Unwise Decisions and Unanticipated Consequences

How could a team of decent, hardworking, normally law-abiding managers find themselves facing fines, jail time, the loss of their jobs, and ultimately the loss of the company they managed? In making executive decisions, these managers were not deliberately trying to evade the intent of the law, defraud anyone, harm the environment, or act in an antisocial manner. Indeed, in the situations that led to the most serious legal problems, they didn’t really do much of anything. Therein lies the tale.

The top managers of a company that we will call the California Ordnance and Technology Corporation (COTC)1 found themselves at the center of a costly regulatory and legal storm because of decisions that were not that different from many of those made in executive offices every day. In some cases, these were not decisions to act, so much as decisions to postpone action due to undesirable alternatives. The consequences, however, were disastrous for the firm and for several of the people involved.

As Messick and Bazerman stated, “Executives today work in a moral minefield. At any moment, a seemingly innocuous decision can explode and harm not only the decision maker but also everyone in the neighborhood.”2 In noting the challenges facing executives, they review psychological research about how people make decisions and process information. Their research findings provide insight into what happened to the executives at COTC — and what could easily happen to many executives today.

Observing that “psychologists have discovered systematic weaknesses in how people make decisions and process information,”3 Messick and Bazerman examine how these weaknesses can lead to unethical decision making. In addition, they point out that the same weaknesses underlie poor decision making generally, whether unethical or not. In considering the case of COTC, we focus on unwise business decisions rather than on ethics per se; at the same time, those unwise decisions resulted in a situation in which the only apparent alternative was a violation of the law.

The story of COTC illustrates how the principles of Messick and Bazerman apply to business decisions. We hope the case will alert business leaders to comparable situations that may need attention in their own organizations. We begin by relating the events that took place at COTC, based on information obtained from key participants and from newspaper accounts. Next we briefly review the principles of decision making laid out by Messick and Bazerman. We then examine a series of decisions made at COTC in light of these principles. We conclude with guidelines to help managers avoid the weaknesses in thinking and practice that lead to poor decision making.

COTC’s Story

COTC was a highly profitable division of a publicly held midsize conglomerate. The division had annual revenues of $25 million in the early 1980s. Located in the northern part of Los Angeles County, its major business was the design, development, and production of specialty ordnance products for the aerospace industry and the Department of Defense. For years, it had routinely transported toxic and hazardous waste materials, byproducts of the manufacturing process, to a nearby military installation, Ft. Irwin, where they were disposed of by detonation.

Community Relations

COTC’s two manufacturing facilities were located in an area of rolling hills and farmland. At the time COTC began operations in the early sixties, the surroundings were sparsely populated. Like many other aerospace or defense firms, the company had chosen the location to avoid the problems associated with operating in urban communities. In the 1960s and 1970s, however, Los Angeles grew dramatically, and the area around COTC changed. Developers began building subdivisions of new homes for middle-class commuters next to the small farms with rusty camper shells in front. There were even some million-dollar homes built nearby.

Property taxes went to the county, not the local community. Thus the major benefit to the immediate community from COTC’s presence came in the form of approximately 400 entry-level manufacturing jobs, many of which were filled by local residents. While the company did promote from within to the level of foreman or first-line supervisor, it did not provide organized management training. Middle-management positions were normally filled from outside. High employee turnover in the entry-level positions suggests that many of the workers did not identify strongly with the firm.

Other than providing these jobs, COTC had little involvement with the local community, deliberately choosing to remain as inconspicuous as possible. The firm had several reasons, some arguably valid, for avoiding community involvement. First, it was not safe for people to be wandering around a site where explosives were manufactured. Second, management believed that widespread knowledge about the company’s materials and products might encourage vandalism or theft. Finally, because COTC’s government contracts required security clearance for many areas, the premises were fenced off and guarded.

Management seemed to regard the local residents as a nuisance to be tolerated when necessary and otherwise ignored, rather than as “neighbors” with any rights or value. The company, after all, had been there first. It viewed dealing with local residents as a cost, not as an investment in a potential asset. Managers routinely referred requests for support for local charities or activities to the corporate headquarters miles away, where they were just as routinely turned down.

Compared with the early residents, the new homeowners were better educated, more politically astute, and more concerned about property values and middle-class lifestyle issues. They began to complain about problems to COTC and, occasionally, to government agencies. One concern was air quality. The manufacturing process created strong odors, which the neighbors did not appreciate. Another issue was noise. The occasional detonation of some ordnance could be unnerving. COTC had three full-time shifts, and in the quiet of the night, noise that might go unnoticed during the day — the sound of trucks, a dropped pallet, a loud radio or voice — would echo through the canyons and become a major annoyance to the sleeping neighbors.

