Beware the trap of making a smart choice among flawed options.
Many years ago, as a young business reporter at the New York Times, I learned about the pernicious concept of institutional imperative. The phrase was coined by Warren Buffett, who first wrote about it in his 1989 letter to shareholders, to help explain why organizations that are run by generally smart leaders often make misguided decisions. Though the term institutional imperative sounds like a good thing, Buffett characterized it as a sheeplike response to power and the status quo that can derail critical thinking.
“In business school,” the sage of Omaha wrote, “I was given no hint of the imperative’s existence and I did not intuitively understand it when I entered the business world. I thought then that decent, intelligent, and experienced managers would automatically make rational business decisions. But I learned over time that isn’t so. Instead, rationality frequently wilts when the institutional imperative comes into play.”
Two of Buffett’s examples: “Any business craving of the leader, however foolish, will be quickly supported by detailed rate-of-return and strategic studies prepared by his troops,” and “the behavior of peer companies, whether they are expanding, acquiring, setting executive compensation or whatever, will be mindlessly imitated.”
This powerful insight helped me understand the ways in which CEOs explained the rationale for deals that seemed puzzling in the moment, such as Time Warner’s merger with AOL in 2000. The US$350 billion deal, which was largely unwound ten years later, has been studied endlessly as one of the worst business transactions in history. But in the heat of the moment, once the leaders of each company had convinced themselves that the combination made sense, the institutional imperative kicked in to build unstoppable momentum and make the deal happen.
The ExCo Group’s Adam Bryant wrote this article for his column in Strategy + Business. It was originally published here.
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