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Strategic Error Management — Lufthansa Human Factor Conference
- 1. © Vincent Giolito - vgiolito@ulb.ac.be Error Management on the Executive Agenda Lufthansa 2nd International Human Factors Conference Frankfurt, 20 Oct. 2016 Dr. Vincent Giolito - Prof. Paul Verdin, Ph.D The Baillet Latour Research Chair on Error Management
- 2. © Vincent Giolito - vgiolito@ulb.ac.be Errors?
- 3. © Vincent Giolito - vgiolito@ulb.ac.be Organizational errors
- 4. © Vincent Giolito - vgiolito@ulb.ac.be We see errors as a double deviation Deviation (negative) from expectations Deviation from a norm
- 5. © Vincent Giolito - vgiolito@ulb.ac.be “Houston, we have a problem...”
- 6. © Vincent Giolito - vgiolito@ulb.ac.be
- 7. © Vincent Giolito - vgiolito@ulb.ac.be Intercept and rectify errors to limit and repair damages Negative Deviation from expectations Deviation from a norm
- 8. © Vincent Giolito - vgiolito@ulb.ac.be • Error management. What top executives (can, should) do to “intercept and rectify” strategic errors before they generate disastrous consequences and to repair those if and when they occur.
- 9. © Vincent Giolito - vgiolito@ulb.ac.be The AAA framework of Error Management A A A
- 10. © Vincent Giolito - vgiolito@ulb.ac.be AAssessing error signals A A •Seek raw information •Clarify rules & notice deviations •Project impact •Imagine worst case
- 11. © Vincent Giolito - vgiolito@ulb.ac.be Error signals Meaningful signals... • come in batches • from inside AND outside • involve ethics • may involve authorities • don't pass the mirror/PR test
- 12. © Vincent Giolito - vgiolito@ulb.ac.be Error signals don't come alone
- 13. © Vincent Giolito - vgiolito@ulb.ac.be AAcknowledging errorsAssessing error signals •Realize! •Figure out a new story •Share it •Become error management leader
- 14. © Vincent Giolito - vgiolito@ulb.ac.be Acknowledging errors
- 15. © Vincent Giolito - vgiolito@ulb.ac.be o Tell a story o Factualize o Dramatize o Apologize Acknowledging errors “We made a mistake” “Toyota has been expanding rapidly. Quite frankly, I fear the pace at which we have grown may have been too quick.”
- 16. © Vincent Giolito - vgiolito@ulb.ac.be What do CEOs say? Acknowledging errors helps challenging current strategy (CEO, insurance) “Acknowledge the error, [do] not say "the outside episodes are episodes that will only last for a time, it's just a bad moment, things will get back to normal, don't worry etc." (…) Say: "OK, so, yes, it's a blunder to be there. Now, what do we do?"”
- 17. © Vincent Giolito - vgiolito@ulb.ac.be What do CEOs say? Acknowledging errors meets resistance (Chairman, bank) “There was a bit of reluctance of people here, when I said in interviews that in the past time we had made mistakes (…). It's very obvious. Somehow people felt: "You can't say that, it makes us legally wrong."”
- 18. © Vincent Giolito - vgiolito@ulb.ac.be What do CEOs say? Acknowledging must come from the top (CEO, insurance) “So, I wrote to all staff, I wrote to all people: "One, we haven't done what was to be done. Two, we are going to admit together that the development of our company hinges on our capability to be at the right level of compliance." Of course it's me the CEO who says it, because otherwise it's not true.”
- 19. © Vincent Giolito - vgiolito@ulb.ac.be AActing on errors • Make decisions o Undo o Repair o Transform • Take care of victims • Seize opportunities
- 20. © Vincent Giolito - vgiolito@ulb.ac.be — 700 m€ — 7.5 €b Tackled the problem Hoped for the better
- 21. © Vincent Giolito - vgiolito@ulb.ac.be What do CEOs say? Strategic decision-making and implementation may be swift (Chairman, bank) “In not more than 10 days, we changed the CEO, completed an important spinoff , launched the [refinancing] and a public offering. And so, the markets of the world could see that we had an idea, a solving idea, a solving strategy. And we survived”
- 22. © Vincent Giolito - vgiolito@ulb.ac.be Misaligned agendas High vs. low connectedness Conflicting timeframes Strong emotions: anger, guilt CEO own limitations, personal agenda
- 23. © Vincent Giolito - vgiolito@ulb.ac.be What leadership for effective Error Management?
