Archive for the ‘leadership’ Category
We’ve had our share of posts here at orgtheory on executive compensation. But today I draw your attention to the motherload of compensation debates. In the most recent issue of the Academy of Management Perspectives (sorry, I can’t find an online link), Steven Kaplan, the esteemed professor finance at the University of Chicago, defends his testimony before Congress in which he maintained that CEOs are not overpaid and, in fact, may be underpaid. In the other corner are Jim Walsh of the University of Michigan and John Bogle, former CEO and author of The Battle for the Soul of Capitalism. Kaplan maintains in his essay that CEOs are compensated based on the financial performance of their companies, which he illustrates by showing that their pay is positively correlated with stock price performance (which can mostly be accounted for by exercised options). Walsh and Bogle will have none of it.
Bogle maintains that stock price performance is not the right measure of performance. Corporate boards are using options as a means to entice already well-paid executives to take the jobs, but he doesn’t believe this compensation practice has actually helped improve long-term corporate health.
Simply put, stock prices are a flawed measure of corporate performance. Prices (using Lord Keynes’s classic formulation) involve both enterprise – the yield on investment over the long term – and speculation – betting on the psychology of the market….[B]asing compensation on increasing the intrinsic value of business would be a far better way of rewarding executives for durable long-term performance. For example, CEO compensation might be based on corporate earnings growth, corporate cash flow (even better, for it is far more difficult to manipulate), and dividend growth, and on return on corporate capital relative to peers and relative to corporations as a group (say, the S&P 500). Such measurements should be taken only over an extended period of time, and only after deducting the corporation’s cost of capital (23).
Walsh is a bit harsher in his assessment of Kaplan’s argument. Walsh wonders about the moral appropriateness of the argument.
While scholars must be willing to challenge accepted thinking, it is also true that our work ought to grasp the underpinnings of that accepted thinking. Public concern about executive pay is not about the nature of pay/performance sensitivities, nor is it about envy. The concern is about fairness. Taken-for-granted norms of fairness are essential to the health of the free market system. They too need to serve as a reference point for assessing CEO pay. If we defend the CEO compensation practices…as evidence of a spontaneous market process, then some might wonder about the viability of a society that tolerates such a process. It many not even be so far-fetched to imagine its downfall (30; emphasis added).
Walsh then questions whether Kaplan has conflicting interests that might not make him the most objective assessor of what is the best way to compensate executives.
It is also unfortunate that [Kaplan] never revealed his other interest in this compensation question. Professor Kaplan is not just a business scholar. His University of Chicago Web page notes that he currently serves on the boards of Accretive Health, Columbia Acorn Fund, and Morningstar. The Morningstar Web site reports that he joined their board in 1999 and currently serves as their compensation committee’s chair….That site also includes SEC filings for the past few years. There we learn that Professor Kaplan enjoyed the proceeds from the sale of more than $3.8 million worth of stock in a recent 18-month period. While he is the Neubauer Family Professor of Entrepreneurship and Finance at the University of Chicago, he is also an extremely well-compensated insider in the governance regime he so passionately defends. Congress and his AMP readers should know that (32).
Unfortunately, Kaplan does not offer a rebuttal (that appears in AMP, at least) to Walsh’s claim that he is a biased source.
One source of organizational heterogeneity that is often overlooked in our theories is life-stage variation. If you believe that organizational structure, character, institutionalization, and other important features vary by age or level of development, then the life-stage of an organization matters. From the 1960s to the 1980s understanding processes of “growth and decline” in organizations was an important part of the organizational theory agenda, but over time the theme itself has declined. This may in part be due to the mechanistic nature of early explanations (e.g., first stage A, followed by stage B). These theories became seen as incompatible with the increasingly dominant open systems perspectives, and issues surrounding life-stages became irrelevant. The exception to this was that organizational age concerned ecologists during the 1990s, but I think it’s a stretch to say that ecologists were explicitly explaining differences in organizational life-stage.
So why should we care about life-stage variation? One reason is that the current wave of research on entrepreneurial organizations could use a good theory to explain why and how new organizations (like those they study) are different than older organizations. When you study entrepreneurs you’re not just studying creative individuals, you’re also studying a special type of organization. Better theoretical explanations for life-stage variation would help us understand in what ways they’re different (and consequently how our theories need to adapt their scope conditions when considering entrepreneurs). Another reason to care about life-stages is that it’s an important source of variation when trying to explain larger process like diffusion, institutionalization, etc.
