Misleading experiences, misleading pre-judgments, inappropriate self-interests and inappropriate attachments… These are the four red flags you should be watching for in your organization. They are the source of most major errors at the leadership level and, yes, even your best leaders will stumble sometimes. There are plenty of good leaders out there who make bad decisions that we can group into the categories above.

John Thain, former CEO of Bank of America, and his famous spending habits.

The CEOs of the Big 3 Detroit automakers and the public relations fiasco they created by flying to Washington in separate private jets to beg for bailout money.

Dick Fuld at Lehman Brothers and, indeed, the entire US banking/finance industry for underestimating the risk of sub-prime lending.

Just to name a few.

The Fact is you may have the best leaders in the industry, but they will still make mistakes. No one is perfect.

The Problem is leaders make decisions using certain patterns and subconscious reactions. They are misled by previous experiences, by their environment, by perceptions and many other factors. 20/20 hindsight is great, but wouldn’t it be nice for an organization to notice misperceptions and flawed reasoning before it becomes a “bad decision”!

The Outcome is a perfectly healthy organization that can blunder into major missteps and destroy billions in shareholder value. To make matters worse, it is often difficult to notice these blunders until it’s too late to do anything about them.

The Solution is to recognize the “red flags” of bad decision making and to avoid flawed conclusions by applying the proper safeguards and checks during the decision making process.

Red Flags

Rewind to Hurricane Katrina.

How is it that several competent and experienced US government officials (we’re not talking about George Bush here) ignored the realities of a Hurricane disaster in New Orleans? This natural disaster was highlighted by the Department of Homeland Security in 2003 as a “Top 15” crisis scenario in the US, natural or otherwise. When the hurricane initially struck the coast of Louisiana, early damage reports were dismissed as exaggerations. Reports of broken levees and severe flooding were dismissed until 24 hours after disaster struck. News reports of people celebrating in certain areas of New Orleans that escaped the eye of the storm were misperceived as a sign that all was fine.

Leaders in this situation, and others like it, were using memories of their past experiences to deal with current events. Hurricanes are often followed by exaggerated damage reports. This was assumed to be the case with Hurricane Katrina.

The reports of broken levees were dismissed because earlier reports indicated that it was nearly impossible for such thing to happen. Even when observers in a helicopter reported broken levees, US government leaders initially ignored those reports for over 12 hours.

Disaster response leaders talked themselves into thinking that they “dodged the bullet” in New Orleans after they heard the news reports of people celebrating in certain parts of the city… and, of course, once they connected what they saw on the news with their previous experiences with hurricanes, they determined that there was no urgency.

We know the outcome of that decision.

Do these types of perceptions and experiences guide decisions at your organization? You may not even know it.

How the Brain Makes Decisions

Sydney Finkelstein in his book “Think Again: Why Good Leaders Make Bad Decisions” is not new to studying mistakes. His book looks at similar patterns of failure in seemingly competent individuals.

He deduces that business leaders use their past experiences to define current reactions to issues. They also look at competitors and counterparts around them to get a bearing for business trends. Sub-prime banking crisis anyone?

Business leaders look for obvious patterns and make the assumption that all future patterns are similar. What else? Leaders put emotional tags on proprietary ideas and even on conclusions they deduce using their own logic.

Finally, most business leaders are not particularly adept at considering more than one plan at a time. They will imagine a solution to a problem, and proceed with that solution, unless there is something obviously wrong about it.

Beyond these quirks of the human brain, leaders are sometimes fixated on things or ideas they’ve become attached to.

For example, former Chairman of Samsung, Lee Kun Hee attempted to expand his company into the motor car business. He had a personal affection for cars and it turned into a disastrous business proposal that cost Samsung dearly and distracted the organization from their core business.

In Our Opinion
The Beacon Group’s Advice for Avoiding Bad Decisions by Good Leaders

Encourage Disagreement - Every decision in your organization must be countered by opposite opinions. By having several people commenting and brainstorming on the same idea, you reduce the effect of misperceptions and decisions moulded by past experiences. These counterpart opinions act as checks and balances in your decision making process.

Gather Data - Once you’re at the verge of making a decision, make another effort to gather a bit more data. This isn’t meant to slow down the decision making process, but just to get a fresh perspective.

Separate Decisions and Governance - Have a team of people debate and develop a solution and another team of leaders act as a monitoring body to review decisions. This doesn’t have to be done for every single decision within a corporation, however you can use this method for larger issues.