In life, it’s often said that honest is the best policy. That turns out to be true in businesses, too, according to a new study by professors at LSU, the University of Central Missouri and the University of Missouri.
The study, titled “ Poor Performance and the Value of Corporate Honesty,” will be published in the August edition of the Journal of Corporate Finance. It compares the success of publicly traded companies that took the fall for poor performance with those that chalked it up to outside forces—such as a bad economy or a rough year—and concludes that honesty proves to be the best policy for improving performance.
“What we were looking for initially was companies that apologized in public for messing up,” says Don Chance, the James C. Flores endowed chair of MBA studies at LSU, who authored the report along with University of Central Missouri professor James Cicon and University of Missouri professor Stephen Farris. “What we found out was when companies admitted it was their fault they would start performing better, but when they blamed somewhere else they did poorly.”
For example, Chance says, when BP dealt with the fallout from the Deepwater Horizon oil spill in 2010, the company turned to every direction but itself in explaining what went wrong, which didn’t help its situation.
Chance says he and the other professors looked through the press releases of publicly traded companies, searching for words like “apologize” and “regret,” and then analyzed the company’s financial outcomes following the instance of concession. They did the same for companies that blamed poor performances on a bad economy, removing from the mix the ones whose industry actually faced economic problems during that time.
“We didn’t find that the companies are any different in terms of public images,” Chance says. “One of the things we found was when a company admits it is their fault they tell you what they did wrong, but when they blame elsewhere they are vague about what the problem is. Those who blamed other parties, [a majority] of their explanations were they failed to meet earnings.”
Companies admitting mistakes used specific phrases like “bad acquisitions strategy,” “accounting errors” and “manager mistakes” to explain what led to problems, Chance says.
The increased success of a company that owns up to their mistakes, Chance says, could force a company to investigate the problem deeply and correct it—which could lead stakeholders into thinking the company has a handle on the situation. Chance adds the study’s findings don’t mean the companies cited are universally transparent about mistakes, or honest in the long term, because the study only analyzed specific instances.
Chance compares his findings to leadership shown by New Orleans Saints quarterback Drew Brees after a game, and he tells his MBA students the same.
“He puts on a suit and he stands up in front of a microphone and he says, ‘We didn’t do the things we were supposed to do, and it was our fault,’” Chance says. “He is very very good at accepting responsibility. That’s how you determine quality leadership, is that when you mess up, you fess up.”
—Deanna Narveson
