Archive for the ‘leadership’ Category
Individual Discretion and Institutional Design
Filed under: corporations, decision-making, Design, leadership, management, values |
Comments (1) 
I’m just back from the University of Redlands, just outside of Los Angeles, where I spoke at the wonderful Banta Center for Business, Ethics and Society. The topic of my talk there was “Responsibilities in the Blogosphere,” but the key themes of that talk apply pretty directly to the world of business more generally.
One of the key themes had to do with the tension between a focus on individual decision-making on one hand and a focus on institutional design on the other, between a focus on individual responsibilities and a focus on how Internet giants like Google and Facebook construct online worlds that shape our behaviour.
There’s an awful lot of focus — too much, in my opinion — on individual decision making in ethics. In fact, a focus on individual decision-making is kind of the default, both in philosophical ethics and in more applied areas. The key questions, for many people, are general questions like “How should I behave?” “How should I resolve an ethical dilemma?” and “What factors should I take into consideration in ethical decision-making?”
And to be sure, that kind of focus makes for some great after-dinner speeches. The focus on the individual is empowering: “it all comes down to you.” “Your choices matter.” “We can do better, if each of us just changes how we think.” “It’s all about integrity.” And so on. More than that, individual ethical dilemmas really do have a huge impact on individuals, and so it behooves those of us in the ethics biz to do something to offer some guidance. (One modest contribution of mine to this area is my Guide to Moral Decision Making.)
But there’s a real sense in which the focus on the individual is a distraction. Individuals will make the decisions they make, and those decisions will in large part be determined by forces that are a) psychological and cultural, and b) institutional.
So the real focus should be on institutional design, on devising institutions to foster the right kinds of behaviours. And I’m talking about institutions in the broadest sense, which includes not just corporate frameworks and governance structures, but also traditions and norms and social conventions.
Greater attention to institutional design is more than just a remedy to the excessive (and perhaps futile) attention paid to individual decision-making. It changes the way we frame discussion of ethics in that it makes it clear that business ethics isn’t just a microcosm of everyday ethics. It is instead a matter of using human ingenuity to build ways of doing things that suit the situation at hand: devising rules and norms that put reasonable constraints on human behaviour, to make sure that business stays mutually advantageous. But we’re not building entirely from scratch: rules and other normative institutions in the world of business still have to be ones that can be understood and applied by the human beings who inhabit that world. The software, in other words, has to match the hardware.
Don’t get me wrong. I’m not against thinking about individual decision-making. I teach a course on critical thinking, and I think all of us can learn to think more critically about ethical issues in business, to avoid certain well-known fallacious arguments, and so on. But the emphasis on design helps makes clear that ethics in business is a realm for innovation, and isn’t just a matter of importing into the world of commerce the values you learned at your mother’s knee.
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Note: Some of the thinking here was inspired by a conversation with my friend & former student, Garrett Mac Sweeney).
Must the CEO Go Down With the Ship?
Filed under: accountability, CEOs, contract, decision-making, disaster, ethics, excuses, governance, leadership, shareholders |
Comments (2) 
Two days ago, I asked — in the wake of the Costa Concordia disaster — whether the captain is duty-bound to “go down with his ship.” The question, I said, bears not just on the obligations of sea captains, but on individuals in positions of responsibility at organizations of all kinds. It also has implications for how organizations enculture individuals so that they see following through on promises as more than just a contractual obligation.
But today I’ll make explicit the analogy that is likely on the minds of most readers of this blog: never mind sea captains…what about CEOs? Does the CEO of a “sinking” company have a duty to “go down with the ship?”
First, it’s worth pointing out that sea captains don’t literally have to go down with the ship: closer to the truth is that they’re supposed to be the last ones off, or as close to last as is possible and permits them to do their duty to preserve the lives of crew and passengers. Similarly, bankruptcy for the company doesn’t literally have to imply bankruptcy for the CEO. In some cases, surely, bankruptcy isn’t the CEO’s fault, and there’s no reason to think that justice demands that a blameless CEO walk away penniless. But they should stick around to see the job done, even if that implies some financial risk to themselves.
