“I feel misused by my own company.”

—Oliver Schmidt, Volkswagen engineer¹

“Until I know what my boss thinks, I don't want to tell you.”

—Regulator, Federal Reserve Bank of New York (FRBNY)²

In May 2015, the Volkswagen Group had every reason to feel proud.³ It had sold over 10 million vehicles the previous year, thereby laying claim to the title of world's largest automaker. One of the largest employers in Germany, the company was credited with helping the country recover from the global financial crisis of 2008. Ironically, as it would turn out, its Jetta TDI Clean Diesel won the Green Car of the Year at the 2008 Los Angeles Auto Show. A firm with a 78-year history in Germany, made famous by the iconic Beetle of the 1960s, and with a pristine reputation for engineering prowess, Volkswagen's star shone bright enough to be blinding.

As the saying goes, pride cometh before the fall. Merely months later, Volkswagen (VW), the world's largest automotive company, was facing unimaginable scandal. The clean diesel engines that had anchored its impressive US sales were discovered to have been –essentially – a hoax. German officials raided the company headquarters in Wolfsburg, searching for incriminating evidence. Criminal investigations were opened by the United States and the European Union to figure out who knew what, when, and how. The company halted sales, reported its first quarterly loss in 15 years, and witnessed a third of its market value vanish. CEO Martin Winterkorn resigned in September of 2015, taking “full responsibility” while denying “wrongdoing,” and at least nine senior managers were suspended or put on leave.⁴

In the following years, prosecutors in the United States and Germany would identify more than 40 people, “spread out across at least four cities and working for three VW brands” involved an elaborate scheme to defraud government regulators.⁵ “Dieselgate,” as the scandal was dubbed, referred to VW's deceptiveness in complying with the regulations required by the US Environmental Protection Agency (EPA) to sell automobiles in the United States.

Exacting Standards

How could this have happened? When Winterkorn had taken the helm in 2007, he'd set a goal that was both precise and ambitious: to triple the company's US sales within 10 years, thereby surpassing rivals Toyota and General Motors to become the world's largest automobile maker. The company's so-called clean diesel vehicles, touted for their high performance and excellent fuel economy, were essential to this strategy. There was only one problem: diesels produced more nitrous oxide (NOx) than gasoline engines and would not pass the United States environmental regulations. As VW manager-engineer Wolfgang Hatz admitted in 2007 about the challenge to create clean diesel for the US market, “The CARB [California Air Resources Board] is not realistic. We can do quite a bit, and we will do quite a bit. But impossible we cannot do.”⁶

Hatz and his engineering colleagues then went to work. Somewhere in the millions of lines of software code they wrote for what became the “clean diesel” vehicles, they embedded instructions that would enable the cars to pass the strict US emissions tests. Conceptually, the trick was simple enough. The engineers designed and implemented software that could determine when a vehicle was undergoing standard emissions testing in a lab, in which case only two wheels rotated, as opposed to four wheels when the vehicle was driven on the road. When tested in a lab, the diesel engines complied with acceptable NOx levels. However, that compliance sacrificed performance and fuel economy, which made the cars unacceptable to consumers. That's why the software directed the exhaust control equipment to stop working once the vehicle was off the regulators' test beds. On the road, the so-called clean diesel engines spewed into the atmosphere as much as 40 times the level of NOx permitted by regulations.⁷

For nearly 10 years, all appeared to be going well. The defeat devices, as they were later called, enabled VW to reach its ambitious sales goals four years ahead of its target date.⁸ In 2013, an international nonprofit group, partnering with engineers at West Virginia University's Center for Alternative Fuels, Engines, and Emissions, along with California environmental regulators, became interested in how diesel engines performed. They decided to compare in-lab and on-road emissions and mileage performances on several types of diesel vehicles, including those of Volkswagen. Soon enough, the defeat device came to light. For the next two years, the US environmental agencies presented their findings, VW denied, covered up, and finally confessed. Winterkorn then resigned, saying, “I am not aware of any wrongdoing on my part.”⁹ Across VW's brands, about 11 million of the diesel vehicles worldwide would be discovered to have the cheating device installed.

