Good To Great, by Jim Collins

What Are Your Red Flag Mechanisms?
Chapter 4, pages 79–80

One particularly powerful way to accomplish this is through red flag mechanisms. Allow me to use a personal example to illustrate the idea. When teaching by the case method at Stanford Business School, I issued to each MBA student an 8.5"x 11"bright red sheet of paper, with the following instructions: “This is your red flag for the quarter. If you raise your hand with your red flag, the classroom will stop for you. There are no restrictions on when and how to use your red flag; the decision rests entirely in your hands. You can use it to voice an observation, share a personal experience, present an analysis, disagree with the professor, challenge a CEO guest, respond to a fellow student, ask a question, make a suggestion, or whatever. There will be no penalty whatsoever for any use of a red flag. Your red flag can be used only once during the quarter. Your red flag is nontransferable; you cannot give or sell it to another student.”

With the red flag, I had no idea precisely what would happen each day in class. In one situation, a student used her red flag to state, “Professor Collins, I think you are doing a particularly ineffective job of running class today. You are leading too much with your questions and stifling our independent thinking. Let us think for ourselves.” The red flag confronted me with the brutal fact that my own questioning style stood in the way of people’s learning. A student survey at the end of the quarter would have given me that same information. But the red flag—real time, in front of everyone in the classroom—turned information about the shortcomings of the class into information that I absolutely could not ignore.

I got the idea for red flag mechanisms from Bruce Woolpert, who instituted a particularly powerful device called short pay at his company Graniterock. Short pay gives the customer full discretionary power to decide whether and how much to pay on an invoice based upon his own subjective evaluation of how satisfied he feels with a product or service. Short pay is not a refund policy. The customer does not need to return the product, nor does he need to call Graniterock for permission. He simply circles the offending item on the invoice, deducts it from the total, and sends a check for the balance. When I asked Woolpert his reasons for short pay, he said, “You can get a lot of information from customer surveys, but there are always ways of explaining away the data. With short pay, you absolutely have to pay attention to the data. You often don’t know that a customer is upset until you lose that customer entirely. Short pay acts as an early warning system that forces us to adjust quickly, long before we would lose that customer.”

To be clear, we did not generally find red flag mechanisms as vivid and dramatic as short pay in the good-to-great companies. Nonetheless, I’ve decided to include this idea here, at the urging of research assistant Lane Hornung. Hornung, who helped me systematically research and collate mechanisms across companies for a different research project, makes the compelling argument that if you’re a fully developed Level 5 leader, you might not need red flag mechanisms. But if you are not yet a Level 5 leader, or if you suffer the liability of charisma, red flag mechanisms give you a practical and useful tool for turning information into information that cannot be ignored and for creating a climate where the truth is heard.