What CEOs Need to Know (But Probably Don’t)
March 15 2010 by Jeff Grimshaw
So why do they do it? Because confronting reality requires discipline and deliberate effort. As George Orwell once observed, “To see what is in front of one’s nose needs a constant struggle.” Here I’ll suggest five coaching points for putting this insight into action.
When CEOs don’t know, or pretend not to know, what’s really going on in and around their organizations, trouble follows. (Witness Toyota’s recall crisis and the financial meltdown – just two of many examples.)
So why do they do it? Because confronting reality requires discipline and deliberate effort. As George Orwell once observed, “To see what is in front of one’s nose needs a constant struggle.”
Here I’ll suggest five coaching points for putting this insight into action.
First, embrace truth (over “truthiness”)
In the pilot episode of “The Colbert Report,” satirist Stephen Colbert introduced the word “truthiness,” which he explained with the following example:
“…Do you know you have more nerve endings in your stomach than in your head? Look it up. Now somebody is gonna say: “I did look it up and it’s wrong.” Well, mister, that’s because you looked it up in a book. Next time, try looking it up in your gut. I did and my gut tells me that’s how our nervous system works.”
Webster’s Dictionary has now codified the term to refer to “the quality of preferring concepts or facts one wishes to be true to concepts or facts known to be true.” Too many CEOs and executive teams tend to favor truthiness over truth because, as Colbert suggests, the former just feels better. Ignorance, as the clichÃ© goes, is bliss.
Highmark CEO Ken Melani feels differently. Management at the Pittsburg-based insurer created a “Trust Index” to measure employee engagement and trust in leadership. A couple of years ago, some executives didn’t want to conduct the next scheduled administration of the Trust Index because of an impending merger. According to Melani, “They were concerned that the merger would hurt our results, and we wouldn’t look as good as we had in previous surveys.” Ken’s response: “Wait a second. You can’t just do the surveys when times are good and not during times of uncertainty. Things happen every day. And if scores fall, we want to know so we can address those concerns.”
So the company proceeded with the survey. And it turns out that the results actually were as good as or better than before the announcement of the merger. Ken was pleased. “Employees know that we’re honest and we’re communicating and that even in the midst of change we’re not going to disengage.” In the long-term, Ken found, putting truth over truthiness pays dividends.
Second, surround yourself with people who will tell you what you need to hear (but probably don’t)
When Dean Edwards became the chief procurement officer at Kaiser Permanente, taking on his first role in the complex world of managed health care, he knew he needed access to unfiltered information. “We committed to the organization that we’d deliver hundreds of millions of dollars in cost savings in a relatively short period of time. You can’t take on an aggressive goal like that – and succeed at it – if you’re mired in wishful thinking,” he told me. “Reliable information about what’s working and what isn’t – even if it’s unpleasant – makes it possible to recalibrate as we go, to ensure the right outcome. It’s an essential component of any change program”
So he did a few things to make sure that he was getting the unvarnished truth – primarily by putting around him, as he described them, “people who will tell me . . . what I need to know but probably don’t.”
To tap into the informal networks of his organization, Dean put together an advisory council composed of a dozen people from across the department, nominated by their peers. The first time this group came together, Dean asked for their recommendations about how to improve communication. One of the things he heard was, “Dean, your e-mails aren’t very helpful. Even when you are praising us there’s always a ‘but’ at the end.” Instead of taking offense, Dean soaked up the feedback and subsequently took steps to improve the brevity, timeliness, and relevance of his communications. “And now my e-mails don’t stink,” he told me with a self-deprecating laugh. “Or at least, they stink less.” Dean continues to rely heavily on the council to keep him informed about what he needs to know but probably doesn’t – and for advice on what to do about it.
Another thing Dean’s done is to launch a “day-in-the-life” program. From time to time, he goes out and spends a day with someone in the ranks. He’s charged each member of his senior team to do the same thing. “Some leaders like to do walk-arounds,” Dean explained. “But when you spend only 30 seconds with someone, it’s easier and safer for them to keep the conversation formal, stiff, and generally perfunctory and inauthentic. When you spend a full day with someone, it becomes informal pretty quickly, and you gain invaluable insights into what’s happening that are hard to come by via any other means.”
