Why Companies Make Harmful Decisions

Why is it that companies make bad decisions?

In posing that question, I’m not referring to those infamous bad calls like Decca records rejection of The Beatles, or Blockbuster’s rebuff of a joint venture with Netflix. These are human mistakes — and with the benefit of hindsight, we can all of us believe we’d have made a smarter choice.

Rather, what interests me is why, given all the checks and balances, so many companies appear to take carefully thought through decisions that actively harm the interests of their stakeholders?

A Harvard Business Report estimated that up to 90 percent of all mergers and acquisitions fail; similar claims can be made for internal transformation projects, especially in the IT and digital sphere. Whatever way you look at the problem, it seems that despite access to the smartest minds, sophisticated forecasting tools and due diligence warnings, business leaders continue to get it wrong.

Observation has taught me there’s no single explanation. But after twenty years of corporate decision making — and with the scars to prove it — I’ve at least become attentive to some of the warning signs.

What follows are therefore my insights from experience. Interpret them as you wish, for every situation will be different — which leads nicely to my first observation, that gets straight to the root of the problem.

Complexity

The unfortunate reality is that many strategic decisions are not as binary as whether or not to award a recording contract — rather, they are multifaceted, involving forecasts of markets, competitors, savings and synergies… And what’s more, many of the situations are particular to circumstance, so references are seldom available or even helpful if they were.

In these sorts of complex situations, we all of us — and organizations are no different — resort to simplified solutions that allow for a quicker way through the maze. Academics call these heuristics — we know them as rules of thumb, best estimates, benchmarking and the like.

The trouble with heuristics, is that although they are to some extent inevitable, we risk addressing a simpler problem than the one we face — and worse, our biases and preferences creep into the proposed solution to issues that have been framed for our convenience rather than the reality of the situation.

One antidote — so far as any is effective — is to be extremely careful when simplifying or estimating significant variables. Any benchmarks we chose and assumptions we make, must also be modeled over a wide range of outcomes. The greatest danger of heuristics is actually a regression to the mean where risks and opportunities are smoothed into a safe bet which, in the event, turns out to be anything but.

Impulsiveness

Linked to our tendency to simplify, is a pressure to act — fueled by a deeply ingrained corporate mindset that regards not doing so as a missed opportunity or cultural failing. Organizations increasingly demand that their leaders move at pace, and while this has its benefits, it can also lead to premature decisions that are ahead of the curve.

In transformational projects, the term ‘bleeding edge’ refers to the impact of decisions — typically, those involving the early adoption of technology — which lead to unexpected costs and consequences which harm rather than enhance competitiveness. The underlying reason is that supposed ‘first-mover advantage’ inevitably comes with significantly greater risks. In almost any sizeable market, the lesson of case study after case study is that a little more patience would often have led to a better outcome.

To some extent, this is as much an institutional as an individual problem. I often sense that companies weigh the ‘regret risk’ of missed opportunities more heavily than they do the years of successful delivery. Investors — like sports fans — are both impatient for success and quick to point out the triumphs of others. What they are less good at doing, is recognizing the potential for pitfalls and giving due regard to the judgment of those who avoid them.

There is no cure-all solution to impulsiveness, but it is good practice to ensure decisions can be made over sensible timeframes, to resist the pressure to lead on every front, and to establish agreed expectations for investment and return over time — and then stick to them!

Reward versus Risk

At the heart of the type of decisions we’re discussing is the assessment of risk versus reward.

Of course, no opportunity of any consequence is a certainty — investors, colleagues and customers all understand that. It’s also fair to say that most successful executives need to be less risk averse than say, librarians. But while that’s a good thing, my experience is that risk and reward assessments are often made in a manner which gives undue weight to one over the other.

Think for a moment of all those inspirational quotes you’ve seen at management conferences: Whatever you dream, begin it — for boldness has power and magic! (Goethe); Security is mostly superstition… (Hellen Keller); Do not fear mistakes; there are none!’ (Miles Davis)

Extracts like these can be fine as a means to inspire a sales team or encourage creativity, but their underlying message can — and in my experience often does — contribute to a mindset which lionizes risk taking.

I’m not suggesting that the potted wisdom of Miles Davis is taken too literally by senior executives. But when it comes to major strategic decisions, the notion that boldness equates to virtue remains a powerful force, and a significant hindrance to a full and objective assessment of downside consequences.

The dream of reason

We should also recognize that objectivity is more of an attitude than a destination we ever arrive at. The belief that we can accurately predict the future through analysis and situational modeling alone has been the downfall of many an economist — or for that matter politician.

In practice, we live in a less than rational, often emotional, and certainly disruptive world — companies and organizations can never fully predict the response of others, or indeed, the impact of change on their people and its consequent effect on a multitude of other factors. Which is why softer considerations are just as vital.

Culture and Communications

In analyzing harmful decisions, the diagnosis often points less to the actions we have taken, than the way we went about them.

For example, bringing together two organizations might seem straightforward on paper — but as with personal relationships, there’s more to a good match than aligning compatible skills and qualities. Too many mergers are predicated on the assumption that the mores of one party can be imposed on the other — giving scant regard to the importance of culture, communication and values as drivers of performance.

Successful ventures pay attention to these softer qualities, avoiding the imposition of changes that are diametrically opposed to the past, or rewarding individuals with extended remits for which they have little understanding.

The same cultural empathy should apply to for our search for synergies, sales growth or even colleague engagement — we should not assume that crashing together, or worse, imposing one style on the other, will bring success.

Think Borg and McEnroe — both exceptional tennis players, but not the most compatible doubles pairing.

Imbalance of stakeholders

This understanding of partnership is never more important than in the balance of stakeholder interests. All commercial organizations have at least three key constituencies: their investors, employees and customers. And while all of these will want the company to prosper, they each have subtly different needs and emphasis.

Successful organizations make decisions in a way that ensures all stakeholders take a fair share of the risks and rewards. That means investors accepting there are other calls on cash than paying dividends; employees understanding that job security comes from embracing change, and customers having realistic expectations on price and value despite the leverage they may have.

Conversely, if the interests of one stakeholder group begins to dominate, it can be a green light to harmful decision making. Over the lifecycle of a business, there will, of course, be times of different emphasis — but on the whole, sustainable decisions are founded on meeting the needs of each constituency, while avoiding the ascendancy of any.

And finally…

I could go on with a host of other reasons…

But I’m conscious there’s a limit to the value of observations from experience, and particularly aware that hindsight makes prophets of us all — or in my case, the best Monday morning quarterback to never grace the field.

Perhaps the most important thing, in seeking to understand why so many companies make harmful choices, is to recognize it’s not the corporate entity that makes those decisions at all — it is people!

And as human beings, we are all of us in equal part blessed and susceptible to the paradoxical mix of talents, frailties and hubris that drive our exceptional achievements as well as our greatest mistakes.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s