Second, it seems to me that, as in the case of sea captains, the answer here has to depend a lot on the details of the situation. Sometimes staying aboard will genuinely help, and sometimes it won’t. Also, a CEO’s ill health might be a decent excuse, in some cases. And indeed, some corporate “captains” aren’t even wanted on a sinking ship: in 2008, for example, the US government forced Robert B. Willumstad to resign as CEO of the faltering AIG, and replaced him with Edward M Liddy. The idea that the captain should stick around to help only makes sense where the captain’s services continue to be seen as having value.
Third, there are several different ways in which a CEO can “abandon ship,” and they might not all be equally ethically bad. Abandoning ship could mean selling shares that are about to tank, or it might mean resigning prior to bankruptcy. Or it might mean resigning prior to an inevitable criminal investigation: several rats are known to have abandoned Enron’s sinking ship — Jeff Skilling, for example. Worst of all, perhaps, are “take the money and run” situations. Arranging a bonus for yourself just prior to declaring bankruptcy is the moral equivalent of looting the ship’s safe (or perhaps scuttling all the lifeboats) prior to prematurely abandoning ship.
As always, we need to be careful when engaging in moral reasoning by analogy. A company is not a boat, and bankruptcy is not the same as sinking. But what’s certainly true is that in both cases, the ethical requirements of leadership don’t end at the first sign of trouble.
Must the Captain Go Down With His Ship?
Filed under: accountability, CEOs, character, codes of ethics, contract, decision-making, disaster, employees, ethics, excuses, leadership, professionalism, risk, workplace safety |
Comments (7) 
Italian cruise-ship Captain Francesco Schettino is in jail, following an incident that left 6 dead and (at present) 29 missing. Among the accusations levied against is that he fled the foundering vessel before it was empty. (According to maritime law, a captain doesn’t literally have to “go down with the ship,” but he or she is supposed to be the last one off after ensuring the safety of others.)
Legal requirements aside, is there an ethical obligation for a captain to risk life and limb to stay on board until the last passenger and crewmembers are off? The answer is pretty clearly “yes.” Like many jobs, the job of captaining a ship comes with a range of risks and benefits. As long as the risks were understood when the job was taken on, you’re obligated to follow through.
There’s a more general point to be made here about the nature of ethics, and about ethics education and training.
Ethics often requires of us actions that we’d rather not carry out. You should tell the truth, even when it would be more convenient not to. You should keep your promises, even when breaking them would be more profitable. This is necessarily the case: if ethics only ever required you to do things you already wanted to do, there’d be no need for ethical rules (or at least no need to think of them as rules in the prescriptive sense).
But there’s at least a superficial tension, here, with the idea that ethics should be useful. After all, if having and following an ethical code doesn’t benefit us in some way, why bother? Sure, it’s easy enough to say “The right thing to do is the right thing to do,” but a system of ethics needs some justification in terms of human well-being or it’s just not going to be very credible, not to mention stable. Indeed, some ethical systems are subject to serious criticism precisely because their implications for human well-being are negative. Yes yes, I understand that your code of honour requires you to kill the man who killed your brother, but don’t you see how crazy this all is?
So there’s got to be some connection between ethics and benefit. And it’s not enough to point to social benefit. After all, pointing out that the community benefits from me taking ethics seriously merely pushes the question of justification to a second level: why should I care about the good of the community, especially if doing so requires significant self-sacrifice?
None of this should engender skepticism or cynicism. It just means we need to think carefully about who benefits, and how, from a system of ethics.
It also means that we need to think about how we can help individuals keep the promises that it was in their interest, initially to make. Captain Schettino found it in his interest to make certain promises (albeit perhaps implicit ones) when he signed on to be captain of the Costa Concordia, but then all of a sudden found himself in a situation where it was not in his interest to keep that promise. Threats of punishment were understandably insufficient, here. Staying out of jail is no great incentive if you’re free-but-dead.
