The economic crisis has revealed that large businesses, (such as GM, Chrysler, Ford), and large financial institutions (such as AIG, Merrill, Lehman Brothers, Morgan Stanley) have come to the party with selfish and shortsighted leadership. I’ll argue that this is the norm for all older, large organizations whose top managements are either hired guns or promoted from within; a norm that would be more obvious were we able to probe beneath the masks of other aging behemoths in finance and industry. Furthermore, lousy leadership is an intrinsic consequence of age and size; the larger and older an organization, the less competent – yet more lavishly compensated – its leadership team. Therefore, in the interests of national survival, we need to enact legislation that limits the sizes and life spans of large players in business and finance and that also limits the terms of their management teams so as: 1) to maintain sufficiently robust “free-markets” 2) to reduce the average parasitic load in organizations, 3) to sustain an adequate pool of competent leadership (in business and government) and 4) to proactively reduce the risk that sub-standard leaders of large organizations will cripple or destroy the global economy as they now threaten to do.
In this post I will focus on the structural problem, in later posts I’ll refute the obvious objections to executive term limits and to size and life span limits for large organizations. I admit to favoring small organizations because I spent most of my career founding and leading them. However, I was also a hired-gun junior executive in a moderately successful organization reporting to top executives who were largely clueless, and a member of the bureaucracies of two large and relatively old companies; experiences which further induce me to favor younger and smaller companies. However, my biases are also supported by a more or less universally accepted observation that most innovation and growth comes from small organizations.
Young, newly successful organization
- - Leaders are self-selected owners who grew their organization in the heat of market competition. They are inherently risk takers; adventurers.
- - A Limited pool of organizational resources produces urgent and continuous need for prudent and well executed decisions. A few poor decisions or poor execution can quickly end it all.
- - Small size relative to the market requires management to constantly adapt to market changes; management decisions are constantly tested by market forces against those of their competitors and, on average, the best managers succeed and/or learn and the poorest ones fail. Leadership is constantly tested by results. There are enough competitors and management decisions to make the results statistically significant and not overly dictated by chance.
- - Leaders limit their immediate compensation to enhance the pool of financial resource. Their incentive compensation comes from ownership and therefore aligns their personal interests with long term success of the organization.
Older, large organization
- - Leaders are hired guns, selected by reputations earned in bureaucracies, who reach the top by managing their superiors’ evaluations. In bureaucracies, good evaluations come from giving superiors what they want, not what is best for the organization; just ask yourself how Jay Bybee how he got to be a Federal Judge. They are accommodators and self pre-servative in thought and action.
- - Organizational size delays evidence of good or bad decisions by years and decouples decisions from results, preventing managers from being market tested often enough, and with adequately certain cause and effect relationship, to distinguish the competent from the incompetent.
- - Organization size provides the inherent competitive advantage of scale, which enables poor leadership to succeed in spite of itself.
- - Organizational size severely limits an organization’s ability to adapt to market changes and thereby induces management to pursue market management and market control policies which threaten or eliminate free markets.
- - A large pool of previously acquired resources, masks poor decisions. For example, a large airline can under price a small competitor in a regional market until it drives the competitor out. (By the way Fannie Mae and Freddie Mac are also examples of this phenomenon because they have access to an unlimited pool of government funds and are large enough to set lending rates and asset to loan ratios that are lower than free-market ones would be and ultimately create enormous losses for themselves and competing institutions.)
- - Executive compensation, which drains the financial resource pool, is optimized to placate leaders and their subordinate hired guns to the detriment of their organizations. Human nature, being what it is, induces the over-compensated to believe they are special and deserve what they get; thus blinding them to market realities. It also induces them to personal strategies which maintain their positions and personal reputations at any cost. Few of us have the strength of character to resist these temptations.
There have been internal efforts by large organizations, such as GE, to overcome the intrinsic burdens of size by putting fast track executives in charge of smaller profit centers in which they can succeed, learn and fail; and then promoting them based on results. However, even here the reality is less than it first appears, for getting on the fast track and promotion from within is seldom if ever based on results; in fact results are almost always second to satisfying expectations of immediate superiors. For example, the best battlefield generals (like Patton in WWII) or best regional sales managers -as measured by sales results relative to challenges and resources used- are seldom promoted to executive levels because they got their excellent results by managing and fully supporting their subordinates and by being a pain in the ass to their superiors back at headquarters by constantly demanding the support and resources their people need to accomplish their mission. Those who get promoted during times of prosperity generally stomp on their subordinates and perform as “yes men” back at headquarters. Admiral Zumwalt, who Eisenhower identified and personally selected to develop our Nuclear submarines over a resistant bureaucratic selection system, was a rare example of promotion on merits.
I realize that this post claims more than it justifies. I mean for it to induce consideration and dialog.
