I’ve found few exceptions to this observation: Large, hierarchical organizations over 30 years of age are poorly led, a drag on their societies, and unable to adapt. This applies to diverse organizations like Goldman Sachs, J.P. Morgan, BP, General Motors, the US Army, Penn State University, the Catholic Church, many governments, and most political parties. I believe there are structural causes for such pathetic leadership. These institutions have structured themselves to promote only those individuals who will protect and defend them. Potential leaders of change were the impatient, disruptive subordinates who either left in frustration or were expelled for cause. They were heretics and whistle blowers who directly threatened statuses, perks and self-images.

Promotions through middle management are filtered by five criteria (listed in their order of importance): 1. Perceived loyalty to the immediate superior and that superior’s status within the organization, 2. Perceived loyalty to the existing system as defined by senior management, 3. Likability, 4. Seniority, and 5. Apparent competence, usually equated to an accumulation of the system’s merit badges and an absence of accountable failures.

This  promotion process effectively stabilizes the inner workings of an institution and makes relationships among its members predictable and enduring.  Mediocre executives may administer with ease, so long as neither the mission nor the organization needs to change. Those who have reached the top are old (in their 50s or older), cautious, semi-competent administrators, supported by slightly younger, risk-averse subordinates awaiting their turns. The statuses and perks within these organizations go to those who play the game and get along. Subordinates are rewarded for impeding change, covering up organizational failings, and avoiding risks associated with altering the mission or initiating reforms.

Change, innovation, and bold leadership normally come from small, youthful, informal establishments with self-anointed leaders in their twenties or thirties who are intensely focused on their missions and thrive on taking risks. They attract subordinates who provide critical abilities and passionately pursue the institutional objectives. In the early years, a natural filter attracts worthy applicants and discourages most of the others: the organization is risky, ill-defined and without a history of success.

An ugly reality about innovative startups is that most of them fail or become members of the living dead. A venture capitalist friend told it to me this way: “When a successful VC invests in 10 companies, on average two or three of them will succeed and make him a hero. Three will fail. Worst of all, four will become very attractive small businesses which suck up his time.” I will add that the three which succeed will eventually join the next generation of large, hierarchical organizations run by lousy leaders who replace the founders.

An old bureaucracy will be poorly led until its culture embraces uncertainty, youthful bulls, and institutional failures. I can’t see that happening in the military, Goldman Sachs, Wells Fargo, BP, or the Catholic Church; just to mention a few. They will have to fail drastically before they might renew themselves. It’s tragic for society that some businesses and financial institutions have been allowed to become “too big to fail.” They need to be broken up until they’re small enough to fail and then prevented from growing through mergers and acquisitions.

How to select and develop capable leaders

Almost everyone sucks at selecting potential leaders (as opposed to selecting prudent administrators) because they use the wrong criteria. Potential leaders are too young, too aggressive, make too many mistakes, and are usually arrogant and obnoxious. They are out to accomplish something on their own and don’t want to report to others. They aren’t trying to be selected by others; they do the selecting.  Most of them won’t be successful. And few can predict who will and who won’t succeed. It is easy to identify Steve Jobs as a winner after the fact. However, Continue reading →

Congress should stick to its role as a marginally competent board of directors and stop micro-managing the Postal Service into oblivion.

For 30 years, a meddling Congress has been driving the Postal Service from health into bankruptcy while ignoring the three major drivers of its collapse: Congressional mandates, defined-benefit plans for postal workers, and declining mail volume. Clean up the first two and the declining mail volume could be managed by competent executives and dedicated workers empowered to modernize and expand the system. I’ll suggest a cure that Congress can and should enact.  For details of the financial situation I suggest reading “The Cost Structure of the Postal Service: Facts, Trends, and Policy Implications,” released July 20, 2011 by the Office of the Inspector General

Congress mandates unnecessary services. To subsidize special interests, it compels delivery of 2^nd and 3^rd class mail at a loss. It limits any increase in the price of stamps to the rate of inflation and ignores more rapid increases in operating costs such as transportation. In 2006, it mandated that the Post Office pay $5.5 billion each year into Federal coffers until 2020, ostensibly to pre-fund health care costs for the next 75 years. (Gross revenues for the post office were only $63 billion in 2011). This last piece of micro-management was passed unanimously by Congress. It should have been obvious to any member with a business background that this would accelerate a financial crisis while doing nothing to solve the long term issues of fiscal soundness. It did, however make Congress look better. Through the magic of bookkeeping, it reduced the Federal deficit by $5.5 billion each year!

Defined-benefit plans, like the health care benefits for retired Postal workers, are intrinsically unsustainable because Continue reading →