http://www.strategy-business.

com/article/04414

Recent Studies
On the perils of stretch goals, modular engineering, educating CEOs, and other topics of interest.

by Des Dearlove and Stuart Crainer

Why Honest Workers Cheat

Goal setting may be an effective managerial tool, motivating some employees to superior performance and helping
companies pursue aggressive targets. But goal setting can also turn honest workers into cheats, argue Maurice E.
Schweitzer, an assistant professor of operations and information management at the Wharton School at the
University of Pennsylvania; Lisa Ord"ñez, an associate professor of management and policy at the University of
Arizona; and Bambi Douma, an assistant professor of management and marketing at the University of Montana.
The authors contend that setting specific, quantified targets for employees to reach — such as selling 50 magazine
subscriptions a week, or shipping 10,000 PCs a month, or completing $100,000 worth of repairs a quarter —
encourages unethical behavior. This is primarily because workers are so desperate to reach these plateaus that some
may falsify accounts, overstate sales figures, deliberately ship unfinished products, or perform unnecessary repairs.

To test their thesis, the authors broke 154 undergraduate students into three groups and asked them to create as
many anagrams as they could in one minute from a seven-letter word. This was repeated across seven rounds.

Participants in the first group were instructed simply to do their best. The second group was given a goal of creating
nine words in each round; they were told that this was achievable, but were offered no financial incentive to do it. The
third group was also presented a target of nine words per round — and group members were told they would earn $2
for each round in which the goal was attained.

Participants in all three groups were asked to check their own work. And those in the third group were also each given
an envelope containing $14 from which to take the money they earned. In all cases, anonymity was provided
(although researchers were able to match individual workbooks with the three groups).

So did the authors prove their point? To a degree. First the good news: The study found that most people are basically
honest, despite being given the opportunity and a motive not to be. Of all the participants, only 10.5 percent in group
one and 22.7 percent in group two overstated their performance on at least one occasion. And even in group three,
whose participants had a financial incentive to cheat, less than a third (30.2 percent) actually did so.

Of course, these numbers indicate as well that participants with specific goals — that is, group two and group three
combined — were more apt to cheat than those without goals, regardless of whether there was financial
encouragement. Also, the study found that participants were more likely to overstate their productivity when they
were close to reaching their goals than if they missed by a wider margin. For example, participants in groups two and

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three cheated more often in rounds in which they had created eight valid words — off the target by one — than they
did when they were farther away from their goals.

Goal setting, the authors conclude, can adversely influence corporate culture and should be used with caution. When
managers set goals, they should be wary of unethical behavior. And they should be especially vigilant when employees
approach their targets.

MBA Pedigrees and CEOs

More and more CEOs have MBAs and other graduate degrees from pedigreed universities, a trend that is generally
regarded as a good thing. But are better-educated CEOs better CEOs? Aron A. Gottesman, assistant professor of
finance at the Lubin School of Business at Pace University in New York, and Matthew R. Morey, an associate
professor of finance and undergraduate program chair at the same school, set out to find the answer with the first
rigorous study to test the link between CEOs from top schools and firm performance.

The researchers used a twofold definition to characterize the quality of education that chief executives received. First,
they considered the CEO’s degree: A graduate credential, such as an MBA, signified a better education than an
undergraduate degree. Second, they appraised the standing of the school, which was calculated from the mean SAT or
LSAT scores from the middle 50 percent of first-year students or the mean GMAT score of new entrants. The
assumption was the more prestigious the school, the higher the entrance requirements.

The researchers then applied these two factors to a sample of 482 CEOs drawn from firms listed on the New York
Stock Exchange as of January 1, 2000. To be included, each CEO had to have at least an undergraduate degree from a
U.S. institution.

The graduate degrees that CEOs are most likely to have are an MBA or a law degree from some of the best universities
in the country, according to the findings. About a third of the CEOs surveyed were MBA graduates, and the mean
GMAT score of the participants in their MBA programs was 656.7 out of a possible 800. Some 12 percent of CEOs
were law school graduates, from schools whose students had a mean LSAT score of 161.8 out of a possible 180. And
just over 10 percent of CEOs held graduate degrees other than an MBA, such as in engineering or psychology.

Professors Gottesman and Morey then correlated CEO education profiles with a risk-adjusted measure of their firm’s
performance. They found no evidence that companies run by CEOs from more prestigious schools (undergraduate or
graduate) perform better than those led by CEOs from less prestigious schools.

“If anything,” they note, “we find that prestige of the CEO’s school is negatively related to firm performance.” For
example, the study found that companies with the lowest return on assets were more likely to be led by CEOs who
went to schools where students have the highest average SAT scores.

The study also found that companies run by a CEO with an MBA or law degree were no better off than those led by a
CEO without a graduate degree. In fact, firms headed by a CEO without an MBA or law degree performed slightly
better.

Rebounding from Failure

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Learn and Learning to Fail (Intelligently): How Great Organizations Put Failure to Work to Improve and Innovate,”
Harvard Business School Working Paper No. 04-053. Click here.

In a world fixated on success, failure has become curiously fashionable. Witness the deluge of commentary on — and
unflagging interest in — dramatic corporate failures, such as Enron and Parmalat, as well as the success of Sydney
Finkelstein’s book, Why Smart Executives Fail: And What You Can Learn from Their Mistakes (Portfolio, 2003).
Add to these explorations of failure a paper by Mark D. Cannon, assistant professor of educational leadership at
Vanderbilt University, and Amy C. Edmondson, a professor at Harvard Business School.

