Commentary

Dangerous Reaction to the Scandals
(Originally published in the Los Angeles Times)

Richard Farson and Ralph Keyes

The larger consequences of today’s corporate scandals may turn out to be more damaging than the scandalous behavior itself.

At the moment, investors and politicians are trying to put out the firestorm of corporate crimes ignited by Enron and now spreading wildly. Understandably, they are insisting not only on intensive investigations and accounting reforms, but punishment of the wrongdoers. In response, U. S. business is becoming nervous and fearful. The expansiveness that once characterized the business community is being replaced by caution and accountability. In the long run this could be the most destructive consequence of book cooking by the likes of Enron, Worldcom, and Xerox.

Long before any news of corporate scandal broke, Americans were already on an accountability binge. Especially in our schools, but also in other institutions, we have been demanding tests and standards and answerability. The stunning misbehavior of the darlings of our investing public has only intensified that attitude. But, as Ambrose Bierce observed almost a century ago, "Accountability is the mother of caution." In a climate of fear, we tend to insist more and more on tests and measures. In the process we become increasingly risk-averse.

Taking risks, however, is precisely what is needed now, more than ever. Risk is the only avenue to innovation. And the demand for innovation in the current fast-paced, globalized and technologized economy is constant. We need continual innovation in both product and process.

Instead we are seeing a pulling back, a move toward tightening up, toward making sure no mistakes are made. The most popular new management fad is Six Sigmas, a term from statistics meaning that the work done by our business and government institutions must be as close to perfect as possible. No mistakes. Even 3M, with its vaunted passion for innovation based on a high tolerance for failure has gone the Six Sigmas route.

This impulse to seek error-free perfection takes us in the wrong direction, robbing us of what is perhaps our most important national strength—the ability to innovate. Innovation has made our business culture the greatest in the world. Other countries may occasionally have taken markets away from us, but there were always more where those markets came from because we have the power to innovate by taking chances and, in the process, creating new markets.

Mistakes and failure are the inevitable consequences of taking risks. One measure of genuine risk-taking is the amount of failure generated. That’s why IBM’s Thomas Watson, Sr. said, "If you want to increase the probability of success, double your failure rate." The great innovators, from Edison, Kettering, and the Wright Brothers down to the contemporary entrepreneurs in Silicon Valley have operated on the same principle. They understand that failure and success are intimately connected, interdependent, sometimes indistinguishable. One has always led to the other. Microsoft’s Bill Gates was recently depicted in Fortune magazine as a risk-taker whose success has grown from the realization that "you have to try everything, because the real secret of innovation is to fail fast."

Rather than perfection we need more failure, a lot more. We need to regard both success and failure in the same way, as steps to further achievement. To allow the current revelations of disgraceful corporate behavior to make us hunker down in a mode of caution could cause us to lose our edge in the highly competitive global economy. Over time, that could turn out to be the worst consequence of corporate misbehavior.

Richard Farson and Ralph Keyes are the authors of Whoever Makes the Most Mistakes Wins: The Paradox of Innovation (Free Press/Simon and Schuster, 2002)