- 24. © Vincent Giolito - vgiolito@ulb.ac.be Assessing error signals Acknowledging errors Acting on errors • Leadership qualities o Listening o Empathy o Humility o Self-awareness What it takes • Overcoming confirmation bias and self-confidence
- 25. © Vincent Giolito - vgiolito@ulb.ac.be Assessing error signals Acknowledging errors Acting on errors • Leadership qualities o Reflexivity o Assertiveness o Courage o Self-awareness What it takes • Escaping tunnel vision and escalation of commitment
- 26. © Vincent Giolito - vgiolito@ulb.ac.be Assessing error signals Acknowledging errors •Leadership qualities o Decisiveness o Empathy o “Ruthlessness” o Ethics Acting on errors What it takes • Overcoming inertia
- 27. © Vincent Giolito - vgiolito@ulb.ac.be How does it relate to new leadership theories?
- 28. © Vincent Giolito - vgiolito@ulb.ac.be Authentic leadership Transparent communication • “My leader says exactly what s/he means” Self-awareness • “My leader describes accurately how others view his/her capabilities” Internalized moral perspective • “My leader makes difficult decisions based on high ethical standards” Balanced information processing • “My leader analyzes all relevant data before coming to a decision”
- 29. © Vincent Giolito - vgiolito@ulb.ac.be Dimensions Impact Rationale Self-awareness + Knowing their strengths and weaknesses, Authentic leaders sense potential deviations on their and others' part (Assessing error signals, Acknowledging errors) Balanced information processing + Authentic leaders make a point to hear different voices about issues, which is conducive to psychological safety and trust, and in turn to timely and accurate Assessing of error signals. It may also help efficient Acting upon errors. Transparent communication + Authentic leaders communicate clearly, which is critical for error Acknowledging, and also for Acting as decisions require intense exchanges with various stakeholders. Ethical perspective + Strong personal ethics are vital to sort information from noise in the Assessing signals phase. Ethics also guide efficient decisions in the Acting phase.
- 30. © Vincent Giolito - vgiolito@ulb.ac.be From Wrongto Right
- 31. © Vincent Giolito - vgiolito@ulb.ac.be What can we learn together?
Notes de l'éditeur
- Yes we work on errors This kind of errors — Big errors. Corporate errors that end up on front page of FT and WALL STREET JOURNAL. Errors at: Banks Automotive companies Oil companies Tech companies ... and well, mostly banks
- Paul: at stake is what to do if & when errors occur — Houston we have a problem
- Paul: at stake is what to do if & when errors occur — Houston we have a problem
- What org errors are.
- Paul: at stake is what to do if & when errors occur — Houston we have a problem
- We are interested in what CEOS should do with errors CEOs are front and center when it comes to big errors. They deal with their teams They deal with the shareholders, the markets They deal with the media They deal with the politicians
- (just a reminder) — Skim or skip
- Error management follows a 3 stage cycle, the triple A cycle The stages are It is a cycle rather than a linear process, as error management creates a new situation, new rules, and potentially new deviations
- Assessing error signals Assessing error signals looks like detection, but more precisely on the part of the leader: It's spotting deviations It's clarifying rules to make deviations clear It's imagination about what consequences might follow from deviations It's projecting potential consequences based on various scenarios, including worst-case scenarios
- What are meaningful error signals? Remember our CEO? How can she identify error signals How to sort the info from the noise? The repetition is important (few big errors, many small) So is the congruence from inside (dissenter / whistleblower) and outside (stakeholders) errors that involve ethics, right vs. wrong (e.g. VW, Wells Fargo) Signals from authorities are important - authorities represent society after all, and shape future environment Whatever passes the PR/mirror test: as the CEO, am I proud that my firm does that? Assessing @ Wells Fargo: CEO was forced out just days ago because of millions of fake accounts opened without customers' knowing. In 2009 already there were such stories at Wells Fargo. Managers complaining and customers associations alike. Was it bad? Well... There were a series of legal issues before it became a crisis in the open.
- Errors don't come alone. There is a cockroach effect. When there is one, there are many. the number of errors may signal sometthing more important. Errors embedd
- Acknowledging errors Acknowledging errors is the pivotal point in Error Management It occurs when the leader pictures both the deviation from rules and the deviation from expectations, i.e. goals won't be attained. It is about changing the narrative. Building a new narrative based on the what ifs. Example Votron @ Fortis. Even though not successful
- Acknowledging Acknowledging is first personal to the CEO. It is self-reflection, building a conviction of a narrative that integrates the error in her/his vision of the organization. We have this image from one CEO we interviewed, large bank, took over after major error. He says he feels like iron filings that you put a magnet on. First there is powder and then there is a form. Important, narrative acknowledges and names the error. e.g. Hubris; overconfidence. Then, it is sharing - partly dialogue, mostly persuasion - with close associates, e.g. board, executive committee, advisor Then it is communicating to all relevant parties.