Failure — defined in the paper as “deviation from expected and desired results” — is a fact of life and of business life.
Being able to learn from failure, however, is the real challenge.

Professors Cannon and Edmondson point out that analysis of failures in organizations is never easy because of
technical and social barriers. Technical obstacles include the lack in most organizations of the diagnostic, analytical,
and statistical skills required to understand the full genesis and ramifications of the failure. Social obstacles are well
documented (by Harvard University’s Chris Argyris, among others). People and organizations are uncomfortable with
failure. Without a willingness to acknowledge mistakes and personal limitations, learning from failure is unlikely.

Learning from failure, say the authors, is a process that requires identifying it as it first occurs. This is difficult for
many organizations, because small failures tend to be ignored or simply accepted. Often these apparently
unimportant failures are warning signs of bigger disasters ahead. If a failure is not identified, it may escalate. For
example, in the Columbia space shuttle accident, NASA managers initially played down the likelihood that dislodged
foam from the spacecraft hitting the left side of the shuttle at powerful speeds contributed to the disaster. The
breakaway foam was regarded as commonplace, a normal hiccup in a complex operation, rather than as the starting
point of a calamity.

In the corporate world, Mattel’s ill-fated purchase of the Learning Company led to a $105 million loss in the third
quarter of 1999, rather than the anticipated $50 million profit. Jill Barad, Mattel’s CEO at the time, overlooked the
severity of the Learning Company’s existing problems when the acquisition was made and subsequently did not
acknowledge the financial disappointment of the combined companies as a sign that the deal was a mistake. Instead,
she remained optimistic and predicted a quick return to profitability. A similar pattern was repeated in the following
two quarters.

Why do people and organizations tend to shy away from deep analysis of failures? Because discussing and examining
failure requires a spirit of inquiry, openness, and patience, as well as a tolerance for ambiguity. It also demands time
to reflect and a dogged persistence.

Professors Cannon and Edmondson argue that learning from failure is an invaluable skill that is worth cultivating in
people and their organizations. Failure can be used to drive experimentation if employees are encouraged to try out
new ideas and concepts, as long as they are also protected. It is fine to say “fail often in order to succeed sooner,” as
the innovation design company IDEO exhorts its people to do. But safety nets must be in place to assure people it’s
okay if a project does not turn out as planned. For instance, according to the authors, PSS/World Medical, a
distributor of medical supplies and equipment, has a “soft landing” policy; if someone leads an experiment that does
not work out, they can have their previous job back.

Lost in Translation?
Sanford M. Jacoby (sanford.jacoby@anderson.ucla.edu), Emily M. Nason (emily.nason@anderson.ucla.edu), and
Kazuro Saguchi (saguchi@e.u-tokyo.ac.jp), “Corporate Organization in Japan and the United States: Is There
Evidence of Convergence?” July 2004. Click here.

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At the beginning of the 1980s, American corporations began to look to the East for organizational inspiration.
Japanese corporations appeared to offer a brave new world of efficiency combined with stellar financial performance.
The Japanese, of course, were already in the habit of examining American corporate organization, performance, and
management in their quest for improvement. With so much mutual interest between Japan and the United States, it’s
natural to wonder whether the two nations’ approaches to corporate organization have grown more alike.

To answer this, Sanford M. Jacoby, the Howard Noble Professor of Management and the Area Chair of Human
Resources and Organizational Behavior at the UCLA Anderson School of Management; his colleague Emily M. Nason;
and Kazuro Saguchi of the University of Tokyo Economics Department conducted surveys of human resources (HR)
executives in 374 large companies in Japan and the U.S.

Both models, they discovered, have changed.

Two decades ago, the differences in Western and Eastern corporate models were crystal clear. At that time, Japanese
companies tended to have powerful HR units; on average Japanese headquarters HR departments were twice the size
of their U.S. counterparts. The standard Japanese company regarded employees as assets and emphasized long-term
employment.

The American model, in contrast, was shareholder oriented and, in terms of employment, market oriented. Seen as a
means of minimizing labor costs, HR was usually subservient to finance. Not surprisingly, labor turnover was higher
in the U.S. than in Japan or Europe.

Today, in Japan, employee stock options and independent boards of directors are emerging. There is greater
emphasis on shareholders. The dominance of the HR function is being questioned as jobs are outsourced, training
and welfare budgets are cut, and the era of lifelong employment has come to an end. Headquarters HR units in Japan
are getting smaller (down by 22 percent between 1996 and 2001). The finance function, which has long been
important in the U.S., is becoming increasingly important in Japanese companies.

In the U.S., the perceived rise in importance of intellectual capital, corporate culture, and a motivated work force has
led to improved status for the HR function: Sixty-five percent of senior American HR executives now report to the
CEO. HR departments and employees are frequently seen as a competitive advantage rather than a cost.

Still, with all of these changes, the authors note that the difference in fundamental philosophy between U.S. and
Japanese HR executives remains acute. Asked “What is important to you in your job?” Japanese HR directors ranked
safeguarding employees’ jobs first; American HR directors listed share price first and job protection seventh (out of
nine).

Author Profiles:

Des Dearlove (des.dearlove@suntopmedia.com) is a business writer based in the U.K. He is the author of a number of management books
and a regular contributor to strategy+business and The (London) Times.

Stuart Crainer (stuart.crainer@suntopmedia.com) is a business writer based in the U.K. and a regular contributor to strategy+business. He
and Des Dearlove founded Suntop Media, a publishing and training company providing business content for online and print publications.