(The first of a six part series.)
Natural disasters—hurricanes, tornadoes, earthquakes—are unavoidable. Prudent, responsible companies in disaster-prone locations make contingency plans to mitigate the impact of a natural disaster, even if the likelihood of one occurring is small.
Man-made corporate disasters—products or accidents that injure or kill customers or employees, environmental messes, public relations nightmares, and even criminal prosecutions—are, however, avoidable. Yet, companies which otherwise act prudently and responsibly fail to take steps to prevent corporate disasters. This failure is corporate irresponsibility.
Avoidable corporate disasters are the result of flawed decision-making. Some business decisions appear to be reasonable ones when made, but due to inadequate information, changes in market conditions, technology, or regulations, or other unforeseeable events turn out to be bad decisions. These decisions are only recognized as bad decisions with the benefit of hindsight.
Other decisions are bad decisions from the moment they are made. These decisions result from flawed decision-making processes. Although they can and should be seen as bad decisions from the outset, they often go unrecognized.
Iconic examples of avoidable man-made disasters are the sinking of Titanic and the loss of space shuttle Challenger. The decisions to allow Titanic to sail without adequate lifeboats and to launch Challenger in cold weather with the knowledge that “O” ring seals degrade in cold temperatures were the results of flawed processes. Those decisions could have been recognized as bad at the moment they were made. The failure to do so was irresponsible.
Examples of avoidable corporate disasters include the Enron scandal, the collapse of MF Global, the Massey Mining disaster, and GM’s failure to recall. In each of these cases, objective, independent parties looking at the same facts as those making the decisions would have recognized the decisions as bad ones. The decision makers failed to see that the decisions were bad because they were blinded by corporate culture, habits, expectations, or individual or corporate self-interest. The bad decisions resulted from blind spots.
Compounding the danger of decision blind spots is overconfidence—usually a good trait in business leaders—and the black swan effect: the belief that because the unthinkable has never happened before it never will.
Often, avoidable corporate disasters occur under circumstances giving warning signals of potential disaster. Investors, board members, and managers need to be alert to the warning signs. Among problematic decision-making circumstances: Cases where the interests of the decision makers are in opposition to the interests of major stakeholders (situations called conflicted self-interest); companies facing desperate situations; and, companies in industries regulated by ambiguous rules susceptible to loop-hole finding. Decisions in these and other circumstances have a greater risk of being flawed and require extra scrutiny.
Decision-making flaws that lead to corporate disasters can be ferreted out by board members, managers, and employees attuned to the issues and warning signs. Because proximity to the decision making usually robs decision makers of objectivity, those with some distance from the decisions are best suited to the task.
Just as a rising tide raises all boats, the quest to avoid corporate disasters improves decision making across the board. As all decision making is made better, companies can improve both profitability and responsibility.
Focus on responsible decision making to avoid corporate disasters. A corporate disaster is corporate irresponsibility.