This week kicks off the earnings season for big banks. JP Morgan Chase, Goldman Sachs, Citigroup, Morgan Stanley, and Bank of America are all reporting their Q2 earnings. The market is bullish. It’s been predicting an over 60% rise year over year in earnings per share among S&P 500 companies.
What that means is the biggest banks will expand their businesses to keep pace with the recovery. In view of surging profits, and to hedge against the future, they are likely to go into a buying spree. JPMorgan Chase has made more than 33 acquisitions in 2021. Nine of them took place in June. The main reasons for all these purchases? Either to consolidate existing positions or to acquire new capabilities.
It’s beyond obvious that the financial industry is a target for disruption. Why wouldn’t it be? Margins are high, and traditional players are slow. If you’re an entrepreneur looking for a sector that’s easier to disrupt than, say, tele-medicine or autonomous driving, well, banking looks like a piece of cake.
Already, judging by the market capitalization, the new entrants are well-established. The factors that have boosted big bank’s performance during the pandemic are waning. There is no clear indication of what the next driver of earnings will be. Scott Galloway of New York University put out a compelling comparison, which my team has redrawn below.
Of course, not all traditional players will drop out. Not without a real fight, at least. But to fend off fintech disruptors, big banks need new capabilities. They need to excel in online trading, like Robinhood does. They need to process insurance seamlessly, like Lemonade. They need to busy themselves with cryptocurrency payment services, like Coinbase. All these require new talents, new technologies, and new business models that big banks mostly lack. So, they shop and splurge.
But there’s a catch. Typically, 70%–90% of mergers and acquisitions fail, according to studies published by the Harvard Business Review. In the world of big corporations, with the exception of few outliers, no one seems to be able to get M&As right. If these were track records of an investment house or a professional poker player, they would have gone broke long ago.
The fundamental reason why M&As have such an abysmal track record is this: It’s not because they’re inheritably more complex than other corporate activities, like sales and marketing or research and development. It’s because M&A is an area where companies don’t learn from past mistakes.
Buying companies is uncertain. There will always be failures. But judging by the premiums most companies would pay for their acquisition targets, companies are basically declaring, “Deals must work out and pay off.” In this context, mistakes in M&As become politically charged. Board members get busy placing blame when things don’t work out.
Remember, to criminate is to destroy datapoints. People act defensively. Valuable information gets buried. And when everything starts afresh every time, how could there be any improvement?
Without a Plan to Learn, Wrong Lessons Ensue
To be sure, some of the un-learning is caused by dysfunctional personalities. You know these people. They are bosses who look anywhere but at themselves when mistakes occur. They blame others or external situations. It’s an attribution error that serves to protect one’s self-esteem. A CEO at the board may spend the entire meeting talking up why others were to blame for any corporate calamity. Regulators, customers, the government… what’s not mentioned is their personal culpability.
When things turn out well, they say it’s because of a prescient strategy the leadership team has crafted, and that strategy has been dutifully implemented to deliver the positive results. No mentions of the fact that the general economy has also boosted competitors’ outcomes. Heads I win, tails you lose.
But what feels good in the moment is detrimental to long-term learning. An organization that doesn’t collect facts in advance always suffers from hindsight bias. It only encourages finger-pointing. And the more energy spent on placing blame, the more coverup there will be. All it spawns is a culture that obliterates openness and fact-based decision-making.
So, the first step to turn things around is to commit to fact-finding. Not after the event, but document how decisions are made based on what information is available at the time.
Here’s a mental picture. Imagine a major event unfolds like a tree. It’s a tree that branches out over time. It has one trunk that grows out from past outcomes. The branches are the potential futures. Thicker branches are the equivalent of more probable futures. Thinner branches are less probable. The ever-advancing presence, poker player Annie Duke wrote, “acts like a chainsaw.” As the future transitions into the past, the presence “cuts off all those other branches that didn’t materialize.” Now you look back, and you only see thing that actually occurred. We forget all other considerations that could have happened but didn’t. So, everything seems inevitable. That erroneous sense of certainty is hindsight bias.
Think Ahead and Document Ahead
Annie Duke suggests we all document a decision prospectus. She calls it “pre-mortem.” You imagine yourself at some time in the future, having failed to achieve a goal and looking back at how you arrived at that destination. And if you’re like most people, doing the pre-mortem will help you identify some reasons for failure that you wouldn’t have thought of otherwise.
Most importantly, you’re doing more than just imagining failure. You’re documenting and identifying stuff that you knew before the decision. Now you have the chance to compare stuff that you come to know later, after the outcome. This way, you’re less likely to blame yourself for a bad outcome while forgetting the context at the time of the decision. Conversely, just because it’s a good outcome doesn’t always mean you’ve acted diligently. You might have just experienced a dose of dumb luck.
Good decision-making doesn’t always guarantee a good outcome. Life is full of chances. Luck always plays a part. What we can control, ultimately is to improve our own batting average. Learning with a full set of information is key.
Thanks for reading—and be well.
P.S. Fact-finding is key to organizational learning. A related concept is transparency. Only when facts are shared can learning happen at scale. Have you come across examples or practices that encourage lesson-sharing across a company, whether about successes or failures?
This article has been co-authored with Angelo Boutalikakis, a Research Associate at IMD’s Center For Future Readiness.