- Acknowledging What is the message? Critical is "We made a mistake" What is the critical word here? Critical word is "We" It refers to the error as an organizational error. It doesn't point fingers. It (attempts to) thwart guilt. Again, Qualify the error. Example: recalls from 2010-2011, accelerators etc. @ Toyota "I am deeply sorry for any accidents Toyota drivers have experienced. I sincerely regret accidents. (...) Toyota has, for the past few years, been expanding its business rapidly. Quite frankly, I fear the pace at which we have grown may have been too quick."
- Why is it CEO role? Cite briefly, skim or skip
- Is it easy to acknowledge?
- Why is the CEO? Because he/she's the voice of the company And why important? Because error is human. Error is forgivable. If CEO says we made mistake, so be it. We normal. S/He's normal. It's life.
- Taking action upon errors follows from acknowledging What it necessitates: Making decisions, i.e. problem solving Creativity helps Empathy with error victims Communicating to relevant stakeholders Taking action includes seizing opportunities Short-term opportunities e.g. bank CEO assigns small team on digitization without ordinary bureaucracy because needs small wins Long-term, broad change initiatives as fear fuels need for direction e.g. bank chairman imposes younger CEO, corporate simplification and new labor contracts as a pathways for survival Then it's a cycle, as error management creates new situation, new errors, new errors signals to be assessed in a new context etc.
- Hope for the better is major impediment to EM
- Why is it CEO role? Cite briefly, skim or skip
- There was not much research besides aviation Here is how we went about it
- We set out to ask the question to CEOs: How frequent are errors? What do you do about it? What are your own errors? Pretty good sample: 20 out of 50 companies responded at CEO/chairman level
- Public sources and interviews on major cases of strategic errors ... A two year effort now recognized by international academic community in strategy and leadership studies
- So here is what we found
- One - Errors are important to CEOs One of Europe's prominent business person told us that they have to deal with strategic errors every month. Among 21 interviewees, only one initially said - we don't make errors. And then, stories went on that were matching error definition
- Two - A finding on strategy errors that is, wrong choices made by top executives themselves. Time matters. Higher-order errors are best viewed dynamically, as originating in discrepancies between a) firm-specific rules and routines; and b) rules imposed by the environment. It defines a 2x2 matrix. Axes are: horizontally, changes in the environment; and vertically, changes in the firm. No change in either environment or strategy ➔ no error Change in both environment and strategy ➔ error contingent to adequation Change in environment, no change in firm strategy ➔ Typical error. See VW: US pollution requirements change, VW sticks to its Diesel US strategy and has to use cheating devices No change in environment, change in firm strategy ➔ Rare error. See Fortis, acquisition planned and funded as an opportunity, not a clear market necessity Classical error: Nokia, Kodak, Blackberry ➔ PAUL: "rare error" is risk taking, it's ok, wanting to take an advantage.
- To be skimmed or skipped
- Going back to distinction of lower vs. higher-order error In the case of lower-order errors, acknowledgment is almost implicit. Executives and their teams correct errors implicitly. They make sense of new issues as they arise. It's organizational "system 1" thinking i.e. automatic, "gut feeling" reaction. Example: SocGen & Kerviel. CEO is warned that there's MORE money in the bank than accounts show. He immediately realizes what it can mean, mobilizes a small team, and manages despite turmoil in markets. The bank could have tanked or been taken over. However, the CEO chose to reject organizational responsibility, which eventually cost him is job and the bank part of its reputation
- In the case of higher-order errors, executives have to Assessing signals delineate a hierarchy of rules distinguish implicit vs. explicit rules EXPLICITLY acknowledge "old" rules as erroneous Engage in organizational change, by forging new alliances and winning over resistances. When they don't, external forces often take over — and force them out Example Fortis, the agressive "We Will do It" rule was not acknowledged as erroneous till the end by the chairman. Up to collapse.
