The mantra of performance management is implement good practices and you will deliver superior results. Unfortunately life is just not that simple with some companies having more than their fair share of luck in stumbling upon commercial opportunities while everything others touch seems to turn to dust. So how prevalent is luck or randomness in the business world?
- First, it is pertinent to note that the profitability and stock returns between companies identified as good or poor performers in Collins and Porrass’s highly lauded ‘Built to Last’ shrank to nothing in the decade after its publication. It’s just that those classified as good in the book got lucky at the time they were studied only to regress to the mean in later years. The same thing goes for many of the companies cited in ‘In Search of Excellence’ a decade earlier and in Fortune’s ‘Most Admired Companies’ if you look at them over the long term.
- Other research* compared the impact of new CEOs on peer matched companies and found only a 0.3 correlation coefficient between the CEO’s past success and the companies’ subsequent performance. That means that only 60% of successful companies were led by CEO judged as being previously successful; a mere 10% better than random. This is hardly evidence to bolster the hero worship and salaries CEO’s typically receive.
Like me you are probably asking yourself why we bother with performance management when the hard data tells us that success is so dependent on luck. Well my take on this is that to be lucky, first you have to put yourself in opportunities where you can win – while paying particular attention to managing risk.
So surely it’s the CFO’s responsibility to ensure that the company always has a balanced and manageable portfolio of opportunities that may (or may not) come good. Even more critically, the CFO should always make sure that the company has placed serious bets on any technologies or contingent opportunities that could jeopardize its survival; something companies such as Nokia and Research in Motion appear to have failed to do in recent times.
But knowing that luck or randomness is so prevalent in the commercial world doesn’t undermine the role of performance management. How else do you manage the resources needed to pursue a portfolio of opportunities or define and monitor a disparate set of strategies, ready to turn up the gas as soon as an opportunity shows sparks of life. Success may depend on luck, but we still need the right tools and processes to manage our bets.
M. Bertrand and A. Schoar, ‘Managing with Style: The Effect of Managers on Firms Policies’ Quarterly Journal of Economics, 118, (2003), pp 1351- 1408.