Rebuilding American Enterprise

The root cause of the American economic crisis is not economic, and so will not be been resolved by economists. That cause is managerial: too many corporate “leaders” have been trashing their enterprises for quick gains, instead of managing them for sustainability. The American economy will have to be fixed one enterprise at a time, to restore the country’s renowned sense of enterprise.

Shareholder Value

Corporate correctness dictates that publicly-traded enterprises maximize “Shareholder Value”. Don’t confuse this with anything of real value, let alone any human values. Shareholder Value is a fancy label for pumping up the price of a company’s stock as quickly as possible, so that those in the know can cash in and run before the stock sinks.

In what has become the prevailing premise of the market economy, economist Milton Friedman (1970) proclaimed that only the shareholders count (even if they are day traders)―not the workers or regular managers (who may have devoted their careers to the company), not the customers (who are there to profit the company, not to receive service), not the local communities (in which the company is embedded) or the country (that chartered the company in the first place), indeed not even the company itself (which can readily be dismembered for that quick cash). In other words, there is no sense of institution, of culture, of history. The company belongs to the shareholders and everyone else be damned. Welcome to the mercenary world of unsustainable enterprise.

The Destruction of “Creative Destruction”

There is a natural life cycle in enterprises. They usually begin small, under the tutelage of entrepreneurs who use their resourcefulness to explore niches in the marketplace, by creating novel products and useful services.

As these enterprises succeed and grow, such exploration may be displaced by exploitation, to take advantage of success, for example by cutting costs and prices to increase market penetration. Customers may benefit from this, but it can make these companies vulnerable to new enterprises that are more inclined to explore. As the latter replace the former, in a process that Schumpter (1942) called “creative destruction,” the economy continues to develop.

But there is another kind of exploitation that has the opposite effect. We can call it destructive preservation. Large corporations sustain themselves by exploiting their power in political ways: they buy competitors to approach monopolistic positions in the marketplace; they bully workers, suppliers, and even customers to squeeze extra money out of them; they mount promotional campaigns to influence public policies in their favor; and they lobby governments to get tax breaks and subsidies, if necessary bribing politicians in the process (often legally, for example through large political donations).

Building up an enterprise is hard work. Using sheer power to sustain it is a lot easier, less creative, and often more profitable. So many large corporations have turned to this other kind of exploitation, which preserves them at the expense of a healthy economy.

And when things get really bleak, the biggest of these corporations seek public bailouts to evade private bankruptcies. After the financial manipulators have finished milking these organizations dry, governments are supposed to save them from demise. These companies are said to be “too big to fail”, while in actual fact they have proved themselves to be too big to succeed. By offering such companies public welfare, the government is acknowledging that no huge enterprise can ever be allowed to die. So free enterprises survive in America, while the country’s sense of free enterprise falters.

There remain, of course, the renowned explorers of the American economy―the large corporations that continue to innovate, Apple and Google being prominent examples (not that some of these companies don’t also exploit). But for each of these, consider the “defense” companies that live off the taxpayers; the pharmaceutical companies that rake in fortunes thanks to government-granted but unregulated monopolies (called patents); the agro-businesses and petroleum companies that take massive subsidies in the name of free enterprise; and the many financial institutions with their massive manipulations.

All of this, of course, is done under the label of Shareholder Value. Some shareholders do benefit, for a time, but does the economy benefit when so many of its resources are locked up in old, sick, politicized companies that should be replaced by vibrant new ones?

The Corporate Person

How can so many employees and managers be directed to the relentless pursuit of “Value” for shareholders they never met, especially when they themselves are being exploited in the process? Mainstream economics has two simple assumptions to help answer this question: that the corporation is a person or else that a person is the corporation.

Judicial precedents in the U.S. have established that the corporation is a person in law, with certain rights of personhood, for example to exercise free speech and contribute to political campaigns. Of course there are limitations to this―for example, no corporation has ever gone to jail for committing a crime. In other words, the exploiting corporations have their legal cake while eating the resources of society.

Mainstream economics has acknowledged this notion of personhood, but not legally so much as literally: the corporation is seen as a person, specifically a “rational actor” who maximizes Shareholder Value.

Of course, anyone who has ever gone near a real corporation knows that there are real people in there, who live and breathe and cooperate and compete rather than maximizing anything. So here is where the second assumption comes in, promoted by people in finance, trained in economics: a person is the corporation. The chief executive officer (CEO) is the be all and end all of corporate decision making. He or she must, therefore, be paid bonuses―massive ones if necessary―to drive everyone else in the pursuit of Shareholder Value. This is facilitated by calling these other people “human resources,” to distinguish them from human beings.

This assumption is certainly convenient for those in finance and economics who look down on the corporate world from on high as well as those journalists disinclined to venture beyond the executive suite. But for no one has it been more convenient than the CEOs themselves.

Short-term Solutions for Long-run Disasters

It is at the CEO level where the lofty theory of economics has given way to the lowly practice of leadership. These “leaders” know quite a bit about exploitation. So why should they be excluded from its benefits? Their remuneration depends on measures of performance, and these can easily be manipulated: simply make decisions that look good in the short-run, when the bonuses are paid, even if they may prove disastrous in the long-run.

