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This chapter is about believing the pronouncements of important corporations. These organizations have considerable prestige, perhaps because of the large amounts of money they represent. This in¯uence rubs off on the people that make up the management team and the nonexecutive directors who are the Greek chorus of corporate life. We discover how the organization works, its politics and the in¯uences on the management team including the CEO credibility cycle and the winwin options game. We ®nd that often there is a great business leader, the Stalin in the boardroom that tells us what to believe. We believe the great leader because we must. The corporation is the organization of choice of the western democracies for the conduct of economic activity. They are the show exhibits of the free enterprise system and dominate international trade and global ®nancial markets. The great corporations are the producers of the most sophisticated products even when government might be the customer as for infrastructure and instruments of war. This is hardly surprising given the accumulation by corporations of capital and intellectual resources far beyond the capability of the individual or partnership. Despite the current ascendancy of the corporation, opinions as to its ef®cacy are mixed. Corporations are not always popular with everyone. Several authorities question the role the corporation plays in society and attribute many of society's de®ciencies to the lack of corporate accountability. Saul uses a negative term corporatism, which he applies to any interest group whether specialist, professional, public or private, pro®toriented or not that share the characteristic that the primary relationship of individual members is to the organization and not to society at large. The loss of democracy is justi®ed by the implied promise of better ef®- UNCORRECTED PROO ciency. He regards the modern corporation as the direct descendant of the medieval craft guild. Antony Jay began his career in a government owned media corporation, which might explain both his view of the nature of the organization and his ability to so perceptively describe its functioning. From this basis he reviewed the company structure and its inhabitants in Corporation Man. In Management and Machiavelli he also draws out historic precedent with his image on the grander scale of the medieval kingdom with all its political intrigue. The power politics of the company itself we soon realize is no different from any other organization, whether church, university, army or club. It contains, like any human society, the elements of monarchy, aristocracy, nobility and democracy. ¼ Antony Jay11 compares the modern corporation with the medieval kingdom. It is headed by a king, (or president or managing director) who is surrounded by his courtiers and advisers (directors and specialists) and who seeks to maintain his authority over his provinces, some near some far (divisions and subsidiaries), each immediately ruled by a baron (or plant manager) who may be either docile or turbulent and whose own authority (over his factory) may be effective or weak ¼ The competition for power is between the king, the courtiers and the barons. The medieval court seems to me to be the more appropriate setting for the corporate life. The image of the craft guild quaint though it is does not conjure up an image of time wasting. Medieval craftsman without craft would not have lasted long. The life and death intrigues of the indulgent court seem a much more appropriate setting for endless meetings targeted against rivals rather than actually doing something. The kingdom at least had the resources to absorb the rivalries and jealousy. The idea that the staff of the corporation is intrinsically less committed to the outcome than the individual is far from new. It was the subject of comment from the great and original Adam Smith more than two centuries ago where he expected directors to show less anxious vigilance for other peoples' money than partners in a private company would show for theirs. Then came the excesses of the industrial revolution and the careers of the great industrial entrepreneurs. The twentieth century brought the growth of corporation and in reaction, the growth and subsequent reduction of government regulation. As we move into a new century the problem is loss of reality or substance stemming from the lack of ownership and the responsibility that goes with it. Our modern economic doctrine still draws from Adam Smith the requirement that the management of the corporation maximize pro®ts, Antilogic: Why Businesses Fail While Individuals Succeed 22 UNCORRECTED PROO yet these are for the bene®t of owners rather than for themselves. This rather altruistic presumption provides an unstable basis to the theory of the ®rm. It is odd in that management has the power over the ®rm whereas the owners are notably without power. Indeed management is speci®cally engaged to have power and carry forth the execution of the business. Yet the expectation is that management will forgo its own interest in the sel¯ess pursuit of pro®t maximization for shareholders. If this immutable doctrine about making money were religious rather than economic there would be another doctrine directing money to society rather than to the individual. But the theory of the ®rm directs the rewards of enterprise not to society but to the shareholder. The connections between the actions of the manager and maximization of pro®t have several links and loose ones at that. At various times society has concluded that these links were too loose, resulting in corporate governance regimes to impose on business those disciplines that the theory tells us should happen automatically. Not surprisingly, this has led to frequent tensions between those who want an unfettered market and those who seek regulation. What is management really trying to do amongst all this confusion? It could be the simple biological urge for survival but we can quickly dismiss the common self-serving exhortation of management to provide for its continuity by training successors. This emphasizes survival of the organization although these actions are often concentrated on dominant managers who recruit acolytes in their own image with the purpose of ensuring their own survival rather than permitting their departure. This is an example of a common form of corporate Antilogic. Do as I say, not what I do. The desire for survival alone is not suf®cient to explain management's actions. It must also be related to the concept of satisfying, which is doing just enough to get by comfortably. Economic theory often depends on the concept of maximizing, perhaps because the maths is simpler. Yet management behaviour suggests that the objective is to do just enough. Amiable survival can become the prime consideration of the current custodians of the corporation. Robert Townsend does not beat about the bush in his humorous best-seller Up the Organization. He was a successful chief executive and he knew what he was talking about when he set out the actual priorities of the corporation starting with the care and feeding of the chief executive, his entourage, and the board of directors (mostly his friends, put by him to ensure the tranquillity of his reign) and ranging through management, employees, to customers and well down the list to the shareholders. This attitude demonstrates the limit on the level of pro®t management needs to seek. Pro®tability is a means to an end with most Believing the Corporation 23 UNCORRECTED PROO managers, particularly in the higher echelon wishing to enjoy what they are doing. Pro®tability need only to be suf®cient to deal with shareholder's needs and to ensure the survival of the organization. Once that is achieved the management group can enjoy themselves. They achieve this by ensuring that those other interest groups get enough to avoid a fuss. What is left over is for growth, interesting projects and play money devoted to the management group itself. The controlling manager group retain power so long as earnings are suf®cient to pay the regular dividends to shareholders and to provide reinvestment. This pro®t proviso need not be very onerous. In many successful corporations survival is not realistically in question although it is frequently mentioned to keep everyone on their toes. This occurs even when the ownership position is secure. One example is a consumer goods multinational that was take-over proof because