Why it pays to invest in bosses who blame themselves
Plenty of CEOs play the blame game when things go wrong, but research suggests that their stocks suffer as a result.
By Jeffrey Pfeffer, Business 2.0 Magazine

(Business 2.0 Magazine) - The defense's core argument in the Enron trial--that senior executives were ignorant of their company's troubles--sounds depressingly familiar. Specifically, it reminds me of how so many chief executives point fingers in times of crisis.

The examples are countless.

After Air Canada filed for bankruptcy in April 2003, CEO Robert Milton blamed the carrier's problems on everything from Canadian airports to the government of Dubai.

GM (Research) CEO Rick Wagoner harps on how skyrocketing health-care expenses handicap his company to the tune of $1,500 per car.

After Overstock.com's (Research) share price began plunging last year, CEO Patrick Byrne infamously declared it the result of a conspiracy among Wall Street short-sellers. (See "101 Dumbest Moments in Business," January/February.)

With so many CEOs playing the blame game, you'd think it would at least be a good tactic for keeping stock prices high. But research suggests the opposite.

In a 2004 study of annual reports, Fiona Lee of the University of Michigan and Larissa Tiedens of Stanford found that stock prices were higher one year later when companies blamed poor performance on controllable internal factors rather than on external issues. Excuses are also an ineffective customer service strategy: Numerous studies have shown that consumers value an admission of failure and an apology.

But the strongest argument in favor of taking responsibility is that it's simply good leadership. Morale suffers when people don't believe that the work they do affects their organization's performance. Attributing bad results to outside forces fuels such resignation. Copping to shortcomings, on the other hand, is the first step toward recovery.

No one in a company is going to fix a problem until executives name and describe it. No one will follow a leader whose message is that success and failure depend on random factors. No one will take responsibility for his own errors unless he sees the company's leaders building the foundation for a culture of truth-telling.

In fact, remarkable transformations can happen when an executive owns up to mistakes. When Dell (Research) missed sales expectations in 2005, for example, CEO Kevin Rollins admitted in a conference call with analysts that he and the company had poorly managed pricing. That's par for the course with Rollins, who became concerned about a culture of greed developing at Dell several years ago.

After publicly blaming himself and other senior managers for failing to set the right tone, he instituted a new compensation system based on subordinates' evaluations of their bosses.

Another example is Anne Mulcahy, who became Xerox's (Research) chief executive in 2001. After just five months on the job, she told Wall Street that the company's business model was flawed. Then she explained to employees the challenges they faced, the first step in a remarkable turnaround at Xerox.

Hospitals are now forced by law to admit their errors, and research shows that doing so defuses anger and even results in fewer malpractice suits.

Everyone makes mistakes. But the next time you're reading your favorite company's annual report or, for that matter, watching the nightly news, pay attention to whether the leaders behind the microphone are fessing up to the bad, and not just congratulating themselves for the good. Research suggests that doing so can improve your own portfolio's performance.

Business 2.0 columnist Jeffrey Pfeffer is the Thomas D. Dee II Professor of Organizational Behavior at Stanford University's Graduate School of Business. Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.