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Why CEOs need to track bad news

July 18, 2003

Just when there seem to be no leviathans left standing in the boardroom, management guru Jim Collins has listed the 10 greatest CEOs of all time (Fortune, July 21, 2003).

As the author of Built to Last and Good to Great, Collins' credentials for winnowing the merely good from the truly great are of course undisputed.

To narrow his search for great leaders, Collins uses nearly the same filters -- legacy, innovation, resilience and financial performance -- that he used in Good to Great to separate the truly great companies from those that aspired to but never made the cut to greatness.

Some may argue over the flaws in Collins' selection criteria, many will carp over the final list. But none can argue that the league of extraordinary leaders chosen by Collins displays certain noble traits: strong core values, the strength to pursue those values against odds, courage and grace under fire, humility, and a sense of higher purpose than beating last quarter's results.

To these virtues should be added a fundamental prerequisite for smart leadership: the ability to hear and act on bad news. Effective leaders don't shy away from bad news, they welcome it. They set up systems to ensure that feedback about problems, crisis, threats and chaos speedily finds its way to them.

And they are hardwired to project the right emotion and reaction when the bad news is relayed to them: gratitude instead of resentment; acceptance instead of argument; constructive vigour instead of destructive denial; and a sense of action instead of atrophy. Thus do great leaders consciously build a culture where bad news bubbles right to the top.

Most CEOs however, seem loath to face the unvarnished truth. Burdened by long-term pressures and short-term irritations, leaders often slip into a self-protective cocoon where no negative information is allowed to penetrate. Many don't even realise when the defence mechanism kicks in.

Sometimes, it starts by shooting the messenger, other times by ignoring the rude message on the wall. Soon managers around the leader get the signal that bad news isn't welcome, and the effort shifts to protecting the leader from nasty reports.

By being open only to positive data and by blocking out negative information, leaders leave themselves vulnerable to strategic snafus. If you don't know a start-up's products are selling faster than yours, you really don't have a handle on how the competition is undercutting your future.

Partially-deaf leaders also forget that bad news that is acknowledged and acted upon early becomes a source of strategic advantage: buy up the start-up and use its innovations to drive new product development.

The inability to face reality is eventually the reason why so many good companies fail to become great -- and go bust. It's also the reason why someone as iconic as Lee Iacocca didn't make Collins' list of the top 10 CEOs of all time.

In fact, according to Sydney Finkelstein, the Steven Roth Professor of Management at Dartmouth's Tuck School of Business and an authority on strategy and leadership, there's a direct link between when a leader stops listening and starts failing.

Leaders who are brilliant in all respects, have the best management degrees, and boast of an impeccable track record, stumble when they refuse to take cognisance of bad news.

Finkelstein has studied more than 51 companies in a research project spanning six years -- an interesting slice of time as it straddles CEO mishaps before, during and after the Internet boom -- and last month, released the findings in his book Why Smart Executives Fail.

After trawling through all kinds of corporate mistakes and disasters Finkelstein found that the critical reasons for failure were not incompetence or ineptitude or inability, but 'breakdowns in how executives perceived reality for their companies, how people within an organisation faced up to reality, how information and control systems in organisations were mismanaged, and how organisational leaders adopted spectacularly unsuccessful habits.'

Given that Finkelstein and his team spoke to more than 200 people -- many of them CEOs I asked him if any finding came as a shock. There was one.

Finkelstein found that whether the company got blindsided by a new technology or by a change in government regulations or by a new competitor, "out of the 51 companies we studied, in every case, to my surprise, the CEOs already had the data or information they needed before them.''  Marvels Finkelstein: "In every case, they chose to ignore it.''

Companies don't just drive themselves into a ditch. They go into a decline when the person in the driving seat refuses to pay heed to the warning signs. It's very hard for a CEO -- who is always under tremendous pressure -- to accept more angst from bad news.

But good CEOs tune in nevertheless. They know that tracking bad news is one way of building sustainable competitive advantage. As Jim Collins would agree, great leaders capitalise on the fact that bad news never ends.

(The columnist is a Boston-based management writer)

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