How could this failure have been avoided? It's natural to want to point a finger at someone, or at a small group, to hold responsible for, at the very least, the 59 unnecessary deaths and 30 cases of chronic bronchitis that researchers estimated are the result of VW's deceptive emissions practices.

Martin Winterkorn is certainly a good candidate to be cast as the villain. He had a reputation as an arrogant, perfectionistic martinet with an obsessive attention to detail. As one executive at VW told reporters, “There was always a distance, a fear and a respect…If he [Winterkorn] would come and visit or you had to go to him, your pulse would go up. If you presented bad news, those were the moments that it could become quite unpleasant and loud and quite demeaning.” Other managers cited instances when Winterkorn blamed engineers for paint that exceeded regulations by less than a millimeter, or for not offering a specific shade of red that was selling well on competitors' models.¹⁰ A video shot at the Frankfurt motor show in 2011 and widely viewed on YouTube shows Winterkorn's irritation at discovering that Hyundai, a so-called lesser automotive brand, had managed to engineer a steering wheel that was silent when adjusted from the driver's seat – a feat VW had been unable to master.¹¹ “Bischoff!” barks Winterkorn, as if to lay the blame on his design chief, Klaus Bischoff, and voices displeasure that a rival company managed to get rid of the “clonking sound.”

Yet, there are reasons to question this temptingly simple explanation with its singular villain. First, many organizational leaders genuinely believe that “no news” means that things are going well. They assume that if people were struggling to implement some directive or another, they would speak up and push back. They take for granted that their own voices are welcome and fail to appreciate that others might feel unable to bring bad news up the chain of command. For sure, this kind of blindness does not constitute effective leadership, but it also cannot be called villainous. Second, and more specific to this case, Winterkorn's leadership was not born in a vacuum. He was the protégé of the immensely powerful Ferdinand Piech, VW's former chairman, CEO, and top shareholder. A brilliant and visionary automotive engineer, Piech had been convinced that terrorizing subordinates was the way to achieve profitable design. Chrysler executive Bob Lutz recounted a conversation he had with Piesch at an industry dinner in the 1990s. When Lutz expressed admiration for the exterior design of Volkswagen's new model Golf and wished for similar success at Chrysler, Piech offered up an explanation that might serve as a textbook example of how to create a psychologically unsafe environment while seeking to motivate:

I'll give you the recipe. I called all the body engineers, stamping people, manufacturing, and executives into my conference room. And I said, “I am tired of all these lousy body fits. You have six weeks to achieve world-class body fits. I have all your names. If we do not have good body fits in six weeks, I will replace all of you. Thank you for your time today.¹²

Writing soon after VW's fall, Lutz speculated that Piech was “more than likely the root cause of the VW diesel-emissions scandal” because he instigated “a reign of terror and a culture where performance was driven by fear and intimidation.”¹³ Although perhaps an extreme case, the fact is that many managers are sympathetic to the use of power to insist that people achieve certain goals – offering clear metrics and deadlines. The belief that people may not push themselves hard enough without a clear understanding of the negative consequences of failing to do so is widespread and even taken for granted by many in management roles, along with just as many casual onlookers contemplating human motivation at work. What many people do not realize is that motivation by fear is indeed highly effective – effective at creating the illusion that goals are being achieved. It is not effective in ensuring that people bring the creativity, good process, and passion needed to accomplish challenging goals in knowledge-intensive workplaces.

