It was striking how CEOs exercised judgment in the run-up to the financial crisis and made decisions that either protected firms or hastened their demise. Both Jamie Dimon of JPMorgan Chase, which succeeded, and Richard Fuld of Lehman Brothers, which did not, can be characterized as strong leaders. The essential difference in decision making between the two firms relates to processes that Dimon uses to solicit vigorous feedback:
At the monthly all-day operating-committee meeting of the top 15 executives, the atmosphere is variously described by the participants as “Italian family dinners” or “the Roman forum–all that’s missing is the togas.” Dimon will throw out a comment like “Who had that dumb idea?” and be greeted with a chorus of “That was your dumb idea, Jamie!” “At my first meeting, I was shocked,” says Bill Daley, 60, the head of corporate responsibility and a former Secretary of Commerce. “People were challenging Jamie, debating him, telling him he was wrong. It was like nothing I’d seen in a Bill Clinton cabinet meeting, or anything I’d ever seen in business.”
While this particular style may be a bit strong for some firms, the underlying principle is sound. Robust decision making with plenty of feedback before reaching closure on major issues is essential for sustained success of nonfinancial as well as financial firms. Professor Sydney Finkelstein of the Tuck School of Business at Dartmouth has analyzed public and private organizations and their decisions.
He and his colleagues found that decision makers may be hampered by misleading experiences in their backgrounds (fighting the last war), misleading prejudgments, inappropriate self-interest, or inappropriate attachments, all of which can lead to flawed decisions. Finkelstein and his colleagues point to two factors that must be present for an organization to make a major mistake: (1) an influential decision maker makes a flawed decision, for any number of reasons, and (2) the decision process lacks capacity to provide feedback to expose errors and correct the decision.
The remedy, they found, lies with improved decision processes. First, design the decision process to enlist additional experiences and data relevant to major decisions. This can help to offset tendencies toward groupthink. Second, encourage group debate and challenge to ensure that opposing points of view have been heard and understood. Third, possibly separate decision-making authority bodies, with one group submitting the proposed decision to a higher “governance” group for approval. Professor Finkelstein reports he has become a strong supporter of the idea of separating the role of CEO from that of board chair. Dividing the roles allows the board to exercise more independent judgment than may be possible if the CEO also exercises authority as the board chair. Finally, implementation of a decision should be carefully monitored to ensure that each major decision is yielding the promised results.
When a bank credit committee conducts a mutually respectful dialogue between bankers who want to consummate a deal and underwriters who fear the downside risks, this helps to create a balanced decision that considers both upside gains and downside risks and helps to shape a well-rounded decision. In other words, risk management is an essential ingredient in a robust decision process and an important component of what this book calls constructive dialogue. Successful financial firms built constructive dialogue into their decision making.
Either company CEOs or their firms’ cultures must be strong and self-confident to create a robust decision process such as Finkelstein and other governance experts recommend. The cost of lower quality decision making, as became painfully clear in the financial crisis, can be substantial harm to an organization and its future.
That leads to the most fundamental difference between firms that weathered the financial crisis and those that failed: The successful firms all understood the need for integrated decision making that took account of upsides and downsides of proposed actions and of the firm’s condition at any point in time. Leaders of failed firms simply didn’t get it. They either pursued market share or other league table rankings, essentially without regard to risks, or they failed to manage their firms well enough to be able to understand their potential exposures to downside risks.
Reprinted with permission from Why Some Firms Thrive While Others Fail: Governance and Management Lessons from the Crisis by Thomas H. Stanton published by Oxford University Press, Inc. © 2012 Oxford University Press.
Thomas H. Stanton is a fellow of the Center for Advanced Governmental Studies at the Johns Hopkins University. Based in Washington, D.C., Thomas practices law with a specialization in federal financial programs, design of government organizations, and regulatory oversight.
[Image: Flickr user Kit]