Here’s a guest post by Sydney Finkelstein, a Professor Strategy and Leadership at the Tuck School of Business at Dartmouth College, and the co-author of Think Again: Why Good Leaders Make Bad Decisions and How to Keep it From Happening to You (Harvard Business School Press, 2009). Follow Sydney Finkelstein’s Blog – The Syd Blog.
Decision-making lies at the heart of our personal and professional lives. Every day we make decisions. Some are small, domestic and innocuous. Others are more important; decisions that affect peoples’ lives, livelihoods and wellbeing. Inevitably, we make mistakes along the way. We are only human – even when we are at work. Indeed, the daunting reality is that enormously important decisions made by intelligent, responsible people with the best information and intentions sometimes go wrong.
Ken Lewis of Bank of America made a disastrous acquisition of Merrill Lynch. Juergen Schremp, CEO of Daimler Benz, led the merger of Chrysler and Daimler Benz against internal opposition. Nearly 10 years later, Daimler was forced to virtually give Chrysler away in a private equity deal. Kun-Hee Lee, CEO of Samsung, pushed his company into a disastrous investment in automobiles. As losses mounted, he was forced to sell the car division for a tenth of the billions he had invested. Richard Fuld refused to accept the consequences of the worsening credit crisis and consider a sale of Lehman until it was too late. When he was ready, there were no buyers to be found. And CEO Jerry Yang insisted that his Yahoo! was worth much more than the market, or Microsoft, believed it to be. In the end, his stubborn refusal to consider Microsoft’s overture to buy the company cost shareholders $30 billion, and Jerry Yang his job. (And perhaps the story repeats itself at Sun with founder Scott McNealy resisting IBM’s overtures.)
Whether the decision is a personal one, as in the case of Yang and McNealy, or of global importance, as in the case of the meltdown of the financial markets in 2008, mistakes happen. But, why do good leaders make bad decisions? And, how can we reduce the risk of it happening to us?
I’ve been working on this issue for much of the last dozen years, and a lot of my thinking boils down to this: we are all subject to a series of decision-making biases that make us think we are right when we are really wrong!
Take Ken Lewis and Merrill Lynch, for example. If you look at the deals Bank of America made both under Lewis’ predecessor, Hugh McColl, and later under Lewis, there were two primary defining attributes. The companies were in mainstream banking, and the economy was not in severe distress. This was true for NationsBank’s acquisition of BankAmerica as it was true for Bank of America’s acquisition of FleetBoston. These were deals for which there was an established playbook – cut overhead costs, consolidate assets, and build bulk to fend off competitors and create new business opportunities. When it came to Merrill, the playbook no longer applied. Merrill, perhaps the poster child for sub-prime excess, almost wrote the book on toxic assets. Add in a global financial crisis – remember that both Bear Stearns and Lehman had essentially failed by mid-September when Bank of America agreed to acquire Merrill – and it is apparent that Lewis’ experience built up over decades of deal-making was not only off the mark, it was dangerously so. Relying on misleading experience is one of the most common explanations for bad decisions we have identified in our research, and Bank of America is now Exhibit A.
There are other fundamental biases in how people think that can lead to other big mistakes. One of the most powerful is personal attachments – to people, to places, and to things. These attachments make the world go round, so none of us would want to eliminate them from our lives. But sometimes, when we allow ourselves to give in, these attachments push us into potentially dangerous territory. To me, Jerry Yang’s refusal to sell to Microsoft, and Scott McNealy’s (so far) unrealistic attitude toward IBM and its very generous takeover offer of Sun, are classic illustrations of attachments in action. Founders of companies find it very difficult to let go, and perhaps that is why God created venture capitalists to ante up their money and have the fortitude to remove the founder CEO when necessary. When these powerful founders are still in place, they are influential. For Yang, why sell to Microsoft, the evil empire of the computer industry? For McNealy, why sell to IBM, and give up everything that he’s built over years of hard work? Both are attached to their companies, so much so that they cannot readily separate their personal needs (for control, for association) and their responsibilities as stewards of these two companies. And so deals that should be done are not done.
What to do? I’ve advocated four key steps to reduce our vulnerabilities to making bad decisions:
(1) Make sure you’ve got lots of data sources, internal and external, that can enhance our ability to assess what is really going on.
(2) Make sure you’ve got the right people around the table. Not just talent, but people who are unafraid to push back and challenge.
(3) Make sure you are monitoring any important decisions in real-time, ready to step in and make adjustments before the momentum becomes too great.
(4) Make sure to create a robust governance system, perhaps the hardest challenge of all because this really means that the board of directors is active, vigilant, and strong. A tall order to be sure.
The reality is that leaders can make good decisions. But, to do so, we need to broaden our understanding of what happens when we are confronted with the usual mix of unstructured and incomplete data, different perspectives, time pressures and other sources of uncertainty. We all share some common attributes because of how our brains have evolved, and these attributes have much to do with how we think and act. If leaders are aware of what might go wrong, we will be in a much better position to make the right decisions, at the right time.