Organizations of all kinds — including especially corporations and professional associations — need to work hard to help members think of the relevant ethical rules as something more than the terms of a contract, to help members become the sorts of people who simply would never abandon ship when they are needed most.
Reverse Discrimination in High-Profile Hiring
Filed under: activism, decision-making, discrimination, governance, leadership, stakeholders, values |
Comments (5) Discrimination has a bad name, in part because what we typically mean by the word “discrimination” is more like “unjustified discrimination” or “discrimination on morally-irrelevant grounds.” But discrimination per se — even discrimination based on normally-irrelevant characteristics like race or disability — is not always bad. In a very few cases, discrimination is rooted in bona fide job requirements. The classic example is that it’s OK to discriminate against the visually impaired if you’re hiring pilots; having good eye-sight is a bona fide requirement for being a pilot. Being white, on the other hand, is not.
For a recent controversy over reverse discrimination (or rather over a failure to engage in such discrimination) see this recent case from Halifax, Nova Scotia. By Clare Mellor, for the Chronicle Herald: Africville trust hiring prompts some anger: Choosing white minister ‘insulting’
Some members of Nova Scotia’s black community say they are outraged that a white person has been hired as executive director of the Africville Heritage Trust and are calling for her resignation.
“I find it insulting to all black people,” said Burnley (Rocky) Jones, a local lawyer and well-known human rights activist.
“Surely we, within our community, have many people fully qualified to do such a job.”
The trust was set up to establish a memorial to Africville, a major African-Nova Scotian community destroyed on the orders of Halifax officials in the 1960s.
The trust’s board of directors, which includes six representatives of the Africville community, recently hired Carole Nixon, a white Anglican minister, for the position….
So-called “reverse discrimination” is challenging, ethically. Preferential hiring of individuals from historically-disadvantaged groups can be a ham-fisted way to right past wrongs. But in at least some cases — particularly cases involving high-profile positions — the symbolic significance of the job in question has to at least be considered. (A very similar controversy arose a couple of years ago, when the Canadian National Institute for the Blind hired its first non-blind CEO.)
The first thing to note about the Halifax / Africville case is that it’s not primarily a black-vs-white dispute. It’s clear that those who oppose the hire don’t speak for Halifax’s entire black community. The Board of Directors of the Africville Trust is the body that did the hiring, and although detailed information about the composition of the Board is hard to find, the article cited above does say that the Board “includes six representatives of the Africville [i.e., black] community.” That doesn’t change the fundamental ethical questions at stake, but it does sweep away any thought that this is just an us-vs-them debate.
It’s also worth pointing out a legal worry, here. Hiring based on race is generally wrong, and typically illegal. It’s not clear to me (a non-lawyer) that excluding non-blacks from consideration for a job like this would even be legal. Do the critics of this hire simply think that the job posting should have said “Whites Need Not Apply?” Likely not. But a subtler position is logically open to them, anyway, namely a position that says something like “if in doubt, give the job to the black candidate” (based perhaps on a presumption of greater personal understanding of the issues at stake). But again, I don’t know whether that would be legal. (Does anyone reading this know?) And surely no on really wants to settle, as one activist quoted in the story suggests, for a candidate who is merely “fully qualified”. After all, there might well be a number of “fully qualified” candidates, and so you’re still going to need to make a decision. And if the job is important, then we likely want it filled not just by someone qualified, but by the most qualified person.
But on the other hand, critics of this decision do have a point, and that has to do with the symbolic value that would attach to putting a black person in charge of the Africville Trust. It’s not hard to see that selecting a black man or woman for this kind of leadership role would send a certain kind of message, and maybe give black kids in Halifax another positive role-model, one more non-white individual occupying a position of prestige and influence.
