others attract others to share their vision for the development of an enabling new technology. Vise (2005 p. 54) comments: “Strip away all the technical knowledge and what you found were two young guys with character. That would translate well into the work they did, especially in a field where people needed to trust you to trust your products” (Vise 2005 p. 54). It is difficult to overestimate the audacity, if not arrogance of the project that Brin and Page developed. In 1996 the Web was estimated to have 10 million documents available.

The number of documents online was estimated to be growing at 2000% a year.

Part of the way in which this was achieved was by giving key technical staff a great deal of freedom and mimicking a University department’s ethos of creating space for new ideas to flourish. Central to this was the practice of empowering key technical workers to allocate 20% of their time to topics of interest to them (rather than a senior colleague at Google). This practice allowed them to pre-commit resources to unstructured innovation that might otherwise get squeezed out by pressure for immediate results. They were simultaneously ruthlessly ambitious, while recognising the long-term benefits of allowing “blue-sky” curiosity driven research to thrive within the company. Page argued: “We are trying to be ruthlessly efficient about how we run our business and we are in this to make a lot of money.

But we are not necessarily going to make money from all the things we have.”

(Vise 2005), p. 267).

As Google moved outside the boundaries of being a search engine they sought mechanisms which allowed them to retain the coalition of human capital necessary to launch a challenge to Microsoft, as the world’s premier technology brand. To facilitate this they created “founders-awards” being multi- million dollar stock option offerings, to those who produced valuable products. Page was well aware of the frustration felt by innovators like Nikola Telsa, whose inventions led to X-rays and Solar cells, on seeing the glory and wealth, produced by those products, largely taken by his overbearing employer Thomas Edison (Battelle 2005), pp. 65 f.). The very concept of a search-based venture was somewhat against the grain of then prevailing wisdom of Internet commerce. Yahoo, Excite and Hotbot all formed originally as search engines, were by this point busily engaged is diversifying into more general purpose portals, with sections for finance, dating, news, chat, etc. In fact the motivation for Michael Moritz, of Sequoia Capital, investing in Google was to allow a prior investment of his (Yahoo!) to keep an option on licensing

Google’s search technology, as its own efforts went increasingly elsewhere. The IPO process crystallised many of the strengths and weaknesses of the founding duo. The IPO prospectus filed with the SEC included: “An Owner’s manual for

Google’s shareholders” (S1 filing) written by Larry Page. Adopting an uncompro- mising tone it opened with the sentence “Google is not a conventional company.

We do not intend to become one.” (Battelle 2005), p. 217). The IPO initiated the dual class voting structure within Google, which granted Page and Brin ten votes, at shareholder’s meetings, for every one share they held. Given that they retained joint ownership of 30% of the company this ensured their control of Google for the foreseeable future. The S1 filing document justified the dominating presence of the founders by analogy to large media companies, such as the Wall Street Journal or the Washington Post. The fact that the founders drew an analogy to an old economy content supplier might itself be seen as indicative of the future direction they had set for the company. The announcement in the S1 filing that Google would not be providing “earnings guidance” to analysts did not go down well with those following the new company’s fortunes with Mitch Kapor (founder of Lotus) a venture capital investor stating:

“Google says: Give us your money and we’ll sell you a lottery ticket. We know what we’re doing and it would be counter-productive for you to have any control over what we do. Sit in the backseat, enjoy the ride and don’t think too much about the odds” (Battelle 2005), p. 219).

The problem with such an attitude being that it could be interpreted as arrogance.

This may have contributed to the great volatility of Google’s share price in the run up to the IPO. The very tenacity and focus of the pair on maintaining a high-quality search engine only site was, in many ways, the key to their success. Indeed the basic business model of getting businesses to bid in an auction for keywords like:

“books” or “theatre tickets”- which subsequently influenced their position in search results presented to the consumer, had already been developed by Bill Gross at

GoTo.com. Gross only charged for links clicked on, rather than having an advert appearing on the GoTo.com site, per se. It was Gross’s decision to abandon GoTo's own site in 2000, in favour of a licensing- only business model, then cleared the field for Google’s expansion. Google took the same auction model and allowed it to influence only search results listed on the right-hand side of the search results screen. This allowed a compromise between developing a credible profit-making strategy and keeping faith with the integrity of an unbiased search engine.

