Obviously, people in general don’t react to failures as they do successes. Researchers in a number of fields have shown that while people like taking credit for successes, they tend to blame others for failures. Just as obviously, the same is often true for individuals in positions of leadership: Leaders tend to self-congratulate when their organizations turn profits, and pass the buck when they bleed red ink.
Whether or not to take responsibility for a failure is a particularly tough call for business leaders. On the one hand, admitting that you made a mistake means losing credibility. On the other hand, blaming external factors won’t necessarily have the desired effects either. So what should leaders do?
To answer this question, researchers Fiona Lee, Christopher Peterson and Larissa Tiedens analyzed the annual financial reports of 14 companies over the course of 20 years. They looked specifically at each CEO’s “letter to stockholders” in order to ascertain whether he or she took responsibility, or blamed financial trouble on the economic environment, by identifying key phrases like “the dollar was particularly weak”, or “it was one of the worst winters on record”.
Surprisingly, their findings show that leaders should fight that primal urge to pass blame. Taking financial data into account, they clearly show that those companies whose leaders who took responsibility for bad performance were more resilient. Indeed, the share value of these companies improved by 19% on average, while the companies of those leaders who blamed external factors improved by only 14%.
How do we explain these results? It’s simple: leaders who take responsibility for their failures are sending an important signal to the market. They’re saying that they are aware of a situation and are doing everything in their power to remedy it. Meanwhile, those leaders who blame environment factors give the overall impression that they are not in control, that they are at the mercy of these external factors. When you look at it this way, it’s easy to understand why investors get cold feet and punish the companies that don’t take responsibility for bad performance.
Ultimately, it’s in a leader’s best interest to stop passing blame and take responsibility for financial difficulty, even when environmental factors come into play. When you pass blame, the markets aren’t buying it. And if the markets aren’t buying it, your other stakeholders – including employees and clients – probably aren’t either.