Toronto’s Bill Kinnon links us Steven Smith’s conversation with Guy Kawasaki who links us to a white paper by Smith and David Marcum on their new book Egonomics (Simon and Schuster, 2007)

The first sentence in Egonomics declares, “Ego is the invisible line item on every company’s profit and loss statement.” Smith claims it’s an invisible line item because the effects of ego are seldom measured. But “people know the costs are there,” he says:

Over half of all businesspeople estimate ego costs their company six to fifteen percent of annual revenue; many believe that estimate is too conservative. But even if ego were only costing six percent of revenue, the annual cost of ego would be nearly $1.1 billion to the average Fortune 500 company.

even if ego were only costing six percent of revenue, the annual cost would be nearly $1.1 billion to the average Fortune 500 company.

$1.1 billion is what analysts refer to as “a lot of money” — and no wonder since it’s in the neighborhood of the average annual profit for Fortune 500 companies.

According to Ohio State’s Paul Nutt, half of all business decisions fail (maybe more since failures are often swept under the rug). How can that be?

Dr. Nutt conducted research on failed decisions with hundreds of organizations over two decades. He uncovered three key causes of decision failure:

• Over one-third of all failed business decisions are driven by ego.
• Nearly two-thirds of executives never explore alternatives once they make up their mind.
• Eighty-one percent of managers push their decisions through by persuasion or edict, and not by the relevance of their idea.

Marcus + Smith say you know a company is headed for ego trouble when you observe:

• whose idea wins matters more than the best idea
• hearing, but not listening
• people thinking me first, company second
• only the “right” people have good ideas
• pressure to fit in
• failure to challenge the status-quo
• candid discussion saved for the water cooler
• failures being buried and never spoken of again
• silos created and tolerated
• meetings going longer than necessary
• people resisting making mistakes or not admitting them

Any of that sound familiar?

Of course it’s possible to have too little ego and function as a doormat. But too little ego does not create the kind of problems we’ve seen this century in, say, Tyco, Enron, or Bear Stearns (who in 2007 managed to be Fortune’s “Most Admired” securities firm — March — AND the poster child for the sub prime lending debacle — August).

In the face of all this, Marcum and Smith — inspired by Jim Collins’ exploration of Level 5 Leaders who combine a unique mix of intense professional will and extreme personal humility — call for a new understanding of humility as ego in equilibrium:

Without a clear understanding of what humility is, it can be seen as a trait best left to special causes and religious leaders, but not business people. If humility seems to be an outdated concept in a fiercely competitive world, it’s because humility is misunderstood, understudied, and underestimated.

Humility — ego in balance — curiosity — remembering we don’t know everything about anything — and veracity — the relentless pursuit of and adherence to truth — are Marcum + Smith’s three principles of egonomics. “Those three principles not only require us to do differently, they require us to be different.”

And there’s the rub. How can a business leader be different without seeming weak in a climate where the one with the most ego perks wins? Seriously. How can a business leader be humbly different without being weak?

[continued in part 2: Egonomics + Servant Leadership]