The Best Management Advice:

“Leave Three Envelopes” is an old sales management joke I’ve heard repeated several times over the years. It was usually just water cooler discussion about expected changes around the time a company’s CEO resigned or was fired. There were lots of versions, but basically it went something like this:

The departing CEO met with his/her replacement privately just before leaving and told them there were three envelopes in the desk drawer numbered #1, #2 and #3. The instructions from the departing CEO were simple: "Open them, in numerical order, each time there’s a problem you don't think you can solve.”

Things went along smoothly for the first six months, but then sales took a downturn that the new CEO was at a loss to explain. He went to his drawer and took out the first envelope. The message had just one line, "Blame your predecessor." The new CEO drew up a press release and tactfully blamed the previous CEO. Deflecting any bad PR for the moment, sales began to pick up and the problem soon resolved itself.

Another six months went by, and the company once again experienced a dip in sales, combined this time with a serious product problem that looked like it might warrant a recall. Since it worked last time, the CEO opened the second envelope. This message said, "Announce a Reorganization." As luck would have it, the company rebounded again, although it was of course unclear that the reorganization had anything to do with the rebound.

But then, the company once again fell on difficult times. Baffled, the CEO went to his office, closed the door, and opened the last envelope. The message said, "Prepare three envelopes."

If you’re wondering what’s the point in repeating this old joke, it turns out that blaming the last boss is a real-world strategy widely used when it comes to deciding about the need for a product recall. So frequently used, in fact, that it is quantified in a study published recently in the journal Production and Operations Management. The researchers used industry data from 125 publicly traded firms that changed CEOs 307 times. The same companies had 584 voluntary recalls from 1992 to 2016. They found that the issuance of a recall is 77 percent higher early in a CEO's tenure (the first three years on the job) compared to those who have led a company longer than that.

"This phenomena is even more likely when the previous CEO left under poor circumstances, becoming more blame-able" study co-author George Ball, from the Indiana University Kelley School of Business, says in the journal article.

The study authors suggest the longer CEOs are in place, the more likely they are to take the blame for news of bad product quality. So, they choose to avoid recalls when possible. "We do not have data to demonstrate if this behavior is conscious or unconscious on the part of firms and their CEOs," says lead author Kevin Mayo, a Ph.D. candidate at the Kelley School. "It may be a behavioral bias that CEOs are not even aware of, but the effects we find are very strong. A recent example of this phenomenon is the hesitancy by Peloton to recall their hazardous treadmills. John Foley, the CEO, has been in the role quite some time and is the co-founder of Peloton. He clearly knew he would — and has — taken the blame for Peloton's treadmill recall and how it was handled."

We’ve talked several times about the nature of the regulations from the Consumer Product Safety Commission, arguably less stringent than other recall-intensive industries like automobile manufacturing or pharmaceuticals. “It creates an environment in which recall timing can be gamed by firms and their CEOs to try to avoid the blame for problems," Ball says in the journal article.

The study is the first to measure the relationship between CEO employment length and their recall decisions. The authors suggest several public policy recommendations, including suggesting the Consumer Product Safety Commission take cues from how the FDA manages drug and device recalls. They point to the fact that the FDA requires firms to report a "Defect Awareness Date" when they announce a recall. This allows the FDA to examine how long the problem was known inside the company before it was actually reported externally. "The average time between defect awareness and recall initiation in FDA-regulated medical product firms is about 90 days," Mayo says. "If the CPSC collected such data (for consumer products), it would become more difficult to delay a needed recall. It's surely more than 90 days right now, for certain firms and certain CEOs." Perhaps they’re just avoiding being “blame-able,” but wouldn’t you like to know?