Egonomics

1 ego and the bottom line Every good thought that we have, and every good action that we perform, lays us open to pride, and thus exposes us to the various assaults of vanity and self-satisfaction. -- WILLIAM LAW Ego is the invisible line item on every company's profit and loss statement. And because ego's subtly out of sight on the P&L, that's precisely why for decades, if not centuries, we've become no better -- and maybe no worse -- at managing the most pervasive, powerful force inside every person in every company. Chances are when you read the opening line of this chapter, the idea that ego isprofitablewasn't exactly the first idea to catch your attention. But despite the negative reputation of ego, it isn't purely aloss.On the profit side, ego sparks the drive to invent and achieve, the nerve to try something new, and the tenacity to conquer setbacks that inevitably come. Surprising as it may sound, many people don't have enough ego, and that leads to insecurity, hollow participation, and apathy that paralyze cultures and leaders. Invested into every team meeting, boardroom debate, performance review, client conversation, contract negotiation, or employment interview is the potential for ego to work for us or against us. If we manage ego wisely, we get the upside it delivers followed by strong returns. But when that intense, persistent force inside manages us, companies suffer real economic losses. Over half of all businesspeople estimate ego costs their company 6 to 15 percent of annual revenue; many believe that estimate is far too conservative. But even if ego were only costing 6 percent of revenue, the annual cost of ego -- as estimated by the people working to produce that revenue -- would be nearly $1.1 billion to the average Fortune 500 company. That $1.1 billion nearly equals the average annual profit of those same companies. But whether ego costs us 6 percent of revenue or 60, when people estimate those costs, what are they thinking of? Usually the last time they crashed into someone's ego or the latest headlines. Under the leadership of David Maxwell and then James Johnson, Fannie Mae delivered unmatched performance from 1981 to 1999, beating the general stock market 3.8 to 1. Fannie Mae was listed as one of only eleven companies in Jim Collins's study of 1,435 companies inGood to Greatthat created and sustained unparalleled performance, with leaders to match. On January 1, 1999, however, Franklin Raines replaced Johnson as CEO. Five years later, under pressure from Fannie Mae's board of directors after questionable accounting practices, Raines resigned. "By my early retirement," Raines claimed, "I have held myself accountable." Ironically, four years earlier, in 2002, Raines was asked to testify before Congress about the collapse of Enron. "It is wholly irresponsible and unacceptable for corporate leaders to say they did not know -- or suggest it is not their duty to know -- about the operations and activities of their company," Raines told lawmakers, "particularly when it comes to risks that threaten the fundamental viability of their company." Raines walked away from Fannie Mae with a retirement package potentially worth $25 million and total compensation of nearly $90 million during his tenure. He was replaced on December 22, 2004, by Daniel Mudd. As we were writing this chapter, a colleague emailed us a news release. The headline announced, "Fannie reaches $400 million settlement." The first line of the release read, "Fannie Mae's 'arrogant and unethical' corporate culture led to an $11 billion accounting scandal at the mortgage giant, federal regulators said Tuesday in announcing a $400 million settlement with the company." [emphasis added] Daniel Mudd's leadership was also questioned. "Fannie Mae thought itself so different, so special, and so powerful," wrote Bethany McLean ofFortune,"that it should never haMarcum, David is the author of 'Egonomics' with ISBN 9781416533276 and ISBN 1416533273.