of a complex ownership structure. Teams of accountants diligently ensured that all shareholderreporting requirements were correctly met. But who acted on the reports they produced? No new share equity has ever been raised during the career of any current employee. So, for whom was the company managed? Initially it seemed to be managed in the interests of all management but for some reason the holders of power retreated further into the citadel. Life became tougher for management in general and they began to suffer the same rigours as elsewhere. After a time, internal pressures intensi®ed, presumably as a result of external competition, benchmarking or some other Holy Grail. The power-group retreated further and the pressure to perform reached the general cadre of senior managers. Businesses were sold, structures downsized and the heroes of past battles were put out to pasture. Cost cutting exercises caused the regimental dinners to be cancelled and the old victories to be forgotten. Considerable attention is indeed given by the corporation to the commitment, loyalty and morale of the business group to the extent of demanding participation of the individual to the exclusion of other activities. However, for the individual continued inclusion in this demanding club is far from secure. As corporate downsizing and takeovers have become more common a new paradox has emerged with company men clinging more closely to the idea of belonging in the face of declining security. They conspire with their employers in the pursuit of bonding with organizations that are more likely than ever before to dispense with their services. But there is only so much worrying the individual can do. Better to participate enthusiastically in the belief that the group that parties together is less likely to cast individuals aside. No one can be sure of the outcome but in the meantime it is best Antilogic: Why Businesses Fail While Individuals Succeed 24 UNCORRECTED PROO to enjoy the party and certainly try not to look like anyone who is drifting away from the group. Simple survival for the individual is not enough. Contentment comes when just enough is done to achieve survival in comfort. The individual can take steps to improve their own contentment in a process that reduces aggravation by accepting the established action. Toning down individual thought reduces effort and makes it easier to accept the errors of private organizations. The contentment quotient is improved further by reducing the effort necessary to achieve a satisfactory outcome. Better still the avoidance of thought reduces the risk of taking decisions that might prove to be unpopular and so also aids survival. We have seen how the company pursues pro®t satisfying. The individuals pursue self-satisfying with the optimum position often involving going along for the ride and accepting whatever strange things might be going on. Galbraith called this process the pursuit of contentment. For most, mental effort is something that is exceptionally pleasant to avoid. From this comes the nature of all great organization: those serving it have a powerful commitment to established belief and thus to established action. This regularly rewards those who surrender independent thought to organizational policy. Their surrender in turn serves personal acceptance and social harmony ¼ The organizational man is happy with what exists. As this mood controls his private life, so it controls his public attitude.12 The net result he identi®es as misjudgements, eccentricities, error, inanity and delegation are all variants of Antilogic. What is very signi®cant is the rather ®erce way he identi®es corporations as particularly prone to these outcomes as though he regards the corporation as the prime source of Antilogic in society. Nothing so breeds acquiescence in or indifference to social shortcomings as daily exposure to the misjudgements, eccentricities and inanities of private organization. With the rise of the great corporation there comes a contented accommodation to the larger errors of public life and notably those with no immediate effect on the one who observes them.13 It is wise for the manager to avoid attention and decisions. Taking decisions attracts both attention and risk. If action really is required this should be delegated. The more successful the manager is the greater are the risks he runs and so there is a tendency for less action and less thought the higher the manager rises unless he is prepared to make very large mistakes. In previous generations the personality of the company was very much that of the proprietor and his family. They invested in the trade that they Believing the Corporation 25 UNCORRECTED PROO knew and probably in the community where they lived. This led to the tendency for most of them to make the best of what they did and be content to earn a return that permitted them to live well and their business to grow. They were not so much driven by pro®t maximization. They just needed enough pro®t in what was a more positive form of community satisfying. But times change and such an approach is no longer safe. The emergence of the major corporation, of ®nancial engineering and globalization has led to large business lions that like to feed on small business zebras. Now stretching the metaphor in a rather unpleasant way the small business begins to suspect that it would be rather more pleasant to be bought out by the lion than to be eaten. Small business owners begin to believe that life would be more comfortable as an employee of large company than as a small company entrepreneur. Rather than the theory of the economy being driven by the entrepreneur seeking to establish new business we may ®nd that the statistics would suggest entrepreneurs rushing to become managers. In several countries there has been a trend towards industry consolidators racing to use recently established share market listings to buy up small business and professional practices. As part of the process the selling entrepreneur hopes to receive the capital sum that represents the market worth of his business. Once on board as an employee, either as a career recruit or as our acquired entrepreneur, the manager becomes a cog in the corporate machine. He discovers that the role of manager and employee does not have as exciting an image as that of the entrepreneur or speculator. Just as the urban dweller dreams wistfully of the life of the cowboy or beachcomber, the employee cultivates a dashing image. The difference between image and reality confronts the manager with a paradox. The workings of the corporation require inactivity yet his image requires immediate results. Corporate success may come from the application of the law of large numbers to a single participant among many in an essentially neutral system. If the individuals avoid standing out they retain the chance that they are the survivors who one day reach the top in a sort of corporate mortality table. The solution is simple in concept; ®nd apparent results without risky commitment. Easier said than done as it is not always possible to avoid action. Internal rivalry may force activity and there is always the unforeseen outcomes of dithering. Those who do take action in the drive for speedy results provide another basic example of Antilogic that so often begins the downward spiral in a company's fortunes. The initial smallish problem creates an embarrassment that has to be covered up and replaced with pro®ts from elsewhere. New aggressive risks are taken with unfortu- Antilogic: Why Businesses Fail While Individuals Succeed 26 UNCORRECTED PROO nate consequences leading to a cycle of staff replacements (the usual suspects, not necessarily the culprits), new policies, forgotten history, new losses, new staff, etc. until stability eventually re-emerges probably with a new owner. Because of inherently high gearing, the banking industry is particularly prone this type of risk. Similar effects are also common in business with commodity exposures or risky new product decisions and so we may infer general applicability. This may provide a clue to the broad cycles that apply to the fortunes of top management and especially chief executives as they initially soar and subsequently decline in esteem. If actual decisions must be made there is a fundamental protection for top management. The more senior the decision-maker the more likely the decision will be wrong but the less likely the decision-maker will suffer adverse personal consequences. This is the bene®t gained from