Philip Selznick, in his excellent book Leadership in Administration, talks about how the development of organizational character is a life-cycle process (similar to the formation of a personality in an individual actor). He argued for explicit attention to the developmental processes in organizations, suggesting that several processes were consequential in the early stages of an organization’s life. While it’s not clear that they have to unfold in this order, these three processes necessarily take place in organizations that make it past this early stage.
- Selection of a social base – organizations must find an audience. If they’re going to be recognized by others as a legitimate social actor, a new organization must commit to a particular membership group, set of clients or customers, or set of donors. Until organizations find that base, their designs are malleable.
- Building the institutional core – by “institutional core” Selznick meant that organizations had to select particular personnel or individuals to guide the organization. Organizations had to selectively recruit future leaders that would be able to imprint (although he didn’t use this word) their identity on the organization. Further, leadership needed to set up training procedures that reproduced this core.
- Formalization – Organizations needed to develop the rules, procedures, routines, etc. that would make operational maintenance and internal communication possible. Selznick was fairly clear that this process usually occurred after the other two. “Premature formalization, sometimes reflecting an overemphasis on the quick achievement of clarity in communication and command channels, may seal off leadership during the early stages of organization building, when it is most needed.” Organizations that formalize too quickly can ossify before they have the chance to adapt sufficiently to their environment.
See pages 102-112 of the book for more about life-stages. Also, see my earlier post on why this book is underrated.
On page 40 of Philip Selznick’s Leadership in Administration:
The study of organizational character-formation is, then, a phase of institutional analysis. Here the emphasis is on the embodiment of values in an organizational structure through the elaboration of commitments – ways of acting and responding that can be changed, if at all, only at the risk of severe internal crisis. As in the case of individuals, the emergence of organizational character reflects the irreversible element in experience and choice. A great deal of management practice, as in the hiring of personnel, may be viewed as an effort to hold down the number of irreversible decisions that must be made. On the other hand, a wise management will readily limit its own freedom, accepting irreversible commitments, when the basic values of the organization and its direction are at stake. The acceptance of irreversible commitments is the process by which the character of an organization is set.
This paragraph comes from what is, in my mind, one of the greatest but also one of the most underappreciated books in organizational theory. Selznick, mostly known for his wonderful TVA and the Grass Roots, summarizes his theoretical contributions in this elegant essay. The main premise is that organizations are institutionalized when they become “infuse[d] with value beyond the technical requirements at hand” (17; an insight that I’ve claimed is the major contribution of organizational theory ). While that statement has become well-known and is often cited, less cited is the idea that values become infused in an organization through the process of decision-making. Certain choices are so critical to organizational functioning that they represent “irreversible commitments.” Reversing those commitments would fundamentally alter the nature or character of the organization and could potentially lead to identity crisis. Examples of critical decisions include choices about product emphasis, decisions regarding personnel recruitment; implementation of particular training program; establishment of a system to coordinate subgroups and to resolve conflicts between those groups; and formation of interorganizational alliances.
In this slim book, Selznick lays the groundwork for what becomes contemporary institutional theory (forget the differences between old and new!), theories of organizational identity (even the ecological variety), and contingency theory. In addition, Selznick prepares the way for much of Stinchcombe’s work that would appear in the next decade.Leadership in Administration ushered in the contemporary era of organizational analysis, focusing on how environments shape organizations, but what is unique (and still fresh) about Selznick’s perspective is his focus on the important meso-level – the internal decision-making functions of organizations. Selznick, like his contemporaries in the Carnegie School, was primarily concerned with how the environment translated into organizational action. It is this ability to move between macro and micro that really appeals to me as a scholar and makes Selznick’s Leadership a potentially very useful perspective for those of us interested in revitalizing a focus on meso-theory.
I learned of Grace Lee Boggs when I read Stephen Ward’s history dissertation on radical black politics in 1950′s-60′s Detroit. I was very impressed when I saw her featured in The Grace Lee Project, a film exploring identity through interviews with Asian American women of the same name. Boggs is a 91 year old political activist in Detroit with a long history in various civil rights and labor movements. In her interview, you see her working with all kinds of people to make Detroit a better place, especially young people. Reading about her life makes her more impressive. She earned a 1940 PhD in philosophy from Bryn Mawr College with a dissertation about individualism and George Herbert Mead. Then, she moved back to Detroit and led a life as a political activist, fighting for the rights of African Americans and becoming part of the radical black intelligentsia defined by CLR James, James Boggs (her husband of 40 years), and Raya Dunayevksa. She was a vital figure in civil rights politics of the era.
