Vorsprung durch Technik?

We assume that Germans are so efficient that it comes as a shock to discover not one but three monumental cock-ups.

German news weekly Der Spiegel interviewed the architects responsible for three national fiascos – Stuttgart’s railway station, Hamburg’s concert house, Berlin’s airport – and asked them to explain. They blame contractors, clients, national character, changing regulations, and, just a little bit, themselves.

But their professional chutzpah is rather reminiscent of this:

Why have company CEOs become anti-social?

Yesterday, this blog linked to research that proved extremely high pay does not improve CEO performance. But why do CEOs behave worse yet receive more pay?

In the journal Democracy, Chrystia Freeland reviews a new book by Mark Mizruchi, The Fracturing of the American Corporate Elite, which examines the fundamental shift in corporate culture that took place in the 1980s. Unlike today, big business in the 1950s and 1960s wanted strong government, for “steering the economy and underwriting the well-being of the middle class”:

The business heroes in this narrative are the leaders of the “moderate, pragmatic corporate elite [that] had emerged, based primarily in the largest American corporations” by the end of World War II. This elite and its views were “epitomized” by the organization whose history forms the backbone of Mizruchi’s narrative, the Committee for Economic Development (CED). Formally incorporated in 1942, the CED brought together engaged, moderate businessmen from across the country and advanced their views in the major national debates of the subsequent decades. They were an illustrious group: As of July 1945, the CED’s trustees included a senior partner at Goldman Sachs, the chairman of Coca-Cola, the president of General Electric, and the presidents of the Federal Reserve Banks of Boston and St. Louis.

The CED, in Mizruchi’s telling, thought the days of untrammeled free-market capitalism were gone, and that both private and government-led economic management would be necessary for a market economy to survive. In order to maintain the system from which their privileges derived, they believed it would be necessary to attend to the welfare of the broader population. This meant supporting a high level of employment, the alleviation of poverty, the amelioration of racial disadvantage, and the provision of sufficient purchasing power in the population to consume the goods that American business was so proficient at producing.

This was the creed of the nation’s most influential corporate leaders, a group that supplied Cabinet secretaries to both Republican and Democratic Administrations. Today, with so much of the national economic conversation consumed by the budget deficit and which middle-class entitlements need to be cut to reduce it, that platform would place you on the left wing of the Democratic Party, and no leading business organization would advocate it.

Why since the 1980s has business treated government almost as an enemy? Freeland thinks the answer is one that Mizruchi is reluctant to acknowledge, probably because it is an uncomfortable answer for Liberals. It is an unintended consequence of the cultural shift in the 1960s:

[Mizruchi] doesn’t pursue the truly unexpected and uncomfortable paradox his historical study reveals. When America’s postwar corporate elites were sexist, racist company men who prized conformity above originality and were intolerant of outsiders, they were also more willing to sacrifice their immediate gain for the greater good. The postwar America of declining income inequality and a corporate elite that put the community’s interest above its own was also a closed-minded, restrictive world that the left rebelled against—hence, the 1960s. It is unpleasant to consider the possibility that the personal liberation the left fought for also liberated corporate elites to become more selfish, ultimately to the detriment of us all—but that may be part of what happened. The book sidles up to but doesn’t confront head-on the vexing notion that as the business elite became more open and meritocratic, it also became more selfish and short-termist.

The most wounding criticism of liberalism is that, in liberating the individual, it destroys society. That is the basis of the opposition to liberalism pursued by communitarians from both the Red Tories and Blue Labour.

Liberals (but not right-wing libertarians) understand that no one can be truly ‘free’ without the support of society and community. No one has the ability to “pull themselves up by their own bootstraps”. Yet because the Liberal Democrats are in coalition with a party that has little time for society, and because Liberal Democrat members pursue the tactics of  ‘community politics’ divorced from the underlying philosophy, Liberals in Britain are vulnerable to their communitarian critics.

A few days ago, David Boyle called for a new kind of Liberalism that emphasises what we share, not merely our individual interests. He is quite right because, as the present economic crisis demonstrates, if liberalism is interpreted simply as an absence of limits, liberty is diminished for all but the wealthiest few.

Executive pay – because you’re worth it

You know those excuses for the obscenely huge amounts of money handed over to company chief executives? It’s a reward for high performance and all that? Turns out to be complete bollocks.

Here’s the abstract of an academic paper published earlier this year, Performance for Pay? The Relation Between CEO Incentive Compensation and Future Stock Price Performance:

We find evidence that CEO pay is negatively related to future stock returns for periods up to three years after sorting on pay. For example, firms that pay their CEOs in the top ten percent of excess pay earn negative abnormal returns over the next three years of approximately -8%. The effect is stronger for CEOs who receive higher incentive pay relative to their peers. Our results appear to be driven by high-pay induced CEO overconfidence that leads to shareholder wealth losses from activities such as overinvestment and value-destroying mergers and acquisitions.

[With thanks to David Grace for spotting this.]

A pro-EU article in the Mail?

Yes, it’s true. The financial section of the Mail on Sunday published a report with the headline:

Staying in the EU is vital for business, warn two-thirds of small firms

Well, it’s in the Mail, so it must be true. But it obviously hasn’t convinced the Mail’s readers, as the pig-headed comments beneath the article demonstrate.

