Tag Archives: Stock

Why Management Is Broken And How To Fix It

While we work to improve quality and efficiency, our leaders manage our organizations into oblivion. Literally. Something is terribly wrong. Leaders of major corporations in virtually all industries do things that causes them to, either accidentally or deliberately, destroy billions of dollars in value in a breathtakingly short time. What could be behind this phenomenon? Can it be fixed? If so, how? This article explores a few possibilities.

Business Education

This subject has been the topic of many an article lately, and even a few scholarly papers. Most of these place the blame on one or more of the following: inexperienced professors focused on academic pursuits; failure to teach ethics/social responsibility; lack of practical experience opportunities for students. Professor Henry Mintzberg warns that business school academics pursue the arcane just to achieve academic publication. For state-funded institutions, being published means points and points bring prizes in the form of additional government funds. “We need more innovative ways of teaching,” Professor Cary Cooper of Lancaster University’s Management School admits. “MBA courses, case studies and knowledge transfer are not the whole answer to what management education should be about. We need more strategic management experience related to front line management. Managing change in technology, ethics, leadership and management skills is what dictates the success or failure of companies today. I don’t think management education is enough about the skills of management – the skills of managing other human beings.” Dr Peter Hahn, a banker turned academic, points out that too much of business academia maintains a two-tiered universe, with those doing most of the central business teaching lacking business experience, and those leading and administering often lacking academic experience. Those with business backgrounds could add so much more. “Business schools need to entice more experienced men and women to gain superior academic credentials,” Hahn says. “The economics of teaching will assure that this is never going to be a large group, but it should be a vital one to keep business schools viable and relevant.”

Progressive Education and Pragmatism

Not only is the content of business education irrelevant and the faculty in business schools inexperienced and unqualified, the method of teaching and the underlying philosophy are also flawed. The most popular approach to teaching business students is the case method. In essence, the case method replaces textbooks and lectures with disguised historical data about a (usually disguised) company and discussions among students and professor about how to respond to the data. Truths and right answers are not only not taught, proponents of the case method do not believe that universal truths exist and faculty often disagree among themselves on the answer. Teaching students business principles is thought to be “dictatorial.” Instead, learning is considered a social venture (not an individual accomplishment) and the emphasis is on acting rather than knowing. With few exceptions, students who are taught using this approach are not able to think for themselves. According to Jerry Kirkpatrick of Northwestern University, “The case method of instruction does not enable students to think for them- selves; rather, it teaches students to become arrogant, emotion-driven, critics who do not have any knowledge to think about even if they could think.” Can you think of any managers in your company who might fit this description?

Governance

Warren Buffett lists the following guidelines for good corporate governance:

Minimal Board Compensation: The board is the lowest paid of all Berkshire employees.
No Stock Options: Buffett believes stock options should not be part of executive compensation and resigned from Coca-Cola’s board when the beverage giant insisted on paying stock options. Berkshire directors get no stock options and instead must buy stock on the open market, or “pay to play.”
No Indemnity: Although Berkshire is an insurance company, it doesn’t provide professional indemnity insurance for directors and officers, unlike 93% of US companies. This forces management to better identify, assess and manage risks.
No Retirement: Directors and officers are asked to serve for a lifetime, with no term limits, enabling the company to seamlessly tap accumulated experience and knowledge, especially of the owners-turned-managers running the family businesses acquired by Berkshire. There are no management contracts, and managers are free to leave at any time.
Transparency: Buffett explains his principles on values and investing in the Berkshire Hathaway Owner’s Manual. These include treating shareholders like partners, not taking on debt, preferring to buy family-owned businesses, and being free to talk about anything except the stocks that Berkshire is buying or selling, which would create investing competition.

Assuring good governance, Buffett points out, is the responsibility of all stakeholders, not regulators.

Incentives

President Barack Obama believes that the cause of the financial meltdown was greedy bankers. Indeed, we are all conditioned from childhood on to believe that selfishness is bad and that it is immoral to be “greedy.” But all living things pursue their own self interest, plants and animals alike. All of us are “greedy” in the sense that we would like to improve our lot or that of our loved ones. Are bankers (or big businessmen, or stock brokers, etc.) as a group more prone to this than the rest of us? I seriously doubt it. Instead I believe that the incentive structures allow and encourage business leaders to act in ways that jeopardize the interests of investors and employees while enriching themselves. For example, the 2002 Berkshire Hathaway annual report includes this insight in the discussion of derivatives:

“The parties to derivatives also have enormous incentives to cheat in accounting for them. Those who trade derivatives are usually paid (in whole or part) on “earnings” calculated by mark-to-market accounting. But often there is no real market … and “mark-to-model” is utilized. This substitution can bring on large-scale mischief.”

“Greed,” aka self-interest, is a constant. It didn’t just appear in the fall of 2008. Blame the system that caused leaders in entire sectors of the economy to act in ways that harmed their major stakeholders, and the economy. Structure incentives such that the interests of all groups are in harmony. Make sure that business leaders’ fortunes rise and fall in the same way as those of their constituencies.

Solutions

Assuming that the problems of incentives and governance are addressed as recommended, the Lean Six Sigma approach can then be used to remedy the problems with management education. Lean Six Sigma is more than a set of technical tools that can be used to solve specific problems. Over the decades since WW II it has evolved into a complete system for managing an enterprise. Rather than a haphazard approach to leadership based on a social consensus, we begin with fundamental principles of leadership and deploy these principles using a rigorous approach. The approach can be summarized as follows:

It all begins with the vision of the founder. This foundation establishes the purpose of the enterprise and it doesn’t change. Deming calls it “Constancy of purpose.”
Next, leaders identify stakeholders, learn their voice, and translate these voices into broad strategies for achieving long-term success.
The strategies are operationalized with specific balanced scorecard metrics that are sorted into those metrics that represent requirements which must be competitive and those requirements that must be world-class.
Selected metrics (we have a process for making this selection) are displayed on leadership dashboards. This provides leadership with a focus and a way to measure progress.
The dashboard is used to identify improvement projects and plans. Some of the projects will be “just-do” projects, others will be lean six sigma projects.
The feedback provided by the dashboards will be used to determine if the plans and projects are successful in terms of implementing the strategies. Strategic plans will be modified accordingly. Thus, strategic planning becomes an ongoing activity rather than an annual exercise in futility.

Unlike the approach taught in business schools, our approach is based on a vision of a new and better world resulting from the enterprise’s existence. We look to harmonize the interests of all stakeholders, rather that pitting one group (shareholders) against all others. We believe that there is an objective reality and that we can know it, albeit imperfectly, through models, facts and data. We believe that facts and data can help us make better decisions, and we have tools which help us glean information and knowledge from the data. Finally, we understand that our strategies and plans are a model of reality and that our actions have an impact on this reality, i.e., our plans are a transfer function that connects the root causes we address with the outcomes we desire. We believe that although all models are wrong, some models are useful. We use objective feedback to help us determine how to make our models more useful.