- Remember our CEO? He or she is to go through the 3 phases of error management in a complex environment Strong emotions - anger, guilt - trigger cover-up and denial and ass-covering Timeframes for decisions are conflicting There are multiple stakeholders, agendas are conflicting, e.g. in SocGen case, the deputy CEO de-solidarized from the CEO And CEOs themselves are under stress, they may be subject to tunnel vision, not to mention personal vs. organizational agenda Especially for dealing with higher-order errors, we find that leadership qualities that help efficient error management are paradoxical, contradictory
- Regarding Error Management, One - Based on Case analysis, we found a discrepancy between how error management is perceived: EM perceived as a linear relationship between errors and the difficulty of error management EM reality is: errors compound themselves, all the more so that the organization and the environment are complex, and the relationship between errors and error management is exponential rather than linear. Errors create a halo of uncertainty in which subsystem interaction become less and less predictable and correctible. In that sense we confirm findings from theory of normal accidents based on aviation and industrial disasters.
- To identify and correctly assess error signals, leaders should be untypical. While they often get to the job thanks to their assertivity, they must create a climate of psychological safety be humble, ask, listen, take distance for measuring deviations be a little paranoid Example: SocGen - Kerviel
- For acknowledging errors, leaders must guard against groupthink, abstain momentarily from consensus-building Take a stance, create a singularity Be prepared to act as whistleblowers in their own firm Deframe Unframe yourself CEO position may help for convincing others — it doesn't makes it easy.
- Paradox is even more visible in the Acting phase, which may extend over long period of times. decisiveness, boldness help change things however, empathy and ethics are critical to influencing those on the receiving end
- Research has shown a tangible impact on performance. It is our experience that authentic leadership can be evaluated, 360°, it can be trained, can be coached. With a little help it is possible to become a more authentic leader.
- Three - We define two orders of errors as we integrate the time dimension in the analysis of errors Organizational life/projects are made of a series of decisions Most of those decisions are within a set of organizational norms that evolve over time Some of those decisions indeed deviate from organizational norms. We call them lower-order errors, be they made by executives or employees. Why lower-order errors? Because the organizational norms themselves may deviate from superior principles and norms over time. The deviation between organizational norm and superior principles is a higher-order error. Implementing or maintaining organizational norms that deviate from superior principles is a higher-order error. Among superior principles there is the principle of consistency with vital organizational objectives. It's definitely the responsibility of top executives to intercept and rectify higher-order errors.
- A simple example - just two decisions and a major blow to Société Générale in 2008 when a rogue trader almost sank the bank In 2005, as the trader breaks his limits and makes a profit, his supervisor congratulates him. Norm was: he should have been fired. In 2007, as the trader increases illicit operations, his supervisor (not the same person) ignores email alerts from third-party (compensation). Norm is: immediately act on alerts And actually, norms were consistent with superior principles Two lower-order errors. But what do they reveal? They reveal that internal norm, cultural norm was have fun with markets and make money. Cultural norm had drifted. Cultural norm was now far off the overarching principle of controlling risk and respect regulation. There was a higher-order error.
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- Actually there are two type of big errors Errors in strategy: top management made choices that prove wrong Errors in operations that develop in crises We find that they share so many characteristics that we see only one group that we call strategic errors. That is, errors that challenge the long-term goals of the firm, including its survival. Error management is whatever executives should do to intercept and rectify errors when they occur in order to reduce the impact of the errors - and possibly to draw opportunities from the situation errors created, and to go From Wrong to Right PAUL ➔ No research on it - only preventing learning etc.
- Remember Strategic Errors? We found there are actually 2 types of errors Lower order errors Higher order errors Remember the definition? Double deviation, negative deviation from goals & expectations, and deviation from rules Lower order error is when the broken rule was right Higher order error is when the rule itself was wrong, when the rule itself was deviating from a higher rule and was deviating from— not consistent with – goals and expectations.
- Lower order errors are those where rules in place are consistent with goals and expectations. Kerviel typical example However, raises the issue of conflicting rules, specifically conflict between explicit and implicit rules. Explicit rule was: personal trading is forbidden, Implicit rule through culture was make money whatsoever
- Higher order errors are about the rules themselves Deciding a new rule or maintaining an old rule, that while being respected deviates from a higher-order rule leads to negative deviation from expectations Typical example is Fortis. They stick to the rule of balanced financing, with as little equity as possible. However, market turmoil handicaps banks with low levels of capital. Sticking to the rule of balanced financing is deviating from the rule of prudent financing (and deviates from the goal of surviving). Prudent financing is the higher-order rule that should be supplanting balanced financing.
- And then there's all the grey area of when lower order errors may signal higher order errors. ➔ PAUL