The work of senior managers proceeds in a choppy, dynamic manner that puts a premium on the efficient use of time. Decisions are often made - or delegated - in an instant, or after very brief and limited consultation. In such a context, it is not surprising that experienced managers resort to judgmental heuristics, "rules of thumb" to hone in on a decision. No one has thought longer or more wisely, and with more insight, on the work of management than Henry Mintzberg. Mintzberg destroys the illusion of the senior manager as a calm, thoughtful strategist foreseeing the future, analyzing and making great decisions:
Managers [he argues], work at an unrelenting pace; their activities are typically characterized by brevity, variety, fragmentation and discontinuity; and they are strongly oriented to action. (1)
After working for many years in such environments, a personalized set of heuristics, a "personal toolbox" emerges that senior managers carry from job to job. After thirty years of CEO experience in high tech, biotech and higher education, I would sometimes quip, only half-jokingly, when an exasperated executive would come to me with a seemingly unsolvable conundrum, "Oh, that is #32," and proceed to recommend a solution derived from my having experienced a similar problem many times before.
Every CEO comes to the job with a personal tool box. The toolbox doesn't contain a wrench set or a blood pressure kit as it might for a plumber or a doctor, it contains a kaleidoscope of experiential rules of thumb (ROTs). A rule of thumb (ROT - see Glossary of Terms) is a principle derived from personal experience that provides almost immediate guidance for behavior in certain situations. Our research shows that such rules of thumb are the coin of the realm for experienced CEOs and C-level executives. As part of a research project on CEO decision-making, I interviewed twenty CEOs. One CEO explained to me that one of his abiding rules was: "Hire well and let them do their jobs."(2) Another CEO, the former head of a major software firm, followed this stricture, "About a quarter of your R&D budget should be dedicated to long term projects." (3)
These ROTs, however, do not emerge in a vacuum; rather, they are formed by experience and generally under an umbrella of core values. In order for decision-makers to optimally utilize ROTs when facing a major decision, ROTs should ideally align with the higher-level values that serve as the leader's moral and professional compass.
In some instances, however, values may appear to directly impact decision making. One such example emerged before the 2007 Pan American Games in Rio de Janeiro for Odebrecht, a $21B engineering and construction company. After complications emerged with a previously contracted corporation, a request for proposal was sent to Odebrecht by the Mayor of Rio de Janeiro, asking them to fix the previous company's errors and complete a large portion of the Pan American Game facilities - all within a very short time frame. CEO Marcelo Odebrecht was faced with a game-changing decision. He could accept the highly challenging contract duties, which would bring national exposure for his company - either building the company's reputation if successful, or damaging the company's reputation if the contract was not completed in time. Although Marcelo was intuitively against the high risk contract, and he shared this view with the company's Brazil Director, his final decision was made based upon two core values that guided his company: trust and partnership.(4) Marcelo relied on his Brazil Director's knowledge of the local dynamics of Rio, the attendant risks and rewards, and let the Director make the final call. The contract was negotiated and successfully completed, substantially enhancing the networks and reputation of the company. In this case, the CEO delegated a major decision based upon his set of overarching core values.
In subsequent discussions with Mr. Odebrecht, however, it became clear that there were three generic ROTs derived from the company's values that guided his decision not to intervene:
1. Decentralize operations.
2. Decentralize strategy.
3. Promote from within (to ensure competence and adherence to corporate values). (5)
Based on these values, Mr. Odebrecht explained that it was easy for him to provide counsel yet refrain from interfering.
ROTs and Values: The DNA of Executive Decision Making
The set of values and rules of thumb (see Glossary of Terms) that an executive brings to his job are critical because, among other things, they form the DNA that shapes the decisions - especially the major decisions - that executives make. And it is such decisions, above anything else, that determine whether an executive will be successful in propelling his or her organization forward.
The Case of the Two Hotel Companies
While participating in a consulting project for a $2B hospitality company, two of my colleagues and I were asked to advise the CEO on a major decision: whether to merge two similar hotel companies operating in the same state or keep them separate and allow either or both to expand, as demand grew. I capitalized on this opportunity by asking the two members of the group (and myself) to mentally note, for later discussion, their immediate "gut" reaction to the options presented to us. I did the same. The four of us - including the CEO - had about 100 years of C-level experience. The CEO regaled us with facts about occupancy rates, cost of adding capacity, timing, and cost of expansion. After the significant discussion that ensued, we, and the CEO, agreed ultimately that merging of the two chains was the best option.
