On the subject of investing checklists as an aid to better decision-making, we also noted some interesting research done a while back (post the Tech bubble) by Sydney Finkelstein. Finkelstein is the Professor of Management at Dartmouth’s Tuck School of Business. Rather than focus - as most researchers do - on the reasons behind management success, he chose to look at corporate failures. In what he calls the largest research program ever devoted to corporate mistakes, he spent six years studying more than 50 companies – including Enron, Tyco, WorldCom, Rubbermaid and Schwinn - and conducting some 200 interviews to ascertain what they did to become complete failures.
If you share Charlie Munger's view that a key part of good investing is learning to make fewer mistakes than the next guy, this is pretty interesting from an quot;alarm bellquot; perspective - quot;I don’t want you to think we have any way of learning or behaving so you won’t make mistakes. I’m just saying that you can learn to make fewer mistakes than other people – and how to fix mistakes faster when you do make themquot; (Munger).
So what were the conclusions of Finkelstein's work?
When do Businesses Fail?
Firstly, Finkelstein's work found that most businesses failed during four major business events, i.e. new ventures, dealing with innovation and change, managing mergers and acquisitions, and addressing new competitive pressures. This is perhaps unsurprising as these are all times of major corporate change, which might put stress on an organisation. Secondly, he found that failures are caused by four destructive patterns of behaviour that typically set in, well before a business goes under. These four syndromes involve:
- Flawed executive mind-sets that throw off a company’s perception of reality
- Delusional attitudes that keep this inaccurate reality in place
- Breakdowns in communications systems developed to handle potentially urgent information
- Leadership qualities that keep a company’s executives from correcting their course
Thirdly, he found that spectacularly unsuccessful people had seven personal qualities in common.
7 Habits of Spectacularly Unsuccessful Executives
Nearly all of the leaders who preside over major business failures exhibit four or five of the following habits. The truly quot;giftedquot; ones exhibit all seven. They are usually found in conjunction with admirable qualities, such as unusual intelligence, talent, charming, personal magnetism, and the ability to inspire others. So what are they?
- They see themselves and their companies as dominating their environments, not simply responding to developments in those environments.
- They identify so completely with the company that there is no clear boundary between their personal interests and corporate interests.
- They seem to have all the answers, often dazzling people with the speed and decisiveness with which they can deal with challenging issues.
- They make sure that everyone is 100% behind them, ruthlessly eliminating anyone who might undermine their efforts.
- They are consummate company spokespersons, often devoting the largest portion of their efforts to managing and developing the company image.
- They treat intimidatingly difficult obstacles as temporary impediments to be removed or overcome.
- They never hesitate to return to the strategies and tactics that made them and their companies successful in the first place
Ironically, he notes, that each of these seven habits represents a quality that is widely admired in the business world. Business not only tolerates the qualities that make these leaders spectacularly unsuccessful, it celebrates them....
Checklist for Avoiding Bad Managers
He also suggests the following checklist structured around some key concerns as a set of warning signals for those looking at a given business / management team.
Is there unnecessary complexity?
- Is the company’s organizational structure convoluted or complex?
- Is its strategy unnecessarily complex for an otherwise simple problem?
- is its accounting overly complicated, nontransparent or nonstandard?
- Is it employing complicated or nonstandard terminology?
Is spending out of control?
- Does the management team have enough experience to handle growth?
- Are there small, yet nontrivial, details or problems that seem to be getting overlooked by management?
- Is management ignoring warnings now that could lead to problems later?
- Is the company so successful or so dominant that it is no longer in touch with what it needs to do to remain on top?
- Do the unplanned departures of senior executives signify deeper problems?
Is the CEO Distracted?
- Do I have unanswered questions about the CEOs background and talent?
- Is the CEO spending too much money to fulfill personal missions that don’t necessarily benefit the company?
- Are company leaders so consumed by money and greed that they’re taking questionable or inappropriate actions?
Is there excessive hype?
- Is it possible that the excitement around the company’s new product is just hype?
- Could the excitement around the company’s merger or acquisition be hype?
- Is the excitement around the company’s prospects just unfulfilled hype?
- Is the latest missed milestone part of a pattern that could signify deeper problems?32
A Question of Character
- Are the CEO and other senior executives so aggressive or overconfident that I don’t really trust them