Over the last fifty years (!), she’s expanded her interests and her recent efforts include her work with Detroit youth who renovate deteriorating neighborhoods, a column for the Michigan Citizen, and her work on behalf of housing issues. In this interview with Bill Moyers, she comes across as an insightful person who sees community action as a form of social learning. Here’s Moyer’s photo essay on her. Though we’d disgree on some points - for example, she appears to be a fairly hard core Marxist – I admire her ability to see the future as an open horizon to be shaped through local action. I just hope that I can live such a rich life that has helped the world become a better place.
Pirate alert! Remember that cool working paper about pirates and democracy that Fabio linked to last summer? It is now in print in the Journal of Political Economy, “An-arrgh-chy: The Law and Economics of Pirate Organization.” In the paper Peter Leeson, an economist at George Mason, examines the organizational structure of pirate ships, comparing them primarily with merchant ships. Pirates, in contrast to the autocratic authority structure of merchant ships, developed democratic mechanisms of governance, complete with checks-and-balances and constitutions. The democratic governance system of pirates ensured that no single officer on the ship could dominate and abuse his authority for personal gain. In comparison with merchant ships, pirate ships did not face the principal-agent problem. Pirates owned their own ships (or at least occupied them without rent) and could take all of the booty for themselves, whereas merchants worked for landlubbers who owned the assets of the ship. Leeson’s conclusion is that pirate democracy was a response to the economic conditions of piracy.
One of the interesting insights of Leeson’s study is that pirates were one of the first groups to develop democracy as a form of governance.
The institutional separation of powers aboard pirate ships predated its adoption by seventeenth- and eighteenth-century governments. France, for example, did not experience such a separation until 1789. Nor did the United States. The first specter of separated powers in Spain did not appear until 1812. In contrast, pirates had divided, democratic “government” aboard their ships at least a century before this (pg. 1066).
Here is Leeson’s website. I can’t help but chuckle at the prominent skull and crossbones directly above his title as the “BB&T Professor for the Study of Capitalism.” If you wondered how an assistant professor starting in 2005 has rapidly advanced to full professor, check out Leeson’s loaded CV. Peter is also a regular at the Austrian Economists blog.
Last week, the Harvard Business School caught my attention with the announcement of a new joint BA-MBA program allowing liberal arts majors early admission to the Harvard MBA program. The “2+2 program” is a pretty sweet deal. An undergraduate applies at the end of the junior year. If they are accepted at the beginning of the senior year, they get automatic matriculation in the HBS MBA program after two years in the work force. It gets better – the program will even help people find a job to tide them over between graduation and the MBA program.
I was wondering why the HBS would consider such a policy. They always have way more applicants than spots and their graduates do pretty darned well. Furthermore, the 2+2 program goes against the grain of MBA admissions. Right now, the thinking is that the MBA is a gateway to high powered management jobs. You would probably want folks to have at least a few years of experience in a real job before committing them to 2 more years in school and about $100k in debt. Also, I haven’t seen any crisis in modern management that could have been avoided with a few more art history majors at the helm.
There are a few hypotheses. One is gender disparity. The MBA programs draw mostly from the econ, business, and technical majors, which are male dominated. Around 30% of MBA classes are female, compared to 50% + for medical and law schools. By directly recruiting from areas other than econ & technical fields, you start changing the odds. It’s a sneaky way to solve a sticky political problem.
Another hypothesis is that this is really driven by the self image of the companies that HBS wants to ally with. The Harvard Crimson article reports that this is definitely an attempt at getting the “creative people” that companies like Google and McKinsey want:
Kreisberg said the school has been courting Google for some time, and this program provides an chance to strengthen ties with the company.
“This is a brilliant way for Harvard to make an alliance with Google, something they’ve been dying to do,” he said.
It’s not clear to me that throwing English majors into the econ/stats/case study curriculum will magically create a new class of creative managers, but the 2+2 program might help firms like google create ties with high prestige b-schools and let HBS project an image of a hip, 21st century educational institution. Not a bad deal.
