Set Policy Without Rules

IMAGINE CONDUCTING this experiment. Put five monkeys in a cage with a bunch of bananas hanging from the ceiling. Underneath the ba­nanas, place a ladder just tall enough to reach them. Then any time one of the monkeys tries to climb the ladder, spray the entire cage with cold water. Quickly, the monkeys will learn to avoid the ladder and abandon their quest for the bananas.

Then take one of the monkeys out of the cage and replace it with an­other monkey–monkey number six–and put down your sprayer. The new monkey, of course, has no idea about the booby-trapped ladder and water, so it soon tries to climb the ladder. When it does, the other four monkeys attack it to avoid the cold shower. The new monkey doesn’t know why it was attacked. Regardless, when another original monkey is replaced, and the same thing happens, even monkey number six partici­pates in the attack.

Continue replacing monkeys one at a time until none of the original monkeys are left. Still, all five monkeys will avoid the ladder, and attack any new monkey that tries to climb it. They all obey the same rules of behavior, even though none of them have any idea why.

This is how corporate policy is formed.

The previous story has been told in many forms and in many places.1 The original author is unknown. But it does appear to be loosely based on an actual experiment by G. R. Stephenson in 1967 with rhesus mon­keys.2 The point, of course, is that rule books don’t govern behavior in any organization. Behavior is dictated by what is rewarded or punished, even if the original reason for that rule is long forgotten and perhaps no longer present. This holds true whether the reward or punishment is wit­nessed in person or relayed through a story. With monkeys in a cage, of course, it must be witnessed personally. In a corporate environment of humans, it’s usually a story that carries the message. Here’s a case in point.

At the corner of Pike Street and Columbia Parkway in downtown Cincinnati, right across from Procter & Gamble’s world headquarters, stands a 100-year-old, eight-story building. Today it serves as owner­occupied condominiums. But in the 1980s and 1990s, it was a commercial office building, known by the name of its largest tenant, R.L. Polk & Company. Every P&G new hire at the time was intimately familiar with the Polk Building because one of its floors was leased to P&G and served as the company training center. All new hires spent at least a week there during their first year learning about the company and how to do their jobs. It was also the subject of the first story I ever heard told at P&G.

Part of the training philosophy at the Polk Building was that the most effective learning takes place when the student is completely immersed in the material and isolated from distractions of the main office across the street. So the floor was equipped with a cafeteria that served a free lunch and snacks to all trainees to keep them in the building and focused on their studies. And since the only people on the floor were the trainees and trainers, they didn’t even have need for a cash register.

Over one of those first free lunches, one of our trainers regaled my new-hire class with stories about the company. The first was a highly en­gaging one about two of our predecessors several years earlier. Two young men, just out of college, had joined P&G and spent their requisite time in the Polk Building. A few weeks later, one of them arrived at work without his wallet. Not wishing to spend an entire afternoon working on an empty stomach, and too embarrassed to ask anyone for a loan, he re­membered the free lunches across the street. So he simply walked into the Polk Building, went to the cafeteria, ordered his lunch, and enjoyed his free meal. Pleased with his resourcefulness, he shared his exploit with his comrade and convinced him to join him the next day for a free lunch.

Together, they walked in and leisurely consumed their free meal without a single question or sideways glance from anyone. There were no security guards to keep them out, no signature required, no badges to swipe to authenticate their “trainee” status.

Emboldened by their success, they repeated the exercise twice more that week and several times over the rest of the month. Of course, after seeing the same faces returning for lunch so often over such a long period of time, the cafeteria staff began to wonder what was going on. Even the instructors teaching the courses were usually never in the building more than a week at a time. They had full-time jobs across the street to get back to as well. Had these two been hired as P&G’s first full-time train­ers? The women in the cafeteria made a few phone calls to check, and quickly realized these two were interlopers, bilking the company one lunch at a time.

Despite their pleas of ignorance, the story ended with their uncere­monial exit from the company, the details of which were highly enter­taining and almost certainly exaggerated by our host. The laughter at the lunch table continued among my colleagues, and ended with the coining of a new phrase that meant being fired for stealing from the company in a flagrantly stupid fashion. From then on, we referred to such an expul­sion as being Polked.

It was never clear to us if the story was true or apocryphal. But it didn’t matter. It stuck. There was no entry in the policy manual that told us we would get fired for eating in the Polk Building if we weren’t in training. But after hearing that story, none of us would even consider re­peating the offense. More importantly, it put us on notice that there are probably all kinds of bad behaviors that could get you fired without being explicitly told so in advance. The story taught us to use our common sense of what’s right and wrong. We didn’t need a rule book. If you do right, good things happen. If you do wrong, there are consequences, up to and including getting fired. The story, and the phrase coined from it, became a self-policing mechanism among my peers. If any of us ever said or did anything even remotely questionable, they would be quickly met with a probing look and the admonition, “Careful, genius. Keep that up and you’ll get Polked.”