But even Piech was not, as Lutz remarked, the “root cause” of Dieselgate. Just as CEO Martin Winterkorn's beliefs about how best to motivate people were learned from his mentor, Ferdinand Piech, Piech's management beliefs were learned from his mentor – his grandfather, Ferdinand Porsche, who had been the brilliant lead engineer for the Beetle. Nor was Herr Porsche the root cause. Porsche, for his part, was hugely inspired in his efforts by Henry Ford and in the mid-1930s traveled to Detroit to study Ford's River Rouge factory complex, eventually using what he'd learned to build the first automotive assembly line in Germany.¹⁴ This was still the golden age for the manufacturing industry, when fear and intimidation were, arguably, a proven managerial technique to motivate speed and accuracy in factory workers. When authoritative demands, combined with process improvements, could reduce an automobile's assembly line production time from 12 hours to 3, as Ford's factory did, the company's profits were real.

The root cause of VW's Dieselgate scandal in 2015 cannot be located in the personality or leadership of any single person or small group. Perhaps one could say the failure was caused by holding fast to an outdated belief about what motivates workers. A scene in Charlie Chaplin's classic film Modern Times parodies what such old-fashioned motivation-by-fear can look like. Chaplin plays an assembly line worker who fails to keep pace tightening the widgets as they appear before him on the moving belt, only to be kicked by a coworker, chastised and hit by a manager, and ordered to increase speed by an executive.¹⁵ Today, when simple tasks have increasingly become automated and knowledge workers do not tighten widgets but rather collaborate, synthesize, make decisions, and continually learn, such methods seem especially comedic.

Interestingly, Bischoff, the designer who was chastised by Winterkorn for the clonking steering shaft, defended this management style, telling a reporter, “Of course [Winterkorn] went through the roof when something went wrong…” and excused the behavior by pointing out that his boss could also be “extremely human with a soft spot for people's personal fates.”¹⁶ What's at stake here isn't whether or not a CEO is extremely human or not. Winterkorn's kindness and “soft spots” were likely within a normal range when measured against other human beings. What's at stake is what he believed was the best way to motivate employees – and the relevance of these beliefs for today's work. Given what we now know about the relationship between psychological safety and learning, a leader who threatens to fire managers and engineers if they do not come up with world-class body fits in six weeks seems best cast in a silent film.

Like the noxious fumes the faulty VW diesel engines emitted, low psychological safety affects everyone who breathes it in. As Professor Ferdinand Dudenhoffer, an automotive expert of at the University of Duisburg-Essen, put it “…there is a special pressure at VW.”¹⁷ The company's governance dynamics contributed to that special pressure. According to Dudenhoffer, unlike at other German automobile manufacturers, where the supervisory board ultimately controlled the CEO, at VW the board held “no such authority.”¹⁸ That may be because relatives of the founding Porsche family held a quarter of the 20 board seats; two seats were held by regional politicians, eager to do whatever it took to keep jobs in the region, and two were held by representatives of Qatar's sovereign wealth fund.

Given this insidious culture of fear, it's unsurprising that when faced with a seemingly insurmountable technical obstacle – to produce a diesel engine that could pass US environmental testing – and pressed for a solution that could meet the company's target goals, engineers and regulatory officials at VW decided to find a way. However clever and lucrative the idea may have seemed at the time, and however much VW's sales and reputation soared, history has shown us that it was not, in the long run, a viable solution.

At least one member of the supervisory board was unafraid to speak up. Bernd Osterloh, 1 of the 10 elected members who represented employees (comparable to union representatives in the US), sent a telling letter to the VW staff on September 24, 2015, shortly after the US regulators revealed the cheating. As if citing central tenets of psychological safety, Osterloh wrote, “we need in the future a climate in which problems aren't hidden but can be openly communicated to superiors. We need a culture in which it's possible and permissible to argue with your superior about the best way to go.”¹⁹

After the emissions scandal broke, Winterkorn claimed the company needed stricter rules to make sure this kind of deceit did not happen again. But it's unclear how stricter rules would have engineered an environmentally safe diesel engine or enabled the company to reach its goal to become the world's largest car company. In retrospect, the goal itself seems suspect. Could failure have been avoided if the engineers, working in a psychologically safer environment, could report back the “bad news” that attaining a clean diesel engine under the terms demanded was simply not feasible?