Neither government authorities nor COTC’s management responded at first in any systematic or positive way to the community’s concerns. The regulatory agencies had more pressing problems, and some of the complaints were about activities that were “unneighborly” rather than illegal. Managers at COTC were more concerned about business operations and profit margins. No one questioned the policy of ignoring the community, which eventually proved to be very costly.

Hazardous Waste Storage

By the early 1970s, the environmental movement was becoming a significant political force, and it soon became evident that one of the most serious polluters was the military. As one response to the problem, the Department of Defense began restricting access to military bases for the disposal of waste materials by outside contractors. In fact, an accident at Ft. Irwin in 1977 involving waste materials from one ordnance contractor resulted in a suspension of any access there for most ordnance manufacturers. In 1979, COTC initiated a request to DOD for assistance in disposing of its accumulating waste materials, but it took six months and some negotiation before it was given a one-time permit to use Ft. Irwin.

Sometime during the 1970s, companies were also required by the Environmental Protection Agency (EPA) to declare whether they generated hazardous materials and, if they did, to specify what these were. COTC complied. In 1980, there was an opportunity for some firms, including COTC, to apply to be “grandfathered in” as treatment, storage, or disposal facilities for hazardous materials. The safety officer who had been dealing with the Defense Department urged that COTC file for the license because it was his understanding that the DOD would no longer give them assistance with disposal by DOD. The company did apply for a license, but the application was lost. The regional EPA office informed COTC that it would have to resubmit its application. After several weeks of indecision and a formal staff discussion about the topic, the manager decided not to go through the application process again. He still believed that COTC would be able to negotiate with DOD to take its waste material to Ft. Irwin.

Other than a possible loss of access to Ft. Irwin, there was little that made obtaining a permit attractive. Becoming licensed would have required additional investment in facilities, more paperwork, more regulatory inspections, and more personnel. At the time of the decision, cost was not the major issue. COTC’s military contracts were “cost-plus” contracts; any extra expense could have been added to the contract price. Senior managers made the choice on the basis of convenience. They just didn’t believe that the closing of Ft. Irwin would affect them.

Shortly after the deadline for refiling the EPA application had passed, the Department of Defense closed all military facilities for disposal purposes by any outside contractor. Other local defense contractors joined with COTC to lobby to keep Ft. Irwin open, but to no avail.

COTC’s manufacturing generated both toxic and PEP wastes. The toxic waste could be legally hauled away and disposed of elsewhere, but the PEP wastes were another matter. Their rate of accumulation was accelerated by the practice of indiscriminately placing other industrial waste (e.g., plastic containers and pipes, used gloves, wood, paper, etc.) in the barrels along with the hazardous materials. When the Department of Defense announced its final decision, an extensive search by COTC turned up no available licensed facility that would accept these rapidly accumulating barrels of hazardous (and nonhazardous) materials. Without an alternative disposal site, the number of barrels quickly grew. By 1984, more than 1,000 barrels of PEP wastes were being stored at COTC.

California law at the time prohibited the storage of hazardous or toxic waste for a period of longer than ninety days unless the facility was a licensed hazardous-waste storage facility. Therefore, within a short time, COTC was in violation of state law. Stopping production would have stopped the accumulation of more waste, but the company did not consider that because it would have been a breach of contract with the Department of Defense and would have effectively put the company out of business. Furthermore, stopping production would not have solved the problem of the existing barrels. While COTC managers hoped that its government contract might afford the company protection from other laws, they had no guarantees. In fact, no relief was legally available under that claim since the contracts required compliance with local statutes.

Faced with an impossible situation, management made the decision to be sure that the barrels of waste materials were stored reasonably and to accept the fact that the company was in violation of the law. If the federal government wanted COTC’s products, managers convinced themselves, it surely would not allow EPA or other government agencies to impose serious sanctions or shut down the company. For more than a year, in fact, no one came to shut down operations. The barrels were placed on pallets, covered with lids, and tended on a daily basis. No one with authority at the company, however, reviewed the pattern of indiscriminately placing all types of waste in the same barrels. Had the hazardous and nonhazardous materials been separated, the rate of accumulation of the illegal barrels could at least have been slowed considerably.

Because it dealt with hazardous materials, COTC was subject to regular inspections from various government authorities. During a routine inspection by the County Department of Health Services in the fall of 1983, an inspector determined that COTC was in violation of some codes in the hazardous-waste storage area. These involved storm-water run-off protection and the requirement that the barrels be stored on a concrete pad rather than on pallets. COTC’s general manager received a formal notice of violation a few weeks later that specified actions required and the dates by which the Department of Health Services had to be notified of compliance.

