The Stress Effect

Why Smart Leaders Make Dumb Decisions--And What to Do About It

Henry L. Thompson

• Publisher: Jossey-Bass
• Year: 2010
• ISBN:
  9780470622988
• Edition: 1
• Topic: Business
• Subtopic: Leadership
• Index: Business

Reveals the powerful and undermining effects of stress on good decision making-and what leaders can do about it

The ability to make sound and timely decisions is the mark of a good leader. But when leaders with otherwise strong track records suddenly begin making poor decisions-as seen in the recent corporate scandals that rocked the business world-the impact can be widespread. In The Stress Effect, leadership expert Henry L. Thompson argues that stress is often the real culprit behind this leadership failure: when leaders' stress levels become sufficiently elevated-whether in the boardroom or on the front line of a manufacturing process-their ability to effectively use their emotional intelligence and cognitive ability in tandem to make wise decisions is significantly impaired. Until now, experts have argued that increasing your emotional intelligence will help you cope with and manage stress. This book suggests that stress actually blocks access to your emotional intelligence as well as your cognitive ability, two critical components in the decision-making process. This book

• Shows how stress adversely affects the performance of even the most savvy leaders
• Reveals the truth about one of the prime factors behind the current failure of leadership
• Offers a solid prescription for building a "stress resilient system" and arms leaders with best practices for managing specific stressors that take the biggest toll on decision making
• Is written by an award-winning organizational psychologist and leadership consultant whose clients include a roster of Fortune 500 companies

A groundbreaking and insightful resource for leaders, The Stress Effect reopens the dialogue on stress, its effect on decision making, and what to do about it.

CHAPTER 1

How Leaders Make Decisions

Most decisions are seat-of-the-pants judgments. You can create a rationale for anything. In the end, most decisions are based on intuition and faith.

NATHAN MYHRVOLD

Just a few weeks before the collapse of industry giant Enron in December 2001, CEO and founder Ken Lay told his twenty-eight thousand employees, “Our liquidity is fine. As a matter of fact, it’s better than fine, it’s strong.” Yet at the same time he was urging employees not to panic, Lay, who had a Ph.D. in economics, sold 918,000 shares of his own Enron stock for $26 million.

Lay and other Enron executives blamed the company’s collapse on Andrew Fastow, the chief financial officer, who pleaded guilty to falsifying Enron’s balance sheet and conspiring with other employees to skim millions of dollars. “I think the primary reason for Enron’s collapse was Andy Fastow and his little group of people and what they did,” Lay said in an interview on 60 Minutes. “But certainly I didn’t know he was doing anything that was criminal.”¹

Following convictions of other Enron executives, Lay himself was convicted in May 2006 of conspiring to inflate stock prices and misleading investors and employees. Facing the prospect of spending life in prison, Lay maintained his innocence until his death two months later of coronary artery disease.

The collapse of investment banking legend Bear Stearns came on the watch of Jimmy Cayne, who had become CEO in 1993.² During the next fourteen years under his leadership, the company’s stock skyrocketed from $16.61 to a high of $172.69 per share in January 2007. But a series of poor management decisions and the collapse of two hedge funds in 2007 plunged the Wall Street giant into a crisis unlike any other in its eighty-five-year history. In May 2008, Bear Stearns became a bargain basement steal for J. P. Morgan Chase at ten dollars a share.

Less than a year earlier, however, Cayne had reassured investors that the firm would rebound, saying confidently, “You can count on us.” The former CEO would eventually admit that he was paralyzed with indecision during the firm’s crisis: “It was not knowing what to do. It’s not being able to make a definitive decision one way or the other, because I just couldn’t tell you what was going to happen.”