A final hypothesis is simply faculty boredom. Perhaps teaching regression analysis and Black-Scholes theory to endless streams of Goldman Sachs alumni is tedious and the school wishes to try teaching different kinds of students, who won’t go into super-quantitative number crunching finance gigs. They do say that 2+2 might grow to be 10% of the 900 person HBS MBA cohort, which means some professors will have the pleasure of developing some neat new curriculum for them. Call it the Niskanen-public choice theory of curricular change. Whatever the reason, I’d be interested in seeing how this program works and if it’ll help HBS plug into the firms of the creative class.
Hat tip to Elizp in Bloomington.
In an earlier post I talked about the impetus for the creation of business schools, as outlined in Rakesh Khurana’s new book, From Higher Aims to Hired Hands. The first section of the book deals with the early attempts to build business schools designed to create socially-minded managers with a strong professional identity. Not surprisingly, the early business schools found this to be a difficult project.
Successful businessmen, like Andrew Carnegie, funded many of the early b-schools, partly in hopes that doing so would help them would gain more respect among the public. The industrialists of the 19th Century lacked the credibility that entrepreneurs have today. They were often uneducated and viewed as only interested in making a profit, which, back then, was seen as a bad thing. To counter this image, they funded business schools that they hoped would lead to the collective betterment of society. The business school would create the new professional manager was concerned with issues greater than profit-seeking. The ideals socialized in these budding managers would teach them to behave responsibly and ethically, thereby taming capitalism and the corporation.
Getting this dream off the ground was hampered by the lack of a coherent set of shared ethics or professional norms that the new b-schools could inculcate in their students. Business schools lacked trained professional educators that drew on a common knowledge base. Most of their training was based in practical skills and technical knowledge, sometimes as mundane as typewriting. Even the creation of a governing association, the American Association of Collegiate Schools of Business, did little to produce a coherent training or professionalizing curriculum.
On page 197 Khurana describes the pathetic state of the business school during and shortly after the Depression years:
The curriculum at the majority of business schools in the 1940s and 1950s was still best described as an amalgamation of subjects, unified by little but the frayed idea of management as a distinct subject of study. With the exception of a mere handful of schools, business education also continued to be beleaguered by poorly trained faculty who lacked a doctorate or an academic publication record. For that matter, a survey of business school research that was published during the 1950s showed that the era’s research consisted largely of superficial, anecdotal examples or broad generalizations that were rarely subjected to rigorous testing or peer review…Finally, the caliber of students in business schools was far from stellar. Growth in enrollment after the war tended to expand the proportion of students whose interests were primarily or exclusively vocational rather than academic. According to a survey published in the mid-1950s, graduate students in business at the time scored below the average for all graduate and professional students on standardized tests.
By the mid-1950s the business school, as an institution, was about to change dramatically with the decline of AACSB and the rise of the foundations (primarily the Ford Foundation) as the patrons of the business school. The disciplines were on the verge of invading the business school classrooms.
One of the central premises of the first half of Rakesh Khurana’s new book, From Higher Aims to Hired Hands, is that at the turn of the century management was an occupation without an identity or legitimacy. Managers, while fulfilling important roles in business, did not have a recognized role in American society. Many people didn’t know what managers did. The management toolkit, as we know it today, did not exist. Compared to other traditional occupations and professions, managers lacked status. If managers were to gain their desired status and legitimacy, they first needed to collectively define among themselves a new identity for management.
This transformation occurred in a time when the credibility of the corporate enterprise was also questionable. Populists and labor both had complaints about the increasing power of the corporation. As the corporate form became an ever-useful tool in the hands of the wealthy elite, both parties felt that its rising influence would disrupt societal order. Management used their position as mediators within the corporation, the brokers between labor and elite and between capitalists and community, to develop a sense of social purpose for their occupation and to decry the need for the professionalization of management.
Given these openings, management had a clear opportunity to legitimize itself if it could shift the ground of the argument from the legitimacy of the corporation to the value of managers as the natural leaders of the emerging corporate order. For management to take advantage of this moment, it would be necessary to offer the public an explanation of what management did and to standardize managerial work, and the market for it, by standardizing its producers. In other words, managers would have to be adequately trained and socialized to present themselves as providing distinct services for exchange in the labor market. At the same time, managers would need to construct a collective identity for themselves and infuse it with content that served to portray management as an ordering institution producing clear benefits for society. As soon as these requirements for the explanation and identity of management came to be understood, circumstances were ripe for the emergence of a vanguard of what DiMaggio calls “institutional entrepreneurs” – interested actors who would dedicate themselves to framing this new reality for others.