the combination of effects of ®nancial genius. Those involved with large sums must be smart. Consider how this works in the typical borrowing transaction. The person who requests a very large loan must be positively in¯uenced by the very large sum involved and so will tend to be seen as a ®nancial genius. The bank of®cer with authority to approve such loans will have constant involvement with large sums and so will also have been greatly in¯uenced in this case by the rub off effect. With a ®nancial genius proposing a loan and a greater genius approving it is no wonder that such transactions can be speedily waved through. The seniority of the people involved will ensure that the strict rules required for small transactions will not be applied and no junior experts will challenge the decision. This example was from the banking industry but applies to any large ®nancial decision. If the error is large enough the perpetrator can be promoted all the way to the CEO's chair. No matter how they get to the position, all Chief Executives begin with a positive balance in their CEO credibility account. This is a notional account that re¯ects the balance of public regard for the CEO and functions very much like a bank account. The precise starting balance depends not only on the CEOs' own characteristics but also on the pro®le of their predecessor's account and the state of the business. A typical new CEO begins with a balance of, say, 100 units. A unit has no absolute value but has a relative value over time and in comparison between CEOs. Boards, journalists, analysts and investors are all very interested in the relative balance. The board must react if the relative balance becomes too low. The typical credibility account has a life of approximately three years and is constantly declining, analogous to a glider that must lose altitude unless the pilot can ®nd a new source of lift. In the ®rst year he can do no wrong because of good-guy momentum and Believing the Corporation 27 UNCORRECTED PROO this may temporarily offset the decline. All new business leaders are given the bene®t of the doubt for a period, even the most unlikely appointment. This can reach the extent that the new man is accepted because, when appointed, the illustrious predecessor looked as unlikely as this man does now. All CEOs are given a honeymoon period because the market wants a new approach, new thinking or a new broom. This is the period when he can do no wrong and all he says is brilliant. It seems that the tides of fortune are ¯owing in his direction but in reality when things are going your way all explanations are seen as brilliant new insights. When things are going poorly the same explanations will be regarded as folly. Never the less for a while at least, the Gods smile on the new CEO. In the second year, depending on performance, the good-guy momentum slackens and the inherent decline takes over. In the third year the CEO can do no right and this, together with the ongoing decline, exhausts the balance in the credibility account. The job of leading any business has the same basic feature. The basic truth for CEOs is the same wherever they are. This is not very obvious to the incoming CEO excited and buoyed up by the honour and prestige of his new appointment. It therefore behoves the outgoing CEO to prepare the successor for what to expect by leaving instructions. The departing CEO had no advice for his successor other than to give him three envelopes with the instruction to open each in turn if things became really tough. At ®rst everything was ®ne but after a period trouble started and the new CEO became the subject of criticism. Our hero opened the ®rst envelope, which contained a message that read `Blame the old CEO'. Our hero followed the instruction and life became easier. After a further period the situation Antilogic: Why Businesses Fail While Individuals Succeed 28 UNCORRECTED PROO deteriorated and the now experienced CEO opened the second envelope and found that it contained the message `Blame the economy'. Again our now battle hardened and experienced CEO took the advice and life improved. After a further period of challenging conditions our veteran CEO opened the third envelope and read the ®nal message `Prepare three envelopes'. Ultimately, the non-executive directors act to replace the CEO. However, the new CEO is given only a credibility balance of 75 due to the nervousness of the board in the face of the investors looking for quick results. This lower balance is exhausted more quickly. The process may be repeated once or twice more with each new CEO receiving a smaller and smaller balance. After this the Chairman and board are replaced and the next CEO is given a credibility balance of 200 plus options and the cycle repeats. Why does he get more than the original CEO? After the disaster the replacement board will over react and ®nd the most spectacular candidate possible and so ratchet up both expectations and reward. Just as our glider pilot can ®nd himself swept up in a weather change so can the post disaster CEO bene®t from the work of his predecessors and cycles in the economy. The choice of the successor CEO is a natural occasion when Antilogic comes to the fore. The board must now ful®l one of its main reasons for existence by choosing the new CEO. They had probably hoped for happier times when the illustrious long serving CEO would choose his own successor. We have seen how even the unlikely successor can be accepted if he follows a successful CEO but when a CEO has to be replaced it is more than likely that the board will chose the well prepared likely appointment. This will be applauded by the market but probably turn out to be an inappropriate choice. If the board wants to have a choice of likely candidates the process can be very wasteful. It is the result of a process apparently designed to make the wrong selection due to the dif®culty of an illustrious leader identifying a potential supplanter from amongst his subordinates. A good leader has his own vision of where the enterprise should be going and how it should get there, and his idea of a successor is the man most likely to keep going in the same direction. Obviously this man is probably his closest associate, his number two, the man who has supported him most ably and loyally throughout his career. But the mere fact of having been a loyal number two is prima facie disquali®cation from becoming number one. It suggests someone who is better suited to following than leading, someone whose qualities are complementary to those of the leader instead of Believing the Corporation 29 UNCORRECTED PROO identical. A leader will have his own vision, and his own ideas, and they are unlikely to coincide exactly with those of his predecessor; consequently he may have antagonized the outgoing leader, or at least questioned his ideas, put up alternatives of his own, and generally created a slight chill in the atmosphere. It therefore takes a very wise man indeed to realize that this thorn in his ¯esh may make a better successor than the apple of his eye.14 Farmers would recognize this as the problem of the old bull and the young bull. However this situation of the outgoing CEO choosing his successor will be the exception rather than the rule as few can choose either their time of going or their successor as the credibility cycle reveals that the typical CEO has his lowest credibility precisely at the moment that he is to be replaced. Once he or she is safely in the seat it is prudent for an incoming CEO to take down the decorations accumulated during his predecessor's reign. Incoming CEOs are notably Spartan and fundamental in their tastes and keen to eschew the excesses of the past. This process is called window undressing. It is also known as clearing the deck. It would be bad form to take down too early the decorations of an illustrious predecessor who is still in the neighbourhood. This could be seen as hasty and ungrateful and regarded as premature window undressing. The precise timing is dependent on how illustrious was the predecessor and whether he had overstayed his welcome. With the growth of the media has come a whole new process by which corporations seek to ensure that their interests are portrayed in a favourable manner. This may involve in¯uencing government policy, or investors or customers. A complex process is initiated depending on the audience to be in¯uenced. Much of the process is indirect in that the message is issued to journalists, especially ®nancial journalists and to