We’re living in an age where mistakes and failure are probably seen as positively as they have ever been.  It’s said that if you’re not making mistakes then you’re not pushing yourself hard enough, and as such it’s a crucial element of an innovative culture.

Whilst you suspect the celebration of mistakes has become something of a cliche, it is nonetheless crucial to have a culture whereby they are surfaced rather than buried.

Most of the time when we talk about owning up to mistakes, we’re doing so through an individual lens.  Does the same thinking apply on an organizational level too?

Owning institutional mistakes

A recent study from the University of Missouri suggests that it does.  It suggests that when companies had performed poorly, yet blamed this performance on external factors (such as competition, unions or the economy), investors punished them, with their share price tumbling as a result.

By contrast, when a company owned up to their performance and addressed the various problems that contributed to it, their share prices generally recovered in the aftermath of the announcement.

“Honesty is appreciated, especially when it’s a difficult message from leaders,” the authors 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.”

The analysis revealed that when a company took responsibility for a poor showing, they ended up growing by 18 percent.  This compared to a decline of 77 percent seen in companies who preferred instead to blame external factors.

Unfortunately, this latter strategy appears all too common, with roughly 2/3 of the announcements studied placing the blame on external factors.

Of course, whilst some of these reasons may in fact be valid ones, in the majority of instances the company was simply ignoring the true causes, which of course made rectifying issues something of a challenge.

“Firms that did admit the problem were able to stop the slide of their stock, and in many cases recovered within a year. Those companies that continued to blame outside factors never saw their stock recover,” the authors reveal.

Only the first step

Of course, as is well known, admitting you have a problem is but the first step on the recovery process, and companies that outlined how they would try and improve matters saw their recovery boosted most of all.

Interestingly however, there appeared to be no correlation between the makeup of the executive team, either in terms of the length of tenure, its independence or even its structure, and the willingness to accept responsibility.

The authors suggest a number of possible reasons behind this apparent difficulty in taking responsibility, including hubris, pride and even fear of litigation.

Interestingly however, when a company blamed external factors, they nonetheless often changed their CEO too, with some 44 percent of companies in this camp doing so in the year after the announcement.

It’s notably difficult to admit to mistakes on an individual level, but this study highlights how it can be equally challenging to do so at an organizational level too.

Despite that difficulty however, it is something that is undoubtedly needed if restoration is to occur.