I then asked each member of the group, including the CEO, what their initial conclusion had been, before exploring the situation in detail. All four of us had initially concluded, without the benefit of much analysis, that a merger was the best option. We had arrived at our conclusion using a variation of the following simple rule of thumb: "The economies of scale that can be realized by merging similar businesses will strengthen and make more profitable the surviving brand." By using this simple ROT, we immediately concluded the merger was a good idea. Subsequent discussions and an onsite visit only strengthened our initial hunch. (6)
The point of this anecdote is not that the fast answer is the right one or the best one, but that executives with significant experience, say a decade or more (see Herb Simon Reason in Human Affairs, p. 26), have tried and tested ROTs that quickly lead them to a preliminary conclusion. They think in terms of ROTs.
Then comes the difficult part. Exploring whether one's personal ROTs are appropriate in the context of the situation being explored or whether they need to be updated or discarded.
Beyond Gut Feel
When CEOs are asked why they made a particular decision, however, they rarely respond by quoting rules of thumb, instead they allude to "gut feel," "intuition," or "I just knew what to do."
In a study of 40 decisions made by 20 CEOs, we determined that for both the successful and unsuccessful decisions, intuition played the dominant role (see Figure 1). At least this was the explanation that the 20 CEOs in our sample offered. But was it really intuition or gut feel? After some probing by a deft, persistent interviewer, we found that each of our CEOs had an explicit or implicit set of rules of thumb that underpinned their "intuition."
Take the case of Ray Stata at Analog Devices, a manufacturer of printed circuit electronic modules. In 1970, Stata faced what was arguably the defining decision of his career - whether or not to make a "bet the company" investment in a new technology, linear integrated circuits, that threatened to replace the analog modules that the company produced. Analog's board did not support the move, nor did the company's other founders, Matt Lorber and Dick Burwin. Faced with this opposition, Stata took the extraordinary step of borrowing the money ($2M in 1970 dollars) personally and committing to Analog that if the investment prospered, Analog could pay him back and they would own the firm in its entirety. If it failed he was out $2 million. Over the next decade, the firm prospered and now accounts for $3 billion in sales, or most of Analog's revenues. Why did Stata take such a daring personal risk into this new field? Initially Stata said it was mostly intuition. After some exploration, what emerged underpinning intuition was a set of rules which help to explain why he made the decision to stake his own money on the venture. (7)
Ray's ROTs underpin the logic of his decision (see Figure 2). Notice in particular strategy rules 3 and 4 below:
3. Innovation drives success.
4. You can't play it safe and win.
Investing in Analog Devices Semiconductor, then called Nova Devices, a linear IC startup, was a risky proposition (strategy #4), but it could open up the door to entirely different tools for Analog's talented engineers to create value (strategy #3). The venture teetered and it almost failed, but at a critical moment of uncertainty, Analog (Stata) had faith in the Nova team and their vision of the future, and he redoubled his investment (see rule 5). Although Stata's introspection seems straightforward, very few executives are able to articulate clearly their ROTs or relate them to their "intuitions.
Adaptive ROTs
ROTS, however, are not immutable. The best executives adapt their rules to their continuously changing ecology. (8)
Case: The Intel Memory Crisis
In the early 80's, Intel, the world's leading memory producer, was under unrelenting pressure from high-quality, low-priced Japanese semiconductor memory manufacturers. By the mid-1980's, Japan's share of the semiconductor industry, led by memories, surpassed the United States (see Figure 5). By the mid-80's, Intel was losing money in memories and many at "The Memory Company" felt it had lost its bearings. Sure Intel made other important product lines, namely microprocessors, but an Intel without memories was inconceivable.
It was at this point that Intel Founder, Chairman and CEO, Gordon Moore and Intel President, Andrew (Andy) Grove met after "wandering in the valley of death" to discuss the quandary in which the company found itself. After an extended discussion, Grove turned to Moore and famously asked, "If we got kicked out and the board brought in a new CEO, what do you think he would do?" [Moore] answered without hesitation: 'He would get us out of memories.' [Grove] stared at him, numb, then said, 'Why shouldn't you and I walk out of the door, come back and do it ourselves?" (9) They did. Andy Grove became CEO two years later while Moore continued as chairman, and Intel thrived, becoming the world's largest semiconductor company with sales of over $15 billion in 2009, and in July 2010 reported its best quarter ever at $10.8 billion.