The Sprinkler System

Static electricity can be dangerous when people are working with explosive materials. On many days, the humidity in Los Angeles, a semi-arid region, is low enough to make static electricity a problem. Consequently, COTC had developed and installed portable sprinklers to increase humidity when needed. These were long pipes with several sprayer heads each. The system was hooked up to the potable water supply, but at an early stage, the company chemist decided to use one head in each of the sprinklers to recycle industrial waste water. At the time of that decision, the waste water was more than 99 percent water with a trace of acetone. The latter evaporated in the spraying process and posed no threat to health or the environment.

No process, however, was created to regularly evaluate the water content. Over time, the manufacturing process was changed, and the concentration of chemicals in the waste-water stream increased. By 1984, when it was finally checked, the ratio had changed from more than 99 percent water with a trace of acetone to approximately 97 percent water and 3 percent chemicals. At times, the ratio was even higher. Since the waste water was only being sprayed from one head per sprinkler, the overall concentration of chemicals in the air was still very low, but it was high enough to create an irritating odor when the sprinklers were used. Some employees who worked in the areas directly affected expressed concerns about the health effects as well as the odors.

Employee Relations

When employees complained to their supervisors about the odor, they were told to either stop complaining or quit. Given the pay scale, supervisors assumed there were plenty of other people who would take the job. Management did not view complaints as an acceptable form of communication, and the company had no formal grievance procedure in place. The first-line supervisors did not have the kind of training that would have helped them handle complaints. They were neither systematically instructed in environmental regulations nor given any indication that the company viewed these regulations as important. Because there was no formal grievance procedure for employees, there was no formal complaint to which the senior management had to respond. Nothing was done.

The Complaint

Nothing was done, that is, until two disgruntled employees (one of whom hoped to get a reward from the state for exposing a violation of state environmental laws) called the Department of Health Services to complain about the spray in late fall 1983. This was close to the time that the department had sent the notice of violation concerning the hazardous-waste storage area. The employees further alleged that illegal transportation and dumping of toxic waste were taking place and that an underground storage tank allowed toxic wastes to leach into the soil.

Managers at COTC did not immediately learn of the complaint about the spraying system and the underground tank, but they did have the notice of violation, which could not have come at a worse time for the general manager. He was being pressured by corporate headquarters almost daily to bring his division in under budget for the fiscal year that would end in March. Two other divisions of the corporation were not going to meet their financial goals for the year, and COTC was targeted to help make up the difference in order to keep the shareholders happy. All capital expenditures, including maintenance, were deferred. Even barrels of toxic waste that could have been disposed of were left to accumulate beyond the legal time limit to save the $600 or so cost per barrel for disposal.

The estimate for complying with the notice of violation was approximately $50,000. Spending the money before the end of the fiscal year would mean that COTC would not meet its financial goals for the year. If it did not meet its goals, individual managers would not receive their year-end bonuses, a significant part of their remuneration. Under that kind of pressure, the general manager added the notice of violation to the stack of deferred maintenance items on his desk. He did not request a hearing or variance, nor did he ask corporate counsel to try to obtain additional time, time that probably would have been granted.

COTC’s failure to correct the deficiencies cited in the notice of violation was illegal. In retrospect, it was also unwise. In March 1984, the Department of Health Services decided to act. The notice of violation had been ignored, and the department had received the employee complaints. It appeared that COTC was hiding problems. The department brought its concerns to the district attorney’s office.

Prior to this time, companies found in violation of environmental laws in Los Angeles County were fined, but usually nothing else happened. Many companies simply viewed the fines as a cost of doing business — a trade-off against the cost of actually cleaning up their processes. However, the local district attorney anticipated a challenge by a candidate who, based on his reputation, was likely to make environmental laws a major campaign issue. Showing concern for the environment would thus be important to the district attorney’s reelection. In addition, many within the district attorney’s office believed that these laws would not be taken seriously unless individuals, not just corporations, were at risk. It was in this context that COTC’s case was brought to the district attorney’s attention.

A search warrant was obtained and executed by the Los Angeles County Sheriff’s Department in conjunction with an interagency task force composed of eighty-seven people. Several news reporters who had monitored the police radio transmissions also showed up. The parameters of the warrant were broad enough to let the authorities search extensively throughout the company’s facilities. COTC’s managers had no idea that a warrant was going to be served on them and were totally unprepared. Even the task-force members had questions about how to enforce a search warrant on a defense contractor operating under security restrictions. COTC’s management decided to cooperate, both to minimize interference with business activities and to ensure the safety of those present.

