Elon Musk may be discovering what experts in organizational behavior have known for years: white knights rarely rescue companies.
This could explain Musk’s reticence to go forward with his proposed acquisition of Twitter TWTR, -4.19%. Many are dubious of Musk’s stated reason — concern that many Twitter accounts are fake — and have therefore wondered if there were some other, unstated, reason. Might that other reason be a growing awareness that the odds would be against him in trying to make Twitter a significantly more profitable company?
I have no privileged insight into Musk’s thinking, but clearly the Tesla TSLA, -7.51% founder is a smart guy. I wouldn’t be surprised if he’s aware of academic research about what typically works — and doesn’t work — in trying to unlock a company’s potential. In short, that research tells me that the odds against Musk succeeding at Twitter are daunting.
Perhaps the highest hurdle an outsider like Musk would face in turning Twitter around is that, if the way forward were easy and obvious, the company almost certainly would have gone down that path already. There’s little doubt that Parag Agrawal, Twitter’s current CEO, is himself very smart, having earned a Ph.D. in computer science from Stanford University.
The counterargument, advanced by some, is that Twitter’s internal culture is holding the company back. Former CEO Jack Dorsey has made a version of this argument, claiming that Twitter’s board has “consistently been the dysfunction of the company.” Others have wondered if executives besides the CEO, along with managers further down the Twitter hierarchy, are too entrenched and have created roadblocks to needed change.
“ ‘Most of the CEOs who try to radically transform a company will fail.’ ”
The problem with this counterargument is that, in a contest between an outsider CEO and an internal culture, the latter usually wins. Gautam Mukunda, a professor of organizational behavior at Harvard Business School, has found from his research that “most of the CEOs who try to radically transform a company will fail.”
Rakesh Khurana, a colleague of Mukunda’s at Harvard Business School, who is a professor of leadership development, also has found that a CEO’s behavior is severely constrained. A corporation’s internal culture “exerts a far greater longer-term influence on the company’s success” than a CEO, Khurana told me in an interview several years ago.
Another perspective on the long odds Musk faces comes from research conducted by Jim Collins, the business consultant. For his book “Good To Great,” Collins compared two groups of companies. The first included firms that transformed themselves from merely equaling the S&P 500 SPX, -4.17% over a stretch of many years (“good”) to outperforming it by a margin of at least three-to-one over a period of 15 years (“great”). The second group included good companies that never underwent such a transformation.
Upon researching why companies in the first group underwent this transformation while those in the second group did not, Collins discovered that one key difference was whether the CEO had become chief executive after first working in the company. More than 90% of the “good to great” companies had named internal candidates as CEO, whereas just one-third of the companies in the second group did that. Collins concluded that “bringing in a white knight to be CEO is a recipe for mediocrity.”
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com
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