In the first section of the book Khurana describes the process of organizing a new management identity. The business school became the place for this collective action. The business school was an ideal location inasmuch as it drew upon three prominent institutions: science, the university, and the professions. By creating a place where management could be standardized and managers socialized, the groundwork was laid for the creation of a new profession, akin to the function of law and medical schools. Whether they would be successful or not in this venture is also the topic of Khurana’s book.
I don’t think I’ve read anything that so insightfully deals with the professionalization of management. I had the undergrads in my complex organizations course read chapter 1 (which I just described) in connection with Weber and bureaucracy. I thought the chapter might be a little heavy for undergrads but they absolutely loved it. We had the best class discussion of the semester after reading the chapter.
1. Loyal reader Belle Lettre on taking organizational theory courses in different academic departments.
2. Charlton Copeland at blackprof.com asks whether black alumni from majority white schools should give their money to historically black colleges. Comments worth reading. Best answer: yes, you should give to white majority schools because you can help wherever black students may be.
“History in general, and the American experience in Vietnam in particular, have much to teach us, but both must be used with discretion and neither should be pushed too far. The Vietnam analogy, for all its value as the most recent large-scale use of American force abroad, has limits. Most importantly, the applicability of the lessons drawn from Vietnam, just like the applicability of lessons taken from any other past event, always will depend on the circumstances of the particular situation at hand.”
If nothing else, it’s worthy thick description. The interviews show how traumatized US leaders were by the Vietnam war and how that affected later choices. Another case study of letting the worst outcome carry too much weight in policy judgments.
Lots of people work in groups that are not really teams. If you work alone in a cubicle, and meet your fellow team members only in the Monday status meeting, you’re not in a real team. Organizational researchers reserve the term “team” for groups that have high interdependence–each task that you do, sometimes on an hourly basis, is dependent on what the other team members are doing at that same time. Some team tasks need high interdependence, while others don’t. In a recent post at Huffingtonpost.com, I gave a sports example: a basketball team is highly interdependent; a baseball team is low. In an interdependent team, you can’t get anything done without working closely with the other team members. Years of organizational research show that as your team becomes more interdependent, you need more and better communication, and higher cohesion. In my book GROUP GENIUS, I show that real teams need what I call group flow–a state of peak performance that comes from close work, shared commitment to the goals, and pride in the team.
I’ve just read a fascinating academic study* of interdependence in top management teams (TMT)–basically, this is the group of senior executives that has their offices in the executive suite at headquarters and that report directly to the CEO. Professors Murray Barrick, Bret Bradley, and Amy Colbert studied 94 credit unions, with TMT size ranging from 4 to 14 members. They interviewed 517 of the 601 TMT members at these credit unions. To assess TMT effectiveness, they measured the team’s own ratings of their effectiveness, and then they waited one year and measured each firm’s performance using data from the National Credit Union Administration.
Using some fairly sophisticated statistics, they demonstrated that when teams are more interdependent, coherence and communication more strongly predict the team’s performance and the firm’s performance over the following year. But what’s interesting is that there were two different kinds of teams. For teams that were highly interdependent, high coherence and good communication predicted both team performance and firm performance. But for teams that were not interdependent, low coherence and less communication was related to better performance. The top performing teams and firms were those with interdependent teams and high cohesion and communication; but the non-interdependent teams with low cohesion and communication only performed slightly worse.
The key message is that you need a match: between the degree of interdependence on the one hand, and coherence and communication on the other. The least successful teams were those for which these two features were mismatched.
I would add one tip from my own studies of innovation: significant innovations always emerge from interdependent teams, and rarely come from teams low in interdependence. That’s why innovations tend to come from teams that are high in group flow, high in cohesion and with constant communication. Credit unions aren’t generally associated with high innovation; I’d like to see this study repeated, but in an industry that is associated with constant innovation.
*Barrick, M. R., Bradley, B. H., Colbert, A. E. (2007). The moderating role of top management team interdependence: Implications for real teams and working groups. Academy of Management Journal, 50(3), 544-557.
