Likewise, economists and planners are casting around for an alternative, comprehensive yardstick to supplant GDP as a reliable measure of economic well-being.
Even the money market’s classic totem, Libor, had to be retired and replaced. With such tectonic macro changes, a re-assessment of performance measurement at the micro or firm level has also become unavoidable.
The rise of institutional investors and high net worth individuals with easy access to leveraged funds over the past three-four decades has resulted in company boards being over-populated with shareholder representatives.
These directors started rewarding or punishing chief executives on the basis of narrow metrics—such as increases in gross margins, net margins and market capitalization—without concern or regard for how these were being met.
As CEO performance got centred around shareholder returns, corporate finance and balance sheet re-engineering became central to management processes.
This single-minded focus on short-term outcomes and shareholder returns influenced thought processes to the extent that every other corporate activity—manufacturing, quality control, safety, human resources and ethics—became secondary.
Something had to give. Ongoing introspection and change-management processes at two iconic US companies, Boeing and Starbucks, will hopefully become triggers for change in the dominant management ethos.
Both companies were hostage to the dominant paradigm of short-term results and financial engineering, to the detriment of operating excellence, and have suffered deep collateral damage.
The chiefs of both companies—Kelly Ortberg at Boeing and Brian Niccol at Starbucks, appointed recently—acknowledged, separately, that the companies had drifted from their roots, given an unusual obsession with delivering positive cash flows every quarter while ignoring their core purpose of building safe and efficient aircraft or acting as community coffee houses.
Interestingly, the two companies are dissimilar and suffer from different kinds of problems, but their CEOs are hinting at similar fundamental solutions.
Boeing has been in the eye of a storm over the past few years, with the company’s new 737Max aircraft dogged by multiple safety issues. A fuselage panel blew off mid-air this January on a plane deployed by Alaska Airlines.
Boeing’s Starliner space capsule with Nasa had to leave behind two astronauts in space due to propulsion problems. Earlier, investigations of two commercial flight crashes in Indonesia and Ethiopia, coming within six months of each other in 2018-19 and resulting in 350 deaths, revealed that Boeing had failed to disclose safety compromises in its new flight control system, MCAS.
But here’s the thing: Then CEO Denis Muilenberg told investors a month after the first crash that 737Max planes were “…as safe as any airplane that has ever flown the skies,” despite internal probes concluding that MCAS was a safety risk and needed to be rectified.
Boeing and Muilenberg got off lightly for misleading investors by paying a fine of only $200 million and $1 million, respectively, to the US Securities and Exchange Commission, but, crucially, did not admit or deny any wrongdoing.
Even more egregiously, Boeing struck a $2.5-billion sweetheart deal with the US department of justice to avoid prosecution for misleading regulators about the MCAS safety glitch, leaving loved ones of the crash victims without any closure.
Boeing’s focus on squeezing costs—on wages by laying off staff regularly and on production by outsourcing work to dodgy external suppliers—to generate consistent shareholder returns is a template that has been around for a while.
Albert J. Dunlap, nicknamed ‘Chainsaw Al,’ gained notoriety for sacking over 11,000 workers in Scott Paper and earning a $100-million bonus for selling off the shrunken company to Kimberly-Clark in 1995.
Jack Welch, who headed General Electric Company (GE) from 1988 to 2001, secured the moniker ‘Neutron Jack’ for sacking 10% of the company’s staff every year; in his first year as CEO, he sacked close to 100,000 people across the conglomerate.
As stock markets rewarded a bump-up in margins due to a reduced wage bill, the Welch formula became an accepted corporate doctrine across the globe.
Regulators and politicians also bought into this corporate practice, as it became a vital component of the unshakeable LPG credo. This economic model assumed market omniscience, reasoning that markets would eventually sort out everything, including the re-employment of sacked workers.
It also conveniently enabled lopsided remuneration policies, with top executives earning 70-100 times the wages of those in the bottom half of the company. Multiple companies—beyond Boeing, Starbucks or GE—are feeling the adverse effects of these policies.
As the LPG model comes under review, it is appropriate that the prevalent corporate model also be put under the microscope. But that model first needs to be re-examined in business schools, the ideas nursery where such dodgy corporate practices have been germinated, nourished, justified and propagated.
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