The 2 biggest threats to organizational change

To achieve organizational change, CEOs need more than a strategic plan. They must understand how biases — their own, and their employees’ — can shape actions and decisions

These biases can operate subconsciously. The two I see most often are loss aversion and conformity.

LOSS AVERSION

Picture a management team composed of accomplished individuals with long tenures, gathering at the company’s annual planning meeting. The CEO has been in place for five years, business performance is strong, and Wall Street has rewarded shareholders handsomely. Yet the CEO has a nagging perception that forces in the marketplace threaten the company’s long-term outlook. Choices made now will determine the ability of the organization to respond in the future. What is his team likely to do?

Research has shown that individuals possess a negativity bias: Our fear of losing is greater than our thrill of winning. This tendency to prefer avoiding losses over achieving equivalent gains drives powerful risk-averse behaviors that can hold us in place, leading us to prefer the status quo even when change is in our best interest.

At an organizational level, this tendency increases exponentially. The compounding effect of risk aversion across thousands of individuals — each preferring known working patterns over the perceived risk of change — generates organizational inertia. The end result: We don’t change, and the organization suffers.

CONFORMITY

Conformity can also lead an individual to see risk instead of opportunity.

Despite their better judgment, some people feel nudged into alignment with colleagues. Instead of pushing back, they keep their heads down.

Social psychology experiments have explored the nature of conformity. In one experiment, seven college students were asked to compare the lengths of lines. In each round, two large white cards were shown. The first showed a single vertical black line. The second showed three vertical lines of significantly different lengths, one of which was as long as the line on the first card. The students announced their match in the order in which they were seated.

The group was unanimous and correct in their selections for the first two rounds. But in the third round, all but one individual was secretly instructed to select the wrong line. The goal of the experiment was to understand what the uninstructed person would do. Would he point out the obvious error to the group, or would he go with the majority?

In these and similar conformity experiments, the individual accepts the majority’s incorrect judgments 35% of the time.

So what do risk aversion and pressures to conform mean for CEOs who need to effect change? In these and similar conformity experiments, the individual accepts the majority’s incorrect judgments 35% of the time.

So what do risk aversion and pressures to conform mean for CEOs who need to effect change?

By the time the organization recognizes the necessity for change, it’s often too late. The business landscape is littered with companies that failed because of this. To avoid this fate, CEOs should consider these actions:

— EXPLOIT UNIQUE EVENTS TO RESET THE AGENDA. Turning points — a change in executive leadership, a merger or a collapsing share price, for example — startle an organization into action. These are moments when the organization will embrace change by virtue of its necessity.

— FOCUS ON POTENTIAL LOSSES. Because individuals value losses more than gains, CEOs should frame a transformation agenda in terms of what the organization, and thus the individual, will lose: “If we don’t embark upon this transformation program, we will fail to maintain pace with competitors and …”

— CREATE SEPARATE SPACES FOR TRANSFORMATION EFFORTS. Breaking free of legacy thinking and structure can seem impossible. For example, consider a utility company building a new business to serve private sector clients in addition to municipalities. To jump-start change, an independent business unit was designed with its own performance management, hiring, compensation and governance structures. Separating the new business from its parent created the mindset to win with new and very different customers.

— EMBRACE AND CHALLENGE THE LEADERS OF YOUR TRANSFORMATION. To persevere against opposition, leaders need to encourage and challenge others. There can be no success without CEO engagement on these two dimensions. Without affirming the need to change, doubts will emerge. Without pressure for bold outcomes, incrementalism will take root. Employees need both public endorsement and private coaching to implement major initiatives.