The Investigation and Its Aftermath

In an effort to contain the damage being caused by the investigation’s disruption of business and by the negative publicity, COTC took several actions. Some were successful. Most were not. The company hired outside consultants, some to check for contamination in the soil and water and others to help with public-relations problems.

COTC’s Actions.

COTC formed an internal committee to investigate violations, but there was little to investigate. Committee members knew that the storage of PEP and toxic waste for more than ninety days was illegal, but storing the PEP waste was clearly better than dumping or illegally burning it. In the absence of an available disposal site, storage had seemed a reasonable choice. The reason that some of the barrels of toxic waste had not been hauled away was also clear: to save money — not much to investigate there.

Official company policy did not condone dumping. Although the current senior management claimed to be unaware of any dumping incidents, it became clear as the investigation continued that on at least a few occasions in the past, some employees had taken seriously a statement to the effect that they should “take care of things yourself” and had dumped toxic waste. The investigation also confirmed that the bottom of a concrete underground holding tank had been broken out years earlier at the direction of a previous manager after a county engineer had inspected it. While some lower-level employees admitted to having known about the tank, the current managers again claimed not to have known that it was broken. The lack of awareness, however, did suggest a problem with their level of quality control and with their accounting for toxic waste.

Community Response.

A citizen’s group from the local area formed, calling itself “Community Activists United to Save the Environment” (CAUSE). CAUSE galvanized the area residents into a significant political force. All the complaints that had been ignored over the years resurfaced. Stories circulated in the newspapers that the sprinkler system sprayed liquid directly from the toxic waste barrels onto the ground simply to keep the cost of disposal down. Anyone who had ever been ill or who even had a pet that had been ill since moving to the area blamed COTC. Many filed lawsuits seeking damages. The company found itself the focus of a great deal of unwanted attention.

COTC, which had always tried to stay aloof from the community, would now have liked to have had community support, or at the least, neutrality. In addition, COTC management recognized the possibility that residents might be jurors in court cases filed locally. But even those residents who worked at the company were not particularly positive about it. They were neither committed enough nor strong enough to counteract the work of CAUSE.

The public-relations consultants did their best to defuse the community’s outcry, but CAUSE was busy. A stream of unfavorable stories appeared in the press. The community was frightened and angry, and whatever COTC did was too little, too late. Speeches were made and press releases provided on behalf of the company, but they met with limited success.

Government Response.

The constant reporting about the situation put pressure on the government to act. A major search warrant had been executed; something had to come of it. The regulatory agencies issued cease-and-desist orders directing the company to cease, among other things, the storage — without a permit — of the barrels of hazardous materials. At this point, COTC would have gladly ceased storing the barrels but was unable to find any place to legally dispose of the PEP wastes. Using all its political contacts, the company was able to get the secretary of defense involved, but even he could not find a disposal site for several months.

COTC was obviously going to pay fines and spend a great deal of money to make improvements, but, as mentioned earlier, there were some in the district attorney’s office who wanted individuals to be found personally liable. Much of environmental law is based on strict liability, where motive, intent, or lack of knowledge is irrelevant. While most criminal law punishes the actions of individuals, environmental law also punishes a failure to act when one has a duty to do so. Middle managers, for example, are not relieved of liability by claiming that they were just following orders. Whether actual damage to the environment has occurred does not matter. If the law is broken, there is guilt, and in COTC’s case, the law had been broken. At the least, the company had illegally stored barrels of hazardous waste material.

After considerable follow-up investigation, the prosecution targeted three COTC managers for criminal charges: the general manager, the director of operations, and the director of administration. Eighty-seven misdemeanor criminal charges were filed against each, alleging illegal storage, transportation, and disposal of hazardous waste. The high number of counts was attributable to a filing based on each continuing week of the offense, although the government actually could have filed for each day.

The parent corporation initially agreed to pay legal fees for these managers as they were accrued and to pay for the defense of other corporate officers who were potential targets. But as part of a strategy to end the matter, and perhaps to protect the senior officers of the company, the corporation was the first entity to reach a disposition of the case against it. It agreed to pay a fine of $300,000 and the costs of the cleanup, costs that rapidly escalated to millions of dollars since much of the deferred maintenance had to be taken care of expeditiously. Even the barrels of PEP waste had to be emptied, the contents evaluated, and the nonhazardous materials removed, cleaned, and disposed of separately.

Once the corporation had reached its settlement, the policy about paying for legal fees was changed. The corporation declared that after a specified date, which was very close, it would no longer pay for the legal defense of COTC’s managers, thereby putting more pressure on those charged to settle and to do so quickly.

Final Consequences.

