Be a Leader, Not a Control Freak

Pfeffer believes part of the problem is that we've mythologized CEOs into heroic figures who have total control over their companies. It's not that leaders don't make a difference -- their leadership sets a cultural tone, for starters -- it's just that their effect on performance isn't as great as it's perceived to be. Perpetuating this leadership myth ultimately hurts the bottom line.

"The big challenge in companies of any size is to get everybody in the organization to take both individual and collective responsibility for the well-being of the organization," Pfeffer says. "If you have a strong, dominant leader, everybody looks to that individual, and they basically say, 'It's not my job; it's not my problem.'"

The more overconfident leaders are, the more likely they are to see themselves as instrumental to their companies' success, says Mathew Hayward, author of the new book Ego Check: Why Executive Hubris Is Wrecking Companies and Careers and How to Avoid the Trap and a professor at the University of Colorado at Boulder, who researches confidence in business decision-making.

His research shows that the bigger the ego of the CEO, the more the CEO will overpay for acquisitions, thinking his or her Midas touch will boost profits after the acquisition. "That's why we see acquisition premiums in the range of 30% to 50%," he says. "Hubris was the No. 1 factor."

You have to have some confidence to start a company, and your influence as the founder remains strong as the company grows. The key is to know where your influence lies and where it does not.

Entrepreneurs can't control external factors, but they should be in control of the general direction of the company, what it focuses on and who it hires early on, says Jeff Benrey, 44, co-founder of Trovix, a Mountain View, Calif., software firm with 40 employees and annual sales exceeding $1 million. "What you can control the most is the people you choose to work in your company," he says.