Skip to main content
risk management

If you're still wondering what inflated the dot-com bubble, inflamed the financial crisis and ignited a series of recent corporate disasters, the answer is staring you in the face: It's the stupidity, stupid.

Failure to step back and question flawed assumptions and established working practices condemned Internet startups, international banks and parts of the world economy to oblivion at worst, or at best, years of painful rehabilitation.

"Functional stupidity" is the latest theory, conceived by Mats Alvesson and André Spicer, to describe the perilously bovine state into which many large organizations can easily sink. It is not the first contradiction in terms applied to such problems.

During the Cold War, Western apologists for the Soviet Union, unknowingly doing the bidding of their cynical Moscow masters, were described as "useful idiots." In 1986, Chris Argyris wrote how otherwise proficient managers could unintentionally contribute to a regime of "skilled incompetence" by adeptly avoiding pressing questions. More recently, Margaret Heffernan has blamed "willful blindness" for the catastrophes that befell investment bank Lehman Brothers, Bernard Madoff's investors and Rupert Murdoch's British newspapers.

In a similar vein, Marcel Rohner, the former chief executive officer of UBS, said last week he didn't know about manipulation of Libor interest rate-setting during his tenure at the Swiss bank. He had never looked into the issue.

The Alvesson-Spicer paper for the Journal of Management Studies suggests that organizations that make a virtue out of the cleverness of their staff and sell intangible services – accountancy firms, consultancies, banks – are particularly prone to stupidity. They're certainly guilty of the kind of mushy mission statements and ill-defined strategic visions identified as the tools of "stupidity management."

When Mr. Rohner admitted that UBS had "a mechanistic reliance on risk processes which led to an abdication of responsibility by other people," he could have been offering future researchers a case study in functional stupidity.

But what intrigues me about the theory is the insight that stupidity is essential. Managers need to instill a little stupor into their staff (and imbibe some themselves) for big companies to operate at all. The "functional" part of stupidity lubricates the work process and fosters greater certainty and a happier atmosphere.

If you don't believe there's a place for stupidity, picture the opposite – an atmosphere of "dysfunctional smartness," in which bright professionals run amok, questioning everything. Would the gains in terms of corporate self-awareness really be worth the total sacrifice of cohesion and efficiency?

The central challenge for managers is to know where – and how – to draw the line. In Clever, their 2009 hymn of praise to smart people and organizations, authors Rob Goffee and Gareth Jones warn that even the successful philosophy of Google and other "clever collectives" could "become a rigid doctrine or ideology that is resistant to new ideas and ways of looking at the world." This is the dark side of a strong culture, where companies such as UBS, Barclays of Britain and Olympus of Japan have recently found themselves.

It is obviously possible to get clever people to use their skills and knowledge to identify risks in established business practices; getting them to correct poor processes before a crisis hits is harder.

Manufacturers tend to be less stupid than service companies, because the consequences of an unquestioning attitude are detected when products fail. Clients can provide a check on flawed process at, say, banks – but if poor practice suits their short-term interests, they have little reason to complain. One option would be to test service companies' "products" by replicating the direct feedback engineers receive about flawed devices. Another is to subject processes to stringent and regular peer review, inviting criticism from insiders and outsiders to offset the danger of skilled incompetence nullifying the benefits.

I frankly doubt, though, whether such methods would have alerted the world to grandiose consensus errors such as the one that laid developed economies low. Human nature still tends to censor dissent better than any direct order, from corporate boardrooms downward. But it is surely worth experimenting with more mechanisms to prompt critical reflection. You'd be stupid not to.