The negative publicity was devastating to COTC’s business. It was difficult to keep the business operating with many members of the management team spending all their time on issues related to the criminal complaint. County officials threatened to pull their land-use permits. Numerous lawsuits were filed. As pressure from the criminal investigation continued, relationships within the once-successful company became strained. Confrontations arose almost daily.

Eventually the three division officials agreed to plea bargains, where each pleaded “no contest” to three counts of the complaint. The director of operations received a sentence of thirty days in a local jail; the general manager, a fifteen-day sentence. The director of administration was determined to be less culpable when it was found that he did not have administrative responsibility for the actions that were under investigation. He was required to give three speeches on environmental issues and business instead of serving jail time.

The company made inquiries about seeking a disposal license and building an incinerator that would take care of the waste materials, but the local community protested so vigorously that the idea was dropped. The PEP waste was eventually shipped to a facility in the southeast where, ironically, there were fewer safeguards against contamination of the environment than COTC had put in place in its own facilities. Civil suits against the corporation and the officers dragged on in the courts for more than ten years. While the company was not found liable in any of these suits, the costs in money, energy, and morale were tremendous.

The accumulated costs and stress were finally too much for COTC. The extensive clean-up, the facility remodeling, and the legal defense ran into millions of dollars. Dealing with the clean-up and the legal problems took management time and energy that needed to go toward meeting contract obligations. When added to the bickering and distrust among key personnel, these problems created a situation where the real work of the company was not getting done. Production fell behind schedule. Competitors exploited the delays when making their own bids. COTC was now losing money. It finally lost so much that the parent corporation closed the division, gave up the line of business, and moved the corporate headquarters out of California.

Decision-Making Concepts

Messick and Bazerman discuss three types of theories that executives apply when making decisions — theories about the world, theories about other people, and theories about ourselves. While we describe the theories separately for analytical purposes, it will become evident as we apply them to COTC’s situation that in many cases, they are interrelated.4 Not every concept comes directly into play in every poor decision, but in most poor decisions, more than one of them is involved.

Theories about the World

Good decision making requires an accurate understanding of the environment in which that decision will be played out. Without that understanding, it is impossible to assess the probable consequences and choose thoughtfully among them. Messick and Bazerman suggest that theories about the world are frequently flawed in three ways: (1) in the consideration of possible consequences, (2) in the judgment of risk, and (3) in the perception of causation.

Consideration of Possible Consequences.

Psychological research shows that people often attempt to simplify difficult or complex decisions by ignoring some, or most, of the possible consequences. While this tactic can make the decision seem easier, it does not change the actual outcome. Predictably, such decisions are likely to have unanticipated outcomes. This need to simplify, Messick and Bazerman suggest, is related to five types of biases: ignoring low-probability events, especially potentially negative ones; limiting the search for stakeholders to a few visible and “important” groups; believing that the public can be kept uninformed about activities; discounting the future in favor of short-term results; and undervaluing collective outcomes.

Judgment of Risk.

Theories of the world will be inaccurate “if they systematically err in assessing the probabilities associated with the consequences.”5 Psychologically, people prefer a reasonably deterministic world in which there are known explanations for things that happen. Only then can they plan for and control events. But again, the certainty of the belief does not change the actual outcome. Sometimes events occur at random. The judgment of risk is often affected by how the risk is framed. Research shows that people tend to be more accepting of risk when the options are stated in terms of positive benefits, and they tend to be more risk averse when the negative consequences are stressed, even if the results being presented are objectively the same. Messick and Bazerman illustrate the point by noting that in studies using plant closing scenarios, “changing the description of the outcomes from jobs and plants saved to jobs and plants lost is sufficient to shift the prototypic choice from risk-averse to risk-seeking behavior even when the actual outcomes are identical.”6

Perception of Causation.

Research shows that people tend to assign blame and credit to individuals rather than analyze how social structures or even equipment may have failed. This tendency can lead to a misunderstanding of the real causes of the problem and therefore lead to decisions that may not solve the real problem.

Theories about Others and the Self

Messick and Bazerman’s work examines ethnocentrism and stereotyping. We are all ethnocentric to some degree, dividing the world into “us” and “them” along various dimensions. The general tendency is to assume that “they” are somehow different from “us.” We understand the individual differences among members of our group. They, on the other hand, are assumed to be all alike. It is therefore easy to misjudge the responses of people from other backgrounds or categories. Not only are stereotypes often inaccurate, but relying on stereotypes means missing the individual characteristics, abilities, and values of the person in question.

