When companies report bad news — say, about earnings for the quarter or the year — often as not, they blame external causes. It’s almost as if the companies were reassuring their shareholders that things are fundamentally fine, except for that one factor (which, of course, is a one-time event; it won’t happen again).
A study to be published this fall suggests that this “blame game” may not be in the best interest of shareholders or stock prices. Larissa Z. Tiedens of Stanford University and two of her former colleagues at the University of Michigan, Fiona Lee and Christopher Peterson, studied the period from 1975 through 1995. The authors found that companies that attributed poor performance to internal, controllable, and specific reasons enjoyed better stock performance the following year — 14 to 19 percent better — than companies that blamed uncontrollable causes like the weather.
One reason for this premium performance might be that taking responsibility for bad news makes company executives seem more trustworthy. But that comes at a cost, explains Tiedens: “Taking personal responsibility for poor performance means that you admit to having done something wrong.” People want to think highly of themselves and want others to think highly of them, so they tend to “perceive the causes in the most flattering way possible — i.e. in a way that suggests we didn’t do anything wrong,” she adds.
While there does seem to be a correlation between taking responsibility and improving future stock performance, does one actually cause the other? Tiedens suggests that if the executive really believes that the mistakes were in his or her control — rather than just saying so, for the sake of appearances — “it will probably coincide with a change in their behavior.” And if their leadership was part of the problem, correcting it would be part of the solution.
Yet it’s the rare executive who writes takes a fall in the annual letter to shareholders. “Being self-critical is a difficult, but essential, skill for executives,” says Tiedens. Many find it a struggle to reflect on their own “negative characteristics” and the possibility that they contributed to their companies’ poor performance. Don’t compound the problem by surrounding yourself with yes-men, she adds; insist on honest, critical feedback from your staff and your colleagues.
Mea Culpa: Predicting Stock Prices from Organizational Attributions
to be published this fall in the Personality and Social Psychology Bulletin
More articles:
Diversity as Strategy
from the September 2004 issue of the Harvard Business Review
Racially diverse teams with a “learning perspective” perform better than more-homogeneous teams without one, maintains Harvard professor David A. Thomas. Examining the turnaround at IBM, Thomas shows how then-chairman and CEO Lou Gerstner established task forces for eight constituencies — Asians, blacks, gays, Hispanics, white men, Native Americans, people with disabilities, and women — to explore how the company could enhance each constituency’s productivity. Such a diversity strategy can succeed, writes Thomas, only in the presence of support from the top leaders, employees who are engaged with the initiative, management practices in line with the strategy, and a clear business case for the initiative.
How to Lead a Self-Managing Team
from the Summer 2004 issue of the MIT Sloan Management Review
According to some surveys, 79 percent of Fortune 1000 companies empower “self-directed” or “autonomous” teams. But according to Vanessa Urch Druskat of the University of New Hampshire and Janet V. Wheeler of Bowling Green State University, not enough attention has been given to oversight of these teams. The authors discuss how leaders of self-managing teams can excel at “managing the boundary between the team and the larger organization.”
The Cash Flow Sensitivity of Cash
from the August 2004 issue of The Journal of Finance
How do financial constraints affect corporate policies? Murillo Campello and Michael S. Weisbach of the University of Illinois and Heitor Almeida of New York University hypothesize that constrained companies should have a greater propensity than their unconstrained peers to save cash out of their cash flows. The authors, who examined a “large sample” of manufacturers for the years 1971 to 2000, found “robust support” for their hypothesis.
Who Are Those Guys?
from the March 2004 issue of the Journal of Restructuring Finance
The turnaround business has blossomed since the mid-1980s, yet many executives know little about the business has changed since the “slash-and-burn” days of yesteryear. At a national meeting of the Turnaround Management Association, Northeastern University professors Harlan D. Platt and Marjorie B. Platt surveyed 103 of these specialists and discovered that the profession is much more complex today — and so are the reasons that companies hire them.