All in all, I’m not sure what to think about this one. But one thing I’m pretty sure of is this: if you think a case like this has a clear and simple answer, you’re probably not thinking about it hard enough.
Jack Layton and Adversarial Ethics
Filed under: adversarial ethics, government, leadership, politics |
Leave a comment Today Canada mourns the loss of Jack Layton, a politician beloved by his allies on the left and grudgingly respected, I sense, by a great many opponents on the right. Layton was, for most of the last decade, the tireless leader of the New Democratic Party (traditionally Canada’s “third” party), and eventually led the party during its historical first turn as the Official Opposition in the House of Commons.
Layton has left behind a considerable legacy of public service, but his career also holds lessons for how we think about business ethics.
One of the things that the market and the realm of electoral politics have in common is that they are both deliberately adversarial. In both politics and business, we want participants (political parties, in one case, and business firms in the other) to compete vigorously with each other, rather than cooperating. The idea is that when participants compete, third parties (voters in one case, and consumers in the other) reap the benefits. Such systems are interesting, and ethically complex. Competitive behaviour is often considered anti-social, and so it requires careful thought to figure out just what the boundaries of competitive behaviour are, when we actually encourage people to act that way.
Here are two facts about Layton that serve as perfect illustrations.
First is that he spearheaded an effort to bring greater civility to debates in the House of Commons. This is not surprising, coming from the Federal politician voted to be the one that Canadians were most likely to want to have a beer with. But that sort of effort is also absolutely essential to any adversarial system. Just as norms of good sportsmanship keep violent games like football and hockey within reasonable boundaries, norms of civility in politics keep that game from devolving into something intolerable.
But some may also recall that Layton was declared (by impartial academic researchers) the “least civil” participant in recent Canadian parliamentary debates. Critics were quick to use that story as ammunition against the affable politician. But the authors of that study rightly pointed out a structural reason for Layton’s place in the ranking: Layton was leader of one of the opposition parties, and zealous debate in Parliament is one of the opposition’s few tools in Canada’s parliamentary system. Canadians would have been worse-off if Layton, in his role as leader of an opposition party (and later as Leader of the Official Opposition), had been more polite.
Clearly the challenge Layton faced — by all accounts met admirably — is the same one faced by business leaders everywhere. And that is how to compete zealously in order indirectly to promote the common good, while at the same time resisting the entirely-natural temptation to behave in such a way as to bring the entire endeavour into disrepute. Competing in a zealous but civil way is a crucial part of Jack Layton’s legacy, and a crucial challenge for all leaders in the worlds of both politics and commerce.
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Correction: the original version of this blog entry claimed that Layton was Leader of the Official Opposition during the time-frame of the academic study mentioned. That was incorrect, and has been fixed above.
Rupert Murdoch and Corporate Governance
Filed under: accountability, boards, CEOs, governance, leadership |
Comments (1) Given a scandal of the size of that unfolding at News of the World, it’s not surprising that people are beginning to look at root causes. One important causal factor is the way in which News of the World‘s parent company, News Corporation, is governed.
I wanted to hear from someone who really knows about this stuff, not just from an academic point of view but from the point of view of someone who has seen up-close just how corporate boards function, and how they malfunction. So I decided to fire a few questions at Prof. Richard Leblanc, an expert on governance and someone who has been engaged by corporations to perform board evaluations.
Here are my questions, and Richard’s answers:
CM: Rupert Murdoch is both CEO and Chairman of the Board at News Corp. From a practical point of view, why does that create problems in how a board operates?
RL: From a practical point of view, he’s running the meetings and controlling the agenda and the information flow. And as an independent director, you’re sitting there and you owe your position to him because he’s the significant shareholder. So you really aren’t independent, in the sense of making the final calls. You’re more of an advisor, or a friend, is what directors tell me who sit on control block boards.
CM: The Board at News Corp doesn’t seem to have a lot of independence. You’ve interviewed dozens of directors about what makes a board work well. How does lack of independence play out in terms of actual board dynamics? Does it really mean everyone just saying “yes sir” to the CEO?
