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Alan M. Webber

Alan M. Webber

Alan Webber, a founding editor of Fast Company magazine, is an award-winning editor, author, and columnist. His most recent book is Rules of Thumb: 52 Truths for Winning at Business Without Losing Yourself.

Twelve-Step for Wall Street

A little more than two weeks, Paul Krugman wrote a very thoughtful piece called "How Did Economists Get it So Wrong?" As a Nobel-winning economist, Krugman asked with great anguish, "What happened to our profession? Where do we go from here?"

He blamed the economics profession for two serious intellectual faults: a belief in the sanctity of efficient markets and a conviction that decision makers are always rational actors. It is a superstructure for economics that, as Krugman pointed out, Alan Greenspan has long believed in, and only recently expressed "shocked disbelief" at the collapse of "the whole intellectual edifice."

Of course, while it's always entertaining to see economists parading around in sack cloth and ashes, business leaders and management writers all know that once again, the economists are over-bidding their hands: This economic disaster wasn't caused by them, it was caused by the business community, by MBAs, and by the teachings that have long dictated the intellectual agenda coming from business schools.

We know it's the business leaders and not the economists who actually to blame for the current economic crisis, because we've seen this movie before--in fact, we've seen it almost every decade for the last 30 or more years. We witnessed the S&L crisis of the 1980s and the creation of the Resolution Trust Corp to get the U..S out of the recession caused by that scandal; we saw the era of junk bonds, the Predators' Ball, and Milken-Boesky financial follies; we watched the dot.com bubble inflate, fed by the fiction that a sock puppet, a T-shirt, and a logo could give you a brand--and then watched the bubble pop; we saw a parade of CEOs and their henchmen trudge off to jail, in the 2000s, as Skilling, Lay, Ebbers, Kozlowski, and Rigas gave new meaning to the concept of "the smartest guys in the room."

The fact is, if the leaders of the U.S. business community were your friends or relatives, you'd stage an intervention after such a long series of drunken orgies. You'd urge them to start attending the 12-step program of their choice, before another binge puts them back in the same old ditch. You can't have a decade-by-decade string of disasters like that by accident; it has to be by design.

And it is. The design is what we've told business leaders and want-to-be business leaders they should think and how they should act.

If Krugman is right about the economics profession having two key ideas that are profoundly wrong, so does the management profession. The first is the notion that the proper definition of victory for a company begins and ends with shareholder-value creation. This has long been the default teaching of business schools, and it is simply a recipe for bad decision making, false values, and, in some cases, an excuse for criminal behavior.

The second is the notion that CEOs are entitled to entrepreneurial paychecks while they do non-entrepreneurial jobs. Right now, the relationship between CEO pay and average worker pay is 319 to one. CEOs and Wall Street investors are claiming gigantic rewards while they take risks with other people's money. They have managed to sever any connection between risk and reward, and perhaps even more to the point, between authority and responsibility.
So what is to be done?

Business schools and business leaders need to ask new questions, develop new answers, and generate new rules, or I guarantee that within a decade we'll be right back in the same ditch.

The first question to ask is, What's the point of the exercise? What's the definition of victory for CEOs and business leaders today and in the future? Before shareholder value and pay became the twin fixation of business leaders, you'd hear them talking about the sense of building a great and enduring company; the importance of contributing to the lives of the employees, the customers, and the community; the sense of carrying on traditions of excellence. You still hear those precepts--but usually from leaders in other countries, not the U.S.

The second question is more personal: Leaders need to do an inventory of what gets them up in the morning and what keeps them up at night. What do they really care about--beyond the size of their paycheck? What mission do they serve? What larger purpose defines their contribution?

You have to salute Paul Krugman for opening a public conversation about the future of the economics profession. Where is the same conversation going on about the future of management and leadership in the US corporation?

By Alan M. Webber

 |  September 15, 2009; 6:40 AM ET
Category:  Economic crisis Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   Del.icio.us   StumbleUpon   Technorati  
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Dear Alan Webber:

Thank you for your most thoughtful piece "Twelve Step for Wall Street".

While I find your prognosis correct, the piece is missing something: what exactly you propose to change.
What replaces the old "shareholder value" doctrine? "Every morning you get up, think about what mission you serve"?

One first has to understand how the old doctrine came about. It is a (thinly veiled) rationalization of maximizing gain by the "owners". Call it "greed", or any other word you wish. Shareholders hire somebody they pay very well to pay attention to one thing only: shareholder profit.

The success of "shareholder value" is rooted in that it codifies innate behavior. It raises to the level of respectability the phenomenon of greed.

So what replaces that?
"Building a lasting concern". "Investing in the community". "Improving people's lives". That's all nice and good, but it does not answer the question "why should investor A put his money in Company X, instead of Company Y?".