SECTION 5:

Summary & Conclusions

This paper concentrates on the rise of successful internet entrepreneurs and portrays such individuals as having visions and the ‘essential glue’ needed to put together and promote the intangible value of new-economy ventures. Using three case-based examples, compiled from contemporary literature, on the heroes and heroines of the internet age, the pivotal role of the E-Entrepreneur is portrayed. E-

Entrepreneurs have most of the usual characteristics of entrepreneurs elsewhere: an ability or desire to take risk, seeking profit and exercising control. But the demands of the new economy make particularly brutal requirements of individuals to face and manage profound uncertainty. In the 1990’s each dot-com venture explicitly marketed itself as the “new-new thing” using Lewis’s phrase (Lewis, 2000). But great ambition frequently comes with great costs and this new industrial landscape contained few icons and fewer mentors. Opportunistic adaptation and an ability to overcome failure are at a premium in such markets. Ironically, it seems that the very characteristics that allow an Entrepreneur to steer the formative business through the start-up phase make them unlikely candidates to lead their more mature corporations, which emerge from their initial burst of creative energies. Internet start-ups, like other business, pass along an uncertain profit trajectory. As profits decline and uncertainty falls they frequently shed the founding Entrepreneur and his/her visionary, but often unstable, leadership. To some degree technical progress almost inevitably entails some degree of creative destruction. So the failures of individual ventures, while no doubt painful for participants, should not really be regarded as a matter for public policy. But it may be that the rigours of high technology start ups require a degree of distain, for standard financial controls, that may justify external regulation. The ‘winner-takes all‘ nature of competition justifies short-term losses, which may be seen as the cost of building a brand capable of ‘dominating the space‘ the Internet venture subsequently occupies.’

Hence the founder’s confidence, while necessary to the task they undertake, may nevertheless generate socially inefficient levels of overinvestment in the sector.’

Bernardo and Welch, (2001). If charismatic, if not domineering, leadership is an essential element of Web based ventures then it might be worth thinking of en- trenching some rights for legitimate dissent capable of challenging leaders who allow building a corporate dream to drift into delusion, or a vanity project. Appen- dix 4 of the recent report on corporate governance in banking (Walker, 2009) discusses psychological and behavioural elements in board performance and especially bank failure. Kets de Vries (2012) offers this approach: ‘A better solu- tion to the elimination of SOB executives is to create the kind of organisational structures, systems and culture that promote diversity, reflectivity and openness at all levels.’ It is evident to the authors that all these are Management Control

Systems (MCS) aspects that need to be fully synchronised and regularly adapted, to fully support corporate strategy implementation, with business ethics paramount to ensure good corporate governance.

SECTION 6: RECOMMENDATIONS

What lessons for public policy and improving public policy may be learned from our case study? Certainly the endless cycle of market crashes and booms suggest another technology bubble, based focused upon analysis of “big data”, or nano- technology, cannot be far away. The Walker Review concerning governance in UK banks contains some useful guidance in this regard. Walker recommends (2009, p.143) that Board Chairmen be trained to manage the difference between “leadership authority and power” and always be aware of the possibility of abuse of power by key personnel, such as the founder of the company. This reminds of the importance of 360∙monitoring in contexts where key workers may retain “hold out” rights over either collective moral or technology development and delivery.

It may well be that are minds are hardwired by evolution to confirm to tribal mentality of compliance to a dominant leader (Morck, 2008, page 183), but it seems equally clear “loyalty bias” has been very costly to many corporations. As

Milgram’s (1974) experiments in conformity show the presence of a clear dissenting voice, especially if of comparable authority to the group leader can circumvent an otherwise disturbing degree of group conformity.

