This Book Changes Everything

by Krishna on September 8, 2007

Last week, I finished reading “The Halo Effect” by Phil Rosenzweig. In this book, the author explains how the “halo effect” or the tendency of people to attribute specific qualities based on a general impression can lead to false conclusions about what actually contributes to success in a business environment.

For example, if a company is doing well financially, people (both outsiders and employees) tend to provide high ratings for various attributes like great leadership, working environment, effective management and right strategy. On the other hand, if the company has a bad financial performance, all its critics jump on it and “find” that everything is wrong with the company.

This behavior is not restricted to companies. You can see it all the time in sports, entertainment and other fields. When a player or actor is successful, all the reporters and journalists rush to hype their every aspect. And the reverse is true when he or she has a failure.

We all exhibit the same behavior towards other people. When we like a person, we tend to glorify them in every respect. And when we are on bad terms with somebody, we believe the worst of them. This happens with people in our family, neighborhood, community and workplace. And no one is the exception to this.

The primary ramification of the Halo Effect is that it raises the possibility that we may be treating the effects of a business success or failure as causes for the business success or failure. For example, if people tend to think a successful company has good leadership, then good leadership is not the cause of the company’s success. But rather, a successful company will be perceived to have good leadership — nothing more, nothing less.

The book also raises serious questions about the following 3 best-selling management books, each of which provides answers to what makes a company successful and great:

  1. In Search of Excellence, by Tom Peters & Robert Waterman
  2. Built to Last, by Jim Collins & Jerry Porras
  3. Good to Great, by Jim Collins

Rosenzweig suggests that although each book (especially the last two) had considerable research (thousands of man hours of effort) behind them, they suffered from the Halo effect. The research was done after the fact, meaning after the successful companies had, in fact, succeeded. Hence, the successful companies would have good ratings for many aspects of their business. At the same time, comparison companies (who were not so successful) would be remembered in a less flattering light.

The various guidelines explained in these books are worthy of praise, as they do give managers an incentive and specific steps to improve their organizational culture. However, as Rozenzweig explains, none of the principles may have anything to do with contributing to the company’s success. It could very well be that people’s perceptions of the company improved as the company became more successful.

I can think of many reasons why this would be true. When a company is successful, it has greater stability and greater potential benefits in the future. Existing employees can see their prospects improving by continuing on with the company: greater financial benefits, challenging opportunities, career growth, better social status, etc. So do potential employees applying for a position at the company.

Employees are also more secure in their jobs thus avoiding financial worries. They can plan their lives better. Managers are under less pressure and stress and hence less liable to deal badly with employees. A successful company has more money to spend on things and activities that can keep employees happy, such as better infrastructure and tools, social functions, training, etc. A successful company can invest in more benefits for its employees. An unsuccessful company cannot do many of these things.

So, that is the key lesson from this book: Make your company successful and you will see improvements in various company performance factors. Trying to improve company perceptions without addressing financial success is a losing game.

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