The meltdown is my fault

Joe Rightwing is still writing to newspapers, trying to blame the financial meltdown on the government.  Like many of his fellow letter writers, Joe condemns the 1977 Community Reinvestment Act, which pressured lenders to help low-income people buy houses, as a market distortion.  Without the CRA, Joe claims, the free market would have kept the economy as level as the Bonneville salt flats. 

This is the height of silliness, for many reasons.  First, the CRA did not force banks to give $300,000 mortgages to people who could only repay $100,000 loans.  What’s that you say, Joe? There are no more $100,000 houses? Tell ya what: The government never prevented builders from erecting cheap houses.  Builders don’t like to build them because they’re less profitable.  That’s the free market at work.

I mean, really, Joe, this is the kind of “devil made me do it” excuse we wouldn’t accept from a six-year-old.

Second, the economy is cyclical whether it’s regulated or not.

Third, the Enron scandal was a wake-up call, and Joe, you didn’t wake up, didn’t even stir an eyelash.  Six years later, Lehmann Brothers is gone too.  Joe, now that you’ve been smacked on both sides of your head, smell the coffee: The free market is good, but people abuse the free market.

Mortgage brokers knowingly sold loans to unqualified buyers. (Economists call this “adverse selection.”) Middlemen securitized bundles of loans, could not even begin to measure the risk of a bundle (nor, therefore, its value), pulled a value out of where the sun don’t shine, and sold it to Lehmann Bros., who, forgetting the business cycle, bought the whole mess, lock, stock and barrel.  If this ain’t abuse, beat me with a stick.

You don’t think regulation is needed, Joe? I quote Joel Bakan: "No one would seriously suggest that individuals should regulate themselves, that laws against murder, assault, and theft are unnecessary because people are socially responsible. Yet oddly, we are asked to believe that corporate persons… should be left free to govern themselves."

Joe, I’m sorry if I implied it’s only you whose been hit on the head.  We’ve both been smacked.  In fact, it was only a matter of time before somebody blamed business educators for this mess.  And now, Joe, some of your fellow letter-to-the-editor writers have snarkily noted that most of the free market abusers have… MBAs.

And they’re right.  Mea culpa, Joe.  I’m a professor, and my ex-students did this.

At the 2002 meeting of the AACSB, the agency that accredits business schools, I waited anxiously for its officials, or any faculty speakers, to mention the word “ethics.”  None did.  The only speaker at the three-day conference to bring up ethics was a luncheon presenter, the CEO of Tupperware.  (There you go, Joe, I’m not anti-business. I make a point to note that in the close wake of Enron, it was a businessman, not an academic, who first said something was amiss ethics-wise.)

AACSB’s 2008 meeting was similarly light on angst about the mortgage crisis.  But it was in Honolulu, where it’s difficult to get too worked up over anything.  A few months later, the INFORMS conference – the gathering of operations researchers – focused on technical reasons why the financial engineering models didn’t work.  Not on the ethics of using them when doing so was clearly inappropriate.

At least at the University of Chicago there’s some disagreement about whether to name the new economics research institute after Milton Friedman.  At least there’s that.

The upshot is that business faculty are not exactly hammering away at this in MBA classes. How can we prepare the next generation of business leaders if we do not make it clear in every accounting, finance, O.R., marketing, and strategy class that responsible users of the free market cannot tolerate certain behaviors?

University faculty cannot make students or graduates act ethically.  But if pressure to act ethically does not begin in b-school, it’s a lot less likely that it will begin later.  MBA graduates were the ultimate cause of this crisis, but business professors were the proximate cause.

Fellow faculty members, repeat after me, and make sure Joe hears you: “The meltdown is my fault.”

The Future of Management

I heard strategy theorist Gary Hamel speak at the AACSB conference.  Hamel said management schools are doing everything wrong.  I found more detail about Hamel’s views in his book The Future of Management (Harvard Business School Publishing, Boston, Massachusetts ©2007).

In my classes, I (Fred) have been teaching that the most successful companies have made innovation systematic.  Hamel goes further; he says innovation must be systemic, permeating the daily activities and attitudes of every employee – and not just in R&D or product development departments.  Fear of change has been banished, the potential of every employee to contribute ideas and energy has been nurtured and realized, and organizational charts and structures change at the drop of a hat.

