Smart people, stupid choices: in Chief Executive's quarter century of existence, we've seen CEOs make big mistakes. A few learn from them. (Chief Catastrophes).

What were they thinking:

It's a natural response to this year's business headlines, as one CEO after another falls from grace. The consequences have included plunging stock prices, forced exists, company and personal bankruptcy and, in at least two cases, federal indictments.

And yet, the news is nothing new. Alter the names and the dates, and the stories begin to sound awfully similar. The same reasons keep cropping up, too--reasons as old as human nature and as familiar as the seven deadly sins. Because of a power struggle. Because they can't make the hard choices. Because the perspective from the corner office is often so skewed that, as Intel Chairman Andy Grove wrote in Only the Paranoid Survive, "the CEO is the last to know." And, the most damning, because they have power and they can use it.

Over Chief Executive's 25 years of existence, we've seen a lot of smart leaders make really dumb decisions--the kinds of choices that, if they're very lucky, leave them with egg on their faces and, if they're not, with a bunk in a federal penitentiary. But we've also seen CEOs who learned from their mistakes and who used those lessons to propel their companies to greater success. We've put together a list of each, to provide a reminder of the former and encouragement of the latter.

Chief catastrophes: Eight decisions that didn't work LUST. Hanky-panky at Bendix: What was William Agee's major misstep? Was it when the then-42-year-old CEO of the $3.9 billion aerospace manufacturer Bendix leapfrogged 29-year-old Mary Cunningham from executive assistant to vice president for planning in less than 15 months? Or was it when his attempt to squelch rumors about their romantic relationship backfired onto the front page of business journals? Even after two years and Cunningham's departure, the buzz about high-placed hanky-panky helped torpedo Bendix's 1982 attempt to acquire Martin Marietta and, in the process, annihilate Bendix, too. Granted, the inherent hostilities in the takeover bid were exacerbated by clashing cultures and adversaries with sharply different management styles. But the deal-breaker appears to have occurred when Cunningham, now married to Agee, openly advised her husband at a crucial negotiation at Marietta's headquarters. Said one Marietta director at the time, "We'll burn this company to the ground before we let that [woman] have it."

ENVY. Coca-Cola's formula for a public relations disaster: It seemed like a good idea at the time. Over the previous five years, Coke had been losing the Pepsi Challenge in overall sales growth and market share among younger cola drinkers. So, backed by four-and-a-half years of elaborate planning and market research, Coca-Cola ditched its 99-year-old formula in favor of New Coke. Pepsi was so delighted that it declared April 23, 1986, New Coke's debut day, a corporate holiday. Irate lovers of the original Coke called for a resurrection. Coca-Cola announced the return of the original formula--rechristened "Coca-Cola Classic"--less than three months later. ABC interrupted "General Hospital" to break the news and Coca-Cola stock shot up $2.37 a share. New Coke faded to a 0.6 percent market share and by 1990, was renamed "Coke II" and virtually vanished.

GREED. CIGNA learns the cost of integration: It appeared to be a perfect marriage. In 1982, Connecticut General announced that it would combine its strength in health insurance with INA's depth of knowledge in property and casualty claims to form CIGNA. Then merger politics came into play. "There was an enormous amount of 'we-they' right after the merger and very little 'us,'" explains management consultant Steve Drotter, co-author of The Leadership Pipeline. "It was about who had what job and who was going to make the decisions, rather than what was right for the business." As a result, the senior talent in property and casualty insurance were pushed out, people without their experience took over a very complex, high-risk business--and flopped. By 1986, CIGNA became the first company to take a $1 billion-plus write-off. When the news flashed across the Dow Jones wire, one unbelieving insurance analyst was convinced that "those damn fools" at Dow Jones had put the decimal point in the wrong place. CIGNA eventually sold the property and casualty unit at a loss.

GLUTTONY. Biggest dot-bomb Web van bags it: By the time the online grocer bagged its last stack of paper plates on July 9, 2001, it had flushed some $1.2 billion in financing down the drain and laid off all of its 2,000 employees--the largest Internet failure in terms of money invested and workers affected. What is amazing is that all that cash was spent with almost no research into whether consumers would want Webvan's services. Its founder, Louis Borders, believed that "if we build it, they will come." They didn't--but even if they had, they would have been tripped up by an expensive automated-distribution system that included a freezer case with a 100-foot-long, computerized lazy Susan that froze at cold temperatures.

Then there was the strategy that called for Webvan to enter 26 cities long before it had proved that its model worked. Commented one analyst, "No one has ever gone public with a national rollout with zero markets performing to plan." In short, Webvan's very creation was a bad decision, says Jeffrey Pfeffer, a professor of organizational behavior at Stanford Business School. "Either there is no viable economic model or if there is one, Safeway will do it better."