What makes this case especially interesting is that the decision to exit the memory business violated two strong, explicit Intel rules of thumb that had been mainstays of the "Intel Way":
1. Our customers demand a full product line.
2. Our R&D needs memory products as a test bed for new technologies.
These two well-established rules of thumb had blocked a serious discussion about the possibility of Intel exiting the memory business. The senior manager in charge of the memory business, perhaps understandably, refused to accept the decision even after months of discussions with Grove. He was finally assigned to another job.
The case is an excellent example of the adaptable toolbox. For almost two decades Moore and Grove's ROTs had served Intel well. In the 1980's, in the face of the Japanese onslaught, they were obsolete. They needed new tools, new rules of thumb. The way Grove saw it: "If existing management want to keep their jobs when the basics of the business are undergoing profound change, they must adopt an outsider's intellectual objectivity" which may or may not agree with the company's prevailing rules of thumb. Intel's new rules of thumb called for adapting to the new environment:
1. We don't need a complete product line.
2. Microprocessors, not memories, will be Intel's core product line.
Deciphering ROTs: The Tools
Most of the major decisions that a CEO faces are computationally intractable and worse yet, many of the input variables are characterized by a high degree of uncertainty. To make such decisions, CEOs and senior executives usually rely on rules of thumb that have been vetted by their life experience and are consistent with their values and personality. The task for a CEO is to identify and understand the origins of his or her personal set of tools, his or her adaptive toolbox, and most importantly, to continuously challenge the validity of those rules of thumb in a changing environment.
A Typology of Rules of Thumb
Rules of thumb come in many shapes, sizes and colors but they can be divided into two basic types: Constructive and Destructive.
Constructive ROTs in turn come in two flavors: Portable and Contingent. Portable ROTs travel with you across industries and contexts; Contingent ROTs, as the name implies, depend on your environment, that is the nature of the industry you are competing in, its stage of development and the position of your enterprise in that industry.
At the other extreme of the continuum are Destructive ROTS. The most frequently found Destructive, or Red for short, ROTs are the product of entangling potentially destructive emotions - hatred, revenge, lust - with major decisions. According to the Dalai Lama, getting decisions right requires "detachment" from such emotions. A rule of thumb can also be destructive if it is simply misguided or just plain wrong and lead people to take mistaken action. Even worse are Corrupt or Evil ROTs that encourage employees to bilk or defraud their customers, steal from the federal government, or victimize one or more groups of people. It is the latter two types of ROTs that often make headlines in the business world (e.g., Jeff Skillings unwritten rule: "Insider trading is permissible," Bernie Madoff's implicit ROT: "Defraud Your Customer until they catch up with you,") and the many lives that lived by this evil ROT makes it perhaps a "worst in category."
Areas of Application
ROTs are just as likely to apply as shorthand for carrying out strategy or managing people or self (e.g., "Decentralize strategy," Marcelo Odebrecht; "fire people only in extreme case" Carnival Corporation, Micky Arison; "Get feedback early and often," former Lenovo CEO, Bill Amelio).
Awareness
Most executives are not explicitly aware of the rules of thumb that to a significant extent guide their behavior. In many of our interviews, the questions regarding values and rules of thumb led to a new level of self-awareness in the executive being interviewed. In some cases, only after several readings and re-readings of the transcripts and follow-up interviews were we able to extract implicit rules of thumb that often were more powerful than the explanations provided by the interviewees. An excellent example is Micky Arison's implicit rule of thumb: "Be worthy of my father's respect and trust." This ROT extended ten years after Arison senior's passing and will probably endure forever. A similar evolving and dominant ROT is from George W. Bush's memoir, Decision Points. Bush, Jr. states in definitive form and with great pride: "I am George H.W. Bush's son." He repeatedly reminds us of how much he adored his father and of his hope to make him proud and his efforts to defend him against all attackers. Both George W. Bush and Micky Arison were the offspring of enormously talented and respected men. The loving relationship with their fathers will always play a major role in their decision-making.
Adaptability
As is clearly pointed out in the main body of the article (see dynamic ROTs), ROTs need to be dynamic. After all, they are not meant to be precisely accurate or reliable for every situation. They need to be tested against realities every step of the way.