broking and ®nancial analysts in the hope that they will favourably in¯uence the public or investors. To facilitate this process the corporation establishes a team variously known as Public Affairs, Public Relations, and Investor Relations whose function is to service the needs of the opinion formers. These people are also known as spin-doctors and ¯acks and draw their expertise from the media and advertising industries rather than from ®nance, investment or the industry of the corporation. The external distinction between company and CEO very easily becomes blurred so that the principle task of this process is often to describe the great beauty and quality of the Emperor's new clothes. This is just the same as the children's fairy tale but with a modern media twist. The dominant CEO can deny the journalist access to stories until such time Antilogic: Why Businesses Fail While Individuals Succeed 30 UNCORRECTED PROO as the CEO's in¯uence declines and past scores can be settled. For a period this leads to the journalist seeing the world through CEO coloured spectacles. The role of the analyst and ®nancial journalist is to determine whether the Emperor is wearing the new clothes today or not. Their ability to ful®l this role follows a distinct cycle not unrelated to the CEO credibility cycle. Indeed it may be one of the causal factors. The analyst or journalist is unlikely to discover that a new CEO is wearing new clothes but with experience may spot that an old CEO is trying to get away with new clothes. It is not important for the Prince to have new clothes; he only needed to appear to have them. With a little sleight of hand there is no need for dishonesty. Being caught out in a lie is very counterproductive as is the in¯exibility of always being truthful. The cunning use of the truth can be used with impunity while retaining adherence to the ultimate truth of the end objective. After practising long enough to appear what you are not, it seems natural for CEOs to develop suf®ciently to become the reality of their image. Fantasy and reality have a tendency to blur in a sort of self-ful®lling prophecy. This evolution follows a pattern that again looks suspiciously like the credibility cycle so that we may postulate that the rate of transition between reality and image and vice versa determines the duration of the credibility cycle. Courage is good but a little public relations help just as well. What they say need not be true but it is easy and most effective if the image is not far from the truth. This may coincide with what the audience wants to hear or already believes and become the perceived truth. With all this public relations help it actually takes quite a while to discover where the great leader is marching. Much is made of the power, wisdom and leadership of the Great Man. No one questions the reality of this until some bright spark realizes that the great leader is never seen without his minders, speechwriters and spokesmen. Later they realize that they have not actually seen him in the ¯esh for a long time. Just like the Wizard of Oz this Great Leader may be an illusion. There are considerable dangers in using ex-journalists as public relations consultants to put across the CEO's story. The current journalists do not like it. It seems to undermine the purity of their profession and reminds them of the retirement from the press that will be their lot as well. As a consequence they are keen to point out the shortcomings of the spin-doctor's work, accelerating the credibility decline. Consultants are the other source of support for the CEO. They function like mercenaries in the employ of a monarch to ensure domination of his kingdom. They bring few surprises. They say, never to ask a consultant Believing the Corporation 31 UNCORRECTED PROO before you know his answer and a good consultant will never answer until he knows what you want. After a while the CEO credibility cycle became apparent to many observers and ®nally to the CEOs themselves. Not unreasonably they found it prudent to seek some protection in the form of employment packages that include the predetermined severance packages known as golden parachutes. The prevalence of the golden parachute has begun to attract adverse comment because of the apparent cost to the company. Cost is not the end of the story as there is also bene®t for the company. There is a group of CEOs who by good luck or good mismanagement succeed in failing in a succession of high pro®le positions. The employment of such a CEO is calculated to encourage a take-over with attendant premium and the generation of real shareholder value. The triggering of change of control clauses provides the CEO with a welcome change from the golden routine. Some CEOs embrace this golden technique as a counter to the iron discipline of the CEO credibility account. The rapidly moving CEO demands immediate results. The quality of the results is of secondary importance. The speed of their movements may come through their own realization of the limits in their management capabilities. This interpretation implies that the CEO knows his shortcomings whereas the various boards did not. The phenomenon of the rapid impact CEO is so pervasive that this explanation has to be unlikely. Possibly the boards have chosen to ignore the shortcomings but it is much more likely that the Manager is unaware or unable to admit to this shortcoming whereas the board recognize both their own role of inactivity and the contribution of incompetence to the ultimate release of value. The board is supposed to know about the capabilities of the CEO. It is their main responsibility as expected in corporate governance. Corporate governance is broadly de®ned as the way companies govern themselves with a little help from the government in the form of corporations' law and regulators. Managers are supposedly paid to manage the business in the interests of the shareholders. The board is appointed to see that management carries out its job with their leader the Chairman given the onerous task of replacing the CEO when the time comes. Annual general meetings and so forth set the stage for this drama to unfold. I will now consider these distinct governance categories and see how well it has been working out in practice. Starting with the managers we immediately encounter a problem. The managers don't just want to manage but they want to own as well. Their rewards have begun to look like those of owners except that the rewards go up even when pro®t does not. The reality of this self-interest was put in Antilogic: Why Businesses Fail While Individuals Succeed 32 UNCORRECTED PROO stark relief by the simplistic speech on the topic of options for the incumbent CEO made by a small shareholder at the annual meeting of a major corporation. His comments were along the lines that the CEO was a ®ne leader who was already working all the hours available with great results and so patently giving him more options was a waste of the shareholders money as he could not conceivably do better. Share ownership schemes and executive options have taken rewards beyond payment for service to payment as capitalists towards actual ownership of the company without the risk. This started as a legal way to save tax on extra income and was encouraged by some mutual funds to provide an incentive similar in character to ownership. Over time the tax situation and incentive needs have changed but the ownership bene®ts remain. For the CEO the granting of options is a win-win situation. He must be attracted in the ®rst instance with an internationally competitive package irrespective of the chance that he will move internationally or whether an international rival is realistically likely to move to this location. The convention must be honoured. Of course, sometimes there are some international transfers but this is subject to fashion and comes at a particular point in the credibility cycle when a clean new start is required. Then the convention is to pay more than the previously disclosed comparable international remuneration in order to attract the right person. This provides the necessary periodic upward adjustment in CEO salaries as all the other local CEOs are brought into line due to the comparative survey. The CEO will also be given the options justi®ed by a comparative survey that delivers about the same as the other CEOs. Because our particular business is not doing as well, it will be necessary to issue a lot of cheap options to provide the necessary incentive, perhaps increased because