The fact is that nobody has figured out how to measure a company’s performance in the long-run and attribute it to a single CEO, unless he or she stay put. But the Steve Jobs of corporate America have been the exceptions: CEOs now average rather short tenures. When a company has done well, or badly, over, say, ten years, which CEO should get the credit, or the blame (leaving aside the fact that a company’s performance depends on more than its CEO, for example on other employees, economic conditions, even the weather in an agri-business)?

So back we go to the short-term measures, which have allowed many a CEO worth his or her financial salt to pump up the company’s stock price long enough to cash in and run. (See the accompanying box on “Games CEOs Play.”) Think subprime mortgages―junk paper from which many a CEO has walked away wealthy, leaving behind the unfortunate mortgagees, employees, and shareholders who held on. In an economy of exploiters, the sharks (1%) keep winning while the sheep (99%) keep losing.

Games CEOs Play

The games CEOs play have become legion. These start by shifting the bottom line to the top: decide what performance is required for the next time period and then use whatever tricks are available to get it, the long-run consequences be damned.

Reduce the workforce (fired workers are society’s problems), while driving relentlessly those human resources that remain (who should, after all, be grateful to have a job in this economy, even if it was brought to its knees by these very behaviors). Cut investment in maintenance, equipment, research (anything unlikely to be noticed, or at least measured, in the short-run). Push suppliers to the wall (the quality of what they deliver can be difficult to measure too). Trash treasured brands, to bring in new customers (for awhile), while using bamboozle pricing to fool the old customers (after all, everyone’s doing it―check the airline prices for what they call “taxes”).

When all else fails, play the favorite game of all: manipulate the financial statements, preferably legally. (A recent trick has been to buy back the company’s stock so that, if the earnings are falling, at least the earnings-per-share seem to be rising.)

Take a good look―its long past overdue―at the worst of these games: firing great numbers of workers and managers at the drop of a share price, while loading their work on to those who remain. It goes by the name of “downsizing”, which is a fancy term for 21st century bloodletting: the cure for every corporate ill. What it does is transfer money from the employees pockets to the corporation’s coffers, and then into the CEO’s pocket.

How can thousands of workers suddenly become redundant, usually shortly after a company has announced quarterly earnings that did not meet the financial analysts’ expectations (even when the company has remained profitable)? Did no-one notice all that redundancy before? Who was managing the place anyway? (Usually the very same CEO who did the firing.)

And does all this firing not affect the enterprise, besides reducing its costs? Not if the CEO is the enterprise, and everyone else is a “human resource.” After all, resources can be discarded―equipment, materials, men, women, what’s the difference?―especially when the wolves of Wall Street are baying at the door for their bones.

The fact is that the consequences of doing this are monumental―to the country as well as the company. At the very least, society has to pick up the costs of much of the grief: sicknesses incurred by fired and overworked people as well as breakdowns in their families, and more. Economists have a convenient word for these costs: externalities. It means that the exploiters pass off to the rest of society the costs that they themselves have created.

Perhaps far more serious are what can be called internalities: the costs to the company itself as a sustainable institution. These behaviors sicken the company too. That is because an enterprise is more than its CEO. Workers and managers matter. Those left behind after the downsizing, having lost trust in their “leadership”, put down their heads, cover their tails, and soldier on passively until they get out, burn out, or are forced out in the next wave of downsizing. So much for commitment to the company, so much for pride in the work, so much for exploration and for innovation. So much for sustainable enterprises. And so much for the enterprising spirit of America.

Enough of “Leadership,” Time for Communityship

It has been said that a fish rots from the head down. Many a company has done likewise.

Americans are obsessed with leadership, probably because they get so little of it. How often has the grand leader ridden in on a great white horse, only to disappear into a black hole?

Any chief executive who accepts a compensation package that pays him or her several hundred times as much as the workers is not a leader at all. How many leaders does that leave in corporate America? We are told that corporations need to pay large bonuses to attract the right people. No, corporations that pay such bonuses often attract the wrong people―narcissists who put their own welfare ahead of the institution they are supposed to be leading.

Leadership is about sending signals that engage other people in the enterprise, not accepting pay packages that single oneself out as so much more important than everyone else. Much of leadership in corporate America is just plain corrupt. What its enterprises desperately need is communityship.

A robust enterprise is a community of human beings, not a collection of human resources. Think of the sense of its people’s engagement in the companies you admire most. Compare them with the companies you used to admire most. What happened to them? What was lost in the pride, the commitment, the trust of their people?

Back to Plan Old Management

It has become fashionable to dismiss plain old management in favor of glamorous leadership―in the popular homily, doing the right things instead of merely doing things right (Zaleznik, 1977, Bennis, 1989, Kotter, 1990). Try doing the right things without doing them right. Do we really need this phony barrier between elite leadership and engaged management?

It was engaged management that built the American economic powerhouse. Sure managers have to be leaders―who would want to work with one otherwise? But leaders who don’t manage―who stay on their pedestals, above the fray―don’t know what’s going on (Mintzberg, 2013).