There’s one other important element of Dean’s strategy for putting around him people who will tell him what he needs to hear. One of the great resources for senior leaders at Kaiser Permanente is the executive consultant. The role is part lieutenant, part chief of staff, part truth teller. Dean hired his executive consultant in part, because she was willing to argue with him. By telling him what she thinks he needs to hear, even when it’s uncomfortable, and critiquing his ideas, Laurie Spoon has helped Dean, as he puts it, to “stay out of my own way for over four years” – during which time Dean’s organization has delivered over $700 million in hard cost savings to Kaiser Permanente.
Third, make high-stakes decisions with eyes wide open
According to the French mathematician and philosopher Imre Lakatos, “It is perfectly rational to play a risky game: What is irrational is to deceive oneself about the risk.” Or, as rapper Ice Cube put it more succinctly, you ought to “Check yourself before you wreck yourself.”
No matter how smart they are, CEOs put themselves and their organizations in peril when they ignore this advice. Look at Harvard. The university depends on its endowment to fund a significant portion of its annual operating budget. For a time, the university was so confident in its investment strategy, which included exotic financial instruments, that it borrowed above the endowment’s value to place additional bets. When the stock market plunged in 2008, the university had to unload $2 billion in stock at fire-sale prices in order to cover the gamble. The result: Harvard lost $11 billion, implemented hiring and salary freezes, and had to reduce the size of its staff.
How could this happen in a place with so much intellectual firepower? As a Harvard insider told Boston Magazine’s Richard Bradley, “You had very smart people [here] . . . who never had a real answer to the question, ‘What would happen if this doesn’t work out our way? What if what the black box is predicting doesn’t occur?’ The answer would always be, ‘That’s impossible’ or ‘You don’t understand.’ The arrogance was palpable.”
What’s the alternative? By engaging your team in an eyes-wide-open reality check prior to making a big decision or committing your resources and reputational capital toward an important effort, you can reduce the risk of delusional choices and proactively prevent excuses before they happen.
At Vanguard, chairman and former CEO Jack Brennan has promoted the use of structured debate to refine and test ideas and guide the development and validation of business strategy. Specifically, the company uses “devil’s advocacy sessions,” where senior staff members appoint teams of officers to argue opposite sides of a key business decision under consideration.
As Brennan told me, “Not only do the participants have to take a stand; they have to do it with passion and conviction. Some of our best decisions – ‘go’ or ‘no go’ – have come out of these sessions.”
What else can you try? In the early months of the financial crisis, I asked PNC Bank’s CEO, Jim Rohr, why his organization was weathering the storm better than most. His response?
“Thirty-five years ago, a manager of our credit committee said to me: ‘Remember, love your balance sheet. Some day you will meet it.” I didn’t have any idea what he was talking about then, but I know now. When we put loans on our books, we won’t know for two or three years if they’re good loans. That’s why you stick to the fundamentals. Know your borrower. Know your balance sheet. Those are basic tenants of banking.”
Even if you’re not in banking, you can “love your balance sheet” – at least metaphorically – by using a tool called “force field analysis” to perform due diligence on high-stakes decisions. In our version, we bring together a team that has already made the decision to embark on some significant project, initiative, or other effort. With those assembled, we facilitate an in-depth discussion around two questions:
- What are all the things (people, habits, situational factors, etc.) that are working in our favor? What’s going to help us succeed? And how are we going to leverage those things?
- What are all the things (people, habits, situational factors, etc.) that are working against our success? What’s going to make it hard to achieve our goals? If we don’t succeed, what the most likely culprit? (The point here is to create a complete list of all the things that will become excuses later if the team fails to address or plan for them now.)
This is a great way to surface some of the risks and issues that leaders are pretending not to know. And, as you might expect, this conversation sometimes spurs the team to reverse or change course in favor of more rational risk taking.
