Thought of the Week - What makes a company successful?

Everybody always says that we live in a knowledge economy, but hardly anyone seems to really understand what that means. One answer Dan provides is that you need a workforce that is highly motivated and feels that it is being treated fairly and can grow within the organisation. Leaving everything else equal, companies with a more motivated workforce perform better in terms of productivity, profitability, and share price according to Dan.

But, in my view, there is a step missing and that step is, as usual, hidden in the term “everything else equal”. If you work in a company full of morons, you can be as motivated as you like, neither you nor the company you work for will ever be successful.

So, step one is: hire skilled people that will succeed at their job.

In his presentation, Dan mentioned that interviewing candidates is one of the worst methods to select candidates for a job. It creates the illusion of knowledge about the candidate and an illusion of being able to predict his or her performance without any evidence that the interviewer actually gets better at predicting the performance of the candidate. In fact, first impressions are usually wrong when it comes to interviewing candidates because the three necessary conditions for first impressions to be informative are not met, as explained by Daniel Kahneman here. First impressions tend to be reliable if you are in a controlled environment, doing an exercise that you have done very often and you get immediate feedback. Job interviews may or may not be a controlled environment, but for most of us it is not something we do every day, and it certainly is not something where we get immediate feedback. In fact, feedback about the performance of the new hire is months down the road from our decision to hire him or her.

Second, there is plenty of evidence that people tend to hire people that are like them and that they can relate to. However, there is absolutely zero evidence that this leads to the selection of high-performing candidates.

If interviews are actually reducing your ability to hire high-performing candidates, what are the important attributes to look for? It’s not politically correct to say this, but the evidence is clear. The candidates with the highest cognitive ability tend to be the ones that perform best. So ideally, you would just ask every candidate to perform an IQ test including verbal reasoning skills, etc. And if you can’t do that, then here is a top tip: Look at the grades the candidates had in school or at university. The literature on human intelligence shows that school grades have no predictive ability to forecast if someone is successful in life, in the labour market, or elsewhere. The only thing that grades in school are highly correlated with is IQ. The reason why school grades are not predictive of success in life is not that schools don’t prepare students for real life, it is because real life does a horrible job at identifying skilled people and then promoting them.

But cognitive ability isn’t everything. Someone may be smarter than everybody else, but if he is a smartass then he won’t succeed. Cognitive ability is a foundation on which to build, it isn’t the finished product. A person will be successful only if he or she is willing to learn and not just in university or for tests but learn every day. And never, ever stop. I do this by writing these missives that force me to look for new things to learn and write about. You do this by reading these missives every day. Congratulations!

Finally, the last of the important predictors of a successful employee is emotional stability. It is incredibly difficult to work with someone who is an emotional volcano, ready to erupt at any time without prior notice. But it is also very difficult to work with someone who is so introverted and insecure that he or she will never dare to say anything or provide valuable insights. What you need are people that are in the happy middle. Emotionally strong, but not overbearing, resilient against stress, and not defeatist when facing challenges.
If you find all three elements (cognitive ability, a willingness to learn, and emotional stability) you have found a great new hire. Congratulations, now do that a couple of hundred times and you can move on to step two and read Dan Ariely’s research on how to motivate people.

Thought of the Week features investment-related and economics-related musings that don’t necessarily have anything to do with current markets. They are designed to take a step back and think about the world a little bit differently. Feel free to share these thoughts with your colleagues whenever you find them interesting. If you have colleagues who would like to receive this publication please ask them to send an email to joachim.klement@liberum.com. This publication is free for everyone.