The Dumbest Idea In The World: Maximizing Shareholder Value

A Forbes piece on Roger Martin‘s book Fixing the Game: Bubbles, Crashes, and What Capitalism Can Learn from the NFL. I have not read the book yet. But I definitely will.

The “real market,” Martin explains, is the world in which factories are built, products are designed and produced, real products and services are bought and sold, revenues are earned, expenses are paid, and real dollars of profit show up on the bottom line. That is the world that executives control—at least to some extent.

The expectations market is the world in which shares in companies are traded between investors—in other words, the stock market. In this market, investors assess the real market activities of a company today and, on the basis of that assessment, form expectations as to how the company is likely to perform in the future. The consensus view of all investors and potential investors as to expectations of future performance shapes the stock price of the company.

“What would lead [a CEO],” asks Martin, “to do the hard, long-term work of substantially improving real-market performance when she can choose to work on simply raising expectations instead? Even if she has a performance bonus tied to real-market metrics, the size of that bonus now typically pales in comparison with the size of her stock-based incentives. Expectations are where the money is. And of course, improving real-market performance is the hardest and slowest way to increase expectations from the existing level.”

via Forbes.

When is the last time you saw such a CEO?

Netflix CEO explanation

Price change and service changes in quick succession… and the ensuing customer dissatisfaction.

An excellent current-events case to bring to the classroom.

via the netflix blog:

I messed up. I owe everyone an explanation.

It is clear from the feedback over the past two months that many members felt we lacked respect and humility in the way we announced the separation of DVD and streaming, and the price changes. That was certainly not our intent, and I offer my sincere apology. I’ll try to explain how this happened.

 

Henry Mintzberg on heroic managers

The notion that “change comes from the top,” Mintzberg declares, is a fallacy “driven by ego,” the “cult of heroic management,” and the peculiarly American overemphasis on taking action. If companies in fact depended on dramatic, top-down change, few would survive. Instead, most organizations succeed because of the small change efforts that begin at the middle or bottom of the company and are only belatedly recognized as successful by senior management.

[missing paragraph is copied below]

Mintzberg argues that the best kind of leader doesn’t try to effect much change. Rather, she functions like a queen bee, which “does nothing but make babies and exude a chemical that keeps everything together.” It is the other bees that busy themselves in going out to sense the environment, find sources of sustenance for the hive, and make the changes necessary to keep the hive alive in the face of an evolving environment. [via HBS Working Knowledge]

In his book “Managers, not MBAs” Mintzberg suggests that

business schools should produce not heroic managers but “engaging managers.” These are leaders who assist those under them, seek input from everyone when forming strategy, and reward everyone when the organization succeeds. [via]

From an interview with Mintzberg:

We’ve long been dominated by calculating managers, right back to Robert McNamara, ex-Ford president and Secretary of Defense during the Vietnam war, and his obsession with numbers. Then there was ITT and Harold Geneen with all his numbers. Now it’s in the form of shareholder value. Everybody is looking at the stock price every few hours. It is like playing tennis and watching the scoreboard instead of the ball. That is the calculating manager.

Heroic managers are ultimately not much different but they think they are artists, they think they are very creative. So they come out with these strategies like at Vivendi, AOL Time Warner, or AT&T. They come out with all these lovely looking strategies, which ultimately are not that interesting. I call them pretend artists. These are the heroic managers, engaging in the great massive mergers, with all the drama that entails.

Finally we have the style I prefer, which I call engaging. This is where managers and chief executives first go about engaging themselves. They know the industry. They know the people. They are committed to the company. They are not there for a few years just to drive up stock prices and run off with their bonuses. And by engaging themselves, they engage other people.

So how do you recognize a heroic manager?

Mintzberg says that they tend to:

  • Ignore the existing business because anything established takes time to fix.
  • Be dramatic, striking deals and merging like mad.
  • Focus on the present, and do the dramatic deal now!
  • Favour outsiders over insiders; rely on consultants as they appreciate heroic leaders.
  • Use numbers to assess insiders. That way you do not have to manage performance so much as deem it.
  • Promote the changing of everything all the time.
  • Re-organise constantly.
  • Be a risk taker.
  • Get the stock price up.
  • Cash in and run — heroes are in great demand.

For a long while, the embodiment of the heroic manager was Jack Welch and I documented elsewhere in this blog how his management rules are no longer followed in industry.

And just to show that management gurus do not know it all, here is (in Mintzberg’s own words) the missing paragraph that I announced at the top of this post:

Enron, with its “loose-tight” management policy, is an example of an organization that has figured out how to effect change without the usual pitfalls, says Mintzberg. The Houston-based energy company manages only two corporate processes very tightly: performance evaluation and risk management. Everything else is managed loosely, and local leaders get an enormous amount of discretion in figuring out how to get things done.

Henry Mintzberg’s website is here.

CEO Pay for failure

“A study released earlier this year by the Corporate Library — and titled “Pay for Failure” — singled out some of the corner suite’s worst offenders. Among them: Pfizer CEO Henry McKinnell; Merck former CEO Raymond Gilmartin; and AT&T’s Edward Whitacre.” (via DCSBN)

Some well-known managers weigh in on the issue:

Continue reading

Fortune: Jack Welch rules no more

Fortune magazine made him “manager of the century” in 1999 but it is now finding that CEOs are no longer following his rules. A leading indicator of the demise of Testosterone Inc.? Interesting debate here.

Below, the new rules and excerpts of the article:

Continue reading

CEO earns 821 times more

Back-to-back results published by the Economic Policy Institute that show that

“In 2005, an average Chief Executive Officer (CEO) was paid 821 times as much as a minimum wage earner, who earns just $5.15 per hour. An average CEO earns more before lunchtime on the very first day of work in the year than a minimum wage worker earns all year.” (link)

And that

“In 2005, the average CEO in the United States earned 262 times the pay of the average worker, the second-highest level of this ratio in the 40 years for which there are data. In 2005, a CEO earned more in one workday (there are 260 in a year) than an average worker earned in 52 weeks.” (link)

Around the same time, a report by a CEO organization assures us that CEO pay is “very reasonable”.