Corner Office-Anticipating the Unimaginable
They say that hindsight is always 20/20, but I am still baffled about the reasons why we didn’t see the Great Recession coming. The only plausible explanation I can find is that we see only what we expect and want to see.
We all knew that the growth of the Internet and a global economy could only mean bigger market sizes and economic growth for infinity. We all knew that running our companies primarily to make profits and enhance shareholder value (not customer satisfaction) was the best way to do it. We all knew that America’s leadership in innovation would last forever. And we all knew that our overheated, overleveraged economy would last forever, and that the stock market would continue to set daily records, right?
Well, there’s just one problem: We have become masters at rearranging facts until they fit our own version of reality. We are lousy at thinking about the unimaginable, asking the “what if?” questions, and facing the harshness of reality. It’s a lot easier to envision the future we expect or want to see, and then believe that that’s “reality.”
We now know that a global economy means greater competition and consumer demand for lower prices and better quality; that tricky, risky financial products created by Wall Street lined its pockets with billions of dollars, but contributed to the collapse of our economy; that the insatiable greed of corporations for achieving quarterly profits while ignoring the wants and needs of customers sacrificed the long-term value of their organizations; and that America’s lack of focus and laziness has dimmed our drive for innovation.
But we just don’t want to think about the unthinkable, do we?
Blind to Icebergs
This is not a new phenomenon. If we took some lessons from history, we’d see that we don’t always learn from our past mistakes. For instance, there’s the classic case study of seeing only what you expect to see: the sinking of the Titanic.
You know, of course, that the Titanic was a luxury passenger liner that sank in the frigid Atlantic waters on April 14, 1912, after striking an iceberg, killing more than 1,500 of its 2,200 passengers and crew. Before that fateful night, many clues that could have warned of potential disaster were ignored because the mindset of the Titanic’s designers, builders, crew, and passengers was not on avoiding disaster, but on building, sailing, and riding in the world’s newest luxury ship.
The obvious signs are well known so I won’t revisit them, but there were some critical yet little-known clues, notably these:
• The Titanic was built to comply with outdated safety rules, including an 1894 law requiring a minimum of 16 lifeboats for ships weighing more than 10,000 tons. That law ignored the need to base the number of boats on the number of passengers. Although the Titanic had 20 lifeboats, more than required by law, the lifeboats still only had capacity to carry 1,178 people, only a portion of the Titanic’s total capacity.
• The metallurgy of the steel plate used to construct the Titanic’s hull was such that it lost elasticity and became very brittle in cold or icy water. As a result, the hull buckled when it struck the iceberg, allowing water to flow into the ship’s five “watertight” compartments in front.
• The ship’s stern and rudder design was a throwback to the 18th century. The tall rudder was appropriate for the ship’s intended cruising speed, but it was a fraction of the size that a ship of the Titanic’s gigantic 852-foot length would need to make a quick turn to avoid collision with an iceberg.
• After the iceberg was hit, most passengers still didn’t believe they were in any danger. Because the ship took two hours to sink and initially showed no visible signs of imminent danger, most passengers were hesitant to board the lifeboats. Most of the lifeboats were launched only partially full—one boat with a capacity for 40 people had only 12 people on board!
So apparently, no one questioned the number of lifeboats on board, how the steel hull would react in icy water, or how the crew would react if an object such as an iceberg had to be avoided or was hit. In short, no one was asking, “What if?” No one was thinking about the unimaginable—that a disaster could strike anytime, anywhere.
The Skeptical Captain
Business leaders and board members are trained to interpret data fed to them. But we need to be better at thinking the unthinkable and asking questions the data don’t address. We must become skeptics—and also recognize when we don’t know everything or don’t have all the answers.
My experience is that sometimes business leaders and board members don’t want to ask “What if?” for fear of seeming negative or appearing to not understand the issue or opportunity at hand. How silly! It’s the leader’s job to raise the critical issues of what could go wrong and the consequences of disaster.
Let’s look at the collapse of our economy. What if consumers who were taking out mortgages they couldn’t afford had asked themselves, “What if I lose my job or become sick or disabled? How will I make my mortgage payment?” And what if the mortgage originators had said to the borrowers, “I don’t really think this idea of you putting no money down is going to work for you in the long run. What if you lose your job or your health?”
And what if the greedy Wall Street bankers had asked, “These mortgage-backed securities could be a disaster. What if our economy were to hiccup?” And what if the federal regulators had asked themselves, “What if these highly speculative mortgage-backed securities were to default, and what if all this commercial real estate that is being leveraged with debt went down in value?”
Here’s a little psychology stuff for you: Research shows we tend to filter and ignore large amounts of information that our senses feed to our brains. While that’s nature’s way of helping us cut through irrelevant data, it also can cause us to keep essential information that we aren’t expecting to see from making it into our consciousness.
In his books Good to Great and How the Mighty Fall, Jim Collins suggests that there is much in common among companies and whole industries that rise and fall. Collins says that the biggest issue with most companies is that they need to “face the brutal facts of life,” and that the most brutal fact of all arises when a company’s core beliefs no longer fit the circumstances. Such a company refuses to question its values and beliefs about how the world works.
In the end, this kind of avoidance will be the cause of its collapse, just as our economy collapsed. Unfortunately, I see business leaders and boards every day who don’t want to deal with the reality of their company’s situation, so they lapse into a state of denial and avoidance—a state that I have termed “denoidance.”
If I can leave you with just one important suggestion, it would be this: At least once a year, get your senior management team and board of directors together to envision the future and how it could be dramatically changed if the unthinkable happened.
What if, many years ago, Detroit’s automakers could have envisioned a future of automobiles less dependent on fossil fuels? They might have created a fresh mindset that led to the reinvention of their products ahead of the curve, instead of now trying to play catch-up.
Thanks to the Great Recession, we’re playing a new game with new rules and new players. We can’t control the number or the size of icebergs out there, but we can anticipate where they are, how large they might be, how to get around them and what we would do if we inadvertently hit one.
At least that’s smarter than sinking and then trying to swim in subzero water without a life jacket. I think then we would be looking the brutal facts of life in the eye!