Mad Management: Corporate leaders - because they are worth it

When I first came to England many, many years ago I was wondering aloud about the many paradoxes in British industry a young Canadian thrust a book at me, saying 'If you want to know how the world works, read this.' It was Catch 22, the classic satire of the US army in Italy in World War Two.

Thursday, 2nd March 2017, 4:24 pm
Updated Friday, 24th March 2017, 9:51 am

I stayed all night reading Joseph Heller’s masterpiece and was particularly taken with the character Milo Minderbender, an entrepreneur whose only purpose in the army was to make money. Wikipedia sums up his role perfectly: “Eventually, Minderbinder begins contracting missions for the Germans, fighting on both sides in the battle at Orvieto, and bombing his own squadron at Pianosa.

At one point Minderbinder orders his fleet of aircraft to attack the American base where he lives, killing many American officers and enlisted men. He finally gets court martialed for treason. However, as his company proves to be incredibly profitable, he hires an expensive lawyer who is able to convince the court that it was capitalism which made America great, and is absolved only by disclosing his enormous profit to the investigating congressional committee.”

This had to be a step too far, I thought, even in a novel. But actually I find today that it is happening everywhere in the western countries, in the name of capitalism/profit. Private and public sector organisations enact policies that damage themselves and their communities all the time – often because the Board is adopting the latest management fad without thinking it through, or worse, because they are focused on shareholder value.

The best example of combining both was from the second largest USA bank (the world’s largest in market cap), Wells Fargo (whose horse drawn carriage is pictured above), which combined the fad of cross-selling with executive share allocation based on the profit and share price levels.

​​Wells Fargo bank executives were excoriated at a USA Congress hearing in September 2016 for its policy of targets for new accounts selling, whereby managers had to hit sales targets of new accounts. It imposed strict cross-selling quotas on employees that arguably went way beyond what was reasonably possible. The result was that one-and-a-half million unauthorized deposit accounts were opened, as well as 565,000​​ unauthorized credit cards. Debit cards were opened and new PIN numbers created. Employees created fake email addresses, forged signatures, etc. What a surprise! In one instance, a homeless woman had six accounts opened in her name, with total fees of $39 a month.

As Dr Deming, my favourite management guru, said, if you give people targets (especially if related to performance ratings) they will achieve them, even if it damages the company. Well, as usual the staff were the ones who were punished. When the extent of the fake cross-selling was discovered 5300 staff were fired – for protecting themselves from really brutal treatment for non-achievement.

To compound this act of mad management, the financials did not stack up either. The income generated for Wells Fargo by all this amounted to $1.14 per fake account, or $450 per employee. It is likely that simply sacking and replacing the offending employees probably cost Wells Fargo more than they got from all this business (Bloomberg). And that’s before you add the $100 million fine the bank has to pay the Consumer Financial Protection Bureau, the $50 million fine to the L.A. city attorney, the $35 million fine to the Office of the Comptroller of the Currency, and the $2.5 million in customer refunds.

But this is not what the Chairman of Wells Fargo was excoriated for at the hearing. The urbane John Stumpf, who looked like everyone’s favourite uncle, blamed “rogue employees” for the debacle! (Does that ring a bell? Rogue traders?) At this point he was asked, “Have you given any of your $19 million compensation back, like your bonus of $4 million”. He looked astounded. “No.” “Have you offered to resign?” Perplexed look. “No, we have fixed the problem, and are scrapping all product sales goals for our retail banking staff, including those in branches and call centres.”

In effect, as usual, the Board took no responsibility for having created a system that caused malfeasance among their employees; like Siemens, like our banks. However, thanks to social media as much as anything else, Mr Stumpf eventually resigned, forfeiting $41 million in stock awards.

Just in case this gives the impression that the USA has a monopoly on egregious banking, our European banks have cost us 213 billion euros through their bad practices, including RBS, between 2008 and 2015.

Executive Salary Review. Now, coming up in March/April we will be getting the announcements of our UK executive salary awards. If the recent past is anything to go by, they, John Stumpf, will have learned nothing. Here are a couple of examples from last year: Bob Dudley, CEO of BP, where thousands of staff lost their jobs - £13.3 million; Rakesh Kapoor of Reckitt Benckiser - £23.2 million; and king of the heap, Martin Sorrell - £70.4 million. It would be well to recall what that most eminent business consultant, Peter Drucker said: “Few top executives can even imagine the hatred, contempt and even fury that has been created – not primarily among the blue collar workers who never had an exalted opinion of the ‘bosses’ – but among their middle management and professional people.”

Charlie Mayfield, Chairman of that most admired and successful retailer, John Lewis, was criticised in some quarters for receiving a package to the value of £1.5 million (about 60 times that of the new graduate starter). But the 91,000 staff all had a profit share bonus of 10% of salary, which probably lopped about £220 million off the profits. Also, unlike Bob Dudley of BP, he did not get salary increase because of a drop in sales in Waitrose.

Consider, if the three CEOs mentioned all had received packages, like Charlie Mayfield, of £1.5 million how much could be ploughed back into those companies: about 4,000 jobs at an average wage (BP could have reduced its redundancies), or pay their suppliers more, or invest in improvement. The list is endless.

About ​20 years ago my wife and I had lunch with Mrs Bailey, of N G Bailey, the largest independent engineering company in the UK, based in Leeds. When I asked her what she was most proud of in her company, she replied: “Our apprenticeship training scheme.” Now there’s a thought.