Perhaps most stunning thing about the VW emissions debacle is that it's by no means a singular event. The same script – unreachable target goals, a command-and-control hierarchy that motivates by fear, and people afraid to lose their jobs if they fail – has been repeated again and again. In part that's because it's a script that was useful in the past, when goals were reachable, progress directly observable, and tasks largely individually executed. Under those conditions, people could be compelled to reach them simply by fear and intimidation. The problem is that, in today's volatile, uncertain, complex, and ambiguous (VUCA) world, this is no longer a script that's good for business. Rather than success, it's a playbook that invites avoidable, and often painfully public, failure.

In the rest of this chapter, we will see a similar script play out in three other organizations: Wells Fargo, Nokia, and the Federal Reserve Bank of New York. In each of these cases, a psychologically unsafe culture appeared to be working for some period of time, but, like a ticking bomb, it eventually exploded from within, decimating reputations of once-venerated companies.

Stretching the Stretch Goal

A year before its notorious fall, Wells Fargo could still call itself the most valuable bank, ranking first in market value among all US banks and serving roughly one in three American households.²⁰ Rated by Barron's as one of the “world's most respected companies,” the lion's share of Wells Fargo's success stemmed from its Community Banking division; in 2015, with over 6000 local branches across the US, the division accounted for over half the company's revenue.²¹ Community Banking provided a range of financial services, including checking and savings accounts, loans, and credit cards, to households and small businesses.

Community Banking relied heavily on cross-selling, the practice of selling existing customers additional products, for its growth strategy. Wells Fargo believed it could gain a competitive advantage in the banking industry by becoming a one-stop shop for all of its customers' financial needs. The bank took pride in its ability to sell its customers additional products. In fact, in his 2010 letter to shareholders, CEO John Stumpf boasted that the company was “the king of cross-sell.”²² By 2015, Wells Fargo's claim to that title seemed strong: it was averaging 6.11 products per customer, compared to the industry average of 2.71.²³

Yet superior cross-selling was to Wells Fargo what clean diesel was to the Volkswagen Group: involving an ultimately unattainable target goal that was nonetheless demanded of employees by the company's top leaders upon penalty of job loss.

By September 8, 2016, it was all over. The ticking time bomb had exploded from within, shattering the king of cross-sell's illusory one-stop shop. After having been found guilty of widespread misconduct in sales practices in its Community Banking division, Wells Fargo announced a $185 million settlement with the Consumer Financial Protection Bureau (CFPB) and two other US regulatory agencies. John Stumpf resigned the following month.²⁴

What happened at Wells Fargo was both predictable and avoidable. And it could not have persisted as long as it did without a psychologically unsafe culture. Let's look more closely at how events unfolded.

In the early 2000s, Wells Fargo had adopted a cross-selling campaign called “Going for Gr-Eight,” meant to motivate Community Banking employees to sell, on average, a previously unheard of eight products per customer. To accomplish this, incentive schemes were put in place up and down the hierarchy: personal bankers and tellers were given a percentage commission for each sale, district managers were required to hit specific sales numbers to earn bonuses, and cross-selling success was factored into top executives' annual bonuses.²⁵

Metrics tracking was strict and unforgiving. Branch personnel were assigned ambitious sales numbers and their progress was tracked closely in a daily “Motivator Report.”²⁶ Each branch was required to report daily sales four times per day: at 11 a.m., 1 p.m., 3 p.m., and 5 p.m.²⁷ One area president told employees to “do whatever it takes” to sell.²⁸ At some branches, employees reportedly could not leave until they reached their daily sales goal.²⁹

Bank personnel who did not meet sales goals were coached to increase their numbers, including “objection-handling” training to coerce people into buying more products. If they could still not hit their numbers, they were terminated from the company. Managers who did not do well enough were publicly criticized or fired.³⁰