I was able to pick up an iPhone early through a local contact at Apple, and I have to say it’s really something. No of course I wasn’t able to do that — who do you think I am? Besides, I already have a phone on a relatively new contract. But I was in the Campus Bookstore here at the U of A and, while briefly down in the computer section, I heard store employees field two calls from people asking whether it would be possible to buy an iPhone there tomorrow, and whether there would be an educational discount on them. The guy in the store replied with more than a trace of sadness that they weren’t carrying the phone because it was only available at Apple Stores and AT&T outlets. He didn’t know about the educational discount. I was only there for about five minutes and clearly these weren’t the first two calls they’d had about this today.
I won’t be buying one anytime soon but, like I said before, it seems to me that the iPhone is going to be a success for Apple, and will probably provide a large kick in the ass to other cellphone manufacturers in the process. Criticism of the iPhone — and general backlash against the widespred interest amongst consumers — has been brewing for some time now. John Gruber has been keeping track of some examples.
Having read a bunch of the iPhone Naysayers, I’m struck by how much they miss the point of what Apple is trying to do with the device (in addition, I find myself wondering what the qualifications for becoming an IT Industry Analyst are, exactly).
A loyal reader insisted I add this pirate pic…
Pete Leeson at West Virginia economics has a working paper on the social organization of pirates. More cute-o-nomics? I’d say no, it’s actually a meaty theoretical paper on the governance of criminal enterprises, using historical evidence from pirates to explore how ships operated as proto-democratic organizations. It’s a combination of history and game theory explaining why pirate ships didn’t devolve into bitter internal warfare. Some interesting points:
- Pirate crews were large complex organizations. The modal crew size was about 120, with crews of 150-200 possible. Some crews were so large they required multiple ships. They were also highly successful – they captured most predated ships and collected huge sums of money.
- Leeson identifies the main problem of ships as “captain predation.” What is to stop a ship’s captain from mistreating the crew? In Navy ships, this was a rampant problem. As king like entities, captains routinely abused crews. This drove a lot of seamen into piracy, because pirate captains were less abusive.
- How did pirates solve the “captain predation” problem? Leeson claims they had “piratical” checks and balances. They actually had multiple branches of pirate authority – the captain who wielded absolute power in battle, and a democratically elected quartermaster who you could appeal to in non-emergency situations.
- There even pirate constitutions, public rules and information developed to determine the power of captains and quartermasters.
More interesting points: division of powers on pirate ships predates their adoption in governments, piratical constitutions became well known rules of conduct, and there was also a right of secession – if you didn’t like the “articles” of your ship, you were free to leave. Definitely a stimulating read.
Last night I read the introduction to Paths to Power, a new book by Anthony Mayo, Nitin Nohria, and Laura Singleton. The book looks to be a fascinating exploration of the social backgrounds of the country’s business leaders. Data for the book come from Harvard Business School’s “Great American Business Leaders of the 20th Century” database. The database has information on the top 1,000 business executives (i.e. CEOs and/or company founders) during that century, as determined by a set of financial performance criteria. Although the database is in no way a representative sample of all leaders, it does contain arguably the highest profile executives and therefore provides a window into the demographic characteristics of the elite of the elite.
In the introductory chapter, the authors argue that the paths leading to top leadership positions has changed over the course of the century. For example, getting an MBA has become much more important to climbing the corporate ladder. Getting a college degree of some sort is now one of the key gatekeeping mechanisms to attaining high leadership positions. While this may seem obvious to us now, in 1900 less than 20% of top business leaders had college degrees. Education has replaced family heritage and religion as the primary mechanisms to access. As a result, current business leaders come from more diverse family and religious backgrounds. Whereas in the 1921-1940 time period, the modal group of executives came from families where fathers were also executives, this group now constitutes one of the smallest categories. In comparison, the number of executives who come from white- or blue-collar backgrounds has more than doubled since the 1920s.
The main point of the introductory chapter isn’t that becoming an executive has become a much more open process than it was before, but the nature of the “social closure” has changed. Executive power is no longer inherited, but it is still clearly limited to groups of people who are capable of jumping significant social hurdles (such as being able to get into a top MBA program) and entering into and succeeding in an elite occupational group.
Forbes produced a list of the top general managers in professional sports (in North America). To rank the GMs, they took into account two factors: winning percentage compared to that of the predecessor and relative payroll compared to the payroll of the predecessor. They double-weight winning percentage in order not to favor GMs that cut costs at the expense of winning. The results, I guess, aren’t that surprising. The top overall GM is Kevin McHale (NBA), who rescued the perpetually-losing Minnesota Timberwolves and turned them into playoff contenders while also keeping costs manageable. The top GM in baseball is Billy Beane of Moneyball fame (#26). The top GM in the NFL is A.J. Smith of the San Diego Chargers (#4). The top GM in the NHL is Jay Feaster of the Tampa Bay Lightning (#2).