Origins
ROTs can have many origins. In the case of an admired father, they may be teachings of the father adopted wholesale. One of our subjects explained that his pervasive rule of thumb before finalizing a decision was "Consult with Dad." Other ROTs are derived from values learned early on in life, while many others are attempts to codify the lessons learned through experience.
Priorities
All rules of thumb (ROTs) are not created equal. On occasion, rules of thumb will conflict and a choice has to be made as to which to follow. Everyone's ROTs follow a hierarchy. One of my basic rules of thumb is: "Don't give someone who has done something dishonest a second chance." I also believe that star performers should be nurtured, recognized and rewarded in special ways. These two ROTs came into conflict early on in my career when my controller, one of the stars on my team, either stole or borrowed $100 from the corporate petty cash box without leaving a record of his "borrowing." I had to make a choice. By 4 p.m. that afternoon, regretfully, his desk was cleaned out and he was gone.
For the insightful leader who wants to go deeper, it is valuable to also ask, "where does this value come from?" Often a ROT is the manifestation of feelings that lie in the unconscious, usually accumulated through the individual's life journey and family experience (see Figure 6). (10)
These ROTs, the tools in the leader's toolbox, come in two broad flavors: Constructive and Destructive (see insertion: A Typology of ROTs); I have found it helpful to distinguish ROTs in terms of their potential outcomes, using common stoplight colors for major distinguishing types. "Green" and "Yellow" ROTs are examples of Constructive ROTs. They are derived from a thoughtful distillation of objective experience. Green ROTs are portable and correlated closely with an individual's core values. Yellow ROTs, although also derived from objective experience, are contingent. They may apply in one industry, one time, one setting, and not in another.
Ray's Rules provide examples of both. An example of a portable universal Green ROT is:
1. If a person is not honest and trustworthy, the rest doesn't matter.
This rule will travel wherever Ray Stata goes. Bill Amelio, the former CEO of Lenovo, had a similar Green rule: (11)
1. Build a team of people you can trust.
One of Ray's Rules (strategy #3) may not be easily transferable to any industry:
1. Innovation drives success.
Although innovation is important in any industry, it is in the R&D intensive industries - high-tech, biotech, pharmaceuticals and aerospace - where innovation truly drives success. Similarly one of Bill's rules (strategy #3) may not apply as well in every industry:
1. Give your decisions a short leash. Quickly pull back in case of a mistake.
While this rule is excellent advice for fast-moving PC or instrument manufacturers, it is questionable for aircraft manufacturers or large construction companies where mistakes can literally be fatal.
A third tool set, Destructive or "Red" ROTs are most often derived from powerful, potentially destructive emotions such as anger, hatred, jealousy, envy, fear or ethnic, racial, or gender bias and yes, love or lust. We concentrate on that group of Red ROTs here. Dan Ariely, now a professor at Duke University laments that in classical economic models, people's emotions are absent. "Pride is not in the model [of economics]. Revenge is not in the model. Fear is not in the model?the model doesn't account for how devastating [these emotions] can be." (12)
Three examples illustrate the potentially detrimental effect of this category of "Red" ROTs. One 48-year-old executive I interviewed was mugged when she was 18 years old and almost raped. To this day that emotional tag, to her disadvantage, will not let her appoint a member of the ethnic group that attacked her to her top team. Henry Ford II turned down a great opportunity, presented to him by Lee Iaccoca, for purchase of Honda engines and transmissions at a very attractive price because he didn't want a "Jap" engine in a car with his name on it.(13) Ann Wang, feeling that he had been cheated by IBM and not recognized for his role in the invention of the magnetic core memory, made one of his rules of thumb to shun anything that had to do with IBM or was IBM compatible. (14) These "Red" ROTs, based on clearly destructive emotions, often lead to poor decisions, significant setbacks or lost opportunities.
The mother of all such examples is illustrated by a decision that Warren Buffett made early in his career. He calls it his $200B blunder. While searching for opportunities for investment, Warren Buffett had noticed that Berkshire Hathaway, a textile company, was gradually selling off its mills. The company would sell off a mill and use the cash to buy back its stock and the stock would experience a corresponding increase in value in the months after the sale of the mill. Buffett watched as this process repeated itself and shortly before the sale of another mill, he took a substantial position in the company's stock. Subsequently, he met with the CEO and shook hands on a deal to tender his stock at $11.50, making a tidy short-term profit.