As the David Armstrong quote at the beginning of the chapter indi­cates, rarely does anyone ever actually read a company policy manual. The purpose manuals primarily serve is a legal one. If the company is ever sued for wrongfully terminating an employee who broke the rules, the company lawyer can cite chapter and verse in front of the jury exactly the policy the now-terminated employee violated. But if your objective is to keep people from violating the rules in the first place, the policy manual will do you little good, because nobody reads it.

So how do employees learn the rules of an organization? One way is through their own behavior and experience. If they get punished for some­thing, they quickly learn not to do it again. It must have been against the rules, written or not. If they get rewarded for something, they’ll keep doing it. But nobody can possibly break all the rules themselves. So the main way people learn the rules is through the stories they hear about other peo­ple–those who broke the rules and suffered the consequences, and those who didn’t and got rewarded. So in addition to your legally required policy manual, what you need are some good stories. The previous one is an ex­ample of someone breaking the rules and paying the price. But stories of positive reinforcement work just as well, as the following story about one of the oldest and most respected companies in America illustrates.

Sara Mathew joined Dun & Bradstreet in August 2001, as chief fi­nancial officer. Less than a year later, company sales projections were showing a slight decline. But nothing had substantially changed since she’d arrived. So why the drop in the sales forecast? The answer was found in several arcane accounting rules.

One of Sara’s first actions as CFO was to put a new finance team in place so she could be sure the financial reporting was being done by the book. For the complex transactions in their industry, there are several ac­counting methods to choose from. Knowing which one is best is a com­plicated affair and depends on the situation. The right answer even changes over time as government regulators make new pronouncements. Appar­ently, the methods Sara’s new team was using recognized revenues slower than other methods. Hence, the slight dip in sales. That made Sara curious. She was certain her method was correct. So she had her team look into the methods used in the past. They found the wrong method had been used in several cases. In some of them, the problems went back nearly a decade–not exactly what a new CFO wants to find in her first year.

Sara knew the company would have to restate its financials. That meant reversing all the inappropriate revenues and profits that had been reported in the past–millions of dollars out of its bottom line. And there couldn’t have been a worse time for this to happen. Just months earlier, Enron had filed for the largest bankruptcy in history as a result of fraud­ulent accounting practices. She went straight to the CEO.

In his office, she remembers the alarm on his face as he responded to the news. “Restatement! Like the Enron restatement?”

“Yes,” she told him. “Like Enron. But in our case I don’t think there was fraud–just a mistake. I won’t know for sure–or how much money we’re talking about–until we do a thorough investigation.”

“How long will that take?” he asked.

What Sara was thinking was, “Heck, I don’t know. I’ve never done this before.” What she said, however, was, “Our next earnings release is in six weeks. I’ll have it done by then.” At the time, she was unaware that no re­statement of this size had ever been completed in less than six months.

As the work began, Sara couldn’t help but worry about the size of the problem. Hopefully, it would be small and inconsequential, and get no negative reaction from Wall Street. Her fear, of course, was that it would be big, and the share price would suffer.

In a situation like this, there are three ways a leader can respond. Op­tion one is to ignore the problem. After all, they were using the proper accounting methods now. It’s possible nobody would ever find out about the past errors. Option two is to pursue the work on the restatement, but to stop digging when the size of the problem gets too big to go unnoticed on Wall Street. For a company the size of D&B, that number is about $50 million. Option three is to keep digging until you find everything, without regard to the size of the problem. Let the chips fall where they may. Sara chose option three.

Working around the clock, the finance team completed the job in six weeks, as promised. With its next quarterly release, D&B adjusted its in­come going back 10 years. The grand total was a $150 million charge, with no fraud found. And despite the sizable amount, the stock price held steady. The size of the restatement and the speed with which it was an­nounced left Wall Street certain there were no more skeletons in D&B’s closet. Sara and her team received accolades and even monetary awards for completing the restatement in record time, and in a manner that left investors confident in the company and its management.

The actions of Sara and her team defined the rules of behavior in the finance department at Dun & Bradstreet. Accounting policy is defined in the rule book, written by the U.S. Financial Accounting Standards Board. But how those policies are followed at D&B was defined by the CFO, and the story that will live on even after she’s gone.