Fourth, don’t play “good crop, bad crop”
Who deserves the credit when things go well? Who deserves the blame when they don’t? A phenomenon social scientists call self-serving bias makes it easy for us to answer “me” and “not me,” respectively. Self-serving bias refers to our tendency to take credit for successes but to chalk up failures to factors outside our control (such as bad luck or other external variables).
And it’s another way that CEOs too often divorce themselves from reality. Sydney Finkelstein described the phenomenon in his book, Why Smart Executives Fail. “In one organization we studied,” he says, “the CEO spent the entire 45-minute interview explaining all the reasons why others were to blame for the calamity that hit his company. Regulators, customers, the government, and even other executives within the firm – all were responsible. No mention was made, however, of personal culpability.”
The same phenomenon showed up, in spades, in the midst of the financial crisis, as Nick Paumgarten described in a recent New Yorker article.
“In congressional testimony, the disgraced CEOs of failed institutions – Richard Fuld, of Lehman Brothers; Martin Sullivan, of AIG – talked about a “financial tsunami” that caught them unaware, as though they had not figured in the plate tectonics…but the potential for catastrophe was clear to see, for all who had eyes to see it, and men like Fuld and Sullivan were paid tens of millions of dollars to have or hire such eyes…So to claim ignorance or helplessness is to admit to negligence, or to tell a lie. It grated when, last fall, Donald Trump tried to get out of paying debts by claiming that the economic meltdown was a ‘force majeure’ – the legal equivalent, basically, of an act of God – and not a logical outcome of a set of observable circumstances. The real-estate bubble was not a great secret.”
There’s a tongue-in-cheek saying among old Communist party bosses: “Good crops come from good farming; bad crops come from bad weather.” Our Cold War policy of containment stopped the spread of their ideology across our borders but did little to prevent us from producing our own homegrown version of “good crop/bad crop” thinking. Even before the Wall Street bailout, my research showed that employees don’t care that much about executive compensation per se; what they resent is a policy of “socialism in the C-suite, capitalism for the rest of you” – whereby senior executives grant themselves all the positive consequences of success while shielding themselves from the negative consequences of failure. The influence on employee loyalty and productivity is toxic.
So what can CEOs do to keep the “good crop/bad crop” mentality in check? Besides leading by example, you can call it out when you see your employees exhibiting this bias (and invite them to point it out when they perceive you are doing the same thing).
Fifth, treat mistakes as intellectual capital
One of the responsibilities of the reality-friendly CEO is to help create an environment where people channel their energy into learning from mistakes instead of covering them up. On this score, an exemplary leader is Walt Buckley, chairman and CEO of Internet Capital Group.
At the height of the Internet boom, ICG’s market capitalization exceeded GM’s. “In the late nineties, every time we made an investment, the stock went up – we could do no wrong,” he recalls. “This created a false sense of invincibility. We got so caught up in the success of the moment that we lost a good deal of our discipline and focus.”
When the crash eventually came, it hit hard. But instead of blaming everything on forces outside their control (namely, the dot-com crash), Buckley led his team in meditating on their mistakes.
“We had to be honest with ourselves about the mistakes we’d made that put us in that place, including the mistakes I made. Looking back, I now call that time the MEMP period – Made Every Mistake Possible,” he told me. But with the tough lessons came an interesting perspective. Think about it: You make every mistake possible, and you’re still around to fight another day? For a band of warriors, that’s a liberating feeling. And with it, Buckley created an environment where, without being paralyzed by defensiveness, he and his team could thoughtfully catalog their mistakes, treat them as intellectual capital, and apply them in their return to battle. “As we headed up the next hill, we turned every one of those mistakes into a guide for how to climb back up to the top,” Buckley says.
Embracing empirical reality may remain “a constant struggle,” as Orwell suggested. But the reward for CEOs and senior executives who put these five coaching points into practice is a significant reduction in costly surprises, and the associated drama and distractions.
Jeff Grimshaw is co-author with Gregg Baron of “Leadership Without Excuses: How to Create Accountability and High Performance” (McGraw-Hill), and is a partner with MGStrategy (http://www.mgstrat.com/index.html), a performance improvement and accountability alignment firm based in Philadelphia, PA .