RL: Independence is a state of mind. There are formal rules but that doesn’t capture the co-optation by the CEO, and personal and social ties. Second, independence should reflect reasonable perception standards, and in this case, independence from the significant shareholder. So when you have a non-independent board, or several directors who are beholden, things don’t get discussed, information doesn’t reach you, you don’t have executive sessions as you need to, and there’s less tone-checking.
CM: Without reference to News Corp in particular, what connection do you see between a well-functioning board and the likelihood of wrongdoing at a firm?
RL: I’ve assessed some of the best run corporate boards in the world. I’ve also assessed boards that have had massive failures, including death, property destruction and monetary loss. The best boards are independent, competent, transparent, constructively challenge management, and set the ethical tone and culture for the entire organization. Usually where there is some ethical failure, or corporate wrongdoing, there is some defect at the board level I find. Undue influence, bullying, poor design, lack of industry knowledge, and directors who are not engaged, or don’t have the power or incentives to be engaged, are some of the red flags.
Roger Martin on Executive Compensation
Filed under: CEOs, compensation, corporations, governance, leadership, pay, shareholders |
Leave a comment Yesterday I attended the Annual Meeting of the Canadian Coalition for Good Governance, along with a handful of colleagues from the Clarkson Centre for Business Ethics.
The meeting’s keynote speech was given by Roger Martin, Dean of the Rotman School of Management. (Disclosure: I am a Visiting Scholar at Rotman.)
Martin’s speech was basically a summary of the key ideas from his new book, Fixing the Game: Bubbles, Crashes, and What Capitalism Can Learn from the NFL. (I mentioned Martin’s book a few weeks ago, in a blog posting called Business, Football, and Incentives.)
Here is a rough summary of what he had to say, paraphrased and condensed:
Prior to the mid-70’s, stock-based compensation for CEOs was rare. But starting especially in the 80’s, it became very common indeed. Martin traces the sea change to a famous paper by Michael Jensen and William Mecklin, called “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure” (PDF here). The basic idea at the time was that paying senior executives, and especially CEO’s, in company stock or stock options would align their interests with those of shareholders. Shareholders naturally want the value of stock to rise, and paying CEOs mostly in stock gave them a very concrete reason to want stock to rise, too.
It was a fine theory, says Martin, but it didn’t work out well. If you compare the era of stock-based compensation to an equivalent period before, you see that returns went down about 15% and stock volatility went up about 15%. Those definitely aren’t the kinds of results that shareholders were looking for.
And yet somehow people still cleave to the idea that stock-based compensation aligns interests. Why?
It’s clear enough why CEOs themselves are fans of the system. The reason, according to Martin, is rooted in the fact that stock prices only reflect the market’s collective expectations about a company’s future performance. That means in order to boost stock prices (and hence their own compensation) CEOs merely need to boost expectations. So, says Martin, that’s what CEOs have learned to do: manage stock analysts’ expectation, rather than managing actual performance. If analyst expectations are low when stock options are granted, and high when they get cashed out, a CEO stands to make a lot of money, independent of what that variation means in terms of actual performance.
But of course, says Martin, CEOs have realized that you can’t play that game for very long. So, they learned to look for opportunities to play a hit-and-run version of the game: get in, play hard, and cash out. That, he says, is the real reason why the average tenure of CEO is so short these days.
Is this malfeasance on the part of CEOs? Not really, says Martin. It’s just CEOs doing what they are payed — incentivized — to do.
Now, says Martin, compare this situation to the way quarterbacks are payed in professional football. Professional quarterbacks, he says, are paid for real, on-the-field performance. Additionally — and this is crucial — they are forbidden from profiting from outsiders’ expectations of how they will perform, i.e., from gambling on the outcome of the games they are playing in. Why? Because professional football leagues realize that letting quarterbacks gamble would give them all kinds of perverse incentives. The corporate world, it seems, has something important to learn from the world of pro football when it comes to incentivizing key personnel.