In this regard, Hamel likes Whirlpool, Toyota, Google, and a few others.  Here are key passages from his book: 

(p.31) While Whirlpool's innovation efforts have been widely reported, a competitor would find it hard to duplicate what is now a deeply engrained innovation system – for the same reasons it would be difficult to pick apart Toyota's multifaceted management advantage.

 

(p.34) Management innovation follows a power law: for every truly radical idea that forever changes the practice of management there are dozens of others that are less valuable and less influential. But that's no excuse not to innovate. Innovation is always a numbers game: the more of it you do, the better your chances of reaping a fat payoff.

 

(p.36) Many executives doubt that bold management innovation is actually possible. Strangely, managers are unsurprised when science advances by leaps and bounds, yet seem unperturbed when the practice of management fails to do the same.

 

(p.38) If management innovation has been mostly incremental in recent years, it may be due to a lack of daring in the choice of problems to tackle. Ask yourself, has your company ever taken on a management challenge that was truly unprecedented, where you couldn't rely on another company's experience as a guide? General Electric has. In 2006, chairman Jeff Immelt set his colleagues the goal of growing GE's top line at twice the rate of global GDP growth, net of acquisitions. No company of GE's size has ever managed this sort of growth, yet that didn't deter Immelt from taking on the challenge. If the problem is big enough, progress of any sort will be valuable, even if you never find a "solution." I once heard former U.S. Secretary of State George Shultz draw a distinction between "probems you can solve" and "problems you can only work at." As a seasoned diplomat, Shultz knows that some problems, like ethnic strife, global poverty, and terrorism, defy once-and-for-all solutions. Yet he also understands that when you're up against problems of this scale and significance, even modest advances can yield big dividends.

 

(p.102) What makes Google unique, though, is less its Web-centric business model than its brink-of-chaos management model. Key components include a wafer-thin hierarchy, a dense network of lateral communication, a policy of giving outsized rewards to people who come up with outsized ideas, a team-focused approach to product development, and a corporate credo that challenges every employee to put the user first.

 

(p.103) [Google top execs] Brin and Page understand that in a discontinuous world, what matters most is not a company's competitive advantage at a single point in time, but its evolutionary advantage over time. Hence their desire to build a company that is capable of evolving as fast as the Web itself.

Hamel’s oft-quoted aphorism: Organisations used to require intelligence, obedience and diligence from an employee – but they could get that from a cocker spaniel. Today’s organizations need employees to display passion, creativity and initiative.

I liked Hamel’s book, despite some bloopers:

• Hamel appeals to Francis Fukuyama’s largely discredited “end of history” notion.
• His reference to the “college student who spends less on an airline ticket to Fort Lauderdale than he'll spend on booze over spring break” is sadly out of date…
• His statement that “the law of diminishing returns kicks in and at some point the ratio of progress to effort starts to sag” doesn’t accord with learning theory as I understand it – and as Hamel notes, organizational learning is what it’s all about.

The main take-away for management educators is that we should be teaching how to create corporate culture.  A good idea, but most new MBA grads are in no position to create culture.  On the contrary, they tend to be overwhelmed by the prevailing corporate culture two weeks after starting their new jobs, or the second time their passionate, creative initiative is punished, whichever comes first.  In this regard, Hamel’s advice is reminiscent of the Microsoft helicopter joke.  (If you haven’t heard it, ask me.)

Still, it’s food for thought.  And at least, business schools might seek out companies that are sympathetic to this new view, and point our grads in their directions.  Or, we might emphasize Hamel’s ideas in executive ed courses.  I look forward to discussing these ideas with you; enter your comments on this page.  

GRADUATION SPEECH, LIMA, PERU, JUNE 2008

Flew down to South America to speak at PUC-Lima's MBA/DBA commencement, and to give a couple of lectures the next day. After the speech (you'll see why, if you can read this), several students asked if I would pose for a photo with their mothers. The speech took off on a letter I wrote to The Economist earlier this year.

Queridos profesores, graduandos, padres de familia, amigos y huespedes distinguidos. Me hace muy feliz de estar aquí con ustedes una tercera vez y de felicitar a otra clase de graduandos y a sus familias.

