The chicken or the egg argument

Does success breed engaged employees or do engaged staff lead to success?

The 'halo' effect: In October, the Strategic Capability Network (SCNetwork) hosted Phil Rosenzweig at its monthly breakfast event. Rosenzweig, author of The Halo Effect…and the Eight Other Business Delusions that Deceive Managers and a professor at the International Institute for Management Development in Switzerland, talked about a number of critical issues, including whether engagement drives performance or performance drives engagement and how best to learn from the success of other companies. SCNetwork provides a forum for business leaders to discuss leading-edge issues in HR management (

The chicken or the egg argument

Silver bullets only worked for the Lone Ranger
Thought leaders discuss the 'halo' effect

SCN Network's panel of thought leaders brings decades of experience from the senior ranks of Canada's business community. Their commentary puts HR management issues into context and looks at the practical implications of proposals and policies.

The chicken or the egg argument

Employee engagement is as likely to be a product of corporate success as a driver of it, according to author Phil Rosenzweig.

“Engagement is a component of performance, but I also think performance helps drive engagement,” he said.

When talking to a group of senior HR leaders at a Strategic Capability Network event in Toronto in the fall, Rosenzweig cited a 2003 study by researchers at the University of Maryland, Which Comes First: Employee Attitudes of Organizational, Financial and Market Performance, that examined 35 companies over eight years and found high business performance leads to high employee satisfaction more often than the reverse.

“This has very important policy implications,” he said.

A company might be able to sacrifice short-term employee satisfaction initiatives in favour of business initiatives that will drive performance because the research shows a high-performing company will lead to satisfied employees, said Rosenzweig, who wrote the book The Halo Effect… and the Eight Other Business Delusions that Deceive Managers.

“Make choices that drive success and high employee satisfaction tends to follow,” he said.

This kind of thinking goes contrary to what some engagement studies have suggested and what HR professionals have been doing — trying to convince senior executives to invest more in employee-centric initiatives as a means to drive performance.

However, engagement can still play a key role in business performance, said Rosenzweig. In order to succeed, a company needs to develop a business strategy and execute that strategy, he said.

“Employee engagement is an important component of execution,” he said. But if the strategy is inadequate, performance will suffer, no matter how engaged employees are.

In his job as a professor at the International Institute for Management Development (IMD) in Lausanne, Switzerland, Rosenzweig has seen too many managers who are willing to believe everything they read or hear about how to make a business successful.

“The overwhelming majority of managers who come through IMD are smart, they’re hardworking, they’re honest and they want to do the right thing. I’ve also observed that most of them are lacking in critical thinking, weak when it comes to analytical rigour and rather gullible when it comes to believing the pronouncements of gurus and professors,” he said.

Authors and researchers who try to uncover the secret to an organization’s success too often fall into the trap of success making everything look better. When a company is doing well, people tend to make positive attributions about all aspects of the company, said Rosenzweig.

People assume the company must have great strategy and a great chief executive officer even though the quality of these components isn’t measured independently of the company’s success.

“Independence is lost because that measure is shaped by performance instead of shaping it,” he said.

This is called the “halo effect,” where a general impression leads to specific judgments.

Cisco Systems is one example of this. It experienced a meteoric rise from 1996 to 2000. A Fortune article cited the company’s brilliant strategy, outstanding management of acquisitions, superb customer focus and status as a visionary leader as reasons for the company’s success.

Then the dot-com bust happened and share prices plummeted. The company began to rebuild but, in 2003, Cisco’s comeback article in BusinessWeek stated the company’s strategy before the bust was wrong, it mismanaged acquisitions, forgot about customers and its leadership was arrogant.

“What’s interesting in the story is not what it said about the company in the (comeback) years, but that it actually reinvented how the company was in the (boom) years,” said Rosenzweig.

The business success, or failure, coloured how all these other supposed drivers of success were viewed, proving they were in fact reflections of performance.

Rosenzweig also takes issue with books that promise business success. No matter what tips or tricks a book offers, it can’t guarantee success because one company’s success in the market depends on the success, or failure, of all other companies in the market, he said.

“In a competitive market setting, I think business performance is more relative than absolute,” said Rosenzweig.

Books that espouse anything different are perpetuating what Rosenzweig calls the “delusion of absolute performance.”

Throughout the 1990s, Kmart’s market share tumbled. It was widely criticized for having bad strategy, execution and leadership, said Rosenzweig. But in fact, the retailer improved on many independent measures during that time, including faster inventory turnover, lower administrative costs and improved central purchasing. But no matter how much it improved its own practices, the biggest competitor, Wal-Mart, was already doing it better.

“(Kmart) got better in an absolute sense and worse in a relative sense,” said Rosenzweig. “Where it got to in 2002 was not even where Wal-Mart was in 1994.”

