The usually estimable Economist has adopted an editorial stance toward corporate governance best described as peculiar. It goes like this:
The compensation paid to CEOs — in many cases more than Samoa’s gross domestic product — isn’t, as it might appear, bloated. Instead it correlates well with company performance. And anyway, it’s justified by the risk CEOs take when they accept the position. (The Economist has apparently redefined “risk” to mean “being able to retire in luxury no matter what you deliver.”)
Meanwhile, the corporate raiders who buy corporations, drain them of cash and take on a load of debt are actually improving the balance sheet. By doing so, you see, they take away from managers the temptation to misuse the cash.
As a public service, I’d like to offer an alternative model of governance to the Economist’s editorial crew: Hire good management teams.
No, this isn’t unrealistic ideological bunk. As evidence of its possibility, look no further than Toyota. It’s a strong candidate for best-managed company in the world. Its CEO, Hiroshi Okuda, receives less than a million a year in compensation, it is sitting on a mountain of cash, and it just continues to gain marketshare, market capitalization, and profits.
Oh … and, it manufactures its cars in the United States, treating its employees well enough that they have no interest in unionizing.
Meanwhile, Ford pays its CEO, Alan Mulally, $35 million per year, it isn’t sitting on a mountain of cash, and continues to lose marketshare and market capitalization. Profits? Maybe some day Ford will figure out a way to “monetize its business model” as folks used to say during the quaint days of the dot-com boom.
Many readers took me to task for last week’s column criticizing Ford and its non sequitur reply to reader Geoff Hazel’s suggestion that it stop running a dumb series of advertisements. It wasn’t Ford’s fault, they explained. It’s Ford’s lawyers and the litigiousness of American society.
Some recognized the absurdity of Ford trying to prevent Mr. Hazel from suing it if it stopped running an ad without compensating him for the idea, but still figured fear of litigation was the genesis of the boilerplate. But even this doesn’t hold up to close scrutiny, for two reasons.
First, nobody has yet sued me for publishing ManagementSpeak, even though I routinely use reader submissions. Why is that? Two reasons: First, the whole litigiousness issue has been overblown, and second I make sure everyone submitting an entry knows the rules — that I get unlimited use without providing compensation. It just isn’t that hard.
To reinforce the point, the New York Times Magazine recently ran a feature describing how Toyota chief engineer Yuichiro Obu and project manager Mark Schrage designed the new Tundra: They talked to large numbers of truck owners and watched them at work. Notably absent was any suggestion that Obu or Schrage worried about lawsuits. They focused on designing a great truck.
Among the lessons for in-house IT: (1) Hire people who want to build great products. (2) Don’t waste their time “gathering requirements” — have them gain, not just insights but empathy regarding how people work. And (3) Keep compliance requirements in perspective. They are important, but they are the tail, not the dog.
That Ford richly deserves its failure is evidenced by another anecdote, this one provided by Joe Pascudniak:
We enjoyed a fortnight in Tuscany in 2004, driving all around the place in a rented Diesel Ford Fiesta. Not like any Diesel I’ve ever driven.
Started right up, just like a gas car. Quiet, no Diesel smell, brisk acceleration. Small wonder that in Europe, Diesel cars dominate the market.
Unleaded gas was about $US 1.25 a quart at the time and Diesel cost us about $US 1 a quart. My Age 20 (Celsius) brain is not as agile as it once was but mentally doing a litres to gallons and KMs to miles conversion yielded an estimate for our Fiesta of somewhere between 50 to 60 mpg.
When we got home, I emailed Ford to ask if they would consider importing Diesel Fiestas to the US. If so, my check would be in the mail.
A week or so later, I got a snotty reply to the effect that Ford’s product plans had no room for a Diesel Fiesta.
I once pointed out that the solution to Ford’s problems is to start building cars people want to buy (see “Time for architecture planning,” KJR 10/9/2006).
It appears that Ford does build them. It just won’t sell them to us.