Sydney Finkelstein is the Steven Roth Professor of Management at Dartmouth College’s Tuck School of Business. He is the author of the widely acclaimed book Why Smart Executives Fail. The book identifies the fundamental reasons why major mistakes happen, points out the early warning signals that are critical for managers and investors alike, and offers ideas on how organisations can learn from corporate mistakes. Finkelstein also serves as consultant with host of major corporations including American Express, BASF, Boeing and GE.
In discussion with James Nelson, Finkelstein exposes the root causes of corporate failures and offers an unprecedented inside look into what kinds of mistakes can bring great company to the brink of collapse.
How did you hit on the idea of studying executive failures as opposed to success stories?
It came from several places. If you go to business shelves in most book stores and look at the leadership section, you’ll find large number of books on great companies, successful organisations and titles by retired CEOs talking about how they were so successful. You’ll find very few books or analyses of the other side – all the things that went wrong. We know there are many instances when things don’t go right, but no one seemed to pay much attention to this in terms of research and analysis.
I wondered why that is, since there’s lot we can learn from failures. After all, intuitively we say people can learn from their mistakes, but very seldom do we take the time and energy to try and do something about this. So to large extent that really drove me. It was also very interesting angle from which to look at leadership. There are some excellent lessons which come from this particular perspective.
How did you go about identifying which business failures to study?
I started by looking at the stories which were making news, then began to gather data on large number of companies where things had gone wrong. I had several key criteria, the first being whether it was possible to gather sufficient data to give clear idea of what went wrong. Second, it could not be an industry-wide phenomenon where all companies in an industry struggled, and third, where the magnitude of the loss was extremely large. I wasn’t interested in minor problems. I wanted cases where the types of mistakes and issues involved changed companies dramatically. Once I did that lot of companies fell by the wayside and I ended up with much smaller number to study in detail, including companies in Japan and Europe.
So you believe your findings would apply to companies outside the USA?
Yes, I’m certain of that. While there are obviously differences in business practice and culture across these countries, the same patterns of failure kept recurring, and that I found remarkable.
Were the results of your research different from what you expected to find when you began?
I didn’t start off with group of hypotheses. I was interested in discovering what the patterns were when looking at large companies – and there were two main ones. The first was just how successful, talented and intelligent these leaders were before the really bad things happened. These were people who had been promoted many, many times and selected above other talented people many times. They were real winners with excellent track records, yet it is precisely these people who were at the helm when the disastrous things happened in these organisations.
The second major finding was how these mistakes really could be attributed to the individual who was running the company or division, whether CEO or other senior executive. This was in contrast to what most people, including myself, had assumed – that lot of company failures occur because of external factors.
For example, government changes, regulations become stricter or new technologies replace the old. Obviously, all these things happen on regular basis. But I can tell you that of the 51 companies I studied those externally driven explanations for failure were never the real underlying causes for these disasters. The key decision makers knew what was going on but elected not to do anything about it. I use the term “choosing not to cope” to symbolise what that behavioural pattern is all about.
After these failures, were any of the executives able to restart their careers elsewhere?
The truth is none of them ever had chance afterward to run another major company. Many of them left with quite significant compensation, but the career consequences for these failures tended to be long lasting. No one is going to hire them to run company again.
Some of the companies you write about had losses in the billions of dollars. Surely losses on this scale could be tied to the whole senior management team and not just the CEO?
There’s plenty of blame to go around. Take Motorola where they failed to shift from analogue to digital technology for their mobile phones, and as result lost 75 percent of their global market share. The divisional CEO and general managers running the cellphone business were really the ones behind that failure.
The corporate CEOs were not without blame for having left them alone to run their own show without questioning, pushing back and challenging their strategy. So there was responsibility which could be spread across the whole management team.
But there are many examples where the CEO is so dominating that the management team is really incidental to what actually happened. We could say that the whole management team is responsible even in those instances because they failed to provide the feedback, push-back and debate that are so essential. They allowed themselves to be yes-men and yes-women for the CEO. You’d like to think that very senior executives would be able to resist when they disagree with the direction the CEO is taking. But the truth is that in most instances they didn’t, and that in itself is serious consequence.
Why do you think they didn’t?
In so many of the companies I studied the CEO would cull some of the more outspoken executives, and in some instances they would even lose their job. One of the classic warning signals of impending failure is when there is significant degree of senior executive turnover, almost always because the CEO is pushing them out. They are replaced, but virtually always with people more loyal to the CEO.
Couldn’t solid corporate governance from the board of directors have avoided some of these failures?
Absolutely. Corporate governance and effective vigilance by the board is critical component in dealing with many of the problems that our research uncovered. But, as you know, in many instances boards are broken. We live now in the post-Enron world and even in this environment there are plenty of boards that are still not standing up and being as vigilant as they might be.
Often board members feel somewhat beholden to the CEO for their position. Board members do very well. The private jet comes to pick you up for flight to corporate headquarters, and the remuneration board members receive is not trivial.
Many board members are themselves CEOs of other companies, and in their CEO role don’t want to be challenged by members of their own board, so they don’t themselves act this way. But more than all these factors, the biggest problem with boards we studied is how weak the team interaction is between board members. culture forms where they are not an effective working group in the way we understand how groups can be effective in other levels of organisations. All too often there’s not open constructive debate. There’s not an attempt to gather all the information that might be valuable.
These are essential components for an effective team, and they are lacking on many boards because as group they tend not to think of themselves that way. So one of the potential major improvements to how boar