Today, Sara Mathew is CEO and chairman of Dun & Bradstreet. She and others continue to tell this story to help employees understand not just the accounting policy but also the rules of behavior. Doing the right thing is rewarded at D&B. It’s a policy Sara’s confident she won’t need to restate.

* * *

The premise of this chapter so far has been that you need stories to es­tablish policy because nobody reads the policy manuals. But there is an­other reason–probably an even more important reason. Rules often lead to unintended consequences, sometimes causing more damage than the ill they were designed to prevent. Stories rarely do that. The following story illustrates the counterproductive nature of rules.

Phil Renshaw spent 17 years in banking and corporate finance before becoming a consultant and coach for finance executives with Circulus in Buckinghamshire, England. He’s seen the downside of creating additional rules when the existing ones aren’t working. One of his favorite examples is having senior managers personally approve all expenses, thinking it’s a good way to reduce spending. It may succeed in reducing spending. But that doesn’t mean it was a good idea.

In Phil’s experience, here’s how that typically plays out. A company has just entered the final quarter of the fiscal year and is woefully behind its earnings target. In order to save money, a temporary rule is put in place for the rest of the year. A senior executive, such as a vice president, must approve all expenses, no matter how small. The result is an absurd set of consequences. The first two are a result of the fact that such a leader might have hundreds, or even thousands, of people under his au­thority. Personally approving all those expenses could take several hours a day, distracting the VP from more important duties. He tries to keep up for a few days or weeks, but his work suffers because of it. Eventually the VP delegates the task to an administrator, which is the second ab­surdity. Expenses approval has now been delegated to an administrator less qualified to review them than the original managers who would have done so in the absence of the new rule.

The third and most malicious absurdity is that this rule robs mid­level managers of their ability to keep the organization productive and motivated. For example, let’s say for the last week, three employees have worked 15-hour days on an urgent project, and complete it in record time.

At 10 o’clock in the evening on the last night, when the project is finalized and submitted, the manager wants to take the employees out to dinner in appreciation. But then she remembers the new rule. Only the vice presi­dent can approve this meal expense now. It would require a lengthy ex­planation to justify, and the VP might not approve it. She decides not to take the risk, and just thanks them for their hard work and sends them home. Money was saved, but at what cost? The employees are demoral­ized and the manager is undermined. Phil’s advice is that if you can’t trust your managers to make good decisions, you shouldn’t have hired them. Instead, he advises companies to embed the quarterly cost or profit re­quirements in performance incentives like bonuses, or options, or even extra days off work. Then let individual managers decide which expenses are worth spending anyway and which are not. You’ll have just as good a chance at hitting your earnings target, and without the train of absurdities.

If you ever find yourself considering instituting a new rule, consider the unintended consequences first. Ask yourself what Phil Renshaw would make of your rule. And if you happen to be one of the innocent victims of an equally toxic rule from upper management, tell them Phil’s story. You might just get them to reconsider.

SUMMARY AND EXERCISES

1.     Rule books don’t govern behavior in any organization. Behavior is determined by what is rewarded or punished, even if the original reason is long forgot­ten–like monkeys in a cage.

2.     Employees cannot possibly break all the rules themselves. They learn through the stories they hear about other people’s behavior getting rewarded or pun­ished. Make sure the stories in your organization reinforce the behavior you want. You should have positive stories (financial restatement at D&B), and negative ones (getting Polked).

3.     Rules can lead to unintended consequences. The next time you’re thinking about implementing a new rule, consider Phil Renshaw’s story of expense ap­proval. Consider telling a story instead.

4.     If your boss has implemented a toxic rule, tell Phil’s story. Your boss just might reconsider.

Notes

1.    Dozens of similar versions of this story have appeared on the Internet for over a decade. The earliest appearance in print I’ve found is in John E. Renesch, Getting to the Better Future (San Francisco: New Business Books, 2000), where the original source is also unclaimed and unattributed.

2.    G. R. Stephenson, “Cultural Acquisition of a Specific Learned Response Among Rhesus Monkeys,” in D. Starek, R. Schneider, and H. J. Kuhn (eds.), Progress in Primatology (Stuttgart, Germany: Fischer, 1967), pp. 279–288.

Paul Smith, director of Consumer & Communications Research at The Procter & Gamble Company, lectures regularly for the MBA programs at Xavier University and the University of Cincinnati. He can be found online at www.leadwithastory.com.

 

Lead with a Story: A Guide to Crafting Business Narratives That Captivate, Convince, and Inspire by Paul Smith

(c) 2012 Paul Smith

All rights reserved

Published by AMACOM Books, www.amacombooks.com, Division of American Management Association, 1601 Broadway, New York, NY 10019

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