The Perils Of Top Management
I’ve been following and commenting on various discussions on top executive pay and performance. So far, the only conclusion that I can draw is that, with the amount of disagreement over what behaviour should be rewarded (and by how much), it’s not surprising that Chief Executive Officers and chairmen/women act the way that they do.
Top management have to look after a number of interest
“groups”:
·
Staff
·
Customers
·
Shareholders
·
Lenders
·
Regulators
·
Legislators (politicians, not lawyers)
·
Tax authorities
·
Suppliers
·
Local communities
·
Environmental groups
·
The press/TV
… to name but a few. Often,
the interests of one group are completely opposed to the interests of
others. To take a simple example,
customers may want the lowest price possible, meaning that the business has low
margins and therefore reduced profitability.
This is in direct contrast to shareholders who want high profits as this
means higher dividend payments.
Top management are rewarded based on how well the company
performs. As we have seen ,
this can result in unethical and/or immoral behaviour which ends up damaging
the very interests that they were trying to serve. If you’re in a position where you’re only as
good as your last quarterly results and you want to keep your job, you will,
naturally, do whatever it takes. It’s a
brave CEO or chairman/woman who stands up to stakeholders of one group or
another and says that, for the long-term good of the business, he/she is about
to take an unpopular decision which may mean lower dividends, margins, revenues
or other negative results, even though it’s the right thing to do for the long-term
good of all stakeholders.
The key is “long-term”.
Our current system concentrates too much on and rewards short-term thinking. Performance
measures are set in one-year blocks, divided into 3-month chunks. Shareholders, analysts, senior managers and
others review these and comment positively or negatively. An organisation’s share price rises and falls
based on the perceptions of a few people who lack all the information,
experience or inside knowledge of the top management team.
“Market sentiment” may also impact share prices for no sound
reason. If one (say) bank shows poor
results, “banks” are sold on the stock exchanges, whether their underlying
business and fundamentals support selling or not. The same applies if sentiment is optimistic.
Programme trading, where brokers’ systems are “trained” to
sell if a share price goes below a certain value (or, conversely, to buy if it
exceeds a certain value) also cause markets to gyrate in disproportionate
ways. This can be triggered by the
“market sentiment” described above. Top
management have little to no control over this, short of talking regularly to
those (analysts, reporters and commentators) whose opinions (however misguided)
are seen to “count”.
Even if results are poor, top managers can still receive
handsome bonuses. If the CEO is sacked,
he/she still often receives a large payoff.
The rewards for mediocre performance are still all-too plentiful. A
recently dismissed bank CEO reportedly
earned $291 million over the five years he held the job (that’s $58
million/year), despite the fact that his organisation’s share price fell by 89% during his tenure. He will never need to work again…
In the face of conflicting interests, we need to take a step
back and ask:
·
What is in the long-term interests of a
business?
·
How best can this be served?
·
Who is most qualified to manage the business?
·
How much time will they require to achieve their
long-term targets?
·
How will the business measure and reward
success?
·
How will this be communicated to stakeholders?
These and other questions will form the basis of the Terms and
Conditions under which top management are hired and fired. It may mean reduced
revenues/margins/profitability. If it
also means a business that performs profitably and ethically and provides
long-term employment, economic and social benefit, then that’s what top
management are for.
I have spent more than half my life working in different world markets from the most developed to “emerging” economies. With more than 20 years in the world financial services industry running different service, operations and lending businesses, I started my own Performance Management Consultancy and work with individuals, small businesses, charities, quoted companies and academic institutions across the world. An international speaker, trainer, author and fund-raiser, I can be contacted by email . My website provides a full picture of my portfolio of services.
Labels: Customer Care, Financial, Regulation, Social, Strategy, Teamwork
posted by William Martin @ 16:43
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