Making mistakes is easy. Just ask Matthew Broderick, the American government
official who didn’t realise that Hurricane Katrina was a disaster until it
was too late, or Sir Clive Thompson, former chief executive of Rentokil
Initial, who led the business-services company through year after year of
profit increases only for it to become too unwieldy and for its share price
to slump.
In their book Think Again, Sydney Finkelstein, a professor at Dartmouth
College’s Tuck School of Business, and his co-authors, Jo Whitehead and
Andrew Campbell, use these examples and dozens of others to illustrate how
capable, experienced and highly-qualified managers can make poor decisions.
They argue that the way the brain works means people can make errors of
judgment even when they think they are being entirely logical and rational.
Relying on gut instinct can be even worse, Finkelstein said. “It will
definitely work sometimes but nobody seems to be able to understand the
conditions under which it will not work,” he said.
Our brains use two main processes to deal with new information: pattern
recognition and emotional tagging. These let us use our previous experience
to work out what to do when faced with a new situation, and can work well
when we have enough relevant experience on which to draw. However, things
start to go wrong if that experience is misleading.
That’s what the authors believe happened in Thompson’s case. He had steered
Rentokil through more than a decade of growth with a strategy that included
buying small competitors every year, but in the mid 1990s he changed tack
and made two acquisitions that more than doubled the size of the business.
Unfortunately, the deals weren’t successful and Rentokil Initial’s share
price dropped significantly. Thompson took a number of steps to rectify the
situation but ultimately he was asked to resign.
There could have been a number of factors involved in his decision, but the
authors believe the central cause was flawed pattern recognition that
prevented him from seeing that the big deals were different in nature from
those that had gone before. They write: “[This] caused him to see big
acquisitions as being similar to the many small successful acquisitions that
he had made over the last ten years. Instead of fish and fowl, he simply saw
larger fish.”
Chris Bones, who used to work in the drinks industry before becoming the dean
of Henley Business School at the University of Reading, admits to having
made thousands of mistakes. “It’s how people learn,” he said. “I have made
mistakes at every stage of my career and I have tried to learn from all of
them.”
One that has stuck with him was the time that he was hired to come into an
organisation to turn it around. “I had built a reputation as someone who
comes in when organisations need to sort out a mess,” he said. “In this
particular case, I was brought on board to make big changes to products,
processes and performance.”
When he joined, he inherited a team of people whose involvement would be
critical to the success of the changes that he needed to make. His new
bosses told him he would probably need to make significant personnel changes
as soon as he started, but Bones resisted. His gut instinct told him that
his new team members were well-meaning and deserved the chance to make the
changes needed. “One of my failings is that I take people at face value,” he
said. “I buy into them until they prove otherwise.”
A year later, however, it was clear that he had been wrong. “I realised that
it wasn’t working when nothing changed. I felt like I was wading through
treacle. My bosses were demanding change. They were looking at the results
and saying ‘well, what’s happened?’.” Bones realised that his only option
was to make personnel changes. “They were very nice people who worked hard
but they were simply being asked to do things that were beyond them,” he
said.
The experience changed the way Bones approaches this sort of decision. “I have
become much more analytical. Until then I had been very intuitive but now I
make a cold, clear-headed assessment of the situation.” Trying not to hurt
people’s feelings can end up being more painful in the long run for both the
individuals and the organisation, he said.
Bones’s decision was probably made under the influence of what Finkelstein and
his colleagues call a misleading prejudgment, where an emotional reaction –
in this case the belief that people should be taken at face value – shapes
the way a manager thinks.
A more striking example can be found in the way that President Herbert Hoover
reacted to the Wall Street crash of 1929. The need for governments to
balance their budgets was so deeply ingrained that rather than increasing
public spending and reducing taxes, which may have helped to avoid the Great
Depression, he cut spending and increased taxes. He was so against the idea
of running a deficit that he refused to consider any measures that would
have required it, no matter how many benefits they would bring.
Brian Mayne, a personal development speaker and author, has been caught in the
same trap. Twenty years ago, a big company offered to buy his entertainment
business in a deal that would have netted him and his family about £1m. It
was a good offer but because it was a family business and the only work they
had ever known, they were emotionally attached to it and declined.
“Two years later the recession hit. We had overstretched ourselves and instead
of walking away with £1m we were left £1m in debt,” he said. Rather than
letting the failure crush him, Mayne saw it as a learning experience; he has
now built Lift International, a successful personal development business.
“Good people make mistakes,” he said. “You can’t let the fear of mistakes
stop you from doing anything.”
Finkelstein agrees. What’s important, he said, is that leaders realise that
they are not infallible and that they learn from the mistakes they make.
“Let’s face it. If you never make mistakes you will never learn or
innovate,” he said. “But if someone continues to make decisions that are
biased . . . and refuses to accept that they could be wrong, that is bad.”
Think Again: Why Good Leaders Make Bad Decisions and How to Keep it From
Happening to You, by Sydney Finkelstein, Jo Whitehead and Andrew Campbell,
is published by Harvard Business Press