The American crisis has not been economic, but managerial, thanks to this detached form of leadership having been raised to some sort of high calling. Lost has been the hard managerial work of building sustainable enterprises, as communities of people deeply engaged in developing products and serving customers.

And don’t think that sitting quietly in an MBA classroom for a year or two develops that kind of manager. Quite the contrary, giving people who have never managed the impression that theory and cases have prepared them to do so develops more of the hubris that is hardly needed. Business schools have been a major part of the problem, not the solution.1

Management is neither a science nor a profession. It is a practice, rooted in the specific context of its industry and its organization. People who believe that they know how to manage everything mostly know how to manage nothing. Managing is learned on the job, although practicing managers can benefit from programs that use their experience to enhance their practice.2

So Look to Enterprises, not Economics, to Fix the Economy The American president is surrounded by smart economists who are supposed to be fixing the economy. They cannot, not in any sustainable way.

Think of economic theory as a cloud in the sky. From a distance it may look distinct enough. But as you get closer, you realize how diffuse it is. An economy functions, not on the basis of statistics in mid-air, but as activities on the ground, where products are made and services are rendered. Here is where it is built, where it gets sick, and where it has to get cured. (For a comparison of economics in the air and management on the ground, see the accompanying box on productivity.)

The Unproductive Side of Productivity

American economists have long been proud of their country’s record on productivity. They have also been inclined to dismiss that of some other countries, including Canada, whose productivity numbers have been lower. So how come the Canadian economy has been doing far better than that of the U.S. since the troubles began in 2008? Can an economy possibly benefit from lower productivity? In one respect, yes.

Economists measure productivity as the ratio of production outputs to labor inputs. On the ground that can happen in two ways, which we can label exploring and exploiting.

Exploring means using better processes, installing more efficient machines, training better workers. That is how economists see productivity, and it is good for an economy.

What they fail to see is an exploiting side of productivity, that is bad for an economy: cutting costs on the backs of workers and managers by making them work longer and harder for less pay. Imagine a company that fires all its production workers and then ships its customer orders from stock. Economic statistics would record this as highly productive―until, of course, the company runs out of stock.

The American economy has been running out of stock. To be more specific, many of its large companies have been running out of people to exploit. No longer can they sustain themselves by underpaying workers and overworking managers, while harassing suppliers and coning customers. A sustainable economy can only be built on a foundation of sustainable enterprises.

The American economy is sick because so many of its enterprises and so much of their leadership are sick. Economists can no more fix this than can meteorologists fix the weather. Both can gather their statistics and make predictions, that’s all.

The problems have been created in corporate America and that is where they will have to be fixed. The country needs to be encouraging vibrant new enterprises, not extending the lives of tired old ones. And it has to ensure that they grow up to be robust and sustainable, by tapping into the enterprising nature of the American people.

The stock market has become a significant part of the problem. Young companies that go to it with early IPOs may get necessary funding, but too often accompanied by pressures that prematurely drive exploration toward exploitation. Likewise, many established companies would do themselves a favor by breaking away from the mercenary pressures of short-sighted stock markets. The companies that maximize shareholder value don’t maximize Shareholder Value; instead they look after their customers and respect their workers, suppliers, and surrounding communities.

All of this will require managers who are deeply engaged in their enterprises, prepared to lead them past leadership, toward communityship. Get rid of the obscene compensation packages and watch many of the mercenaries disappear from the executive suites. Eliminate bonuses, period. Pay the CEOs decently but not excessively and watch for the appearance of more true leaders (Mintzberg, 2009).

Enough of the aggregated measures and disconnected theories of the economists. Enough of the wolves of Wall Street on the backs of American enterprises. Enough of so much narcissism in the executive suites and so many detached elites in the board rooms. Americans will have to rebuild their economy with determination and patience, enterprise by enterprise, in order to regain their country’s legendary sense of enterprise.

Footnotes

1. See my book Managers not MBAs (Mintzberg, 2004), also a 2012 debate on The Economist on-line http://www.economist.com/debate/days/view/900/print).

2. For a set of management development programs we have created to do this, see IMPM.org (for business), IMHL.info (for health care), and CoachingOurselves.com (in the workplace).

References

Bennis, W.G. On becoming a Leader, (Addison-Westley, 1989)

Friedman, M. “A Friedman Doctrine: The Social Responsibility of Business is to Increase its Profits,” New York Times Magazine (13 September 1970)

Kotter, J.P. “What Leaders really Do,” Harvard Business Review (May-June 1990)

Mintzberg, H. Simply Managing, (Berrett-Koehler and Pearson, forthcoming 2013)

Mintzberg, H. “No more Executive Bonuses,” Wall Street Journal (30 November 2009)

Mintzberg, H. Managers not MBAs, (Berrett-Koehler and Pearson, 2004)

Schrumpter, J. A. Capitalism, Socialism, and Democracy (Harper and Brothers, 1942)

Zaleznik, A. “Managers and Leaders: Are they Different?” Harvard Business Review (May-June, 1977)