The truth about Davos

Davos is here again – that’s Davos, a Swiss town that hosts the annual business leaders’ conference, not Davros, creator of the Daleks.

The Wall Street Journal is not normally the most anti-establishment of newspapers but it has published a revealing article about the conference and the organisation that hosts it, the World Economic Forum (WEF).

Some choice quotes:

The WEF says it is there to improve the world, but it is really there to exploit rich people’s need to feel important. It is driven not by achievement but by vanity.

and:

Pride and ambition are monetized with equal brilliance on the revenue side. Simple membership for most Davos delegates is $50,000, plus a $19,000 conference fee. But that is only the first rung on the ladder. If you want to feel important even by Davos standards, you have to climb further. To gain access to industry peer events as an “industry associate,” $156,000 is the price. An “industry partnership,” which buys you two delegate spots, costs $263,000.

Scale those heights and another peak looms. Up in the thin air at Davos are the so-called “strategic partners,” who each pay $527,000. Strategic partners can send five participants—a CEO and his entourage, for instance.

Given that many top chief executives hold office for only three or four years, WEF membership is effectively a revolving door. By the time the novelty wears off and the CEO starts to see Davos as a very expensive cocktail party, he is out on his ear and replaced by a new guy who was frustrated for years about not being able to go.

and:

Davos, in short, is magnificently seductive, a monument to man’s need for self-actualization. (And it is mostly men—women only make up 17% of the elite participants at Davos, though they are 60% of WEF staff.) But does it improve the state of the world? Hardly. When you consider the lifestyle of those taking part, starting with the private jets, it is really quite an achievement for them to keep their cognitive dissonance in check for the better part of a week.

Suddenly, those Liberal Democrat conference registration fees don’t seem so exorbitant. Come to think of it, Davros doesn’t seem so bad, either.

It’s a mad, mad, mad, mad world

Sometimes it seems that our economy is being run from a parallel universe.

For example, you might think that the big banks that have been mired in scandal would make a bad investment. You would be wrong.

Today’s Financial Times reports on how bank shares performed last year:

In several cases 2012 share price performances were seemingly driven by some bizarre inverse correlation with lenders’ misdeeds. Among the best performers were three of the big UK banks – Barclays, which was fined $450m over Libor and lost its chairman and chief executive; HSBC, which was fined $1.9bn over Mexican money laundering and Iranian sanctions breaches; and Lloyds, whose PPI mis-selling has cost it £5.3bn. Barclays and HSBC shares were both up about 50 per cent, while Lloyds’ investors doubled their money.

The sad thing is that this news will be treated within the banking world as a vindication. The necessary reforms will become even less likely – until the inevitable next crisis.

[The FT’s website requires (free) registration; if you are unable to register, search for the headline “Bank shares buoyed on a sea of scandal” on Google News.]

Monty Python on the problem of economism

Peter Cook was the father of British satire but he also knew its limits.

In the early 1960s, he described his satirical nightclub ‘The Establishment’ as “loosely based on the Berlin cabaret of the 1930s, which did so much to prevent the rise of Adolf Hitler”.

In the early 1970s, Monty Python first broadcast this sketch, which in retrospect was extraordinarily prescient. As Cook might have said, it did so much to prevent the rise of amoral and economistic values in the subsequent three decades.

List of shame

Who are the absolute worst chief executives of 2012? At Bloomberg Businessweek, there is a report of business professor Sydney Finkelstein’s annual list of the worst CEOs.

Finkelstein’s list is a catalogue of incompetence, corruption and egotism. It serves as a reminder of just how far the reputation of business leaders has sunk since the late 1990s and early 2000s, when CEOs were treated as gods.

Back then, one major PR agency tried to cash in on this fad, going so far as to trademark the term ‘Building CEO Capital’. The idea was that the reputation of a company and its CEO were inseparable. This was true to an extent, since lousy CEOs can drag their company’s reputation down. But if it were the case that CEOs are vital to a company’s reputation, this should have forced companies to take greater care in who they appointed. Instead, there have been some spectacular failures, such as Tony Hayward at BP and Fred ‘the Shred’ Goodwin at RBS.

The cult of the CEO enabled business leaders to demand obscenely large salaries and fringe benefits, when their jobs usually involved little or no entrepreneurship or risk but were basically administrative roles more analogous to that of the head of a government department.

The CEO-as-god theory was always weak, since all leaders have feet of clay. What enables bad CEOs to survive is the absence of criticism. In Ancient Rome, when a conqueror returned and had his victory parade, a slave would repeatedly whisper in his ear, “memento homo” (“remember you are mortal”). Few CEOs would tolerate such advice today. Most business leaders feel insecure so they reinforce their egos by surrounding themselves with yes-men and generating a climate of fear. The trouble is, this culture is antithetical to the values of an open society, in which weak ideas are rooted out through scrutiny and criticism.

Whether business leaders like it or not, the open society is catching up on them. The main factors undermining the CEO-as-god are not the financial crisis or even high-profile individual failures, but the openness encouraged by the internet, a general decline in deference, and a trend to more flat and less hierarchical management structures.

The old business culture has not gone away (witness the TV programme The Apprentice, which still encourages the idea that management is basically about shouting at people). But it is on the way out. Rather than wait until business leaders fail, we should never defer to them in the first place.