In many ways, the theories about the self are the opposite side of the theories about others. Messick and Bazerman identify three interrelated ways in which theories about the self relate to decision making: the illusions of superiority, self-serving biases, and overconfidence. Illusions, by definition, are not reality-based, and therefore, again, are not a basis for good decision making. For example, the illusion of optimism involves being unrealistic about one’s own future relative to that of others, as exemplified by the “it will never happen to me” attitude; the illusion of control occurs when people exaggerate the extent to which they can control events, including many events that are random or beyond their control; the illusion of favorability involves the tendency to highlight our positive characteristics and discount our negatives. As human beings, we are amazingly creative about rationalizing that we deserve all the good things that we receive but few of the bad, another way of stating the self-serving bias.

Applications to COTC’s Situation

The crisis at COTC was not inevitable. Although there came a point where the company ran out of good options, the worst consequences could have been avoided had better decisions been made even late in the game. While there still would have been problems to resolve from earlier poor decisions, the filing of a criminal complaint against the company and its managers, and the demise of the division, could have been averted had there been an immediate and appropriate response to the notice of violation. It is unlikely that there would have been a search warrant and a criminal complaint had COTC attempted to work with the authorities even then.

The available data are largely behavioral rather than psychological. Since Messick and Bazerman’s framework is based on psychological research, this poses a risk of attribution error. The data do fit the theoretical framework, however. Our confidence in the analysis is increased by the fact that the information comes directly from key participants in the case, including one of the defendants, one of the prosecutors, one of the investigators, and one of the defense lawyers. We also had a copy of the search warrant and news clippings about the case.

Flawed Decisions

In this section, we use Messick and Bazerman’s concepts to analyze six of the decisions at COTC. Like the theoretical concepts, the actual decisions form an interrelated whole.

Decision to Avoid Community Involvement.

The decision to stay aloof from the local residents is an example of at least three biases: not considering low-probability events, limiting the search for stakeholders, and believing that the company could avoid public scrutiny of its actions. The decision seemed to assume that the neighbors would reciprocate and let the company proceed with its business without interference and without anyone asking questions about its activities. This bias is then to further assume that the neighbors will therefore not find out activities that might be detrimental to the neighborhood. It also shows how the framing of the risk affects the decision.

When the policy was first set, COTC judged that the risk of needing community support and not having it was minimal, if indeed anyone seriously thought about the matter at all. Management framed the issue as the possibility of losing freedom of action, a negative outcome. Given that framework, the theory suggests COTC should be willing to take the risk of lacking community support. The company took that risk. Furthermore, disengagement from the community reflected the fact that the company did not view the neighbors as important stakeholders. It meant that COTC’s managers did not have communication with the neighbors that might have made them aware of the rising level of discontent and the changing demographic characteristics of the community. Had they been listening, they might have learned that the neighbors found even less value in having COTC as a neighbor than COTC found in them. The new neighbors were not interested in entry-level manufacturing jobs. They were interested in clean air and water, peace and quiet, and safe neighborhoods for their families. By the time they bought their homes and became aware of COTC’s presence, it did not matter that COTC had been there first. They had a stake. Their health, safety, and property values were at stake.

Decisions about Employees.

The decisions not to invest in training for supervision, not to promote beyond the level of first-line supervisor, not to establish grievance procedures, and not to investigate complaints about the sprinkler system indicate that management did not consider most employees to be important stakeholders. Ignoring this stakeholder group led to a failure to anticipate consequences that were fairly predictable.

Foremen may have clearly understood the technical aspects of making ordnance and been able to supervise that activity. Without training in environmental regulations and management skills, however, they made some poor decisions themselves. Lacking an effective training program, the first-line supervisors used the skills and values they brought from their own backgrounds, including instances of intimidation and chauvinism. Better training might have led to an awareness and resolution of the sprinkler problem, for example, before the employees felt that their only option was to report it to the authorities.

A better understanding among employees of the reasons for environmental regulations might have prevented the dumping of toxic materials and resulted in the reporting of the broken tank bottom, thereby eliminating issues that became important in the district attorney’s investigation and key points in the lawsuits encouraged by CAUSE. Employees understood the company’s emphasis on cost control, but they did not necessarily understand the consequences of simply dumping toxic waste on the ground. The employees who knew about the leaking underground tank believed that if they wanted to keep their jobs, they should keep quiet. Amazingly, information about the tank was not widespread for a long time, but enough people knew about it that it eventually did get out.

When viewed in light of Messick and Bazerman’s concepts, these decisions reflected several biases. Although there was never any evidence that toxic materials actually leached into the water table, the lack of training in environmental issues suggests that there was little concern for potential stakeholders other than those with a financial stake in the company. This indifference extended to the employees who worked in the area and the neighbors whose water might be contaminated. Those who did know about the dumping must have assumed that the public would not find out — another of the biases. The emphasis on saving money in the short term by not investing in training reflects the bias of discounting the future. Finally, there was the bias of undervaluing collective outcomes. If there were problems, not only could COTC and its employees potentially be exposed to environmental hazards, but so could the many other people who lived and worked in the area.