That’s not to say there aren’t good books or studies out there that can help managers develop a winning business strategy, but Rosenzweig cautions managers to approach all books, articles, case studies and advice from consultants with a critical eye to ensure they’re not perpetuating any myths of business success.

Return to the top of the page

Silver bullets only worked for Lone Ranger
Thought leaders discuss the 'halo' effect

SCN Network's panel of thought leaders brings decades of experience from the senior ranks of Canada's business community. Their commentary puts HR management issues into context and looks at the practical implications of proposals and policies.

No panacea to turn ailing companies into top shops

By Matt Hemmingsen

Unlike other writings from academia or business consultants professing to have the panacea to remedy ailing corporations or turn them into high-performing entities, Phil Rosenzweig’s premise in The Halo Effect (see link below) is that organizations cannot succeed “simply by following a specific set of steps.” Rather, it is incumbent upon them to develop their managers’ capacity for rigorous thinking.

Rosenzweig argues that executives rely far too heavily on topical themes that are promoted based on perceived comprehensive studies and analysis. Highlighting several examples, Rosenzweig calls into question their validity and the data upon which their conclusions have been made. Referencing the work of American Psychologist Edward Thorndike, Rosenzweig focuses on the “halo effect” — the tendency to make specific inferences based on a general impression.

Companies must address a number of multifaceted and complex issues in order to remain competitive and successful. Key business decisions are made based on internal (within one’s control) and external factors (beyond one’s control). Information for each, as Rosenzweig showed, can be ambiguous, leading to wrong assumptions being used in the formulation of strategies. Citing technology companies Cisco Systems and ABB, he said their performance created an “impression” or “halo” that shaped perceptions of business strategy.

The need for “independent evidence” is emphasized in the development of sound business plans, coupled with the requirement to truly understand the real drivers of business performance. Given that most strategies are built on assumptions or beliefs of the future, it is imperative the thought process behind their construct be rigorous. To move forward successfully, companies have to do things differently from the competition. This involves making tough decisions during times of ambiguity and taking informed risks to achieve continued sustainable performance.

Rosenzweig speaks to a company’s need for critical thinking — the ability for objective assessment and a realistic understanding of business success and failure. He deems this a critical asset of any organization. From my experience, it’s that rare organization that creates the forum and sets aside the time within which open, honest dialogues are encouraged and the challenging of issues is promoted.

It’s disheartening, after all these years, that observers and commentators of business performance fail to recognize the equal importance and value of the human element. Rosenzweig focuses more on the process of research and the requirement for critical thinking rather than linking the two — people and process — to leverage business performance.

Matt Hemmingsen is SCNetwork's lead commentator on strategic capability. He has held senior HR leadership roles in global corporations. He is a managing partner with Personal Strengths Canada, a member of an international company focused on improving business performance through relationship awareness. For more information, visit or e-mail [email protected].

Return to the top of the page

Tarnished halos... or easily misunderstood

By Dave Crisp

At the end of Rosenzweig’s presentation, I asked what studies or books he’s found that are based on solid research. He named a few authors, writing mostly in business strategy: Michael Porter, Michael Raynor and one or two others. He hasn’t seen many in HR, he said. In fact, his prime example of error is the University of Maryland study showing great results precede high engagement more often than the reverse. In HR, we’re so used to negative assessments we might almost overlook this, but it’s key to understanding what Rosenzweig is saying.

Actually, the engagement study doesn’t surprise me at all. I’d be unhappy if it found otherwise. Why? Because engagement is only one component of effective HR. It’s essential to recognize many highly valid studies (clearly this isn’t Rosenzweig’s main area of interest or he might have stumbled on the 60 reviewed by Stanford University’s Jeffrey Pfeffer in a single article) that show you can’t succeed with piecemeal HR programs. Looking at a single factor should always show this. Interestingly the study didn’t show engagement had no effect because in many situations this did precede results — just not in the majority of cases because it isn’t the only factor.

A series of far more important, solidly based studies, also a couple of years old, came from Watson Wyatt, repeated around the world for its Human Capital Index (HCI). Of 49 HR components, 43 add measurable value to results while six detract. Most importantly, the studies showed effective HR programs preceded results far more often than the reverse. It’s true results help HR measures, just not as much as HR helps results.

Scientists always argue about the validity of research (just check any article about vitamins in the news and, a week later, look for the debunkers). Rosenzweig’s points are solid. Anyone who’s worked with research will be aware they aren’t entirely new, but he’s applied them to today’s popular business works. Fair enough, and useful, as long as we don’t over-interpret. We need to be cautious, but also dig for real value. His own use of the engagement example itself can be misleading if we don’t dig for understanding.

