The departure of Larry Summers from Harvard should encourage us all to spend a moment giving thanks that big organizations are generally commanded by bland, uncreative, risk-averse folks. If big universities were typically home to hard-charging, plain-speaking, creative men and women like Larry Summers, new and small schools such as University of Phoenix would never stand a chance. The same goes for big corporations. The only thing that saves entrepreneurs from irrelevance is the fact that so many steady and boring executives clog the hallways at the Fortune 500.
Why are people near the top of big organizations typically so risk-averse? They’ve got a lot to lose. If you’re making a big salary, enjoy big prestige, and have all the perks, you want to make sure above all that you don’t blow it by taking a risk. This is why most stock mutual funds don’t perform that differently from the S&P 500; the managers want to make sure that they don’t do so poorly that they get fired or that investors make substantial withdrawals. They won’t place big bets, even ones that they think are very likely to succeed, because any big bet entails some risk of dramatic underperformance relative to the index and therefore the end of the personal gravy train.
Your thesis would be valid if indeed managers would be held accountable for their decisions. That is, in my opinion, not the case. Executives do not take risks because they do not have any need to do so. They do not need to fear failure. Not too many executives get fired because they made the wrong decisions.
Good point, patxaran. I love how the Michael Eisners of the world take 100% of the credit for cyclical booms / runs of good luck at their companies to justify billions in compensation, yet don’t give it back when it is realized that they were just selling out for short-term gain.
Perhaps a subtle shading of Philip’s point is that there is more accountability for managers who try risky things than for those who maintain the status quo. There’s an old saying “Nobody ever got fired for choosing IBM,” and there’s a grain of truth there. So organizations often choose the stodgy path of inertia, and slowly die death by a thousand cuts as their more innovative (or focused, see below) competitors gradually overtake them.
But I am going to disagree with Philip, and say that often large organizations do take very large risks, and that a parade of Stupid MBA Tricks / Stupid Lawyer tricks is the hallmark of any dying American business.
Look at General Motors: they bought and sold EDS, they bought and sold Hughes, they blew $4 billion on Fiat, and have lost who knows how much on my beloved Saab. I suppose Hughes had something to do with OnStar, but the rest has just been a disaster. In contrast, Honda and Toyota have avoided such Wall Street soap operas and focused their attention on designing appealing cars, maintaining quality, training employees, and diversifying their production base. None of this is bold or sexy, but it seems to work.
Of course, the Two Tigers have done a few risky things, like the Prius, Asimo, and HondaJet. But those were expected to lose money, and are closely (especially Prius) related to the business of designing and building cars or other transportation devices. If a company needs to show off, it is better to show off with technology BS (Asimo) than with business BS (EDS): Lawyers and MBA’s should be seen and not heard!
This is just another demonstration of how America’s preference for business over for engineering and manufacturing is killing us from within. As a friend who worked for Ford said, within the company, the further removed your job was from making cars, the more prestige you had. Self-hatred like this is not a recipe for success.
On the subject of accountability, we note that Rick Wagoner, who began running GM’s weakest link, North American operations, in 1994, is still employed. And note that he complains about financial issues rather than product problems, as if he still doesn’t get it. Maybe he can’t be honest about product problems (which are largely design problems, not assembly problems, so it’s not the UAW’s fault). In fairness, GM has made amazing quality improvements over the years.
Regarding Philip’s comments… One has to remember that every single thing that an executive/university president does goes under the microscope. So they can say fifty positive things and one tiny, almost negative comment and people only pick up on the negative. This is true during talks to the public, news organizations, etc., as well as during internal talks with the workforce. So the net effect is that everything goes through an aggressive ‘companding filter’ that squashes any originality. With practice, this filter becomes real-time and you will amaze even yourself. If you’ve ever managed a large-ish organization (say ~100 people) or taught a college class you will see this effect for yourself. Over time you can become a bland person, and if you don’t, then the bland person/organization up above you may help you see the light. People above you in the chain rarely want you to rock the boat too hard.
Regarding the comments on GM… I worked at a large telecom company for several years and the same things are true there. Particularly that the further you are away from the actual business at hand, the more prestigious your job. This prestige does not extend to those actually on the front-line performing the real work, nor to your customers, but this is irrelevant within the company where promotional/financial decisions are made.
At the end of the day most individuals that make up a large company will value a 10% raise for themselves over a 10% increase in product quality, not just the execs. In theory, the execs, board of directors, etc., are supposed to be a system of checks against this type of behavior. In practice this is not always so.
GM is like most large US companies — they are not focused on the product. My personal motto on buying mechnical things is, “If it has moving parts, the parent company should be located in Japan.” I have never had a regret when I followed this advice. Sometimes I stray and get burned, then I repeat my motto and go buy another one that will last for a while.
There are large companies that take big risks. Read Built to Last and you’ll find 20 that have done so and each have been around for over 50 years. Some of the profiled companies are IBM, HP, Boeing, and GE. The problem with the GM big bets mentioned above is that those were all failed acquisitions, while the ‘visionary’ companies in Built to Last all had internal projects on which they repeatedly bet the farm. (On a side note, GM was not one in the book)
There is validity to Phil’s thesis though. My guess is that it is due in large part to Boards of Directors / Trustees and, to a lesser extent, large shareholders meddling with operations (e.g. Carl Icahn and Time Warner) and strangling management’s ability to innovate.