The truth is: a company (let's say Honda) can build quality, reliable product that lasts, that people enjoy, that saves lots of gasoline - and never be a shareholder success. So is Honda a success? If it is, how do I fund my retirement with that kind of an investment?

A few more observations:
The much maligned economists with the sacks and ashes are quite different from their MBA partners in crime on the other side of the fence. Those partners show no remorse at all, and nothing suggests their ways have changed.

One benefit of the "shareholder value" doctrine is: you can actually measure objectively how well somebody is doing. Try that on whatever alternative you propose. Can your doctrine measure its own success?

The confusing thing is: the long tenure of Rick Wagoner at GM showed that when the results of these measurements come in, year after year, nothing happens.

The most shocking lesson from this crisis is: shareholders have proven beyond the shadow of a doubt that they are incapable of safeguarding their own self interest. Indeed, they do NOT know best what is good for them, and what is not.

Posted by: anno2 | September 15, 2009 10:54 PM
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It’s unfair to paint with such a broad brush, but the self-indulgent baby boom cohort as been abhorrent in the private and public arena. As Paul Begala stated in his Esquire essay The Worst Generation, “As they came of age, and as idealism might have required sacrifice, idealism suddenly became unfashionable.” Instant gratification, self-obsession and a lack of leaders across the spectrum have resulted in many of the political and societal problems confronting us today. The orgy of excess over the last three decades is simply par the course for this cohort.

Posted by: summertyme40 | September 15, 2009 5:34 PM
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Ultimately, our choices are simple.
Either change Capitalism so it serves the majority interest...or wait for Capitalism to be replaced by the ballotbox or the bulletcase.
This is what has happened everywhere Capitalism has functioned without checks and balances.
As we speak, the Robert's court is preparing to undo a century of precedent and create an entirely new creature, the Corporate Citizen, entitled to all the privileges, immunitys and rights, but having none of the responsibilities and duties of "Persons born or naturalized" which the Supreme Court in Santa Clara v. Southern Pacific Railroad mistakenly and without discussion or argument accorded to the Corporate entity.
For a century it has been obvious, right and good, to limit the use of the nearly infinite wealth of the Corporation to sway the results of elections. That is about to change.
Next thing you will hear will be the sound of the Corporation voting, with weighted votes, to directly elect and unelect the Legislature, the Executive and the Judiciary, assuming Roberts is so dedicated to his ideology as to commit this first travesty.
Make no mistake, if Roberts pulls off this shift to full Citizenship for the Corporation, this is what will happen.

Posted by: mykmlr | September 15, 2009 4:06 PM
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Perhaps business create the better "social value" by taking the long view and planning for long-term stability and profitability. The present trend toward short-term earnings has compelled many business to evicerate their work forces and send work offshore. As a result, few business actually create value, they just cut "costs" (i.e., personnel).

Of course, this is legal and in strict capitalistic terms entirely proper. But the next time some captain of industry whines about his taxes being too high, perhaps he'll understand why his bleating falls on deaf ears.

Posted by: jp1954 | September 15, 2009 11:08 AM
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There are two threads that need to be kept separate. One is the question of the time horizon for a business. The other is the issue of whether businesses should have a role promoting social values that have nothing to do with their business.
A business is typically a group effort. One of the major challenges of any successful group is getting its members to contribute to the long term success factors of the group. For members of the group, there is always going to be a tension between their particular needs short or long term and the group's needs. Successful businesses recruit people who have the potential to contribute to the businesses needs both short and long term. Those businesses train and motivate people to contribute to the long term needs of the business.
On the other hand, the relatively common idea that businesses should have some role contributing to general social value is a particularly bad mistake. Businesses do need to operate in a public legal framework. It is desirable that they try to make a constructive contribution to that framework related to their business needs. But businesses are doing well if they are successful at their business. A business has no way to evaluate decisions based on private value frameworks. Those who wish for this kind of effort always operate under the illusion that businesses are going to chose their particular value framework. In fact, the more likely reality is a business choosing only to give jobs to people who share a particular religon or not to do business with people who have a particular skin color. Its fine to suggest that business people should make some kind of constructive contribution to their society. But they should do it as private individuals with contributions of their private time and money. The business organization should be left to do the only thing it knows how to do which is to run its business.

Posted by: dnjake | September 15, 2009 10:06 AM
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I have said for years that focus on share price, quarter by quarter, is the death of modern business. That, and the explosion of exec compensation!


Posted by: jaycee31 | September 15, 2009 9:56 AM
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Want to fix this problem?


Repeal not the Bush, but the Reagan tax cuts.

Problem solved.

Unwilling to do that?

Well, in that case, we get what we deserve: a new generation of robber barons tilting us ever closer to a complete economic collapse.

Posted by: trippin | September 15, 2009 9:16 AM
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