It is perhaps for this reason that the UK’s Higgs report (2003) recommends non-executive (NXDs) should form a majority of the board of directors. But it seems unlikely that mere weight of numbers will serve to overturn the impact of an overbearing founder/CEO. Hence some form of legitimate dissent outside the operation of the board may serve a useful purpose. One such dissenting voice gaining increasing attention, if not popularity, is the voice of the corporate whistleblower. The NXDs cannot be assumed to have independence if appointed from the executive board team’s business and other networks.

A number of high profile cases of dissenting “action by disclosure” have now been chronicled. Michael Woodford (2012) exposed what he believed to be corporate corruption within the camera manufacturer Olympus after a brief chaotic time as

CEO only to be ousted and sued. But more often subordinates act as the source of internal revelations, like Sharon Watkins at Enron (Swartz and Watkins, 2003).

Often at the cost of dismissal by their furious superiors.

Given the nature of accounting fraud and corporate larceny it is perhaps unreason- able to expect too much from state regulation. Such regulation can only deter malfeasance it uncovers and chance discovery of internal fraud, or corporate larceny, is very unlikely. Hence it may be worth considering the almost unthinka- ble and giving further protection to corporate whistle blowers, subject to their being able to avail themselves of clear safe-harbour rules.

Whilst whistleblowers are often portrayed, and this dismissed, as embittered cranks it may be they serve a more socially useful purpose than commonly recognised.

Indeed the rights of whistle-blowers are indeed being increasingly legally recognised as their social value is seen. The UK Public Interest Disclosure Act (1999) and the US Whistle Blowers Protection Act (1989) later enhanced by the Whistle

Blowers Protection Enhancement Act (2007) give a statutory basis to such rights on opposite sides of the Atlantic. Section 806 of the Sarbanes-Oxley Act (2002) strengthened protection granted for employees of public companies who reveal corporate fraud.

The “business judgment” rule has in general prevented shareholder actions in all but cases of shamefaced corporate looting. Mere bad judgment is not enough to expose the company to shareholder litigation. To reverse this precedent risks inducing a state of company management by Judges and minor public officials, hardly an appealing prospect. But perhaps more of case could be made for “lifting the corporate veil”, and enabling successful shareholder litigation, when substan- tive processes of board discussion and evaluation have broken down and the corporate board is dominated by set of crash dummy yes men. This might form part of a more general shift that is emerging towards an “enlightened shareholder” perspective in UK corporate law (Keay, 2007, 2010).

We have reviewed the Salz Report (April 2013) recommendations (SRRs), for

Barclays Bank, and with adaptation, we propose (of the 34 recommendations within Salz) five adapted recommendations for consideration (a-e); as they generally apply to our paper’s context. Application of many of these control principles is clearly dependent on the growth rate of the firm, and many will be inappropriate in the early development stages.

Such MCSs should reside within the corporate control systems and arguably should negate the expansion of further state control over executive directors. The fear of heavy fines and jail sentences as well as being debarred from being directors should also act as powerful deterrents. However, the psychotic CEOS may have a different hippocampus or cerebral cortex construction and out of control. a) Setting high corporate standards (SRR 2 adapted)

The Board should promote and safeguard the trust in which the firm’s reputa-

tion is held. The senior leadership team should be responsible for demonstrating

and promoting these high standards. These aspects should be included in their

annual executive performance evaluations and variable compensation schemes. b) Monitoring Progress (SRR 5 adapted)

There should be clear formalised targets against which progress is being made on embedding the values needed for a strong ethical culture to be built and main- tained. Periodic surveys should be made of employees, customers and other primary stakeholders. There would be a need for anonymity, with some of the surveys. This area should provide corporate ‘whistleblowers’ with a high the degree of protection that should be offered, if they are revealing covert behaviour potentially detrimental to the firm. This could take the form of ‘corporate wik- ileaks’ i.e. release of archive documents that demonstrate improper executive decisions. We should also consider protection of role of the NEDs/NXDs this context.

c) Appointment of Non-Executive Directorships ‘NEDS’ (SRR 7&8 adapted)

There should be a sufficient number of NEDS with relevant industry experience to critique executive decision-making and facilitate best business practices and ensure that risk management systems are robust and effective.

