Geithner: "Decide which mistakes are easier to correct"

Outgoing US Secretary of the Treasury Timothy Geithner, in an interview with the Economist. Geithner has been at the US Treasury through many crises, most recently the 2007-2008 financial crisis.

You are going to make mistakes, so you have to force yourself to decide which mistakes are easier to correct. In a crisis, you get to a point where you have to decide that you're going to risk doing too much, because it's easier to clean that up.

H/T Fradique Gonzalez

Sometimes there's no time to process a failure before you have to act

We mentioned last week that learning from your mistakes takes time - time to process the complex emotional reactions people have to the failure of a project or initiative.

But what if you don't have time?

Imagine that you are Jamie Dimon, CEO of JP Morgan Chase, lauded as the most hands-on manager and best risk management CEO in the financial services industry. You've just learned that a series of trades from your "London Whale" have gone bad, very bad, and you will need to write down more than $2 billion. What do you do?

This is no ordinary mistake. This is a crisis. A leader such as Dimon has no choice but to do what University of Indiana professor Dean Shepherd, in his book "From Lemons to Lemonade: Squeeze Every Last Drop of Success Out of Your Mistakes" calls "working through the loss." He must very quickly get the facts, make decisions, provide information to the public, and maintain morale among the company's employees.

This Wall Street Journal article highlights Dimon's activities over a 45-day period, starting in early April 2012 when the first signs of a problem began to emerge into public view until the first week after the full-blown crisis began. The article paints a picture of a conflicted but ultimately resolute leader determined to guide the company through the crisis, and mindful of his own culpability.

Dimon certainly deserves much criticism for the predicament JP Morgan finds itself in. But his behavior in quickly assessing and acting on the problem has allowed him to weather the storm. Repairing the damage to the company will take years, but the crisis has been averted.

He will need to find some time on his own, this year or sometime down the line, to process his own role in the crisis and fully learn from it.

Olympus scandal connected to culture of hiding mistakes

Olympus Corp, one of Japan's business titans, has been roiled by a scandal involving overpriced corporate acquisitions intended to provide a cover to write down investment losses carried on the books since the 1980's. NPR's Morning Edition covered the story from Japan, including interviews with Japanese business observers who traced the root of the problem to a failure of governance, and an intense culture of loyalty, in which revealing mistakes was tantamount to dishonoring your predecessors. Some quotes:

"Olympus never came clean on its losses, choosing instead to hide its mistakes with a series of overpriced acquisitions."

"The insider mentality at Olympus is reminiscent of Tokyo Electric Power, whose Fukushima Daichi nuclear plant became the worst nuclear disaster since Chernobyl.... The overriding instinct at such firms is to hide mistakes at all costs. 'The sense that we have to be loyal to our predecessors, that we can't blow the whistle, we can't criticize, because of these bonds of loyalty."

You can listen to the entire story here: "Olympus Scandal Could Hasten Disclosure Changes," NPR Morning Edition, 16 Nov 2011.

NYU Researchers explore learning from success and failure

In a paper published in draft form in January 2011 ("Reaching and Falling: Why Failure in Exploration differs from Failure in Exploitation"), NYU Stern School professors JP Eggers and Jung-Hyun Suh studied learning from success and failure in a new-product development context. They compared learning in exploration (longer-term, more speculative) vs. exploitation (shorter-term, iterative improvement-based development) among mutual-fund firms over a 40-year period.

By using this frame of reference, Eggers and Suh discovered some fascinating results. Firstly, failure in exploratory new-product development had negative implications--but only for what the authors termed "near-miss" failures. Little or nothing was learned from more profound failures.

The authors generated a different but related conclusion from studying product development via exploitation. In this case, near-miss failures correlated with significant positive learning. More significant failures had negative learning. This result makes sense, as exploitation changes are more small-scale, a step forward that, if wrong, can easily be redone. This "probe-sense-respond" model is frequently used to move tech products from version 1.0 to 3.0, such as Microsoft Windows. And, of course, disastrous exploitative changes (Windows Vista, anyone?) tend to send those responsible scurrying into holes to hide.

Here's how Eggers and Suh summarize some of what they learned about learning from failure:

We suggest that positive organizational learning will result from both failures in exploitative activities (which are more pressing for the organization and must be dealt with) and successes in exploratory activities (which bring important new knowledge to the firm that the organization is more likely to encode and utilize). Meanwhile, significantly less learning will result from successes in exploitative activities (which may be viewed as validating the efficacy of existing processes and thus making additional learning unnecessary) and failures in exploratory activities (which may possess little information that can be assimilated and may be met with retreat from risky opportunities).

Here is James March's seminal paper, "Exploration and Exploitation in Organizational Learning," which provided the framework Eggers and Suh utilized.