There has seldom been a better time to make mistakes, with failure increasingly accepted as part of the innovation process. Sayings suggest that if you're not failing, you're not pushing the boundaries far enough.
Indeed, a study published earlier this year even found that share prices go up when companies own up to their mistakes. By contrast, when executives attempted to palm off mistakes on external factors, the markets tended to punish them.
Whilst owning up to mistakes might be good news for the company as a whole however, it is often not such a good move for the executives involved. A recent study found that executives are much less punctual in informing the market of bad news compared to more positive announcements.
The reluctance to share bad news
"The CEO doesn't want to get fired, and is concerned with how the market will view his or her performance as a manager if they release poor company performance," the authors say. "The idea, then, is that the CEO will delay the release of bad news as long as possible in hopes that good news will come along to offset it, so that the bad news never has to be released."
Such concerns for self-preservation can prevent the timely release of information to investors, but the researchers found that regulations did little to improve matters, with the Regulation Fair Disclosure act seeming to do more harm than good.
So what can help executives to open up and disclose bad news promptly? In short, cash. The study found that when CEOs had a hefty severance pay to fall back on in the event of their dismissal, they were much more open about sharing negative news.
"There's a lot of people who think that CEO severance pay is a rip-off," the authors say. "They look at it and say, 'Why are you paying this guy so much money when he was fired at his job?' But if it reduces the manager's career concerns enough, they will take actions that they otherwise might not have. They take more risk and, in this case, accelerate the disclosure of bad news. They don't feel as concerned about being fired in the short run."
Getting the payoff right
Of course, most executives have a severance package, but not all are so hot at disclosing information. The authors believe that to encourage executives to speak up, their severance package needs to be in the top 50%.
Whilst this translates to several million dollars, the authors contend that it is well worth the cost as it translates directly into better conditions for your investors.
If you're struggling to muster the courage to own up, even with a hefty compensation package behind you, I'll leave the final word to the University of Missouri researchers mentioned at the start of this post.
“Honesty is appreciated, especially when it’s a difficult message from leaders,” they say.
“Investors will accept a forthright recognition of an honest mistake, expecting that corrective actions are likely to follow. When firms explain a negative event as due to an external cause, company leaders can appear powerless or dishonest to shareholders.”
So honesty really is the best policy, and you can then crack on with setting things right again.
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