The talent pool of NEDS could also be expanded to include consultants and academics that could provide a high level of criticality, before important decisions are made. The role of the NEDs needs to be codified and they should frequently attend business committees, of particular significance to major areas of business activity. The use of such external advisors is supported by Grant and Quiggin

(2012), through their discussion paper ‘... using a model of inductively justified propositions concerning bounded awareness’ they suggest how the ‘precautionary principle’ could be applied, as a heuristic guide for ‘boundedly-rational’ [CEOs] decision-makers, faced with the possibility of unfavourable surprises. ‘The ex- pected return to the adoption of a heuristic can be evaluated from the perspective of an external observer, who is aware of all relevant contingencies. One interpretation of an awareness based heuristic is that it might represent advice that could be given by a fully aware [NXD] advisor to a boundedly-rational decision-maker who is capable of adopting and implementing the heuristic, but not of understanding and solving the full game.’ (Grant and Quiggin, 2012, p3). Board Information (SRR 9 adapted)

Papers for the Board should be prepared specifically for the Board and allow flexibility to meet (other) demands of individual board members. The reports should be of a good quality with timeliness and the right level of detail required.

Question: Should an encrypted record be kept (in an encrypted time capsule?) for all board papers and minutes. These records could subsequently be made accessible to NXDs and government-appointed inspectors and auditors?

d) Cohesive executive team (SRR 10 adapted)

The CEO should be responsible for building (and maintaining) a cohesive senior executive team, which actively contributes to decision-making through open debate and challenge. The Board should regularly review the effectiveness of the senior executive team. This aspect has to be embedded deeply in the core values of the firm and defended- it was one of the original values expressed in the ‘Nokia Way’ under its founding CEO. These aspects lend themselves to a post-audit review which forms part of an annual performance review. Perhaps such reviews should be held quarterly to detect adverse trends. e) Experiential Learning - from Mistakes Made. (SRR 31 adapted)

Root causes of problematic issues need to be reviewed so the lessons can be learned and shared within the organization. There should be an agreed methodoloy of peer group open discussions and cascading down of the lessons learned up and down the organisation.

The next section presents a critique of some models and frameworks from the

Management Accounting and Management Control Systems literature on Perfor- mance Measurement Indicators (PMIs).

Models and Frameworks from Management Control Systems (MCS)

European Foundation for Quality Management (EFQM)

Figure 1 – The EFQM Excellence Model (EFQM, 2013)

This framework emphasises the leadership element and has a results orientation and is “Used by more than 30 000 organisations to improve performance” (EFQM,

2013). The EFQM is primarily a self-assessment tool that grades 9 elements of a company. This process is driven by an initial assessment of the leadership within a firm (Armstrong and Baron, 2011). Wongrassamee et al (2003) however assert that the EFQM tool can be very powerful when used appropriately, but critique the framework-suggesting that it only goes as far as providing guidance, for a firm that uses it.

Fig. 2: Cambridge Performance Measurement Process (CPMP)

This model proposes the division of four core phases that work as natural progres- sion.

Firstly, a firm undertakes the design of performance measures, then the implementation of these, followed by the actual use of the measures. It concludes with a reflection phase, that challenges strategic assumptions.

Figure 2– The Cambridge Performance Measurement Process (Neely et al, 1996)

Bourne et al (2000) support the use of this measurement process, but recognise that overlap between the different phases is likely to occur. Again, there is a focus and appreciation for the fullest integration of the firm’s strategy, as seen here in the reflection phase. Furthermore, the iterative style of the framework provides a greater level of flexibility, enhancing the usefulness of the framework.

The Performance Measurement Questionnaire (Dixon et al, 1990) was developed to help managers “identify the improvement needs of their organization, to determine the extent to which the existing performance measures support improvements and to establish an agenda for performance measure improvements” (Pun and

White, 2005: p55). The results of the questionnaire are shared with the respondents in a workshop environment. Bourne et al (2003) identify the benefits of using the system as a catalyst for improvement, but state the need for a refinement of the communication process involved.