Les traigo saludos de Maastricht School of Management. Los países en todo el mundo continúan acercándose a MSM sobre las colaboraciónes para los programas de grado, y MSM ha establecido nuevas colaboraciónes este año. Se puede ser orgulloso que su grado es uno que inspira confianza por todo el mundo. Este año MSM ha publicado dos más volúmenes en la serie del libro de textos del MBA que mencioné en la graduación del año pasado. MSM trajo el congreso anual de la Asociación Internacional del Desarrollo de Gerencia a su país vecino, Suriname. Este congreso comienza hoy en Paramaribo y continúa con la semana.

En este podium hace un año, comenté a propósito de la responsabilidad social corporativa, CSR. Ahora quisiera volver a ese asunto, ofreciendo una vista simple del CSR, y observando sus implicaciones para sus carreras, estimados graduandos.

Porque sus padres y madres están presentes esta noche, quiero implicarlos en mi declaración. Me ayudarán a dar vuelta al CSR, un tema que otras personas ven como cuestión compleja y polémica, en un concepto directo y realizable:

Antes de que las corporaciones piensen en hacer el bien, deben parar el hacer el mal. Para efectuar el CSR, los ejecutivos necesitan solamente hacer lo que les dijeron sus madres: Repare sus propios líos, y refrénese de tomar lo que pertenece a la otra gente.

Antes de que las corporaciones piensen en hacer el bien, deben parar el hacer el mal. Cada derramamiento de aceite limpiado en el costo público, cada soborno para destruir una aldea para excavar una mina, decepciona a una madre en alguna parte. (Si Mamacita es economista, ella llama de estos actos los “efectos externos negativos.”)

Antes de que las corporaciones piensen en hacer el bien, deben parar el hacer el mal. El soberano carga una corporación en la expectativa de cierto beneficio social, y en la expectativa que la ley será obedecida. Es hasta la corporación simplemente al honor del este contrato.

Como cualquier buen concepto en ciencia de gerencia (o cualquier ciencia), el principio simple destapa complicaciones. Por ejemplo, los gobiernos son flojos en hacer cumplir los términos de cartas corporativas, y las corporaciones pasan mucho dinero para preservar esa situación.

Otros ejemplos - como la crisis actual de la hipoteca que originó en los Estados Unidos - ilustran que el reto real no es tanto el comportamiento de una compañía individual, pero la relación entre los sectores, por ejemplo, entre el negocio y el gobierno. Esto es, para mí y mis estudiantes, un tema fascinador e importante para la investigación.

Dije que ataría esta discusión a sus carreras. Para ocuparse eficazmente de relaciones entre sectores, es aconsejable trabajar en sectores múltiples. Intente trabajar durante algún tiempo en industria, y entonces en empresas sin fines de lucro. Quizá también para los militares, para la prensa, o para un NGO. La experiencia en sectores múltiples ahora es un requisito frecuente para los situaciones del alto directivo en cualesquiera de ellos.

El consejo adicional de la carrera se encuentra en las declaraciones recientes de dos hombres famosos.

El teórico bien conocido de la estrategia Gary Hamel dijo que las organizaciones del pasado requerían de un empleado inteligencia, obediencia y diligencia - pero (él dijo) podrían conseguir eso de un perro de aguas cocker. Las organizaciones de hoy necesitan que los empleados exhiben creatividad, iniciativa, y pasión.

Arthur C. Clarke, autor famoso de 2001: A Space Odyssey e inventor del satélite de comunicación, murió en marzo de este año, a la edad de 90. La revista The Economist dice que las visiones cósmicas de Arthur C. Clarke le dejaron con poca paciencia para aplicaciones más humildes como las políticas y la economía. Ésos, Clarke escribió, fueron sobre el “poder y el dinero, ni una ni otra cuyo debe ser… la preocupación primaria de hombres maduros.”

Por supuesto como los graduados de MSM y del CENTRUM ustedes han dominado las herramientas del negocio y de políticas, y las utilizarán para alcanzar objetivos moralejas, y quizás incluso cósmicos. Pero ambos caballeros, Sr. Hamel y Sr. Clark, están sugiriendo que los patrones y los empleados necesitan crecer, para hacer seres completamente adultos y sociales, para hacer frente a los desafíos del mundo de hoy.

Sé que sus profesores serán orgullosos como ustedes hacen exactamente esto. Y no olviden: Escuchen a sus madres! Gracias, y otra vez, enhorabuena.