Here are some more famous last words from other CEOs of major corporations, spoken during the months prior to the crash of their respective companies in 2008. All of these comments indicate a serious lapse in decision-making capabilities:

“Do we have some stuff on the books that’s going to kill us? Of course not.”—Richard Fuld, CEO, Lehman Brothers

“We believe the probability that it [portfolio of credit default swaps] will sustain an economic loss is close to zero.”—Martin Sullivan, CEO, AIG

“The home-loans business had a challenging first half of the year, but ... we think we’re back on track to get that unit back to profitability before the end of the year even in these challenging conditions.”—Kerry Killinger, CEO, Washington Mutual³

It’s hard not to grimace at those statements now because there is nothing humorous about the impact of a failed organization—particularly on the employees, clients, and others who depended on them for their livelihoods. Starting in 2007, major companies began to fall like dominos: first Enron, then WorldCom, followed by Tyco and a series of major failures in large U.S. corporations. The U.S. financial system began to implode, sending shock waves throughout the global economy. At the center of this crisis were leaders in major decision-making roles. As we know all too well by now, some of these men and women made the right calls, but far too many of them, unable to perform under increasingly higher levels of stress, made bad choices for their organizations.

At the same time, the U.S. presidential campaign was in full force. Throughout the campaign, the focus turned to which Democratic candidate could handle the “3:00 A.M. phone call.”⁴ In other words, voters wanted to know who could best make critical world-changing decisions. As the campaign narrowed to John McCain and Barack Obama, the question of which candidate had the knowledge, experience, and ability to make global decisions on issues such as Iraq, Afghanistan, Iran, and North Korea was foremost in the minds of American voters.

But as more financial institutions began to fail, the focus of the campaign shifted from the Iraq war to the economy, taking the momentum away from John McCain, whose strengths seemed to be foreign affairs and defense, and moving it to Barack Obama. As Fannie Mae, Freddie Mac, Bear Stearns, AIG, General Motors, and other major institutions fell apart, the focus of the campaign became which candidate would make better decisions about the economy.

If the financial crisis has taught people nothing else, it made one fact abundantly clear: we no longer live in a world where the leaders of the top companies in the United States make financial decisions that affect only America. The decisions that the CEO of General Motors or AIG makes reverberate around the world. The global financial system is woven together in an intricate web in which a slight movement by any major player will send ripples throughout the entire system. As Thomas Friedman says, the world may have become “flat.”⁵

The Art of Choosing a Leader

How did we get to the point where CEOs are paid incredible salaries and bonuses regardless of the quality and effectiveness of their decisions and the performance of their companies? Have the world, and the organizations in the world, become too complex for humans to lead? Has leadership become too complex? Has the complexity of decision making in large corporations outstripped human decision-making capacity? I don’t think so. But I do think that perhaps our worldview of leadership has become archaic. Many of us still buy into the antiquated notion that anyone can successfully lead a large corporation or be successful in a high-level government position.

This is America, after all, the land of opportunity. “You can be anything!” we tell our children. But is that really the truth? Can anyone be a Fortune 500 CEO? Can anyone be the head of a Hollywood studio? Can anyone lead a platoon, a ballet company, a high school, a town council? Of course not. But telling our children, “Well, you probably can’t be anything ... but you can be great at something!” doesn’t exactly hit the right note. And especially in the professional world, holding to the idea that not everyone can make it to the top smacks of elitism or social hierarchies, making many people, including those in charge of identifying and managing leaders, uncomfortable.

As you will see in the chapters that follow, we actually have the knowledge to understand how the best leaders think. Yet we don’t always call on it to select our decision makers and then hold them accountable. Instead we prefer to cling to the old notion that anyone who works hard can rise to the top and be successful. It’s precisely because of our collective blind spot that organizations, and the leaders we put in charge of them, fail. Perhaps if we’d taken off those blinders and chosen our decision makers realistically, we could have prevented the economic meltdown and its global impact.

In addition, many may be unaware that we have the knowledge and ability to understand the complexities of leadership and decision making, that we can know what happened in organizations such as Enron, Chrysler, Washington Mutual, and the U.S. government, and that we could have prevented the catastrophic failure of the global economy.

At the close of the first decade of the twenty-first century, the domain of leadership is reeling from the effects of questionable decisions made by supposedly smart leaders who had been placed in roles that exceeded their competence and ability levels. Lawrence Peter must be experiencing the paradoxical feelings of pride and concern: pride because he knows that his Peter principle—In a hierarchy every employee tends to rise to his level of incompetence—is being proven every day, and fear and concern for the country because the principle is correct.⁶ The current approach to selecting leaders and not holding them accountable has created large bureaucracies populated by leaders incapable of making effective and efficient decisions or of responding to the dynamic, rapidly changing landscape of the global environment.