In the corporate world, says Martin, the only ones with something to gain from having stock-based executive compensation are CEOs and hedge funds. Both, he says, benefit from volatility of stock prices.
Martin’s prescription: performance-based compensation is fine. But don’t reward CEOs based on stock prices. Reward them based on real performance, in terms of something like earnings or sales or market share — different systems will make sense for different companies with different strategic objectives. But the point is to reward them for something more real than merely meeting the expectations of analysts.
It’s a provocative thesis, and a bold prescription. To say that stock-based compensation is “standard” is an enormous understatement. And Martin acknowledges that change, if it comes at all, will not come quickly. But given how widely-agreed-upon it is that current modes of compensation are not working, bold prescriptions may just be what is in order.
Ethics of Golden Handshakes
Filed under: boards, decision-making, employees, governance, leadership, pay, stakeholders |
Comments (2) When an executive leaves in disgrace, what does the organization owe him or her? How should a Board handle such situations? In some cases, contractual obligations may seem to settle the matter, but contracts can be contested. Should they be? Does the IMF’s Dominique Strauss-Kahn deserve a quarter million dollars?
For further food for thought, see this story, by Tom Hals and Dena Aubin, for Reuters: Strauss-Kahn severance revisits CEO pay dilemma
The IMF now faces a challenge that keeps members of corporate compensation committees up at night: explaining why they may have to pay a handsome severance package to an indicted executive.
…
Former International Monetary Fund managing director Dominique Strauss-Kahn, facing charges of attempted rape in New York, resigned his post from the global lender on Wednesday.Strauss-Kahn’s contract entitles him to a one-time severance payment of $250,000, the IMF said on Friday….
Whether a Board of Directors should attempt to fight in order not to pay severance to an executive who has brought disgrace upon the organization is clearly going to depend on the circumstances. But it serves as a good example of the conflict between two different styles of moral reasoning. On one hand, a Board thinking primarily in terms of consequences might well reason this way: “Look, we need to get past this unfortunate incident. Let’s pay this guy the money his contract says he is owed, and be done with it. It’s better for the firm, overall, if we pay and get this finished.” On the other hand, a Board might think primarily in terms of justice: “This guy has brought shame (or at least notoriety) upon the organization. He doesn’t deserve a dime. We should fight for what’s fair.”
The tension between these two styles of moral reasoning is an ancient one, and it’s perfectly reasonable to find something attractive in both styles of reasoning. But the fact that both kinds of reasons might occur to a single group of people — a Board of Directors — in a single situation implies an interesting question. Even if we were to agree (even for sake of argument) that a Board of Directors’ main obligation is to serve the interests of the organization and its shareholders, that still leaves open this important question: should a Board of Directors seek the best outcomes for the organization and its shareholders, or should it seek justice for it and for them?
Should Boards Monitor CEO Morality?
Filed under: accountability, boards, CEOs, character, crime, decision-making, employees, governance, leadership, privacy |
Leave a comment A Board of Directors is responsible for overseeing the management and direction of a company, and that task includes monitoring the full range of risks to which a company might be subject. But what if the company’s CEO is one of those risks? What should a board do when a CEO’s off-the-job behaviour raises concerns? The IMF’s Dominique Strauss-Kahn is a case in point. Long before his recent arrest, Strauss-Kahn’s behaviour towards women raised eyebrows. Should it also have spurred the IMF’s Board to act?
See this story, by Janet McFarland, in the Globe and Mail: When and how to confront a wayward leader
Most corporate directors find it hard enough to confront a respected CEO about work-related poor performance, but it is even harder to tip-toe into the minefield of rumours about problems in an executive’s personal life.
(I’ve blogged before about whether ‘private’ vice is a business issue. I’ve also written about whether a CEO’s divorce is a purely personal matter or not.)
McFarland quotes me in her story, but let me give a slightly fuller version of my comments here.