The Performance Prism (Neely, Adams and Crowe, 2001) is touted by its creators as a radically different look at performance measurement. It identifies five facets that provide a comprehensive overview of performance, with a particular onus on stakeholders.

In response to the Performance Prism, Neely, Adams and Crowe (2001: p11) state:

“The feedback has been overwhelmingly positive” and there is some evidence to support this. However, Frederico and Cavenaghi (2009: p15) suggest that there is a need ‘for a review of its adaptability and effectiveness in a larger set of organiza- tions’, insinuating that more rigorous testing is required, before endorsing the

Performance Prism as a definitive source for performance appraisal.

Figure 3- The Performance Prism (Neely, Adams and Crowe, 2001)

Finally, The Balanced Scorecard (BSC) (Kaplan and Norton, 1992) is the most renowned framework in this field. In their own words, the BSC “retains financial measurement as a critical summary of managerial and business performance, but it highlights a more general set of measurements that link current customer, internal process, employee, and system performance to long term financial success” (Kaplan and Norton, 1996:p21). The BSC was the framework to really emphasise the intrinsic link between a firm’s strategy and their performance measures.

Consequently, firms were quick to grasp and adopt the concept and in it was noted that “the Balanced Scorecard had evolved from an improved measurement system to a core management system” (Kaplan and Norton, 1996: preface ix). However, they are equally quick to emphasize its limitations, advising that the four perspectives “should be considered a template, not a straitjacket” (Kaplan and Norton,

1996: 34). As a simplistic foundation the BSC can provide firms with a focused view of the holistic link between strategy and performance measures. However, other commentators (Pun and White, 2005; Wongrassamee et al, 2003) highlight the frequent lack of specific targets and explicit methods for successful implementation of the framework, justifiably doubting the practical use of the BSC.

Figure 4: The Balanced Scorecard (Kaplan and Norton, 1996)

There are numerous other performance measurement frameworks that may also be used in these circumstances. Summarized examples of some these can be seen in this table:

All of these frameworks provide different angles on the intricate and complicated topic of performance measurement. Pun and White (2005) provide a very detailed analysis for the majority of many of the aforementioned frameworks, with reference to manufacturing business operations, concluding that improvements within a business will be seen with a successful integration of a performance management system that “can align corporate strategies with consistent improvement actions”

(Pun and White, 2005: p67). Taticchi and Balachandran (2008) also evaluate the large list of available frameworks and conclude by producing their own performance measurement and management system that combines five aspects: a performance system, a cost system, a capability evaluation system, a benchmarking system and a planning system.

Figure 5: Taticchi and Balachandran’s Performance Measurement and Manage- ment Framework (2007)

CEOs are not homogeneous actors, so there is no standardised set of behavioural controls that can be applied to their individual performance. One would expect that they would mostly behave in a rational decision-making way. Rational decision- making, being based on data evaluation, is either fundamental and or technical in nature. But there is often an element of trusting one’s instincts at the CEO level.

The major issue is that executive judgement measurement is rarely addressed in PMIs, as they are primarily designed to evaluate post-ante results. Thus we are looking at outputs of the managerial judgement exercised. Also, even if we could review the decision-making process (not all top team discussions and evaluations are recorded) Furthermore, independent retrospective review of executive decision- making will have the benefit of hindsight, too. Critically, the truism of MCS is that what gets measured gets done and what does not get measured, by PMIs, rarely does. However, there are a plethora of suggested platforms, frameworks, models and systems, referred to in the management accounting literature. They all claim to resolve the complexities of performance management and measurement. It appears that there are three overriding trends that underpin the majority of the mentioned frameworks. Firstly, to strategic objectives and implementation: The success of the

BSC in numerous industries (Taticchi and Balachandran, 2007) has enlightened others to recognise the importance of having a close relationship between both performance measures and corporate strategy. Secondly, recognition of an adaptable and dynamic system: Highlighted by many commentators (Kanji, 1998; Neely,

