Ooops …. They’ve made a mistake (Okay – NOT)

The BBC Business Daily Report of 5 January 2009 suggests its not okay to make the mistakes in business.  Their on the mark. The old chestnut ‘ if your going to try new things in business be prepared to make mistakes and learn’ has got to be one of the biggest of the many furphies to come out of popular management theory in the last 20 years.   Over the past year we have seen what happens if you make big enough mistakes….  it’s all over (for some at least).   Furthermore, make a big mistake, or enough little mistakes and you won’t get a chance to see if you’ve learnt anything.

The idea that selling lots of sub-prime loans to lots of people who couldn’t afford them constitutes lots of mistakes and not much learning, is pretty tempting.  Lots of people in lots of businesses down the supply chain, being careless, with insufficient knowledge, evaluating things wrongly – making mistakes.

If making mistakes isn’t actually a good thing then what is the solution?  Maybe it’s about thinking things out before you make the decision.  Disciplined planning and analysis, careful thinking and review and questioning  – all the hard things.  Its also about having a culture which supports honest and free speech – which not only encourages (and enforces) disciplined analysis but reinforces the exercise and debate of considered opinions.   The latter in my experience can be difficult  to achieve – as challenging as good analysis in the first place.

Does this mean you don’t take risks or fail on occasions?   Many decisions or plans have a risk (be it a known risk, a known unknown risk or an unknown unknown etc.) and even the most detailed decisions/plans have an element of judgement initially and along the way.  You don’t always fail because you made a mistake.  You can fail for any number of reasons beyond your control, but you need to hunt them down and pull the plug straight away.   A mistake occurs if you don’t look for problems and find them and then act on  them.

I know – sometimes there isn’t the time or money to do the analysis required.  This can lead to all sots of trouble – be it on your own head.   Its your call but maybe its better not to go into the jungle in bare feet.

The idea that we don’t learn from mistakes has interesting consequences for senior management and Boards.  If the solution to a mistake is to implement stronger regulation then why should those responsible for the mistake continue to hold responsibility in the aftermath?  Why should we think they have learnt the skills necessary not to make the same mistakes again, let alone other is a new environment?

“I Can’t Trust Nobody…(in business)”

If there are any lessons from 2008, it’s about trust – or who not to trust. It’s a bit of an issue really, because trust is a pretty important part of doing business. In fact its the foundation of an efficient economy. If your a business, you need to trust your staff and your suppliers, your banker (dare I say it) and your insurer. If your a consumer, you need to trust the producer and the product description.

The sub-prime events have revealed a lot about trust – or at least what happens if its misplaced.  If you trust people who don’t deserve to be trusted then the whole system of business can break down.  We trusted financiers we thought were smarter  and they weren’t.  We trusted mortgage salesman who sold unnafordable loans , we trusted banks offering credit that couldn’t be repayed and on so on.

The world is too big and complex not to trust others – we need too believe that they know what they are doing and will give us good guidance and advice.  Without trust it all breaks down – and it did.

Many countries in the world who had prior experience of misplaced trust and have the benefit of regulations to underpin financial integrity are responding better to the sub prime mess.    But unless we want an army of regulatory bureacrats overseeing all our decisions, we must all start taking reesponsibility – learning more about what we can afford, learning to ask the hard questions of those in positions of responsibility.

To trust others we need to be confident in their ability to understand and act for the benefit of everyone.  Those who are take a role which effects the lives of others need to ask themsleves ‘do I have the capacity and knowledge to do this job competently and with integrity?’.  Those that allow them to take the job need to ask them the same question and piss them off quickly if they can’t.

The fact that so many in positions of responsibility performed so poorly gives no excuse to place any individual on a pedestal beyond accountability.  No manager, CEO or Executive is that much of a superstar that they shouldn’t be made to stand and account for their actions.  There are no Gods of business – just ordinary men and women. When they perform well we must rteward them and when they stuff up, we’d better find them before they bring us down.

If you depend on your employees, sack the managers who don’t understand them!

Employee surveys provide a window into the thoughts and perceptions of an organisations labour force that can provide a unique opportunity to take a competitive advantage

Its can be frustrating for a manager to receive the results of a staff satisfaction or climate survey.  Often as not, the results are below their expectations.  The response is often defensive and resentful.  Behind closed doors, I’ve heard managers argue that staff are ungrateful, or suggest if their not happy they should leave the organisation.