of the perceived risk. Although the options are issued in the expectation of an improvement in the share price the conservative accounting assumes no success and no increase in value and so there is assumed to be no cost to the shareholders. It would be churlish to begrudge those few extra shares later and international investors positively want CEOs and management to be rewarded in the same way as shareholders. When it comes to the retirement of a popular champion there is a divergence of rewards between CEO and shareholder. It is still common to give a retiring CEO new options in his retirement years because of the wisdom of his decisions having an ongoing bene®cial effect whereas shareholders cease to receive dividends or capital gain after they sell their shares. Once he has actually received his options our CEO is now in a win- Believing the Corporation 33 UNCORRECTED PROO win-win situation. If the share-price goes up he is rich and everyone is happy. Perhaps his actions even caused the price to go up. If the shareprice does not go up and he is a ®ne chap regarded by the board as doing a good job they will have to issue further options at a lower strike price to restore his incentive. If he is not popular the board will terminate him but compensate him as if the options are valuable (despite having been accounted at nil cost) in order that he goes quietly. There is a going rate for this as well so that, success or not, the rewards for CEOs continue to be ratchetted up. The shareholders might not be so happy but the working of the credibility cycle tends to have them look forward to the performance of the new CEO. The real owners are the shareholders but do they take an actual interest in the company? Are they stock speculators or faceless mutual funds who treat their holding as simply a negotiable instrument? It is likely that management and the shareholders will disagree about these questions. However, there is widespread agreement that the formal forum for reporting to the shareholders, the annual general meeting, is an historic relic of limited modern use. The central fallacy is that an enormous company often with more than 100,000 shareholders is controlled by the shareholders at the annual general meeting or that the board has the ability to control such an extensive organization. The AGM is an elaborate exercise in popular illusion with the element of democracy so reduced as to be merely vestigial. The widespread condemnation of AGMs is reinforced by the participants themselves who see it as a historic showpiece often abused by interest groups who treat it as opportunity to gain attention for their causes. Labour, consumer, environmental and landowner groups frequently interrupt meetings in an increasingly persistent manner. In Japan organized crime made meeting disruption a pro®table sideline. It is conceded that the AGM is a meeting that is to be endured and at which the minimum possible business is to be conducted, questions are to be stonewalled and where possible directors are silent. The shareholders own the company but they are numerous with individual votes counting for little. The set piece meetings are dominated by small shareholders who lack the understanding or information to effectively interrogate the board. Institutional shareholders normally do not take part other than providing their proxy to the Chairman. As a result the board continues to control the outcome of the meeting even if shareholder activists are able to gain a majority of shareholders present. This is part of the philosophy of institutions supporting incumbent management and only showing their displeasure by selling their shares. Naturally, after selling they no longer have any interest in the affairs of the business. This conven- Antilogic: Why Businesses Fail While Individuals Succeed 34 UNCORRECTED PROO tion provides a line of least resistance for management who respond to shareholder criticism with the suggestion that if they do not like the way the company is run they should sell their shares. After which of course they would no longer have any reason to comment. This approach is encouraged by the psychology of fund managers who have no interest in continued public exposure of their investment let alone disappointment in an unsuccessful company. The net effect is that the general meeting only has relevance in the aftermath of ®nancial catastrophe and is seldom in¯uential in correcting ordinary mismanagement. Ostensibly the board represents the shareholders yet they generally only vote on issues and election lists provided by management and often no choice is possible. This allows self-perpetuation by the board who are in fact appointed by themselves and by each other as a network sometimes with support from other institutions concerned with ®nance. The effective power of corporate governance lies elsewhere. It is suggested that the real power is wielded at the board meeting. Although the board may hold the power over the shareholders the management often holds the board. Townsend is not very ¯attering about the directors with the idea of non-boards. Most big companies have turned their boards of directors into non-boards. The chief executive has put his back seat drivers to sleep. This achievement is understood to be admired. In the years that I've spent on various boards I've never heard a single suggestion from a director (made a director at a board meeting) that produced any result at all. While ostensibly the seat of all power and responsibility, directors are usually the friends of the chief executive put there to keep him safely in of®ce. They meet once a month, gaze at the ®nancial window dressing (never at the operating ®gures by which managers run the business), listen to the chief and his team talk super®cially about the state of the operations, ask a couple of dutiful questions, make token suggestions (courteously recorded and subsequently ignored), and adjourn until next month.15 A more sympathetic view is that board inactivity comes from the sheer dif®culty of carrying out the real role of non-executive directors of guiding company affairs and the selection of chief executives. The non-executive directors are burdened by their lack of knowledge of the detail of the company's affairs and must rely on management for the crucial information necessary to ful®l their responsibilities. They are forced of necessity to concentrate on compliance issues. Management has all the detail but is often unable to judge the company's performance objectively because they were too close to the issues at stake. Believing the Corporation 35 UNCORRECTED PROO It is hard to distinguish the difference between a board that is regarded as good because the results are good and the board that ensures that the results are good. Directors are going to be ¯attered by success whether it exists or not. The accounts will show the pro®t in the best light. If the value of the shares rises life is sweet. The commentators write ¯attering pieces about the company and the directors bask in the association. They are welcome all over town and new offers ¯ood in with the hope that they may achieve the same result in other places. The board meetings are very pleasant. But if the share prices dips the adoring crowds begin to thin. Little by little the commentators begin to question what is happening and after a period of expressing con®dence in the management the directors begin to ask more questions and hope that they are the right ones. The meetings become much less fun but the public image must be maintained. Generally the directors continue to serve. It is sometimes suggested that this loyalty is due to the money involved in fees. Maybe there is an element of ®nancial self-interest affecting the directors and their attitude to fees but this is to overstate their personal ®nancial interest in the outcome, as this is relatively modest. The outcome is there but the motivation is a more complex mixture of in¯uences. First and foremost their role is a continuation of their own business career and now it is their turn to do to others as they have already received. It is prudent and justi®able to act in a manner similar to the other comparable organizations. It gives a very easy satisfying choice and it is much more comfortable to do the same as everyone else rather than to risk the loss of prestige associated with a board seat at a well known company. This gives a dynamic that drives the interrelation between board, chairman and CEO that is most obvious in the area of