Decision Not to Pursue Storage Permit.

In one sense, this decision is harder to fault. Even here, however, some of the concepts apply. The decision reflects a failure to accurately anticipate consequences and to understand the degree of risk. The closing of Ft. Irwin was viewed as a low-probability event. Otherwise, the management at that time would have redone the paperwork to become a licensed storage facility. But this evaluation of risk shows how various elements of the decision-making process are often interrelated in practice.

For example, several of the factors mentioned under “theories of the self” are relevant here. Messick and Bazerman state, “Low self-esteem is not generally associated with successful executives. Executives need confidence, intelligence, and moral strength to make difficult, possibly unpopular decisions. However, when these traits are not tempered with modesty, openness, and an accurate appraisal of talents, . . . problems can arise.”7 When the tendency to view oneself positively becomes extreme, it can involve illusions of optimism, control, and favorability.

All these illusions can be seen at work in COTC’s evaluation of the level of risk involved in losing access to Ft. Irwin. In the first place, management reasoned that if the government wanted the company’s product, then the government would make sure the company could dispose of its waste material. COTC’s managers did not seriously consider the possibility that the government would contract for their product and then charge them with a crime for not being able to dispose of the waste material that was created in the production process. They held an illusion of optimism. This could not happen to them.

They also operated under an illusion of control. COTC’s management misjudged the power of the environmental movement nationally. In part, this misjudgment simply reflected unawareness of what was happening, but it also reflected the conviction that the political connections of COTC board members and management could overcome pressure from any other source.

COTC executives were well aware of the benefit that they provided to the country’s defense through their work, but they downplayed the potentially negative impact of waste disposal on the environment — an example of the illusion of favorability, or the self-serving bias. Because of this illusion, COTC overlooked the fact that the environmentalists were equally convinced of the value of their cause. They missed the movement’s grassroots political power and misread the political landscape. These errors affected their judgment of the risk involved in the decision.

Decision Not to Separate Types of Trash.

While not a major factor in the failure of the company, the fact that no one challenged the practice of placing all kinds of trash into the barrels of hazardous waste demonstrates the overall lack of institutionalized evaluation procedures in the company’s management practice. It shows how not taking action is a form of decision making. Using Messick and Bazerman’s concepts, at a minimum, this practice represents a form of discounting the future and a miscalculation of risk. Keeping the different waste streams separate in the first place would have involved no real costs. Even the extra effort would have been negligible. When all the barrels had to be hand-sorted later, it was a large and expensive undertaking.

Decision to Ignore Notice of Violation.

Much more serious was the decision to delay responding to the notice from the Department of Health Services. The general manager understood very well what his CEO and board would do if he failed to cut costs. He recognized that his management colleagues would be upset if they did not receive their year-end bonuses because the division did not meet its target. But he misjudged the risk of a reaction from the regulators — the “bureaucrats.” The risk was framed in terms of rewards and sanctions from corporate management, not in terms of a criminal complaint. The general manager was risk averse when it came to losing something he valued — the bonuses and the approval of his colleagues. He was more willing to risk sanctions from the authorities, although he did not understand those sanctions very well.

Messick and Bazerman’s theories of self and others apply to the situation in several respects. The Department of Health Services officials represented a group of “others” with whom COTC’s senior managers were unfamiliar. They did not understand the officials’ world view or realize how seriously they took their jobs. The health inspectors believed that what they were doing was important for the public health and safety. Furthermore, they knew that they had the power of the state behind them. They expected respect for their notices.

Meanwhile COTC’s senior managers believed that what the company was doing did not create an immediate danger to public health and safety and therefore that procrastinating a bit in responding should not bring serious repercussions, an illusion of optimism. The illusion of optimism also suggested that by the time Department of Health Services got around to seriously pursuing the issue, the new fiscal year would have started and the company could get enough repair work done to keep the regulators satisfied. Finally, management was swayed by an illusion of favorability — the belief that what the company did was so valuable that the normal rules would be waived if necessary. Because the managers misunderstood the values and culture of the health department officials, they misjudged the consequences of violating their rules. They ignored what was actually a high-probability event, namely, that someone would follow through on the notice of violation soon after the deadline. (COTC was told after the criminal complaints had been filed that if management had even acknowledged receipt of the notice and asked for time to comply, the response from the Department of Health Services would probably have been much different. It was the lack of acknowledgment that raised suspicions, especially when coupled with the employee complaints about the odors and dumping.)