The leaders who uttered those famous last words a few pages back rose to the top of what were some of the largest and most powerful companies in the world. Our research at High Performing Systems indicates that CEOs of large corporations have an average IQ of 125.⁷ Some CEOs we have assessed have IQs over 140. To put this in perspective, the average IQ of the general population is about 100. An IQ of 140 typically falls in the top 2 percent of IQ scores and makes those with this IQ eligible for membership in Mensa, the high-IQ society. We have not found any CEOs of multi-billion-dollar corporations with IQs less than 115. We have also found that many CEOs hold Ph.D.s. These are smart people, yet many appear to have created a culture of incompetent decision making, greed, and lack of accountability. This culture is not limited to the executive suite. It permeates deep into the hearts of their companies. “Dumb” decisions are being made by “smart” leaders at every level.

Some of these bad decisions can be attributed to inexperience, lack of knowledge, or poor judgment. Others can be attributed to a lack of understanding that organizations are systems, and as such, are perfectly designed to produce the results they are currently getting, even if those results are negative. However, bad decision making can also be the result of severe stress on the leader’s cognitive and emotional functioning. As I pointed out in the Introduction, these two abilities—cognitive and emotional intelligences—are necessary for quality decision making.

Leaders must have the knowledge and ability to make decisions at the level of complexity required at their role level. In other words, we have to put the right person in the right job. When leaders with experience make decisions to put young, inexperienced, and unskilled leaders into positions of responsibility where they can cripple the financial foundation of the company (or stall its progress, frustrate employees, and alienate clients), they demonstrate a form of irresponsible decision making.

We begin to learn decision strategies in infancy and develop preferred approaches for making decisions. Decision strategies vary from unconscious, almost instant decisions to longer, more deliberate processes such as strategic planning. Each of these processes is discussed in detail in this book.

The ability to make complex decisions is driven by the leader’s own decision-making ability, strategies, and timeliness. I explain the two major decision categories, rational and intuitive, in more detail and give examples to aid in recognizing to which category a given decision belongs and give examples of how to choose the appropriate strategy when dealing with that type of decision.

A discussion of decision making would not be complete without examining some of the more common and controversial factors, such as gender and age, that moderate the decision-making process. Each of these is discussed in turn in this book, too. Leaders are in a perpetual state of decision making throughout their waking hours, and some argue that decision making continues during sleep. Based on the results of some of the failed companies mentioned above (not to mention less famous but daily failures in countless other organizations), we seem to have some leaders who are sleepwalking.

Let’s move forward and examine leadership, organizational complexity and decision making from the perspective of how leaders get work done and the impact of complexity on the decisions they make, the time span for making decisions, and the difficulty in making decisions at the various organizational levels.

Leadership: Redefining What It Takes

In their book In Search of Excellence, Tom Peters and Robert Waterman suggest that significant differences exist in how leaders think, how complex organizations are, and how decisions are made.⁸ All three of these factors influence the success of organizations. These findings reinforce that the core essence of leadership is decision making. Leaders make decisions throughout the day, every day. A staff is required to orchestrate a top CEO’s daily schedule. Each event on the schedule represents a decision or hundreds of decisions already made and preparation for hundreds more to be made. Everything a leader does or does not do is a decision with significant implications.

The approach to leadership in large organizations has been to create bureaucracies, which are incapable of operating efficiently, effectively, and with accountability. And the anointed leaders have lost sight of what leadership is about. The solution is not more bureaucracy or more people talking about leaders with vision, but rather a change in our leadership paradigm. There was a time when leaders served the organizations they led, not the other way around.

Not only have some leaders lost focus, but many do not understand that not everyone has the “right stuff,” and getting the right stuff doesn’t happen by attending management seminars or higher-level meetings or by being elected to a board of directors or a political office. As I mentioned at the beginning of this chapter, we seem to have a blind spot when it comes to identifying leaders, as we’d like to believe that “anyone” can do “anything” in our society.

When Good to Great author Jim Collins talks about getting the right people on the bus, the wrong ...