If its a good survey with total anonymity, and poignant questions, then its likely that staff answered honestly – more honestly than they would in any open conversation with a manager and probably as honestly as they would talk to trusted friends.

The first thing is that a manager who is angered by a response below their expectations is revealing that they are out of touch with their staff.  They are perceiving their staff according to their own expectations, rather than listening too and watching them.  Consequently they feel confronted when the reality falls short of their prediction.  I have seen instances where the anger turns into recalcitrant management.  The manager digs their heels in, determined to play tough – if the staff don’t like it, then its just tough.  The consequence of this response depends  on the broader organisational context.

Most important is the status of relevant labour markets.  For example, if there is a shortage of demand for your employees across the market (ie. they are highly mobile) then chances are the good ones will leave to greener pastures.

If on the other hand, there is an oversupply of labour, then it may well matter less how well staff are treated.  This context perpetuates aggressive uncaring employee management purely on the basis that it has no opportunity cost.   This is often the case in industries where unskilled manual labour is the primary means of production (old industry and new – take for example call centers).  However, you see it also in developing economies where there labour market supply and demand is imperfect (take India for example, where there is an oversupply of IT and accounting specialists).   Again, you can even see it in unskilled employee cohorts in high tech industries – for example, those performing administrative or secretarial and other support services.

If the product market is competitive,  you may be dependent on a specific groups of employees in the organisation.  In this case recalcitrant management creates a business risk, if there is a demand for employees in the wider labour market.

Executives therefore need to understand how contextual factors effect the business risk when they are dealing with employee survey results.  While it might seem like common sense, I have seen it happen time and time again.

Recalcitrant managers in competitive product and labour environments need to change their behaviour or be shown the door when the risk is real.  The higher they get the more influence they have – the more dangerous they can be and the more damage they can cause.  At the highest level, the Board of Management needs to move on the Chief Executive who just doesn’t get it.

More often, I see problems where a business has grown rapidly and the original managers have strong entrepreneurial skills but suddenly wake up one day with 100 or more staff to whom they can’t relate.   So often the one thing they can’t do is what they have to do – let go and delegate the responsibility for employee management to someone with the skills.

As a business grows, good people become more important to the results.  They require systems, procedures and policies.   They need guidance, particpation, skills and career development and the rest.  A good employee survey will let you know what they value and how well your delivering.  If you listen hard you can create an environment that will stimulate high performance.  If you suffer from organisational deafness your’ll lose them to a smarter competitor.

Corporate Fraud – Overconfidence or Incompetence?

According to a recent Viewswire article ‘Are overconfident executives more inclined to commit fraud?’ Wharton researchers, Schrand and Zechmand propose that overconfident executives may be at risk of being overly optimistic about future company performance. When events fail to live up to their expectations and the cost of their error impacts, they may resort to fraud as a means of covering up resulting business predicaments.

It’s an interesting if not common sense thesis. The idea that managers may find themselves in positions where they have badly underestimated the outcome of decisions is a natural consequence of taking action in in an unpredictable world. Overconfident managers misjudge the risk involved in a decision and may also have difficulty withdrawing from unfavorable situations. Thus they can end up in the deep end and turn to fraud.

From my reading of news reports of costly corporate fraud around the world it would seem many cases involve incompetence and recklessness. The failure of events to live up to expectations arises from flawed expectations – as I said, an inevitable consequence of taking action. But when the flawed expectations have a debilitating cost to the company, its usually a failure to assess or even understand the real risks involved in the decision. This behaviour seems to involve incompetence – that is a lack of skill or capability – as much as overconfidence.

Clearly, the incompetent person should never have been promoted to a position where they could be so unskilled. The question arises how they got there in the first place, and therefore calls into question the overall competency of the organisation. In effect, the poor decision was not the one made by the incompetent person but the person who actually placed them in the position where they could make the decision – or who failed to ensure policies and practices were in place to guide their work (if they broke these then thats a premeditated crime). How did they get there – nepotism, labor shortages, poor recruitment or promotion practices? Is their manager incompetent, or their managers manager?

The authors suggest that you are more likely to be over confident in complex industries. Sure, if your out of your skill depth then the more complex the industry the more likely you are to crash and burn. On the other hand if the industry is more complex, you need greater skill, greater care and more risk management.

One can’t help suspecting that there are a lot of companies out there face a problem of promoting overconfidence and incompetence. When credit gets tight and the bear market growls, poor risk business practices bring it to the surface. It can be a scary time for many CEO’s.