Adams and Crowe, 2001; Wongrassamee, Gardiner and Simmons, 2003; Fitzgerald and Moon, 1996. This is an obvious but frequently overlooked component of successful performance management and measurement. A stagnant and inflexible system could result in adverse and damaging results for a firm (Anthony, Go- vindarajan and Dearden, 1998). Thirdly, Continuous improvement is a concept that is stressed throughout a good number of the proposed frameworks. The most effective method of ensuring this particular aspect of performance improvement is contentious, with numerous variations of feedback regularly suggested. The success of a management control system, in conclusion, depends much up on the power-balance in the executive board. It is critical that they have sufficient fire- power to oust a dysfunctional CEO. Self-assessment of CEO effectiveness will not suffice.

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Table A: Markman & Baron’s (2003) five factors affecting entrepreneurial success

Factor Description Example behaviours 1 High self-efficacy “The extent to which persons believe they can or- Preference for challenging activities ganize and effectively execute actions to produce Display high staying power given attainments” (p.288) 2 Ability to recognize Alertness - differentiate high and low potential op- More extensive research feasible opportunities portunities (although evidence is mixed?) Pay more attention to risk cues than economic information Accept risks exist and focus on controlling outcomes Taking personal responsibility, rather than controlling risk and avoiding responsibility

3 High personal perse- Ability to handle adversity and overcome obstacles Relates to ways in which individuals explain setbacks and failures. verance – financial, personal, social as well as business. Measured using an Adversity Quotient 4 High human and social Human capital: inherited qualities - e.g. intelli- capital gence, health, personality and attractiveness - and acquired skills – education, training, work experience and interpersonal relationships. Social capital: e.g. whom one knows - social networks and contacts, status – provides access to information, co-operation and trust. 5 Superior social skills Social perception, social adaptability, interactive Effective negotiator – securing orders, hiring employees, building competencies. alliances. Table B: Baum and Locke’s (2004) six factors linked with entrepreneurial success (Adapted from Fig. 1 and pp.587-593.)

Factor Description Example behaviours 1 Communicated Vision Motivational communication of val- Direct and explicit goals; clear communication (speeches, pep talks, ues/outcomes. presentations); focus; energetic proactivity. 2 Self-efficacy Task-specific belief in self Self-confidence 3 Goals Specific and challenging goals lead to Sets challenging but realistic and achievable goals higher performance 4 Passion A genuine love for work Enthusiasm and zeal carry the individual through challenges; prepared to work long hours; success or failure seen as personal 5 Tenacity Overcoming obstacles Perseverance whereas others give up. 6 New resource skill Ability to acquire and use resources effec- Effective acquisition, integration and deployment of resources; goes be- tively – e.g. finance, people. yond mere organisational skills.

Table C.1: Lessem’s (1986) Achievers of Mastery in Business

Intrapreneurial type Exemplar 1 Innovator Sir Terence Conran (Habitat-Mothercare) 2 Designer Mary Quant (Mary Quant Ltd) 3 Leader Sir John Harvey-Jones (ICI) 4 Entrepreneur Jack Dangoor (Advance Technology) 5 Change Agent Steve Shirley (F International) 6 Animateur Nelli Eichner (Interlingua) 7 Adventurer Anita Roddick (Body Shop)

Table C.2: Lessem’s Entrepreneurial qualities (adapted from pages 89-91)

Qualities Description Example behaviours 1 Risk taker Taking chances Enjoys calculated risks; believes that future will turn out well. 2 Opportunist Spotting chances Sees opportunities where others see problems 3 Wheeler-dealer Making chances Negotiates with the environment for own benefit; doing deals; combining resources profitably 4 Achiever Securing results Persistence in problem solving; patient; determined; competitive. 5 Powerful Ability to influence people Seek, defend and increase own power. 6 Champion Commitment Identify and promote ideas and products. 7 Marginal Establishing an edge Finding a niche rather than filling a role. 8 Gamesman Enjoying business Control the environment; respond to work and life as a game.

