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Guarding against bad decisions

Jo Whitehead and Andrew Campbell are co-authors with Sydney Finkelsteinof Think Again, Why Good Leaders Make Bad Decisions and How to Keep it From Happening to You(Harvard Business Press, 2009). In this article they summarise a few of the main points of their book with a special focus on their red flagging technique.

by Jo Whitehead and Andrew Campbell

Bad decisions are in the press. Sir Fred Goodwin decides to acquire ABN Amro for cash just as the credit markets are imploding. President Obama admits to screwing up by putting forward nominees to important posta who had not paid their taxes. Eminent peers decide to take backhanders. But bad decisions are not anything new — and they are not things that happen only to other people. Bad decisions are something we all need to guard against. The first response is often to call for more regulation, more oversight and more bureaucracy but not only does that kill innovation and motivation, it is also often ineffective. So is there anything that you can do to reduce the risk of a bad decision without adding layers of heavy handed process? We think so. Our recent study of flawed decisions, suggests that they are much more likely to occur under what we call red flag conditions. Forewarned is forearmed. Spot one of the following four red flag conditions and you can take steps to reduce the risk of screwing up:

• Misleading experiences. This occurs when we are faced with an unfamiliar situation — especially if it appears familiar. Under these conditions we may think we recognise something when we do not. William D Smithburg became Chief Executive Officer (CEO) of Quaker Oats in 1981 where he executed the successful acquisition of Gatorade (the sports drink company) in 1983. In 1994 the expanding company sought to repeat the success by acquiring another successful but underexploited drinks company — Snapple. Smithburg failed to recognise that whereas Gatorade was promoted and distributed in a traditional fashion and was a rising star in its market, Snapple was a quirky, entrepreneurial organisation producing an image drink that was already losing market share. The acquisition was disastrous, leading to the downfall of both Smithburg and Quaker itself.

The lesson: Identify the main uncertainties involved in a strategic decision and ask whether the decision maker’s experience might distort their thinking

• Misleading prejudgments: Before we even begin to evaluate the situation we might be influenced by previous judgments or decisions we have made which connect with the current situation. These are misleading prejudgments. Steve Russell, the CEO of Boots between 2000 and 2004, had a potentially misleading and strong prejudgment that Boots needed to grow and that health-care services were an attractive opportunity. In his own words, ‘I had been formulating this ambition for Boots since I was merchandising director of Boots the Chemist in the late 1980s. So when I became CEO, I was determined to make it happen’. With hindsight he commented: ‘We did not have the know-how to make these services work. We should not have tried to do so much of it ourselves’. Other managers suggested that many of the services Boots tried to enter were inherently low-margin businesses. A turbulent trading period ensued and Russell resigned in 2004.

The lesson: Ask whether the decision maker has any prejudgments that they are bringing to the decision which may distort their thinking

• Inappropriate self-interest. Even among professionals who are highly ethical, this can be a very powerful and often unconscious influence. Doctors’ prescriptions have been shown to be influenced by the favours they have received from drug companies. Credit ratings agencies are likely to underestimate the credit risk of many of the derivative products they rated because they were paid by the issuer of the derivative product.

The lesson: Don’t assume that even the most ethical decision maker will be able to escape the influence of their personal interests.

• Inappropriate attachments. These might be the attachments we feel to colleagues or a business when considering cost reductions. A striking example of inappropriate attachments is that of Sir Derek Rayner who acquired Brooks Brothers (the iconic US retail chain famous for its button-down shirts) when he was CEO of Marks and Spencer in the 1980s. In the four years of his leadership he’d proven to be a highly capable leader who transformed M&S from a family-run company, doubled earnings per share and nearly doubled revenues from £2.9bn to £4.6bn. Yet he paid $750 million for Brooks Brothers even though his team said it was worth only $450 million. When he announced the deal M&S’s share price fell sharply. Why did he do it? As Judi Bevan describes in her book The Rise and Fall of Marks & Spencer, Rayner ‘was enamoured with Brooks Brothers clothing that was in large part aimed at men of Rayner’s age and taste’. Although his advisers had presented six possible acquisition targets, Rayner ignored all the others and ‘went straight for the preppy, upmarket Brooks Brothers chain.’

The lesson: Don’t underestimate the effect of powerful emotions of affection or hatred however much the decision maker appears to be able to remain objective.

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