PRIDE. DEC gets decked by a changing market: Digital Equipment Corp. broke into the world of computers, then dominated by mainframes, in the l950s and grew to become the nation's second-largest computer company by the l980s with simply designed, inexpensive minicomputers. Yet in an ironic twist of fate, DEC top dog Kenneth Olsen pooh-poohed PCs, dubbing them "cheap, short-lived and not-very-accurate machines." On top of the world in 1987 with a market capitalization of $26 billion, by May 1992 the company had lost more than three-quarters of its value and was saving money by switching to a cheaper supplier of toilet paper. Two months later, Olsen, the longest-reigning founder of a major computer company and the person The Wall Street Journal hailed as "the most successful U.S. entrepreneur since Henry Ford," resigned. DEC itself was eventually sold to Compaq, a maker of those very "toys" Olsen had derided.

MORE PRIDE. Oxford Health Plans' diagnosis for technology disaster: "I'm an entrepreneur first, a professional manager second," boasted Chairman Stephen Wiggins in happier times at the health-maintenance organization he founded in 1984. As if that admission weren't alarming enough, being a good picker of computer systems was even lower on his priority list. As revenue and earnings growth skyrocketed eightfold between 1992 and 1997, Oxford invested in a $100 million, customized computer system. Instead of a safety net, it was a ticking time bomb. "We knew trouble was coming," said one former programmer. "The way they were doing it was just textbook wrong"--including ditching the backup billing system.

The bomb exploded on the first day of operations in September 1996. The company failed to generate premium invoices for many customers for four months. Claims processing proved an even bigger debacle, with so many reimbursements languishing unpaid for six months or longer that physicians dubbed the company "Oxfraud." Wiggins stonewalled but couldn't defend himself against a stock price that dropped nearly 43 points in one day. Within four months of that "Ugly Monday," Wiggins was forced to resign as part of the company's bailout deal with investment house Texas Pacific Group.

WRATH. Frank Lorenzo grounds Eastern Airlines: It's not often that a CEO is publicly castigated by Congress, but so bitter, prolonged and, ultimately, unnecessary was Frank Lorenzo's quarrel with Eastern Airlines' labor unions that on October 26, 1989, the Congressional Record noted: "Frank Lorenzo has sabotaged a distinguished airline and disrupted the lives of its employees." Lorenzo had already displayed his cost-cutting strategy at Continental Airlines: By filing for bankruptcy, he was able to fire union employees and restart the airline with a non-union staff forced to accept lower wages and longer hours. When he acquired the debt-ridden Eastern in 1986, he expected to employ similar tactics to turn around the troubled airline. He asked machinists to accept a pay cut, but the union balked and went on strike. Pilots and flight attendants followed suit, and the company-wide strike put Eastern further in the hole. Its creditors took Eastern to court, where federal bankruptcy Judge Burton Lifland eventually declared Lorenzo "not competent" to run the airline. "Frank was like Captain Ahab," recalled Carl Icahn, Lorenzo's counterpart at TWA. "He was obsessed with beating the unions." Eastern went out of business in 1991.

SLOTH. The company that defined defective product litigation: After thousands of American women claimed they suffered from infertility, spontaneous abortions and pelvic disease as a result of using the Dalkon Shield intrauterine device (IUD), manufacturer A.H. Robins stopped U.S. sales--four years after bringing it to market. The tragedy could easily have been avoided if the company had heeded warnings from a co-inventor of the product, a quality-control supervisor, as well as early reports of injuries suffered by users.

Instead, A.H. Robins destroyed some of the documents concerning the controversial contraceptive, waited years before alerting women to its danger, and, according to federal court-appointed officials, engaged in a fraud to misrepresent "the nature, quality, safety and efficacy" of the device. Overwhelmed by more than 400,000 claims, Robins petitioned for bankruptcy in 1985 to avoid paying. The company was ultimately acquired by American Home Products, which placed about $2.3 billion into a trust fund to compensate Dalkon Shield victims.

RELATED ARTICLE: They Can Be Taught

Three Leaders who learned from their mistakes

For some, a mistake is not so much cause for castigation or a lapse to be papered over as an opportunity to learn. "World-class leaders don't run from these lessons," says Noel Tichy, author of The Cycle of Leadership: How Great Leaders Teach Their Companies to Win (HarperBusiness, 2002). "They try to grow from them." Here are three examples, in the CEOs' own words.

MICHAEL DELL, chairman and CEO, Dell Computer

Dell has always been a company that takes pride in -- and direction from -- customers. The direct nature of our relationship with our customers, more than anything else, has been the key to our success. But when we started working on the Olympic project in 1988, we forgot about creating technology for the customer's sake. In creating technology for technology's sake, we fell right into the trap we'd been so proud of avoiding.

