Monday, March 11, 2013

Business Princes

Not only does the emperor, or more aptly satraps, have no clothes. Those little folk with power and prestige and almost all weak of mind and devoid of accomplishment. The alleged best and brightest (BaBs, for derision) in the biz and finance worlds are the scammers who hold open their attache cases and see their boards overfill them with cash and options.

Over at the Financial Times today, Lucy Kellaway dared take another peak at the nude and ugly princelings. Her sideways look was an unscientific poll of overpaid shots. (The link may require registration, but you should be subscribing to the FT anyway, and The Nation as well.) A few admitted to her they were obscenely overcompensated. They had come to terms with that. More common was the dumb-as-a-post attitude that they create value, so they are underpaid if anything.

Chicken lips!

Best and Brightest?!

Go to a biz-school library or click around the net to see that most top execs and financial types are mediocre at best. The BaBs generally lead companies to underperform the Dow. The financial types are generally like pilots whose ships are carried along by strong currents. That lack of real value added doesn't stop their boards or partners from proclaiming they are wizards worth every penny of their multi-million-dollar annual packages.

In contrast to the big paydays, companies with these execs would be better off putting their cash in an index fund. Then they would not get a higher return, but they could take the millions they would otherwise pay the top dogs and actually invest it in meaningful R&D and expansion.

Of course the guys (almost entirely white men by coincidence) who hire these bozo BaBs have a real stake in the scam. Their fiduciary duty includes ensuring competent top management. That in theory carries both criminal and civil costs of they goof up doing so.

Most top business executives share some major flaws. For example, among the worst is short-term thinking. They and their direct reports typically develop and market to pump up profits for one or two quarters. Such tactics almost invariably rob the company and its shareholders of longer term, bigger profits and market share. They simply aren't putting resources where they will pay off biggest. Come evaluation and bonus time, the princelngs claim great benefit to the company.

Oddly enough, in many companies, even if exec plans blow up and returns are awful, the bigs still get bonuses on top of huge salaries. Increasingly shareholders switch into WTF? mode at annual or quarterly meetings, but the klutzes on the thrones remain there.

Another typical mediocre to awful boner is plumping margins by such moves as moving most production offshore, by underpaying workers, or by downsizing to starvation staffing levels. Yet, it's been over a century since Henry Ford showed the wisdom of a different approach. He'd pay is workers enough so that they could afford the cars they built — a large base of loyal, local, repeat customers. Building for a healthy and growing middle class and above is not counterintuitive. It too is a long-term survival plan, and one that gives you a much higher level of control than chasing third-world and developing-nation purchases.

Fantasy Worlds

My conclusions after long exposure to the constant stupid decisions by the shots is that they tend to be very ordinary people who develop the level of self-delusional ego typical of surgeons and ministers. So many above and below pour praise all over them. They begin to believe it all and then come think it is both absolutely true and natural.

It's likely that in a few big companies, shareholders will force some change, although not as likely that these will be deep, systemic improvements in executive selection, hiring, evaluation and compensation. It is even less likely that boards will admit they didn't hire BaBs, rather just connected buffoons who aren't particularly competent. Board members have a huge stake in appearing to have met their fiduciary requirements.

Occasionally,. reporters, biz school academics and some influential bloggers draw attention to the grossest failings of top managers and the absurd levels of reward for ordinary or inferior performance. Therein may lie the catalyst for change. Coming from such an oblique angle will surely take a long, long time.

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