Beginning in 2013, reports began to surface that Wells Fargo employees had engaged in, and were still currently engaging in, questionable practices to hit their sales numbers. A former employee reported that members of his Los Angeles branch opened accounts or credit cards for customers without their consent, saying a computer glitch had occurred if customers complained. He also reported that employees lied to customers-saying that certain products could only be purchased together-to hit their numbers.³¹ Other tactics to meet sales goals included encouraging customers to open unnecessary multiple checking accounts – one for groceries, one for travel, one for emergencies, and so on³² – and creating fake email addressees to enroll customers in online banking.³³

Before the scandal went public, Wells Fargo made a number of changes that seemed to try to address its problems. The company fired over 5300 employees for ethics violations between 2011 and 2016,³⁴ rolled out a “Quality of Sale” Report Card that set limits on the terms of a sale,³⁵ expanded ethics training, and explicitly told employees not to create fake accounts.³⁶ There was, however, one glaring omission: no changes were made to “Going for Gr-Eight.” Just as VW engineers were unable to design a clean diesel engine in ways that were “permissible,” Wells Fargo employees were unable to meet sales goals without engaging in shady practices. There was simply a limit to how many products any one customer's wallet could allow. As one former banker put it, “They [the higher ups] warned us about this [unethical] type of behavior…but the reality was that people had to meet their goals. They needed a paycheck.”³⁷

Eventually, federal and state regulators opened an investigation into the bank's practices. Their report found that from 2011 to 2016, employees in the Community Banking division, in order to boost sales figures, opened two million unauthorized customer accounts and credit cards and sold products and services to customers under false pretenses.³⁸ The investigation also found that several employees who witnessed the unethical behavior had reported it to their supervisors or to the ethics hotline. One even claimed to have emailed Stumpf about it. Some employees were later terminated for blowing the whistle.³⁹

Like Volkswagen, Wells Fargo's avoidable failure was not the result of one bad apple but of a system that demanded hitting targets so ambitious they could only be met by deceit. Employees operated in a culture of fear that brooked no dissent. Rather than manifesting interest in salespeople's experiences while executing the cross-selling strategy and using what was being learned in the field to shift or sharpen the company's strategy,⁴⁰ managers sent a clear message: produce – or else.

Fearing the Truth

A similar script to that of VW and Wells Fargo was followed years earlier – across the ocean and in another industry. Nokia, which traces its origins as a company to an 1865 paper mill in the town of Nokia, Finland,⁴¹ had become, by the 1980s, a pioneering telecom company in the world's burgeoning cellular networks. Led by CEO Kari Kairamo, by the late 1990s Nokia was the world's leading mobile phone manufacturer, with a 23% market share.⁴² By the early 2000s, as a developer of the Symbian operating system, the company seemed well poised to ride what would become the smartphone's exponential rise.

Instead, Nokia became another casualty of avoidable failure. By June 2011, the company's share of the smartphone market had fallen far, and by 2012, its market value had dropped by over 75%.⁴³ The company had lost its innovative edge, its lead as a handset manufacturer, and over two billion euros. In September 2013, the company, conceding defeat, announced the sale of its Device and Services business to Microsoft.⁴⁴

Although it was not a tangled web of deceit that destroyed Nokia, as at Volkswagen and Wells Fargo, all three companies were handicapped by a culture of fear. For instance, an in-depth investigation of Nokia's rise and fall in the smartphone industry between 2005 and 2010, which included interviews with 76 managers and engineers at Nokia, concluded that the company lost the smartphone battle not as a result of poor vision or a few bad managers but at least partly due to a “fearful emotional climate” that created company-wide inertia, especially in response to threats from powerful competitors.⁴⁵ Such fear, said the study's authors, was “grounded in a culture of temperamental leaders and frightened middle managers, scared of telling the truth.”⁴⁶

The truth was that beginning in the first decades of the twenty-first century, the mobile phone industry had become increasingly competitive. Having staked its claim on the featurephone, Nokia was unwilling or unable to recognize the potential of the complex and expensive-to-develop software platform that became today's smartphone. In contrast Apple and Google, following the Canadian company RIM's introduction of the Blackberry, spent billions developing the proprietary platforms IOS and Android, both of which overshadowed Nokia's Symbian platform and effectively launched the smartphone revolution. In other words, Nokia found itself in a rapidly changing, knowledge-intensive industry, where collaboration, innovation, and communication were quickly becoming vital to future success.