The Olympic family of products spanned desktop, workstation and server markets, with single and dual processors and many different operating systems. It was incredibly ambitious for a four-year-old company. Olympic consumed perhaps half of our R&D budget. It involved lots of technology that we hadn't had much experience with, so we hired a tremendous number of engineers.

We started introducing prototypes to our customers. The majority of them said, "Thanks very much, but we don't need that much technology." I often say that mistakes are learning opportunities. Olympic was a learning opportunity of, well, Olympic proportions. We learned to identify potential problems early--and fix them fast. We shut the project down before any of the products ever saw the [commercial] light of day. The most important lesson was to involve our customers early and often in development. If we had consulted them first, we could have saved a lot of time and aggravation.

Lastly, we also committed to a set of principles regarding "buy versus make." At the time, most of the computer industry subscribed to a "we-have-to-develop-everything" view. But we realized that while there were times when it made sense to invent things ourselves, there were times when it made more sense to leave the R&D to our suppliers. Figuring out the difference helped us focus on how best to use our engineers.

When we canceled Olympic, we could have gotten rid of them, too. Instead, we concluded that our engineers were as brilliant as we originally thought; they just hadn't known what our customers wanted. We encouraged them to spend time with sales representatives. We involved them in product planning and the decision-making process. Some resisted. But others thrived.

And so did the company. In less than a year after we canceled Olympic, we announced the broadest and most robust product line yet. Our business soared from $260 million in 1989 to $2.1 billion three years later.

ALEX BERNHARDT, chairman and CEO, Bernhardt Furniture Co.

When I became president of Bernhardt Furniture in the late l970s, it was a slow, steady performer within its industry, which at that time consisted of a number of privately owned, mostly family enterprises, with many, like us, headquartered in western North Carolina.

Our price points were scattered from moderate to top-of-the-line. Then we decided to offer broader price points under the Bernhardt brand. It was the first time I heard the siren song of "cheaper, cheaper, cheaper," and I had yet to learn that cheaper is not better. We built a huge manufacturing facility with state-of-the-art equipment to make the least-expensive dining room furniture we could design. Within one year, we realized the plant might not have been such a great idea. About the time we were ready to deliver our new products to the marketplace, we noticed a trickle--soon a flood--of imports from Taiwan and the Philippines that were using real wood for the same look that we were trying to achieve through wood-like plastics. I'd never heard of these companies and I was blindsided by their skill and value. They were basically copying our designs for expensive wood inlay but using their labor and materials to beat us on price.

My response was to cut price in pursuit of volume. We had to fill the factory at all costs, which we did. It was costly indeed, and resulted in our first year of red ink since the Great Depression. But then I came to the belief that: "If you can't lick 'em, join 'em." I began searching for strategic alliances. We quickly learned that the Asian producers could be part of the solution instead of the problem. Not only were these partners able to produce materials more cheaply, they were also able to give us new designs--woven rattans, leather wrapping and hand painting.

As our partnerships grew and we shifted from the geographic constraints of North Carolina to global thinking, we shifted from a manufacturing to a marketing mentality. We realized it was time to reinvent ourselves as a designer, marketer and supplier of quality furniture.

In the course of a decade we doubled the company's size. Had I not made the mistake of listening to the "cheaper, cheaper, cheaper" siren song I might never have had the insight or the guts to reinvent the company as we did.

WILLIAM VAN FAASEN, CEO, Blue Cross/Blue Shield of Massachusetts

Blue Cross/Blue Shield of Massachusetts had been hugely successful for years. Then managed care came along. By the late 1980s, the company had lost significant market share and had to underprice its products to keep them viable. It was not only losing membership, but draining its balance sheet. Furthermore, the company was engaged in a number of peripheral activities--owning and operating health centers, processing Medicare claims for the federal government, funding biotechnology ventures--whose losses had been hidden by the dominant market position.

I came on as COO in 1990, charged with stopping the losses and developing products for managed care. But we didn't address the adjacent activities. Then in 1995, we became too aggressive about our prices in an attempt to regain market share. The result was about a $100 million loss a year later--a wake-up call. Our mistake was failing to have a clear, focused agenda and not being aggressive about following it. That $100 million was the two-by-four over the head that said, "If it's not core to your business, if it's not adding value to your customer's experience, if it's not bolstering the bottom line, get out of it."

We quickly got out of those activities that either were a drain on our energy and resources or were not aligned with our core business.

We stopped worrying about our size. We would stop chasing price in the marketplace. As long as our prices were competitive, we hoped to create such loyalty among customers that we could generate a healthy margin. So we created an incentive program that rewards employees not only on profitability, but also on the satisfaction of customers and the physicians who service them. Our 3,500 employees can relate to the "satisfaction P&L" because their influence feeds it.

By 1997, we were in the black again. By 1999, member satisfaction was among the industry's highest. But we still talk about the lessons we learned in 1996.