remuneration but in¯uences all areas of decision making. For remuneration the impact is accentuated by the combination of herding where the boards of each corporation compare themselves with the others and slipstreaming as each takes a successive advantage over the other. Antilogic: Why Businesses Fail While Individuals Succeed 36 UNCORRECTED PROO The role of the directors extends to participation in networks between boards. There is a group of individuals subject to that in¯uence who know how to play the game and identify the venerable and subtle rules of the public role that the board plays. The prospect pronouncements that are as opaque as a Delphic oracle and the ritualistic characteristics, especially in the set piece shareholder meetings, give a clue that the origins of the board lie with a Greek drama. In the typical Greek tragedy the chorus is comprised of twelve elders, still a popular number today. The chorus presents the voice of moral conservatism, traditionalism and a reluctance to challenge the present way of thinking. This conservatism is most probably a function of their age. They are a group of sound but elderly businessmen with few exceptions. In this sense I mean sound to be seen but not heard! The chorus must stay inactive, as it is the role of the characters to respond to the circumstances. So we see the directors remain completely silent at the AGM despite all sorts of provocation from the ¯oor. The chorus could not respond other than their continued expressions of foreboding (which must be their concern about personal liability) yet they do nothing to either con®rm their fears or to act in such a way as to negate them. This idea of foreboding is part of the role of creating atmosphere for corporate governance to reinforce the impression that the interest of shareholders is being taken very seriously indeed. The creation of atmosphere is linked to the role as historian (corporate memory) and poet (corporate image). Sound also indicates an ability to act in the expected way. By de®nition non-executives are required not to be involved in the executive decisions of the company. This is probably the explanation why a survey by an international executive search ®rm revealed that 75% of all non-executive directors of Australian listed companies are present or former chief executives of other listed companies. Most chief executives are generalists by background and specialists in their particular industries. They will have concentrated on general management for many years before being invited to non-executive roles. For con¯ict of interest reasons they cannot be appointed to the boards of competitor companies in their specialist industry and current corporate governance practice frowns on appointment as non-executive directors in the same company where they had been executives. Consequently 75% of non-executive directors bring neither specialist skills nor industry knowledge to the boards on which they serve. This is not a practical impediment, as non-executive directors are required not to do anything, hence the title. The principle criterion for acceptance of a non-executive board invitation is the suitability of the monthly board meeting day. Once on board the board they join the Chairman in supporting unquestioningly the actions of the CEO until, Believing the Corporation 37 UNCORRECTED PROO at a moment determined by the Chairman, they will join him in not supporting the CEO. In due time this will lead to the removal of the old CEO and the selection of a new CEO. The intervening period may provide the board, which has trained by not involving themselves in the affairs of the company, with the opportunity to take over the day to day direction of the ®rm and the chance to relive their former days of executive glory. Loyal service as a non-active director is likely to be rewarded in due course with promotion to Chairman with the responsibility to determine when the CEO is no longer to be supported. This progression is not automatic as certain prerequisites also apply. Non-executive directors should not only be non-active, they should be sound. In this case we mean sound like a barrel, do the right thing and do not leak. A recent development has been an increasing number of female nonexecutive directors. This is a welcome strengthening of board talent as generally these women have reached the previously mandatory level of experience at a much earlier age and without the necessity of having had the previously mandatory chief executive role. This may be the positive effect of ®shing in a smaller gene pool. We may expect that, if current seniority criteria for the appointment are maintained, within ten years most company chairmen will be women. Despite the ability of management to control their boards there still remains the irksome compliance duties and for the CEO the ever present danger of the credibility cycle. Some therefore hanker for a further solution, really the de®nitive solution, to the problem of shareholders control and corporate governance. That is to eliminate the shareholder. The managers go out and raise the funds to buy out the shareholders. Periodically there are conditions when the management is optimistic and the shareholders pessimistic so it proves possible for a management committed to the success of `their' enterprise to bid for and buy the company. This is when there are waves of management buyouts (MBO) and leveraged buyouts (LBO). Each corporate strategy swing gives the potential that some part of the corporation might become available to its management. There are problems when this happens, not least the position of the board deciding between the position of management and that of the shareholders. Knowing what they know, management would never want to buy what the shareholders would want to sell! There is also the conceptual dif®culty that the funding must be serviced by the same business. At least for the CEO it eliminates the board and shareholders before the CEO credibility cycle takes its course. Antilogic: Why Businesses Fail While Individuals Succeed 38 UNCORRECTED PROO There are plenty of CEOs who subscribe to the Alfred Chandler philosophy that the modern business enterprise became a viable institution only after the `visible' hand of management proved to be far more ef®cient than the `invisible' hand of the market. They set out to provide that visible hand and some have succeeded. These leaders share all the human characteristics, good and bad, of politicians and, sadly, sometimes of dictators. Business leaders generally begin their reign with humility and enthusiasm. Their con®dence grows with experience but over time there is a tendency towards expecting acquiescence and sometimes towards hubris. We have seen that evolving nature of corporations has led to a loss of effective control by the owners, the shareholders. Power has migrated towards the managers supposedly held in check by the non-executive directors. Although much of the trappings of the entrepreneur are lovingly embraced, the organizations have become more bureaucratic and political in nature. Successive waves of management consultants have introduced the culture and terminology of the sporting ®eld and of the battle®eld. Much play is made of leadership, loyalty and team spirit. Generally, the tendency for this to become a personality cult is held in check by the natural working of the CEO credibility cycle. Sometimes by force of personality or lucky chance a CEO succeeds in outlasting his board and re-balancing its loyalty in his favour. Key to their success is an ability to hang onto power to give enough time to change the organization in their image through control of personnel. Once the constraints of the cycle have been loosened it is likely that the CEO will survive for a dramatically longer term. He or she becomes the respected industry leader and a phenomenon. This enhanced status together with the respect it brings can lead to remarkable results and with the loss of the self constraining nature of the cycle these may be more extreme, both positive and negative. The chief executive naturally will seek to get the best out of his cohorts. Sometimes that may be outright manipulation to rubberstamp his own ill conceived proposals. Even in benign circumstances where the group are not sycophants there are inadvertent dangers that prevent a group member from expressing doubts when the others in the group appear to have reached a consensus. This puts a premium on being the ®rst to express an opinion although it is wiser to