To start, it’s worth making a distinction. There are personal vices that are strictly personal (including most of what goes on between consenting adults behind closed doors.) And there are personal vices that are very likely to impinge upon the workplace or on performance at work. A tendency to engage in sexual harassment is an obvious example, as is heavy drug use.) But, when you’re a CEO of a name-brand organization, that distinction tends to break down. High profile means that personal vices can turn public very quickly, and affect the organization.
Also, bad behaviour on the part of those in the public eye can easily lead to blackmail, which can result in misuse of position and other kinds of bad decision-making. This is another example of why great power brings great responsibility.
On the other hand, there are lines boards should be hesitant to cross, on principled grounds. A CEO’s sexual orientation, for example, should be off-limits. This is obviously less of an issue in 2011 than it would have been in 1951, but even today a gay CEO might be seen as a risk factor (especially for an organization with a conservative customer base) but boards should take a principled stand against taking an interest in their CEO’s sexuality. The board has fiduciary duties to protect the company, but even fiduciary duties have their limits.
The last point I want to make here is that, when faced with a CEO’s bad behaviour, a Board faces more than a yes-or-no question. The ethical question here is not just a matter of whether to confront the CEO, but how to do it. A Board in such a situation needs to formulate a plan — a method of proceeding, including answers to questions like:
- Will the Chair of the Board approach the CEO solo, or should an ad hoc committee do it?
- Should they raise the issue explicitly, or obliquely?
- Should they give the CEO an ultimatum, or ask his or her suggestions for how things might improve?
- Given various anticipated responses by the CEO, how will the Board/Chair plan to react in turn?
Business, Football, and Incentives
I’m fond of sports analogies in helping to explain key issues in business ethics. In both business and sport, a useful competitive endeavour is constrained by a set of rules for the benefit of both players and spectators.
According to Roger Martin, Dean of the Rotman School of Management (where I’m currently a Visiting Scholar) the comparison is not just explanatory, it is prescriptive. According to Martin, for example, CEOs Should Be More Like Quarterbacks. In particular, he says, CEOs should be more like quarterbacks in the way quarterbacks stay focused on the real goal of the game — winning — rather than on meeting the expectations of those who speculate on the outcome of the game from the outside. QBs focus on real performance, measured in yards and touchdowns, rather than on performing well relative to the expectations of bookmakers. Likewise, Martin says, CEOs should focus on their companies’ real performance, rather than on how they perform relative to the expectations of stock analysts.
It’s tempting to run wild with sports metaphors, as the comments under Martin’s blog demonstrate. But we should not be tempted, just because we see one useful comparison, into thinking that CEOs should be like quarterbacks in all ways. You need to make the argument, on a point-by-point basis. Indeed the power of the comparison lies in abstracting away the ways in which CEOs and quarterbacks are not, and should not, be alike.
It’s also worth noting that Martin doesn’t think that the change in CEO behaviour that he advocates is going to happen magically, or even as a result of his own advice and efforts at persuasion. No, Martin is clear that CEO behaviour is only going to change in response to changes in incentives — in other words, changes in how they are paid:
…compensation is largely based in the expectations market in business and is strictly based in the real market in football. CEOs have a large portion of their compensation based on the performance of their company in the stock market, so CEOs spend their time shaping and responding to expectations. Quarterbacks have no part of their compensation based on the performance of their team against the point spread, so they focus completely on winning games.
Of course, that simple analogy needs to be fleshed out. Just what counts as “winning” in business, for example? And why are the opinions of external analysts such a bad way of measuring corporate performance? And finally, what would it look like to reward CEO’s for something other than improved stock performance, and would that lead reliably to better CEO performance on all dimensions, or just some?
(The ideas in Martin’s blog entry are drawn from his new book, Fixing the Game: Bubbles, Crashes, and What Capitalism Can Learn from the NFL. Watch here for more comments on the ideas in that book in the coming weeks.)
The Business Ethics Blog 