Should Business Managers Consider Stakeholders?

Source: AP Photo/Mary Altaffer

Recently the Chicago Booth school of management asked leading economists to agree or disagree with this statement: Having companies run to maximize shareholder value creates significant negative externalities for workers and communities. The questionnaire was prompted by a statement from the Business Roundtable that businesses were bound by a “fundamental commitment” to all stakeholders, including shareholders but also customers, employees, suppliers, and the communities in which they operate. Most agreed or strongly agree, although the largest single group included the uncertain.

Good management makes for great investing

Investors with the time will want to imitate Warren Buffet and invest in a few good companies rather than put up with a host of losers in an index fund, but analyzing individual companies in the way that Ben Graham taught is time consuming. Several experts have developed algorithms that examine financial data that helps weed out the worst.

But if an investor is going to marry a business he must become familiar with the quality of its management. Good management can turn a bad company around and value investors often want to buy shares in a company when it has hit rock bottom and has the potential to turn around.

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.

Slate Article Pays No Dividends

Slate magazine's business and economics correspondent, Matthew Yglesias, advertises his ignorance of investing in his latest rant against dividends: Dividends are Evil. Concerning GE and AT&T's increase in their dividends, Yglesias wrote,

The only problem is that dividends are terrible. Bad for the economy, bad for business, and surprisingly unfavorable to investors. A barbarous relic of a less financially sophisticated era, they’re also indelibly coated with misleading rhetoric that perpetuates sloppy thinking about business, profits, and investment.

 Yglesias then tells what companies should do:

 The impatient move that would benefit the economy would be for a cash-rich firm with an already high share price to invest. Hire more people and do more stuff, upgrade the training of your existing workforce, reward your better employees with raises and bonuses so they don’t go elsewhere, cut prices to build customer loyalty. That’s how profits lead to rising incomes, and how rising incomes lead to demand for the stuff businesses sell.  

Of course, the left does not understand what business is for. Businesses don't exist to "benefit the economy." They exist to make profits for their owners, the people who have invested their savings in the company. No one invests one's savings without the expectation of a decent return in the form of profits. Profits are to business owners what interest is to lenders: profits are repayment of the opportunity costs of giving up the use of one's money.

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.