Business mythology tells us that leaders of large organizations are particularly talented managers, carefully selected by experts from a pool of exceptional people, and must know things the rest of us don’t just to be able to manage behemoth corporations. There are none more besotted with this myth than Wall Street Executives, Republican Congressmen and Larry Summers. Apparently, even actions by Tim Geithner and President Obama President are hobbled by this myth.
It is more accurate to say that leaders of major corporations, particularly the banks, are usually chosen by relatively flaccid groups of people called “boards of directors” on the basis of personal connections within a small group of insiders and years of loyal service to a large institution. Board members, who seldom have significant personal stakes in how well their businesses do over the long haul, were likewise chosen on the basis of personal connections and loyalty to the tribe of financial insiders or to former or present CEOs. All in all, it’s the bureaucrat picking the bureaucrat. From time to time an above average executive is accidentally selected, but mediocrity, untested by market forces, is the norm.
Consider Lloyd Blankfein, the CEO of Goldman Sachs and probably above average as a Wall Street CEO: no history of exceptional people management skills or strategic thinking,… started as a precious metals trader…. made his bones making deals and taking risks, became a board member of Goldman Sachs in 2003 and was chosed CEO in June of 2006 (after a thorough, world wide search?). As CEO he authorized bets that produced short term results and longer term tragedies, but was bailed out by government largess and is self-righteously convinced he earns lavished on him by fellow board members which included $27 million cash bonuses in 2006 and 2007; courtesy of a compliant board. He even suggested he was doing God’s work! (Good to know that God outsources gambling.) It is fair to say that in risking the company he took no personal risks because he gets a king’s ransom each year in spite of the longer term consequences of his decisions and because he’s still in charge even though he oversaw risky and shady deals (Greece’s debts for example) and was bailed out by the Federal Government because of his unsound management decisions.
Or, take Tony Hayward the hapless and self-centered CEO of BP. He joined BP in 1982, worked his way through the ranks, became a member of BP’s board in 2003 and was chosen its CEO in 2007; so much for doing a world search for the best possible CEO. He is one of the board’s 14 directors, 4 others are executives who report to him and three other board members started in 2008 and 2010. (http://www.bp.com/managedlistingsection.do?categoryId=9021801&contentId=7040608) ) Unlikely that he would be forced out by a vote, no matter how damaging his leadership of BP or his disdain for the environment.
Those who believe in market forces should recognize that markets with a few dominant players are dysfunctional as are the markets in which executives are selected. Institutions with more than 5% market shares survive solely because of their size, not because of the competitive competence of their executives. Those who lead these companies should be paid less than peers of smaller organizations who are tested by market forces and, on average, are more competent and are more likely to be replaced when they screw up.
The financial (and other) behemoths must be broken up. Until that happens we’re all at risk from executives who suffer from terminal stupidity and self-importance and who manipulate dysfunctional businesses in dysfunctional markets.
Edwin Lee, 5/27/2010
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I think we see the same structure being played out in the school systems here in Los Angeles.