Lacking a psychologically safe climate where candor was expected, Nokia's top managers and middle managers engaged in a subtle dance of mutual fear. When middle managers asked critical questions about the company's direction, they were told to “focus on implementation.”⁴⁷ People who could not comply with top managers' unreasonable requests were “labeled a loser” or “put their reputations on the line.”⁴⁸ One executive president was said to have “pounded the table so hard that pieces of fruit went flying.”⁴⁹ Olli-Pekka Kallasvuo, former chairman and CEO of Nokia, was described as “extremely temperamental.”⁵⁰ Managers reported that they regularly saw him “shouting at people at the top of his lungs” and “it was very difficult to tell him things he didn't want to hear.”⁵¹

For their part, executives, fearful of the external market threats the company was facing, particularly from software developers at Apple and Google, did not communicate the severity of those threats to middle managers. One top manager, confessing to the fear that higher ups felt and the way that influenced management practice, said, “it was clear that we feared the iPhone. So we told the middle managers that they had to deliver touch-phones quickly.”⁵² Middle managers, afraid to deliver bad news, led their superiors to develop an overly optimistic perception of Nokia's technological capabilities in featurephones and to neglect long-term investments in developing more complex innovation. As one manager put it, “In Nokia's R&D, the culture was such that they wanted to please the upper levels. They wanted to give them good news…not a reality check.”⁵³

A reality check would have required that managers (both the temperamental and the frightened) put aside their fears and speak candidly to one another. Yet such candor seemed impossible, and the window for innovation and redirection passed. In 2007, as the industry became ever more software-reliant, the Finnish telecom company sank still lower. More and more mobile phone companies turned to Google's open source Android operating system. By 2008, when Apple launched the iPhone 3G and the App Store, it was too late to catch up. Although Nokia continued to develop software and launch new products, it would underperform and undersell compared to its more agile competitors.

Clearly, it is not possible to say that psychological safety would have ensured Nokia's success in an increasingly competitive industry. Success required constant innovation, fueled by expertise, ingenuity, and teamwork. But without psychological safety, it is difficult for expertise and ingenuity to be put to good use. And with Nokia's senior executives in the dark about where the company and its technology really stood, the company simply could not learn fast enough to survive. A decade later, Nokia was able to make a comeback. As you will learn in Chapter 7, members of senior management would later realize that they had to change how they spoke and interacted to develop a better strategy.

Who Regulates the Regulators?

In the Nokia, Wells Fargo, and VW cases, we saw the pernicious effects of a culture of fear inside companies with ambitious dreams. What about when one company provides services to, or reviews the activities of, another? When relationships between companies are hampered by a culture of fear, the risks intensify, both for the organizations and for society.

Following the 2008–2009 global financial crisis, the Federal Reserve Bank of New York (FRBNY) received ample condemnation and criticism from the American public and Congress for its failure to effectively regulate the excessive financial risk-taking of several of the big US banks.⁵⁴ In response, the FRBNY commissioned a report to study itself. Bill Dudley, President of FRBNY, asked Columbia Business School Professor David Beim to investigate and assess the FRBNY's “organization and practices, with a particular focus on Bank Supervision.”⁵⁵ The intention was to reveal lessons learned that could be used to improve the Feds' ability to supervise banks and monitor systemic risk going forward.