One thing the list seems to tell us is that baseball GMs aren’t as good as their peers in basketball, football, and hockey. One potential problem with the ranking is that it favors GMs from teams that used to stink, which sort of discounts the skills and contribution of GMs who work for really successful teams. This might also be the reason that baseball GMs do not appear as highly on the list. Is it harder to turn around a losing team in baseball than in the other sports? Last year’s Detroit Tigers seem to contradict that idea, but then we also have the Kansas City Royals.
The rankings also reflect winning percentage but do not favor championship organizations. The value-added of a championship isn’t taken into account at all. But I guess that begs the question, how much value does a professional sports championship really add to a particular franchise? Are the New England Patriots much more valuable today than they were prior to their three Super Bowls?
Jack Welch, the former CEO of GE, is being tossed around by the media for blaming the media for the CEO compensation problem. In short, he believes CEO pay is only perceived as a problem because the media thinks its a problem, which is (in his mind) forcing a lot of good leadership talent to seek their fortunes in private equity. That’s just nonsense. CEO pay has become a national issue because of the rapidly increasing compensation gap (to which rapidly bloating CEO compensation packages have contributed), not because the media hates CEOs.
But Welch did make one good point in his diatribe:
The problem with CEOs is that the board screws up the succession plan. The most egregious payment systems come when someone gets fired, and the board has no ascension plan. Then they have to pay for a new star at another company.
Another intrepretation is that the only plan that many boards have when trying to revive a struggling company is to bring in a celebrity CEO with enough media cachet to at least temporarily boost their stock price and provide cover for the board. Rakesh Khurana’s fine book, Searching for a Corporate Savior, lays out this argument. By institutionalizing an external CEO labor market (compared to an internal search for CEO talent), boards have turned the negotiating power over to the talent pool. And when the celebrity executives have all the power in the negotiation, compensation packages explode.
The Wall Street Journal discusses what-appears-to-be a fascinating new book, The Real Pepsi Challenge, about the creation of Pepsi’s African-American sales division. Immediately before and after World War II, Pepsi’s CEO, Walter S. Mack, created a sales team specifically designed to target black Americans. Recognizing that blacks constituted a market roughly the size of the entire Candian population, Mack decided to go after this niche by hiring a black sales team, the first of its kind in a major U.S. corporation.
Mr. Mack had long believed that being different could sometimes provide an advantage. He started pursuing black customers by hiring a three-member sales team of African-Americans in 1940. During World War II, sugar rations and economic pressures made it all but impossible to continue that initial effort. But after the war ended, Mr. Mack decided to court the black consumer with a full department of salesmen, with a budget for advertising and promotional tools. In 1947, he hired Edward F. Boyd, a onetime singer and actor working then for the National Urban League in New York, to create the new division.
Six members of that team, now in their 80s and 90s, lived to tell their story for the book…Mr. Boyd, Dr. Jean Emmons of Florida, Allen L. McKellar of St. Louis, Julian C. Nicholas of North Carolina, William R. Simms of Massachusetts and Dr. Charles E. Wilson of New Jersey. To their delight, they also lived to see Indra K. Nooyi, an India-born woman, appointed chief executive officer of PepsiCo Inc. in August 2006 — not long after the company edged past Coca-Cola Co. in value of market capitalization. Both milestones would have been unthinkable in the days when the marketing team was working.
The creation of the sales division was a novel strategy that led to the emergence of the niche-marketing strategy that now dominates. The sales division also led to the advancement of the first African-American corporate vice-president in a U.S. company (Harvey C. Russell became a vice president in the company in 1962). Not all was rosey in this endeavour though. The black sales executives were underpaid compared to their white peers, they were confronted with segregation when doing sales trips to the South, and they experienced racism within the hierarchy of the company. Most of the sales team left the company after a new president took over in 1951. While the Pepsi strategy would be temporarily deterred, the legacy of the experiment was to create a new kind of marketing strategy, help to overcome negative stereotypes about black Americans as consumers, and to pave the way for future African-American executives. Looks like an interesting book.