The message I took away? HR practitioners need to be well-informed, vigilant and clear about how HR works. We never know enough, especially since we work in the most complex and highest impact area of business. It’s only in the last 20 years we’ve started to see increasing amounts of valid, useful research demonstrating the power of HR and taking the mystery out of what works in HR. Let’s not be shaken off the facts by over-caution, but make it clear to line managers what really does or doesn’t work and how.

Dave Crisp is SCNetwork's lead commentator on leadership in action. He shows clients how to improve results with better HR management and leadership. He has a wealth of experience, including 14 years leading HR and Hudson’s Bay Co.’s 70,000 employees to “best company to work for” status. For more information, visit

Return to the top of the page

What is successful today might be a disaster tomorrow

By Barry Barnes

Day after day in newspapers, magazines and books, we read that “A” results in “B.” One of the apparent flaws of the education system, from high school to university, is the lack of training in logic, critical thinking and statistics. The result is that society is often unable to distinguish between correlation and causality.

This is further exacerbated by the inability to understand the direction of the correlation, presuming there is a causality (companies with happier employees are more profitable, leading to a “which came first — the chicken or the egg” paradox). Add to this the Western desire for a simple solution and we fall deep into what Rosenzweig has written about in The Halo Effect.

Organizational research is full of studies and reports that highlight how success was achieved through the application of a certain structure, process or leadership style. The message is that adopting such structure, process or leadership style will lead to success. The problem is that success is not always that easy to define. What is successful today may be a sure-fire formula for failure tomorrow. Organizational structures and forms are most frequently built to standardize processes. However, despite intentions to the contrary, these structures often stifle the flexibility and ingenuity that enable innovation.

Success in the business world is measured in relative terms, not in absolute terms, and this may be misleading. As Rosenzweig pointed out, Kmart had an improvement in inventory turns between 1994 and 2002 of 3.45 to 4.56. In absolute terms, this is a great improvement. However, in the same period Wal-Mart went from 5.14 to 8.08 turns. Wal-Mart started ahead of Kmart and ended ahead as well. So in relative terms, Kmart’s absolute success was a failure. Even though it had a great improvement, relative to Wal-Mart it was not a success.

Reward systems and bonuses, while rooted in “real” numbers, also need to be measured against relative performance. Few companies stay on top for long periods of time. Some companies are able to weather the ups and downs of particular business cycles and survive in the longer term. The characteristics that enable these companies to maintain continuity are what other organizations should be identifying and building towards.

But the halo effect, the bias of success, skews understanding of what is occurring and leads to false assumptions about causality. Statistics teach us to watch out for data interdependence in our variables. The complexities of modern business organizations, combined with the variability of human behaviour, lead to the risk of data interdependence occurring and failing to be recognized.

A particular behaviour, when repeated under different conditions, can produce different results. This illustrates the challenge of trying to find an effective and simplistic causal relationship. The halo effect is an outstanding example of why, when we look at behaviours or structures and try to design them for specific results, we are confronted with the statement “it depends.”

Currently one area of research under scrutiny is the relationship between employee engagement and organizational productivity. A number of studies are reporting that high employee engagement is a leading indicator of higher productivity. Similarly, it’s reported that higher productivity results in higher profitability. Numerous studies show higher profitability and higher engagement are related. What is unclear is which came first. Are employees more highly engaged because the company is more profitable? Or is the company more profitable because employees are more engaged?

The answer is often not clear and the direction of the causality is a reflection of the lens, or point of view, the researcher uses. Yet this is often ignored when looking at the results and conclusions. People are more skeptical of results when they see medical research supporting a drug paid for by a pharmaceutical company, or research on tobacco use sponsored by a cigarette manufacturer. This same healthy skepticism and questioning needs to be applied to research and books on business, leadership and organizational design.

Experience is a great teacher. Yet when it comes to identifying possible factors that will improve organizations, many studies fall into Rosenzweig’s fourth delusion — connecting the winning dots. These studies look at successful organizations but rarely examine similar companies that were not successful. Without comparative studies between successful and unsuccessful companies, it’s tough to identify the factors that make companies succeed. We can only show the differences between successful companies, and these are often ignored in terms of trying to identify a single solution or silver bullet. That is Rosenzweig’s third delusion — single explanations.

The Halo Effect challenges us to apply a healthy dose of skepticism and lots of critical thinking to proposed solutions. Rosenzweig pulls no punches when commenting on faulty research design in other studies and books. He posits that we need a more rigorous approach to research design before we make broad-based statements. This is not to say there are not some great principles and wonderfully inspiring stories that can be gained from this body of work. But we need to be sure that business research and the conclusions we draw have been subject to critical thinking. Otherwise we keep the myths alive, and our results will always be below expectations.

Barry Barnes is SCNetwork's lead commentator on organizational effectiveness. He is executive vice-president of ESOP Builders, a firm that develops employee-share ownership plans for private Canadian enterprises. He is also president of The Crystalpines Group. He can be reached at [email protected] or [email protected].

Latest stories