Table D: Timmons and Spinelli’s (2003) Six Themes of Desirable and Acquirable Attitudes and Behaviours (Adapted from Exhibit 7.3, p.250 and pp.249- 255.)

Theme Elaboration Example behaviours 1 Commitment and determina- Enables the overcoming of obstacles and com- Tenacity, decisiveness, competitive, persistent, personal sacrifice. tion pensation for other weaknesses. 2 Leadership Capacity to exert influence without formal Self starter; high standards but not perfectionist; team builder; hon- power. est, reliable fair and trusted; learner and teacher; patient but urgent. 3 Opportunity obsession Oriented to pursuit of goals, familiar with Market/customer driven; value creation/enhancement markets and customers but discriminating. 4 Tolerance of risk, ambiguity Not gamblers, but takers of calculated risk. Manages risk - minimises and shares; manages uncertainty, contra- and uncertainty dictions, stress, conflict; problem solver. 5 Creativity and self-reliance Belief that outcomes lie within own control. Unconventional, open minded, lateral thinker; adaptable; does not fear failure. 6 Motivation to excel Compete, but against self-imposed standards Goals-oriented but realistic; drive to achieve; low need for sta- and challenges rather than others. tus/power; supportive; aware of weaknesses and strengths

Table E: Parker’s (2004) characteristics of entrepreneurs (pp. 39-43 & 68-86.)

Characteristic Elaboration Example effects/behaviours

1 Leadership and motivation Bringing about change; ability to combine other qualities and resolve crises.

2 Human capital Age and experience, education. Age increases likely access to finance and business networks, but may increase risk aversion and decrease willingness to work long hours.

3 Social capital Community organisations, contacts, information. Self- confident, motivated

4 Family background and cur- Values and attitudes. rent circumstances Emotional and practical support

5 Psychological factors: i) Entrepreneurial traits Need for achievement. Energetic, pro-active, committed, takes responsibility for decisions; resourceful. Internal locus of control. Belief that performance depends on own actions, not external factors. Above average propensity to take risk. More willing to take risk; opportunistic; innovative. (aside from risk assessment – see below) Greater capacity to deal with uncertainty. Tolerance of ambiguity.

ii) Independence and job Autonomy Enjoys freedom from managerial constraints satisfaction

iii) Over-optimism More optimistic in (e.g.) risk assessment. Greater confidence in positive outcomes. Less objective/detached in decision-making.

Table F: Synthesis of factors influencing success

Markman & Baron (2003) Baum & Locke (2004) Lessem (1986) Timmons & Spinelli (2003) Parker (2004) High self-efficacy Self-efficacy Risk taker Tolerance of risk, ambiguity and Internal locus of control; Tolerance uncertainty; of risk, ambiguity and uncertainty; Creativity and self-reliance Autonomy. Ability to recognize feasible Goals Opportunist; Opportunity obsession Need for achievement (energetic, opportunities Marginal pro-active, committed); innovative; opportunistic. High personal perseverance Passion Achiever; Commitment and determination; Self-confidence, motivation; Posi- Tenacity Champion; Motivation to excel tive (over-optimistic?) outlook. Gamesman High human and social capital Human and social capital; Family background and circumstances Superior social skills New resource skill; Wheeler dealer; Leadership Leadership and motivation Communicated vision Powerful

Table G: Synthesis of causal factors influencing CEO Hubris (using adapted data from previous tables)

Case 1: Leander and Malmsten Case 3: Pierre Omidyar Case 5: Brin and Page (Boo.com) (eBay.com) (google.com)

Risk taker Realist (aware of his own locus of control) and a Internal locus of control; Tolerance of risk, ambiguity team-builder and uncertainty; High self-efficacy. Builders of com- munities and ecosystems and cohesive teams. Altruis- tic. Over-Ambitious Ability to recognize feasible opportunities Need for achievement (energetic, pro-active, committed); innovative; opportunistic. Game-changers.