We don’t yet know the full extent of the troubles at MF Global, the financial services firm run by former New Jersey Governor and ex-Goldman Sachs CEO John Corzine, who testified before Congress today. But we do know that one leadership dynamic, called the fallacy of centrality, often plays a decisive role in such dramas. Its lessons are applicable to all leaders, not just those whose firms are bankrupt and missing roughly $1.2 billion in customer funds.

Let’s assume that Mr. Corzine was acting in good faith. If he was deliberately leading an organization to defraud investors, the moral of his story is far less useful for others. Instead, we need to ask, “How could this have happened?  What was he thinking?  What kind of leader lets this go on?  If he’s not corrupt, he must be incompetent, right?” 

Unfortunately for leaders everywhere, “positive intent” is not enough.  Simply wanting to do something the right way, or even a certain way, becomes harder and harder the higher up the ladder you go, as you perceive yourself as more “central” to the organization. For entrepreneurs, this often means it becomes harder to lead appropriately as your company grows.

The psychology is clear, and well-established.  Starting in the 1940s, sociologist Ron Westrum studied the practices of pediatricians and noticed a pattern of behavior in doctors who failed to diagnose serious conditions, such as child abuse by parents.  He found that well-intentioned doctors were hampered by their own sense of “expertise” and overlooked clear signals that something was wrong. They convinced themselves that if parents were abusing their children, the doctors (as experts) “would surely know the phenomenon if it actually were taking place.”

Westrum called this “the fallacy of centrality” – the assumption that because one is in a central position, one automatically knows everything necessary to exercise effective leadership.

In practice, that means CEOs often think, “If something serious is happening in my organization, I know about it, because my role is central to the organization.” And who is more central to an organization than its founder, especially at the early stages? The fallacy of centrality can also apply in the negative sense: “Because I don’t know about an event, it must not be going on.”

Robert Sutton, a professor at Stanford’s Graduate School of Business, notes that this problem causes leaders to narrow their focus on their own needs and wants, to the exclusion of others and the organization.  This is a fine insight into the all-too-common habit of leaders acting as if written and unwritten rules that others are expected to follow don’t apply to them.

So, how does a leader minimize the fallacy of centrality?

  • Be aware of the dynamic.  Once you acknowledge the nuances of “centrality,” you can ask all kinds of questions about your personal patterns.  Awareness is the first action for change.
  • Discuss with others.  Many leaders fail to grow simply because they do not reflect on and talk about elemental issues of leadership.  Reflection and discussion are essential steps for change.
  • Decide how and what to refocus.  Ask yourself: How will I pay more attention to others in the organization?  How do I embrace situations and perspectives that differ from my own?  What do I do daily to discover organizational “bad news”?   And when I learn things in the organization that are not as I assumed, what will I do differently to address them?

John Corzine may have led a corrupt company, or he may have been asleep at the wheel as MF Global careened into a ditch. But there’s also a very real chance that he thought he was doing the “right things” – and didn’t realize that his leadership style made it impossible to even know what those right things were.