Rethinking Basic Business Rules
Chapter Two, of The Lindland Manifesto
Is it possible to save a financial system that has lost its bearings?
The answer, of course, is yes. Remember it has only lost its bearings, but recovery will come. Some of the changes are radical and will require time. Some will also require fundamental correction in law. Improvement will surely come because it is in the nature of economics; the lessons of the slide beginning in the late 1990’s have been painful to all sectors of the economy but have created fertile ground for the better.
Let us not waste this precious time of economic and political correction, and change some basic business thinking. Required will be processes similar to the hearings and congressional outcomes that shed light on failed practices in the banking industry and put in place new legislation during the early months of 2011. Hopefully the leading business schools will also examine the rectitude of their lessons to our future managers and proprietors.
Let me start with my top three thoughts for mind adjustment in the old ways of business:
Old Rule 1. Take care of the short run and the long run will take care of itself
The view is that if management can achieve improving quarterly profits, the future will take care of itself in the long run.
This may seem axiomatic at first, but it is the management equivalent of a perpetual motion machine. It isn’t possible and the pursuit of this as a universal standard for measuring business success has lead to most of the sins of Wall Street. Where did it start and gain its currency in business circles? Probably at the Harvard School of Business. There is no argument that this was a major tenet of modern business philosophy.
This nostrum has probably done more to undermine the competitiveness of American business vis-à-vis China than any other. China operates strategically within a very different set of rules and measures. It will be necessary to have other methods of measuring economic progress beyond the basic accounting principles that provide our standards. Wise investors are already aware of this principle and place their bets accordingly, but Wall Street, pension, and mutual fund managers march to a different beat.
Old Rule 2. Good managers can manage anything
Dissimilar business enterprises (conglomerates) are simply other tools for efficiently redistributing asset values and accommodating business cycles. A corollary is the wish to rush into unfamiliar market areas for geographic diversity.
Of course it depends upon your definition of good management. Banks as well as manufacturing businesses are most guilty of this folly. I have never been involved in a business enterprise that hasn’t fallen into the trap where in the grass is greener philosophy wasn’t more attractive than cleaning ones house, so to speak. Eventually, we find it ends in the breakup and sale of components to managers and raiders who can feather their own nests as allies in leveraged buyout schemes irrespective of the interests of other constituencies such as employees, communities, and valuable institutions.
Old Rule 3. Huge scale is necessary in order to vie efficiently with other enterprises and international competitors.
In banking this has given us the “too big to fail” dictum. It is something akin to the arms race. Buried from view are the inefficiencies and failures that too big has caused for most of the major banks – read here Citicorp, UBS, Bank of America, Lehman Brothers, and yes the bailed out AIG, GM, etc. Eventually enterprises such as Fannie Mae feed on artificial means and government subsidy rather than real value added.
There are, of course, economies of scale as well as the fortunate harvest reaped from good product discoveries that propel growth – Google, Microsoft, Apple, Starbucks, CAT, and the like. These enterprises are either closely focused on single product lines or natural offshoots of the primary business.
Sins of huge enterprises are gladly accepted by industrialists and financiers who find fault in government grown too big for practical purposes. The same rules and thinking need to apply to all economic entities. “Big” needs to be constantly justified in terms of real rewards to society and not personal aggrandizement – read as Citibank and Bank of America, as well as regulatory agencies.