The Cult Of The MBA CEO

The MBA degree turned 111 this year. How is it doing? Great for those who hold the degree from top business schools; not so much for the businesses they run, according to a study by the Institutional Investor. The cult of the MBA CEO has led to huge increases in executive pay but not profit gains:

According to data from the Stanford Graduate School of Business, average CEO compensation at the largest firms rose from $1.8 million per year in the 1980s — roughly in line with the previous 45 years — to $4.1 million in the 1990s. By the early 2000s, it had risen to $9.2 million. And those numbers are after adjusting for inflation...

We found no statistically significant alphas — despite testing every possible school with a reasonable sample size. MBA programs simply do not produce CEOs who are better at running companies, if performance is measured by stock price return...

Why executives make the big bucks

Socialists suffer seizures when the subject of CEO salaries surfaces. They never tell us how much more money than a janitor a CEO should make, so it’s clear that no matter what the salary they will harm themselves by their extreme response if it is any higher.

British socialists are advertising their envy in a new report “of companies that Theresa May said risk damaging ‘the social fabric of our country’ by paying bosses too much money,” according to comments by the Adam Smith Institute. The author explained,

"The public register was published on Tuesday by the Investment Association, a trade body of investment firms that manage the pensions of millions of Britons."

The register lists every company in the FTSE All-Share Index which has suffered at least a 20% shareholder rebellion against proposals for executive pay, re-election of directors or other resolution at their shareholder meetings.

Of course, the source of the outrage is pure envy and no amount of economic reasoning or facts will dissuade the left. But can free marketeers justify the highest CEO salaries? There are two reasons that CEOs earn such salaries: 1) marginal revenue and 2) knowledge.

Creative destruction becoming less destructive

Investors should worry about productivity growth of the firms they invest in because it is one of the major determinants of profits and market share. Innovation should drive old technology firms out of business and improve productivity but that hasn’t been the case for half a century.

Productivity growth has been falling since about 1970 for many companies according to Andrew Haldane, Bank of England Chief Economist, in his speech “Productivity puzzles” at the London School of Economics last month in which he reported what’s happening to productivity in the UK and globally.

Haldane said the future is already here — it’s just not very evenly distributed. Some companies are highly innovative with rapidly growing productivity, but most lag far behind. There are broad differences in productivity growth between advanced economies and emerging market economies, between the US and other advanced economies, across industries and within industries. After providing the fruits of excellent research, however, Haldane offered an anticlimactic solution:

The Mayfield Commission aims to create an app which enables companies to measure their productivity and benchmark themselves against other companies operating in similar sectors and regions. By shining a light on companies’ relative performance, the aim is that this would serve as a catalyst for remedial action by company management.”

RX for Healthcare.gov

I posted in November in A Monkey with two bananas about the left's contempt for management being the cause of the failure of the Obamacare web site, Healthcare.gov. Recently, Foreign Affairs magazine detailed the management failures of those in charge of the web site in The Key to Successful Tech Management. The authors wrote,

Assuming basic technical competence, the essential management challenge for all large technology projects is the same: how best to balance features, quality, and deadline. When a project cannot meet all three goals simultaneously -- a situation HealthCare.gov was in by the beginning of 2013, as the administration’s internal memos show -- something has to give, and management’s job is to decide what.

In other words, everyone wants their projects finished fast, cheap, and good, but in reality we can only have two of the three. Good managers understand that and let the client set priorities. The Center for Medicaid and Medicare Services (CMS) settled for fast and cheap so quality suffered. But as the authors point out, Healthcare.gov wasn't the government's worst disaster:  

That honor probably goes to the Federal Aviation Administration’s Advanced Automation System, an attempt at modernizing air traffic control in the 1980s and early 1990s that has been characterized by one participant as “the greatest failure in the history of organized work.”...

In the end, the FAA determined that $1.5 billion of the total $2.6 billion spent on hardware and software for the system had simply been wasted -- more than twice the total cost of HealthCare.gov.

And that's without adjusting for inflation! Then there was the FBI’s Virtual Case File, an upgrade of its Automated Case Support system begun in 2000. The project failed outright by 2005 and the entire $170 million project had to be written off. The authors summarize the government's problem:

These are only two of many such examples one could choose from, all stemming from problems in at least one of three distinct arenas of government tech administration: hiring and procurement, planning, and management.

The government spends $80 billion per year on tech projects, many of which will fail like those mentioned because few people in government have any respect for the field of management. 

Unfortunately, decades of nine- and ten-figure failures have not sufficed to teach the federal government and its contractors such basic lessons....

So the real question is not how to fix a website, even a big, complicated one. It is whether Washington will ever allow good management to become part of its standard operating procedures, rather than something that it turns to only when its regular routines fail badly enough to produce a crisis.

That will happen when socialists admit that CEO's deserve their pay. Good managers are as rare as good NFL coaches. Coaches do little but stride up and down the sidelines and yell during a game, while the players on the field do all of the work. And so it appears to the media and public that CEO's do little but take credit for the work of others.

But the NFL coach's job, and that of a good CEO, is to orchestrate the efforts of the many different players to achieve the team's goals. The coach needs to know something about every position, though he may not be an expert at each. No one function should dominate the effort; each contributes its portion to the goal. One can learn the basic principles of management by reading a few books. But like coaching football, becoming good at it takes years of practice.

The government will continue to fail at everything from IT projects to hurricane clean ups until it learns respect for the role of management. Unfortunately, bureaucrats who fail miserably tend to get promoted while in the private sector they get fired. CEO's have failed, but none as spectacularly as bureaucrats do on a regular basis.

A Monkey with two bananas - Why the Obamacare web site cratered

The Obamacare web site fiasco has proven to be a gold mine for the late night comedians. The failure has been so massive that even the left listing mainstream media has to acknowledge it. No one should be surprised that socialists can’t manage projects well because they have a notorious contempt for the profession of management. 

I have heard managers tell good employees that they could give a monkey two bananas and the monkey could do the employee’s job. That’s a lousy manager. One of the manager’s most important jobs is to motivate employees and the monkey with two bananas story only demoralizes them. 

The left think the same thing of managers and the profession of management, so they never bother to study it or imitate good managers. Recall President Obama’s contempt for management during the financial crisis and ridicule of them for using corporate jets. Obama would never consider taking a trip of any distance in any vehicle other than Air Force One because his time is so valuable. But he considers the CEO’s time to be worth so little that he can ridicule them for doing the same thing he does.