Beim and a small team interviewed approximately two dozen people who worked at the FRBNY, mostly senior officers, about things the Fed did well and didn't do well leading up to the crisis. The result of the examination was the 2009 Report of Systemic Risk and Bank Supervision. The report allocated considerable attention to the FRBNY's culture and communication. In it, Beim described a workplace suffused with low psychological safety in which regulatory officers tasked with monitoring individual banks like Goldman Sachs felt “intimidated and passive,” and thus were not “effective in communicating with other areas, forming their own views and signaling when something important seems to be wrong.” As a result, the regulators “just followed orders.”⁵⁶

As part of their jobs, regulatory supervisors were involved in discussions about individual bank processes and policies, often focusing on specific and large-scale transactions a bank had made or was considering making. Every large bank was assigned a FRBNY regulatory team, tasked with the job of deciding whether a particular transaction was kosher. Here, Beim found that real decision-making was stymied by groupthink or “striving for consensus” – issues were discussed at length without moving to constructive action. The discussions were notably devoid of frank debate and cooperation, where people spoke up about problems and offered solutions, as warranted in any organization where highly complex processes are constantly unfolding at a furious pace. The report emphasized fear of speaking up as a frequent theme that characterized FRBNY meetings and employee experiences in all aspects of their job. It presented stark quotes from interviewees, such as “grow up in this culture and you'll find that small mistakes are not tolerated,” and “[you] don't want to be too far outside where management is thinking.”⁵⁷

The relationship between the regulators and the bank managers was singled out as especially fraught. For one, an information asymmetry existed between the two groups that put the regulators at a disadvantage. Because the regulators had to request information from the banks, the banks could act as gatekeepers, in turn making the regulators feel dependent on the bank's willingness and good grace for timely and useful information. This led, as Beim argued, regulators to adopt a nonconfrontational and often overly deferential style to smooth their attempts to obtain information.⁵⁸ Most critically, Beim reported that within three weeks of his investigation he saw signs of regulatory capture, a phenomenon that journalist Ira Glass later described as like “a watchdog who licks the face of an intruder and plays catch with the intruder instead of barking at him.”⁵⁹ The regulators were, in a sense, disabled from effectively carrying out their regulatory duties by a culture of fear and deference.

What makes this dynamic especially frustrating is that the banks were required by law to hand over whatever information the Feds asked for. Carmen Segarra, who worked as a regulator after the Beim investigation, said, “The Fed has both the power to get the information and the power to punish a bank if it chooses to withhold it.” When asked why she thought the regulators chose deference even though they possessed this power, her answer was succinct: “they are coming from a place of fear.”⁶⁰

Could the colossal collapse of a financial system the likes of which the world had not seen since the 1930s have been prevented had the banks and regulators worked in a climate of psychological safety? That may be a stretch. Lax regulations, greed, and faulty incentives were certainly important contributing factors. However, we can say that the culture of fear silenced or inhibited anyone who wanted to ask questions or criticize, thereby squandering many opportunities to catch and correct excessive risk-taking and other sources of economic failure.

Avoiding Avoidable Failure

Volkswagen, Wells Fargo, Nokia, and the New York Federal Reserve serve as vivid examples of organizations that boasted deep reservoirs of expertise, driven, intelligent leaders, and clearly articulated goals. None lacked capable employees in any of the relevant fields required for the organization to succeed in its industry. In short, they had the talent. What they lacked was the leadership needed to ensure that a climate of psychological safety permeated the workplace, allowing people to speak truth to power inside the company – and, in the case of the Fed, to their industry partners. Chapter 7 will focus on what leaders need to do to create and recover psychological safety; here, I simply note that the kinds of large-scale business failures described in this chapter are preventable.

None of these failures occurred overnight or out of the blue. Quite the opposite. The seeds of failure were taking root for months or years while senior management remained blissfully unaware. In many organizations, like those discussed in this chapter, countless small problems routinely occur, presenting early warning signs that the company's strategy may be falling short and needs to be revisited. Yet these signals are often squandered. Preventing avoidable failure thus starts with encouraging people throughout a company to push back, share data, and actively report on what is really happening in the lab or in the market so as to create a continuous loop of learning and agile execution.