guess, or better still know, what the leader's opinion will be. It is not loyal to make a mistake and guess wrongly. Loyalty also means that once a consensus is reached truth must be consistent with that decision. In his own mind (President) Johnson regarded his in-group of policy advi- Believing the Corporation 39 UNCORRECTED PROO sers as a family and its leading dissident member as an irresponsible son who was sabotaging the family's interests. Underlying this revealing image seems to be two implicit assumptions that epitomize Groupthink: `We are a good group, so any deceitful acts we perpetrate are fully justi®ed. Anyone in the group who is unwilling to distort the truth to help us is disloyal'.16 The consensus group of course de®nes help according to the rules of Groupthink. Janis outlines three concepts that achieve this. Construct a set of objectives that the leader is intending to achieve `presuming always that he acts in a rational manner'.17 This proviso is very unrealistic. The second concept emphasizes those factors that limit rationality of decision making. These could be limits to the ability to obtain the necessary information, limits to the ability to process that information and a tendency to ®nd a course of action that will satisfy the most minimal of goals (a satisfying strategy). This is more like the typical organization. The more information there is the more satisfying takes place. Then as the third concept we have of®ce politics. A variant is a matter of `muddling through'. Policy-makers take one little step one after another and gradually change the old policy into a new one, all the while making compromises that keep every politically powerful group that enters the bargaining reasonably satis®ed or at least not dissatis®ed enough to obstruct or sabotage the new trend. This will tend to diffuse dissent, as it is often not worth the personal risk to indulge in sabotage because the process of incremental change will also pass. The less technical description is to call it the salami technique. Each slice individually is not worth making a fuss. Sometimes the leader is a person of great tenacity both in insisting that the new trends take hold and in ensuring that he sticks around long enough to outlast the doubters. He insists that the team plays the way he wants. He may be so keen on being a team player that he takes it upon himself to be manager, coach, captain and leading goal scorer. No detail is left to chance but often it is clear that the new techniques are for the others to follow and not for the boss himself. One such example is ``Neutron' Jack Welch of General Electric, one of the most admired managers of all time. Welch certainly saw himself as a liberator, inspiring others to realize their responsibility and talents: his key slogan was `Control your destiny or someone else will'. But everyone knew who was really in control. He had chosen his own men to push through his reforms and weed out `resistors'. He replaced the old wedding cake corporate structure with a `cartwheel', Antilogic: Why Businesses Fail While Individuals Succeed 40 UNCORRECTED PROO with the thirteen spokes of the business units all radiating from his own of®ce. There was now much less scope for opposition and balancing forces: he had replaced a republic with a monarchy.18 There are many more examples of business leaders gaining such domination over their organizations as to begin acting as monarchs or dictators. Their careers have led to colourful reporting of both the heights and depths of achievement. Sometimes the story ends in tears, which gives the journalists a further story opportunity as they explain how they had seen it coming and the rest of us should have known. Each period and each country have their famous names with Tiny Rowland, Robert Maxwell, Howard Hughes, the Hunts, Alan Bond, and Al Dunlap amongst the standouts. Other CEOs show the same tendencies but have been able to avoid the ®nancial disasters that often provoke a rethinking of a chief executive's contribution. In the world of corporate regulation, transparent reporting and the ef®- ciency of the market, these situations of CEO domination should not happen as often as they do but there are factors that help them. Firstly, we like the idea of the big boss. We encourage them in their displays of importance. This is an important business. Our leader must be suitably impressive so that we can bask in the re¯ected glory as employees or feel justi®ed in our investment. Not only should they look grand. When the times are dif®cult it is reassuring to have a leader who looks commanding. This applies even in the best-governed companies. Special challenges require special measures. The media, staff and investors all look for strength. They want charismatic leadership. The problem is that once in place the special challenges leader naturally entrenches his position and it is not so easy to change the formula or get them out again re¯ecting a universal human characteristic. Its prevalence changes over time and varies between countries depending on the impact of shareholder activism, and corporate regulation in moderating the credibility cycle. One would expect the more open the reporting of corporate activity the more rapid the working of the credibility cycle would be yet Sampson claims the greatest dif®- culty with autocrats escaping the credibility discipline occurs in the most open of markets, Britain and America. The biggest companies in America, Europe and Asia all have problems with controlling autocrats, within their widely varied versions of capitalism. The Japanese claim to organize retirements and successions better than the West through their system of consensus, but they also ®nd it harder to dislodge dominating bosses ¼ `They are absolute corporate kings'. The German Believing the Corporation 41 UNCORRECTED PROO chairmen are becoming harder to dislodge, in spite of their supervisory boards and the industrial failures of the 1990s. `The chairman always begins to think he owns the company', said one Anglo-German sociologist. ¼ Even the French are becoming more worried about their traditionally over-centralized power. `The French caste system based on a mandarinate gives huge power to presidents: it's really based on monarchic principles', said Octave Gelinier. But British and American companies face the greatest dif®culties in controlling their autocrats.19 It might be imagined that the mounting criticism would be a clear enough message for the big boss. This is not the case because those aggressive characteristics that won the position also serve to reinforce their own self-esteem with in-built defences. As they work their way through the credibility cycle the level of applause will subside and gradually be replaced with criticism. This will have little impact as it is to be expected! The danger with autocrats and the charismatic leaders appointed to meet special challenges is the misdirected energy and uncertain motives. Commanding action has to be taken and no dissension or even debate can be tolerated. It is the classic environment for Antilogic. This may lead to trouble no matter how well meaning the group or benign its intentions. This is the negative side of Groupthink, which ascribes the ®nest motives to those actions deemed to be in the interests of the group. Loyalty demands sticking to the policies of the group even when there are unintended adverse consequences or policy is working badly. The outcome might disturb the members' conscience but this is not allowed to overrule their loyalty to the group. Janis calls this soft-headed thinking, leading to hard-hearted action. Paradoxically, soft-headed groups are likely to be extremely hard-hearted towards out-groups and enemies. In dealing with a rival ¼ policy makers comprising an amiable group ®nd it relatively easy to authorize dehumanizing solutions ¼ An affable group is unlikely to pursue the dif®cult and controversial issues that arise when alternatives to a harsh ¼ solution come up for discussion. Nor are the members inclined to raise ethical issues that imply that this `®ne group of ours, with its humanitarianism and its high-minded principles might be capable of adopting a course of action that is inhumane and immoral'20 Many of the current management techniques aimed at establishing a vision, mission statement, team-building, cultural change, compliance program or whatever are designed to create affable groups. Group cohe- Antilogic: Why Businesses Fail While Individuals Succeed 42 UNCORRECTED