Issue Date: June 2007, Posted On: 6/4/2007

From Halo to Hell

Phil Rosenzweig

With the price of oil reaching $78 a barrel, ExxonMobil’s revenues in 2006 surged to $339 billion, making it larger than General Electric and Citibank combined. Its share price of $80 was double the level of 2004. Not coincidentally, in 2006 ExxonMobil was named by Fortune magazine as the world’s “Most Admired Company.” According to Fortune, it was also No. 1 among petroleum companies for quality of products and services and in quality of management, ahead of rivals Chevron, Conoco, BP and Shell.

Is ExxonMobil really outstanding in each and every one of these categories? Perhaps, but a more likely explanation is the Halo Effect. First identified by U.S. psychologist Edward Thorndike in 1920, the Halo Effect describes how an overall impression shapes specific judgments. In business, a company’s overall performance—usually defined by tangible financial results—shapes our evaluation of other things that are less tangible. For example, when times were good, Cisco Systems and ABB were both admired for their customer focus, efficient organizations and charismatic CEOs; but when performance slipped, they were criticized for the exact same things.

A look around the business world suggests other companies where excellent financial performance casts a golden glow and shapes our perceptions. In 2006, Fortune rated Starbucks as the fifth most admired company in the world. It was ranked first in its industry in all eight categories—not only the three financial categories, but innovation, social responsibility, quality of products and services, ability to manage talent and quality of management. But does Starbucks deserve all those firsts? A more likely explanation is that Starbucks’ excellent financial record has conferred upon it an aura of greatness that exaggerates our perceptions.

Google: Burning Bright

Nowhere does a halo currently shine as brightly as upon Google. Reporters marvel at Google’s wonderful “anything-goes spirit” where the absence of supervision is said to stimulate creativity and where no one needs to worry about whether projects will be profitable. Co-founder Larry Page is said to praise managers who made million-dollar errors, thanking them for their willingness to take risks. In fact, what’s said about Google is eerily similar to what was said about another New Economy wonder, Cisco Systems, a decade ago. That company, too, was admired for its wild ways—until a sharp downturn led critics to castigate it for those same qualities.
Halos on the CEOs

Perhaps the strongest attributions are made about the chief executive. It’s irresistible to infer that a highly profitable company must have a brilliant person in charge. General Electric’s strong record during the 1990s created an aura around Jack Welch and senior executives, including Bob Nardelli. But as we’ve recently seen, once he was out from under the magical halo of GE, Nardelli was rapidly revealed to be something less than a shining knight. Of course, such attributions also work in the opposite direction. CEOs receive exaggerated criticism when performance falters.
Some Lessons

Wise CEOs are aware of the Halo Effect and know not to be dazzled by its glow. They continually seek to raise performance, never allowing themselves to be lulled by favorable judgments or popular praise. By the same token, when financial performance slips, they know better than to make sweeping criticisms or to dismantle what may, in fact, be a company’s strong points.

Phil Rosenzweig is professor of strategy and international management at IMD in Lausanne, Switzerland, and author of The Halo Effect.

http://www.the-halo-effect.com/articles/index.html