Soon after, a letter came in from the CEO, Mr. Seabury Stanton, offering to buy Buffett's shares for 11 and three-eighths. Buffet, a man whose word is his bond, felt he had been "chiseled" by an eighth of a point, and began to accumulate Berkshire Hathaway stock until he had the majority control, and then fired Stanton.
Now Buffett owned a terrible business into which he poured millions before giving up. Buffet figures that if rather than making such a poor investment he would have poured all this money into his preferred investment area, insurance, Berkshire Hathaway would be worth twice as much as it is today, or about $200B more. Buffet was 34 at the time. By now at 80, with 46 additional years of experience, Buffett recognizes that, "Seek revenge at any cost" is a Red ROT to be avoided. (15)
Buffett's story illustrates how experience improves the adaptable toolbox. Now 80, Buffett wistfully recalls and regrets his youthful, emotional mistake and the immense amount that it cost him and his shareholders. The CEOs in our sample learned too. The successful decisions in our sample were made in areas where the CEOs were extremely knowledgeable (a high level of experience) while the level of familiarity with fields where the bad decisions were made was no better than average (see Figure 4). ROTs need to be continually tested and refined against the balance of one's experience and particularly in a new context.
Conclusion:
The basic premise that underlies this paper is that decisions and, especially major decisions, are informed by self-awareness, and can be viewed as an expression of who we are. It therefore follows that enhanced levels of self-awareness will help us pinpoint our biases and our inclinations and leverage those insights to produce higher quality major decisions.
How can we achieve self-awareness? There are several paths on the route to self-awareness. The main one is the life journey audit. We can learn a great deal about ourselves by plotting the key events and formative experiences in our upbringing and our business experiences, identifying crucibles in our life and asking how they have shaped us. We can also learn a great deal about ourselves by taking a serious personality test - such as the Big Five Test - and having a session with an industrial or clinical psychologist who is familiar with such instruments.
The key argument of this paper is that in order to attain self awareness, leaders must tease out the personal rules of thumb (ROTs) that inhabit their adaptable leadership toolbox. These ROTs are critical because in the uncertain and computationally intractable world of major CEO decisions, the default mode is the leader's ROTs.
ROTs can bound, incline and ultimately shape major CEO decisions. For those reasons a major objective of CEO introspection should be to bring your ROTs to the surface while continuously challenging their validity and adapting them in the face of new knowledge and experience.
About the author:
Professor Modesto A. Maidique is the Alvah H. Chapman Chair in Leadership and executive director of the Center for Leadership in the College of Business Administration at Florida International University (FIU) in Miami. He is also President Emeritus of FIU.
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(1) Henry Mintzberg, Managing (San Francisco: BK, 2009), p. 19
(2) Micky Arison, personal interview, March 2010.
(3) Bob Frankenberg, personal interview, July 2009.
(4) Marcelo Odebrecht, personal interview, October 2010.
(5) Gilberto Neves, President and CEO, Odebrecht U.S.A., personal interview, October 2010.
(6) This caselet has been disguised to protect the confidentiality of the decision-maker.
(7) Ray Stata, Chairman of Analog Devices, personal interview, September 2010.
(8) Andrew S. Grove, Only the Paranoid Survive (New York: Doubleday, 1996), p. 89.
(9) Quote and case are drawn from Grove, Andrew S. Only the Paranoid Survive (New York: Doubleday, 1996), p. 89.
(10) See also Drive to Lead: Good Bad and Misguided Leadership, where Paul Lawrence, building on his earlier book with Nitin Nohria, divides unconscious drives into drives to acquire, bond, create and defend.
(11) Bill Amelio, Former CEO of Lenovo, personal interview, October 2010.
(12) David Segal, The X Factor of Economics, New York Times, October 17, 2010.
(13) Paul Ingrassia, Crash Course: The American Automotive Industry's Road from Glory to Disaster (New York: Random House, 2010), pp. 64-65.
(14) Charles C. Kennedy, Riding the Runaway Horse: The Rise and Decline of Wang Laboratories (Boston: Little, Brown &Company, 1992), p. 299.
(15) Warren Buffet, Buying Berkshire Hathaway was a $200B Blunder, CNBC, October 18, 2010.
(16) Warren Bennis and Robert J. Thomas, Geeks and Geezers (Boston: Harvard Business School Press, 2002).