Nondecision about Sprinkler System.

Ignoring the odor and the complaints about the sprinkler system illustrates once again the principle of being concerned with too limited a set of stakeholders. COTC’s list of recognized stakeholders was short: the company (including the management-level employees), the shareholders, and the customers, especially the Department of Defense. As noted earlier, the neighborhood and the lower-level employees were not considered to be important stakeholders. These employees were viewed as replaceable cogs in the machine.

Most of the managers were unaware of how unpleasant the odor from the sprinkler system could be. They walked through the area periodically, but then returned to their air-conditioned offices, where it did not bother them. They assumed that there was not a serious health hazard, but they didn’t bother to confirm that assumption or see if something could be done to mitigate the unpleasant odor, and, of course, there was no grievance procedure that would have allowed the employees to challenge them. They also had no regular process for evaluating the humidifying system. The pay for entry-level employees was competitive, and apparently management considered that to be sufficient consideration for “people like them.”

This type of attitude is often based on lack of personal knowledge and negative stereotypes. Most workers were either young people in their first regular job or women in their forties and fifties reentering the work force, many single mothers. Their socioeconomic background and educational level differed from those of the senior managers. There was little about their life situation with which the managers were personally familiar and with which they could identify. They could be stereotyped as being happy with their jobs because of the pay, given their education and options. “People like them” somehow were expected to be grateful for their jobs and not mind an irritating odor occasionally. It did not occur to management that these employees might actually go to the authorities with their complaints — another illusion of optimism.

Perception of Causes

We have not emphasized the issue of blame or causation so far, but it is a part of this story as well. After the search had been conducted and COTC was faced with the criminal complaint, the question of blame became a major concern. Working relations became almost impossible as managers blamed each other for the situation. The district attorney’s view that some individuals should be held accountable obviously played into this as well. It was easier to believe that individuals had made mistakes than to analyze how the system was flawed, which brings up an important element of the story. Some of the key decisions in the case, including the initial decision to stay aloof from the community, the decision to break out the bottom of the tank, and the key decision not to refile the application for the storage permit, were made by a previous management.

The three managers who became the target of the investigation inherited many of the problems that we have discussed. But they did not correct the flaws in the system. The current managers did not institute procedures and controls to check on even such basics as the accuracy of their toxic-waste records. They did not begin to train supervisors or pay serious attention to their lower-level employees. The status quo was maintained as normal or appropriate.

While the acceptance of that system was, in part, a matter of personal decisions, it was made in the context of a company culture that brought a great deal of pressure to bear for immediate bottom-line results but that did not stress or reward concerns about the environment. Some of these problems were embedded in social systems and company culture, not just in personalities.

Conclusions

Poor decisions are, by definition, those that result in unintended negative consequences. These consequences are often unanticipated, whether or not they should have been. Obviously, unanticipated consequences cannot be avoided in all cases. Humans are not omniscient, and decisions often involve factors that cannot be known but that do affect outcomes —sometimes positively, but often negatively. Messick and Bazerman’s concepts help us understand, however, that many of these negative outcomes can be avoided. They show that particular psychological tendencies are generally associated with poor decisions.

As an old proverb puts it, to be forewarned is to be forearmed. Managers should look for a wide range of possible outcomes and check their assumptions. Do the facts on which a decision was initially based remain applicable today? They should also seek other opinions, not limiting their sources to those who share their biases and stereotypes; and they should become acquainted with their employees and neighbors, particularly those from backgrounds different from their own. The broader the understanding, the less likely management is to be blindsided.

Based on the events at COTC, we stress the importance for managers to actively manage their business (see the sidebar). It is not enough to try to avoid violating minimum requirements in any area; managers must be alert to what behavior the company’s compensation incentives actually encourage.

For scholars, the work of Messick and Bazerman raises a recurring question. The research they cite is psychological research and deals with individual decision making. Yet some of the tendencies that they list are often associated with American culture generally. In particular, many people from elsewhere consider that Americans hold illusions of superiority (including the subsets of optimism, control, and favorability) and tend to limit their search for stakeholders. Since many of the psychological studies referenced were conducted on middle-class Americans, the question of which of these decision-making tendencies are heavily influenced by the culture must be considered. The question is of more than theoretical interest. Managers often must manage culturally diverse work forces both at home and across national boundaries. It is important to be able to appropriately differentiate cultural patterns from more general human behaviors.

Finally, the experience of COTC raises broad issues, for business and for society, about the environment. Perhaps we need to think further about whether the lessons from the California Ordnance and Technology Corporation are ones that society as a whole should consider when contemplating decisions.