“creative men and women like Larry Summers” I like that you’ve learned the lesson from this: don’t offend any women!
Chris,
Thank you for presenting one of my points more briefly. Prius, Asimo, and HondaJet, though not “bet the farm,” are good internal R&D projects, but EDS was an MBA’s funky trick play. GM’s Saturn division was kind of a big risk, and may have been initially successful, but seems to have been left to wither.
Perhaps risk is a term much misunderstood or abused. Looking at it thoroughly, ‘risk’ belongs to the imbecile mass, which is rather large in any concentration of population — not noticeable enough because their dormant state of existence. Lest you incurred their wrath, do not coerce them out of their state. Perhaps Larry Summers has a story to share.
Striding out of the cocoon is leadership — which for one is also much misunderstood. Leaders parlaying casual happiness over golf courses incurred the expense of a nation’s worth.
Leadership is nothing to be happy about (not in our casual imagination) — it is a called vocation.
stolen from CT, but true & to-the-point, I think : –
“basically, the extent to which Harvard picked up Shleifer’s legal bill was viewed as controversial, and then not disciplining or firing Shleifer. Also, Summers had a number of opportunities to settle the case which he didn’t take, and almost certainly made the eventual disaster worse than it needed to be by taking a high-handed approach to the authorities”
There’s leadership, there’s decisiveness, there’s plain-speaking.
Consider also role and accountability for managers administering government projects and services, along with the contractor managers supporting them.
On the one hand, many Department of Defense type programs/projects have managers who rotate in and out of a given program/project every couple of years. Their main focus is often on minimizing schedule and/or budget slips on their interim watch, not in uncovering and solving fundamental problems or in revising the program/project to be more cost/effective over the longer term if the result impacts their shorter term schedule/budget responsibilities. After all, they will move on to some other program/project in a couple of years, and if the program/project collapses after they leave, it becomes someone else’s problem.
On the other hand, many other government positions, like some corporate positions, have better than average job tenure. Does this make managers who have what amounts to tenure, more or less motivated to do really fix things and maximize cost/effectiveness? There is also the aspect of political cover for many government management positions and projects/services — presumably sometimes providing insulation from accountability, and sometimes (less often) providing increased sensitivity to criticism by opposing special interest or political forces. It seems the more millions/billions that have been allocated, the less likely are those involved to admit failures and the more likely they are to declare success, regardless of the reality. Look at the Vietnam War, Missile Defense Program, IRS Modernization, etc. The program’s contractors don’t want to raise too many criticisms for fear their contracts might be canceled, along with the inept program. Similarly in corporate management, there seems a strong impetus to optimize disruptions to quarterly and fiscal year plans, often at the expense of longer term performance — retirement defined benefit and healthcare plans are examples of this; corporate managers avoided near-term dissatisfaction by workers and disruptions, but pushed out the mounting financial consequences to years after the original managers had departed.
Ultimately, it largely comes down to personal values and integrity. Are we as individuals willing to sacrifice personal short term security/benefits for the greater good?
Honestly I think that comparing Harvard to UoP is a little disingenuous. I mean, comparing a staid, established institution with a 300+ year history to a fresh start-up that isn’t even one tenth as old.
The founder of UoP, John Sperling, is alive, kicking and more than willing to piss off people with his opinion. While the founder of Harvard College may ahve been a rebel in his day, any rebelious spirit has surely been outdated in the mean time….
So, some brash ‘leader’ showed up at thehallowed institution, pissed offthe status quo, and got ousted…
I suppose that we could only hope that some of the quality of education that exists in Harvard manages to find its way into the faster/wileyer new breed of education institutions.
The interesting thing here, surely, is that Harvard (a large place, home to many smart people) has been hijacked by a single smallish division (humanities). And alumni, students, business law and research faculty did nothing (or at least not enough) to stop it.
Down-hill for Harvard for a few years would have to be the prediction.
According to the Boston Globe, minority status and (especially) female status are the most important things to look for to run the most prestigious university in American, if not earth. I loved this quote: “There were numerous calls for a strong female or minority candidate, someone bold like Summers but more perceptive about people…” They really like Shirley Ann Jackson, first black female to get a PhD from MIT, which surprisingly was only awarded in 1973. MIT gets a woman, I guess Harvard wants one, too! It’s surprising that affirmative action goes so high up the food chain (and that’s not a generalization about the qualifications of these women: people specifically said they wanted a female or a minority to run Harvard).
Oh, that article is: http://www.boston.com/news/local/massachusetts/articles/2006/02/26/women_scientists_on_wish_lists_for_harvard/
B. Chen: Don’t be surprised that MIT does not have too many black female PhD graduate. By far the most popular doctorate sought by black women is in Education and MIT does not have an Education school. (The macho scientists at MIT would, of course, sneer at a PhD in Education as being insufficiently challenging. Assuming they get through their grueling PhD program, they’d be sneering from their 80 hour/week $35,000/year postdoc while the PhD in Education would be pulling down $140,000 per year as a civil servant, working 40 hours/week in public school system.)