Executives rarely give you interesting information when they talk about their companies. They rely on jargon and platitudes they know will play well with investors. I’m painting with a broad brush, but if you read enough press releases, or listen to enough earnings calls, you’ll see how rare an interesting comment is.
An example where Sears executives use competing explanations to justify their decisions
Let’s look at a recent example of how executives will talk about their business in the most convenient, least interesting way…regardless of circumstance. I’ll use Sears, which is struggling mightily, and has been for years. They’re spinning off some of their brands (like Lands’ End in 2014) to generate more cash. Here’s how a Sears spokesman explained this approach:
We believe separating businesses from Sears Holdings would allow them to pursue their own strategic opportunities, optimize their capital structures and allocate capital in a more focused manner while enabling Sears Holdings to focus on its own business and provide additional flexibility to execute our transformation.
Do you hear the message? There’s value in separating these businesses. Each business can then optimize in its own way. They’re no longer forced to conform inside of a larger monolithic Sears structure, which had introduced inefficiencies.
Let’s rewind the clock to late 2004. Kmart and Sears had just merged. Here’s how the executive team answered the question “Why are we doing this?”, according to an SEC filing from the time:
We believe that the combination greatly strengthens both Kmart and Sears. The creation of Sears Holdings would have a major impact on the retail landscape, and is intended to create shareholder value and operational advantages though scale, distribution, and product and service differentiation among the most impressive in the industry.
See how the story changed? Back in 2004, you wanted to combine businesses to take advantage of scale. Now, you want to pull apart the businesses so they can optimize separately. Same businesses. Same offering. Different idea about what the preferred path forward is.
High level talking points have little to no real world value
In a larger sense, this is why business literature has a sour reputation. Dig through enough textbooks and bestsellers, and you can find a theory supporting any decision you’d like to make. Executives are well-versed in justifying any particular decision, even if they previously used a conflicting justification.
Here’s an example from my own working life. We were working on a big project that would change how our company would use some of our own data. When we were thinking about this big change, we got two pieces of advice, from two different highly reputable sources.
From person A, we heard that we needed to enroll the most senior executives. We needed them to set clear expectations for their organizations, that this new initiative was the way of the future. We needed the senior folks to establish a measure of accountability, so we could quickly drive past the obstruction we’d inevitably face down the org chart. We needed to leverage the visibility of, and respect for, our senior leaders to push past the resistance that would otherwise sink us.
From person B, we heard that we needed to enroll the front line employees. We needed a grassroots success. If we could get “the tip of the spear” on board, so to speak, then we’d organically create the required momentum. We would ensure a word of mouth campaign in our favor, where influencers spread a helpful message through their informal networks. Then, as the momentum built from the ground up, the executives would see the power of this new movement and shift our priorities and strategies accordingly.
Both of those scenarios sound attractive. Of course you need top down support from the organization’s leaders. On the other hand, of course you need bottom up support from the organization’s doers. The problem was that neither approach could reliably guide our decision-making. There are so many examples of success across both of those scenarios, that we had no idea whether or not one approach was more appropriate for our challenge.
Then, in hindsight, it would be easy to second guess us if things didn’t go as we had hoped. You’d just point to the scenario that didn’t materialize and say, well, sure, you should have gone down that path. If we enrolled the executives, but then failed, then we should have worked from the grassroots, or the other way around. Totally unhelpful armchair quarterbacking.
The business literature is full of unfalsifiable conjecture
This is a real challenge in business literature: finding something interesting to say that is potentially falsifiable. If you can backtrack on every piece of advice, and find contingencies after the fact that explain any result that materialized, then the theory is pretty much worthless.
Take Sears as an example. Let’s buy the notion that in some cases, it’s better if businesses combine, because they can leverage scale and shared distribution, etc. Let’s buy the notion that in other cases, it’s better to split businesses apart, since they demand different capital structures and go to market strategies.
What would have been super interesting (and super unrealistic) is if the Sears executives had articulated in each case exactly why one approach was better than the other. What was unique about the Kmart merger that justified the combination? What was unique about the Lands’ End divestiture that justified the spinoff? What were the differences in the two cases?
Like I said, it’s unrealistic to expect executives to speak to this publicly. The absolute best case scenario is that the board established such rigorous criteria, and have used these criteria to guide their decision-making. The more realistic scenario is that the person with the greatest combination of (a) power and (b) strength of opinion made the call, and everyone else fell in line. In this case, you make the decision you want to make, and offer the canned explanation of your choice after the fact.
Scientific thinking can guide you, even far from the laboratory
Be careful with business literature for this reason, particularly when it comes to advice or motives for decisions. The language and logic can be so wishy washy that it’s useless. When you come from a math and science background, it’s particularly painful to watch, read, or listen to.
You can communicate well in business without all the wishy washy nonsense. Add contingencies in advance, when you’re offering your opinion. For instance, in my own personal example, you could say something like this. If your culture is such that autonomy is spread throughout the org chart, and informal networks exercise outsize influence, then go the grassroots route. In this case, stern messaging from the top won’t be effective, and might even be counterproductive.
If your culture is more like the military, where orders are issued and followed with minimal friction, then clearly the top-down approach is superior. Then, rather than just offering that advice and walking away, find ways to probe the organization to determine what the culture is actually like. Maybe you interview people, or talk with them at a happy hour or dinner. Maybe you study the financial performance of different parts of the company, and compare against the org structures. Better financial performance speaks to a healthier organization, so you could divine what’s working and what isn’t, culturally.
There are tons of ways to get a better feel for what your challenge is, then find a suitable path. Don’t reflexively fall back on canned advice that executives like to offer in place of substantive analysis. While this isn’t the laboratory, and we can’t measure everything to the nth decimal place, we can still think clearly and rigorously. Don’t be like the Sears executives, trotting out meaningless platitudes to justify decisions after the fact. You have a lot more courage and conviction than that.