PROO siveness is likely to increase hard-heartedness relative to other sources of faulty decisions. The same tendency can lead to the cover-up. The reasoning goes as follows. Because our ®ne group performs to the highest standards any adverse publicity must be for the wrong motivation and gratuitously damaging. Therefore, to prevent unjusti®ed criticism and needless concern to the public/investors we will prevent disclosure of problems. The non-disclosure of problems at Mitsubishi Motor Corporation and Snow Dairy in Japan are recent examples. The origins of the hard-headedness adopted by the autocrat are clear to see in the following quote about a much loved political leader who applied forceful leadership to achieve what were generally seen as worthy aims. In the professional study of leadership, style is the man. The school that thinks leadership is a collection of macho qualities in which not thinking too deeply, being thick skinned and can do without too many scruples or much delicacy, as well as relying on well-placed mates, are taken to be all that you need. It doesn't matter how complicated the world becomes, these are the old leadership verities; divide the world into the leaders and led; play by the book when you must, otherwise do what you have to; claim to be tough unswerving, always and everywhere positive; and treat those who object as less than men, emotional, impractical and possibly subversive ± though the odd sop, the gain-after-the pain doesn't go astray when it can't be avoided. ¼ There's an element of the gangs and games of 11 year old boys in all macho-type leadership ¼ Every macho leader knows, if he's pressed, that his ¼ authority is derived from some reference to force.21 So, there we have it. The most respectable and benign groups are particularly prone to Antilogic and this Antilogic can take a sinister turn against those that do not share the in status. This applies to individuals, corporations, nations and other groupings. This is particularly obvious in politics with history littered with the most unfortunate examples but it is also endemic in the world of ®nance. The clubby world of business and the ceaseless requirement for soundness from its participants appear almost predestined to be the laboratory for Groupthink. It also helps to explain why so many corporate disasters are accompanied with such adverse consequences for participants and bystanders alike. This is no doubt a shock for those that would participate at senior levels in such an environment. It was clear that actual and aspiring chief executives would resort to savage action to protect their position and so ensure the future prospects of the corporation. This could be foreseen and avoided by choice of organization or by willingness to pledge allegiance, without mistake, to the leader. But Groupthink has revealed that participation in a Believing the Corporation 43 UNCORRECTED PROO cohesive and supportive group is no guarantee of a successful outcome. Far from it as the more cohesive the group the more likely that softthinking will lead to hard-hearted action and this means victims. Not everyone thinks that this is a bad thing. The Great Leaders believe that it is natural and probably inevitable. Remember, they expect criticism and are ready with the response; `no pain, no gain', `you can't make an omelette without scrambling eggs', `when the going gets tough the tough get going'. It is for them to do what is necessary to survive and prosper. This may mean tough decisions and hard yards and if this means the components of the group must change then so be it. One change may lead to another and before we know it there are special rules for the Great Leader. Whatever they do becomes what is necessary for the group to survive and prosper. When they begin hearing voices then watch out for trouble. Corporate history is full of colourful examples but in order to avoid favouritism the following quotes are about one particularly uncivilized political leader. These quotes relate to extreme political outcomes but provide troubling parallels with business practice. Stalin was given a business nickname, the Boss. He had a ®rm grip on public relations and personnel, especially where his grasp of succession planning had the victim run faster and faster to avoid causing disappointment. Despite the promotion to the most senior levels the victim could not resist personal ambition and for the good of the team will need to be removed. The end comes as a surprise in contrast to the less effective modern technique of transferring the individual into a nonexistent role. Much would be written later about the Boss's sadism, as seen in the inevitable promotion of a victim before liquidation. In fact, he simply wanted his prey to work harder and to be unaware that the end was near. Above all, he promoted them at the last minute so that people could see how much he loved them, and how they had betrayed his trust.22 With globalization or whatever other competitive threat there will be need for frequent changes of strategy and attendant changes of conviction. For the Party's sake you can and must at 24 hours' notice change all your convictions and force yourself to believe that white is black.23 In the rough and tough of business it is recognized that our caring and upright leader will not and should not be associated with some of the essential actions that have to be taken. This may mean he is thought to be unaware of unpleasant activities assisted by the growth of in-depth language where prohibitions mean the opposite. Antilogic: Why Businesses Fail While Individuals Succeed 44 UNCORRECTED PROO The whole gathering of course realized that there was no conspiracy. But they also knew the in-depth language. They had been told that the party must have a conspiracy. It was essential for success in the struggle with world imperialism and the schismatic Trotsky. In conclusion, a secret circular from Yagoda was read. The People's Commissar warned them that the use of illegal methods of interrogation such as threats and torture would not be tolerated. In `in depth language' this meant that such methods were necessary because the accused must be ruthlessly `broken'.24 The ultimate justi®cation for the contrast between the language and action of control is the belief that the corporation must be protected and the leader is above the principles so as to ensure that protection is achieved. For the Party's sake! When the former seminarist Stalin called the Party the Order of Sword Bearers he had just that in mind: the sacred nature of the Party. Trotsky expressed the same thought in his dictum `the Party is always right'. Like the church their Party remained pure even if those who served it erred. For like the church, the Party was founded on scripture, in this case the sacred Marxist texts, which would never allow the Party to err, or sinful individual members to change its sacred nature. Hence the principle `everything for the Party' which allowed them to betray themselves and humble themselves before Stalin ± the head of the Sacred Party. The whole process of control demanded by the big Boss depends on the unquestioning loyalty of assistants who are perversely reassured when in due time they are also the victims of the process. It is a question of simple arithmetic that this must be the case. Bad though the image of Stalin is C.S. Lewis found a still greater evil that all Company Men would recognize. I live in the Managerial Age, in a world of `Admin'. The greatest evil is not now done in those sordid `dens of Crime' that Dickens loved to paint. It is not done even in the concentration camps and labour camps. In those we see its ®nal result. But it is conceived and ordered (moved, seconded, carried and minuted) in clean, carpeted, warmed and well-lighted of®ces, by quiet men with white collars and cut ®ngernails and smooth shaven cheeks who do not need to raise their voices. Hence, naturally enough, my symbol for Hell is something like the bureaucracy of a police state or the of®ces of a thoroughly nasty business concern.25 Lewis does not explain what makes a business concern thoroughly nasty. Is it a very ef®cient ®rm that inevitably becomes nasty or is an Believing the Corporation 45 UNCORRECTED PROO inef®cient ®rm that inadvertently becomes nasty? The combination of Groupthink and Antilogic suggests that it is the affable groups applying the most modern techniques that through unintended consequences stumble into trouble. Antilogic: Why Businesses Fail While Individuals Succeed 46