The Big System Is Talking to Us
I don’t know about you, but I have lost quite a bit of money in the stock market over the last few months, and I don’t like it one bit. And some of it wouldn’t have had to happen.
Well I am getting ahead of my self. This is supposed to be an article about getting better -- continuous improvement, etc. Let’s go back to some basics. We get things done by doing tasks, like entering a number into a ledger or pouring something into a test tube. If we draw a box around a related series of tasks, a box that has inputs and outputs, we can call that a process, like compiling a quarterly statement or making a batch of concrete. If you improve the process, things generally get better.
If we take a related series of processes and draw a box around them, we can call that a system, like running a company or constructing a building. If you improve the system, things generally get better. But how do we know if things are getting better? Well we generally measure them. In business, unfortunately for too long, we have been doing most of our measuring of public firms by their quarterly statements. So there is a great amount of pressure for corporate officers to do what ever it takes to “make the numbers.”
Brian Joiner in his book Fourth Generation Management says there are three ways to make the numbers.
Sounds simple enough, but it isn’t. And it can’t be done in a quarter of a year.
W. Edwards Deming, in his book Out of the Crisis explains it another way.
“Short-term profits are not a reliable indicator of performance of management. Anybody can pay dividends by deferring maintenance, cutting out research, or acquiring another company. Dividends and paper profits, the yardsticks by which managers of money and heads of companies are judged, make no contribution to material living for people anywhere, nor do they improve the competitive position of a company or of American industry. Paper profits do not make bread: improvement of quality and productivity do. They make a contribution to better material living for all people, here and everywhere.”
And why are some of our CEOs willing to distort the system or the numbers to make those quarterly statements look good? INCENTIVES! Those of you who have been reading this column for any time at all will know my bias against incentives. Well here you have a classic case of the destructiveness of incentives. We are now being Punished by Rewards as Alfie Kohn put it in the title of his book on this subject.
In a front page article, Why the Bad Guys of the Boardroom Emerged en Masse, in the June 20, 2002 Wall Street Journal, David Wessel says, “One culprit was stock options, which gave executives huge incentives to boost near-term share prices regardless of long-term consequences. No CEO pay package seemed to strike any board of directors as too big. These incentives helped turn the widely practiced art of earnings management -- making sure profits meet or barely exceed Wall Street expectations -- into a gross distortion of reality at some companies.”
And we might add that not only were the CEOs bribed with huge stock options and bonuses, but the board of directors also distorted their own judgment by awarding themselves loans and stock options as well. The theory was that directors would make better decisions if their own economic interests were on the line. As long as the numbers are going up and the board’s pockets are being lined, even if the numbers are distorted, why would board members want to look at the behind-the-scenes manipulations and distortions. We now know this is an expensive failed theory.
Let’s take this to the macro-system level. This brings you and me, our universities, professional societies and the government into the picture. What roles and responsibilities do we each play in this large picture? The answer is many. The point is that we all play a role in this mess. Russell Ackoff says, “The performance of a system is not the sum of the performances of its parts taken separately, but the product of their interactions.” We all interact in this larger system.
The voice of the big system is speaking to us. So what can we do? Ideally you work on the systems you control. We can be more diligent in studying where we put our money. We can personally continue to improve our processes and systems rather than distort the numbers or the system. Beyond that we can work to elect better people to boards of directors. We can insist on doing away with bonuses and incentive plans that can destroy a company. We can elect the best people to represent us in our governments and insist our governments do the jobs we need them to do.