Each of the stories in this chapter can be seen as a case of strategic failure. What started as small gaps in execution spiraled into dramatic, headline-making failures when new information created by actual experience – whether of engineers or salespeople – was not captured and put to good use in rethinking and redirecting company efforts.⁶¹ For instance, Wells Fargo's cross-selling strategy bumped up against customers' real spending power, planting a seed of strategic failure. But what cemented the failure was the salespeople's belief that senior managers would not tolerate underperformance. That they found it easier to fabricate false accounts than to report what they were learning in the field is as powerful a signal of low psychological safety as you can find.

In focusing our attention on psychological safety, I do not mean to dismiss the ethical dimensions of any of these cases. Wells Fargo, for instance. Yet to view the customer-accounts fraud as the result of individually-corrupt salespeople does not square with the widespread nature of the behavior in the company, which points to a system set up to fail. Set up to fail by the pernicious combination of a top-down strategy and insufficient psychological safety to encourage sharing bad news up the hierarchy. A similar point can be made about the VW and Fed cases. As argued earlier in this chapter, any explanation that looks only for a corrupt or foolish individual or individuals will be incomplete, given the complex dynamics at play. What is interesting to consider, however, is the extent to which having information about shortcomings come to light earlier rather than later can nearly always mitigate the size and impact of failures and sometimes prevent them altogether.

Adopting an Agile Approach to Strategy

Taken together, these four cases suggest the necessity of adopting alternate perspectives on strategy that are more in tune with the nature of value creation in today's VUCA world. Solvay Business School Professor Paul Verdin and I developed a perspective that frames an organization's strategy as a hypothesis rather than a plan.⁶² Like all hypotheses, it starts with situation assessment and analysis –strategy's classic tools. Also, like all hypotheses, it must be tested through action. When strategy is seen as a hypothesis to be continually tested, encounters with customers provide valuable data of ongoing interest to senior executives. Imagine if Wells Fargo had adopted an agile approach to strategy: the company's top management would then have taken repeated instances of missed targets or false accounts as useful data to help it assess the efficacy of the original cross-selling strategy. This learning would then have triggered much-needed strategic adaptation.

Of course, sometimes, poor performance is simply poor performance. People underperforming. Not trying hard enough. Sometimes, companies do in fact need to find ways to better motivate and manage employees to help them reach desired performance standards. However, in a VUCA world, this is not the only explanation for missing a desired target; it is not even the most likely explanation. Early signs of gaps between results and plans must be viewed first as data – triggering analysis – before concluding that the gaps are clear and obvious evidence of employee underperformance.

Cheating and covering up are natural by-products of a top-down culture that does not accept “no” or “it can't be done” for an answer. But combining this culture with a belief that a brilliant strategy formulated in the past will hold indefinitely into the future becomes a certain recipe for failure. At both VW and Wells Fargo, signs that corners were being cut were repeatedly ignored. Thus, the illusion that the top-down strategies were working persisted – for a while. Particularly poignant is that disconfirming data were available for a surprisingly long time, but they were not put to good use.

Success in a VUCA world requires senior executives to engage thoughtfully and frequently with company operations across all levels and departments. The people on the front line who create and deliver products and services are privy to the most important strategic data the company has available. They know what customers want, what competitors are doing, and what the latest technology allows. Organizational learning – championed by company leaders but enacted by everyone – requires actively seeking deviations that challenge the assumptions underpinning a current strategy. Then, of course, these deviations must be welcomed because of their informative value for adapting the original strategy. Ironically, pushing harder on “execution” in response to early signals of underperformance may only aggravate the problem if shortcomings reveal that prior market intelligence or assumptions about the business model were flawed.

Finally, as unfortunate as the business failures in this chapter may have been, in many ways they pale in comparison to the human costs of low psychological safety explored in Chapter 4. Here we will see the even more vital role of speaking up to avoid preventable harm.