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Monday, October 02, 2020

Leadership By Numbers


I have written before about the foolish cult of “leadership by numbers” that disfigures many organizations today. You know the kind of thing: the bland BS about “success in raising quarterly earnings by the expected 9.8% in line with known patterns and variances” or “implementing on-going increases in productivity, measured on an inflation-adjusted, year-on-year basis.” The headlines full of ratios that you get on the financial news, reducing the nation’s overall economic health to yesterday’s change in one or two indexes of stockmarket activity. The business pages of newspapers that are filled with tables of figures and charts taken wholesale from press releases made available by the PR flacks at the organizations in question. And the leaders who issue instructions based on seasonally-adjusted variances from some assumed set of ideal results, treating the organization as if it were a car to be driven by reference only to achieved miles per gallon, while ignoring the actual state of the road.

The temptation to reduce the functioning of a massive corporation to one to two headline figures is too much of a temptation for some journalists to resist, but that doesn’t make it right or sensible. Such information is more likely to represent media spin than any genuine understanding of what is happening in the business. Worse, it concentrates attention on spurious, short-term goals at the expense of the long-term health and viability of the business. It doesn’t even question whether the “achievements” so avidly reported are sensible uses of corporate time, attention, or money. And all that is assuming that the figures being used are (a) a rational choice, (b) correctly calculated, and (c) understood properly by the people in charge.

Never mind the likelihood that all the cutbacks will so hamper future business that the long-term profitability of the operation later takes a major hit. It looks good, therefore it must be good.
For example, any corporation can increase short-term profits by one of several mechanistic means. You might make major staff reductions and cut costs all round. Since money is probably still flowing in from business done before the cutbacks, you’ll get a one-off cost reduction that will give a sharp uptick in supposed profitability. Never mind the likelihood that all the cutbacks will so hamper future business that the long-term profitability of the operation later takes a major hit. It looks good, therefore it must be good.

Then there is a slew of accounting tricks, many questionable and some downright illegal, to delay costs while counting income on time, or even early, and shift monetary sums between different parts of the company’s published results. Toward the end of a financial period, there are always opportunities to decide whether to count income as falling in the current period or to defer it to the next one. The same deal works for costs. And have sales people never been known to ask clients to delay (or advance) placing an order, so that the potential income can be counted in a way that helps them meet some arbitrary, short-term target?

The figures are not the business. They are not always even very accurate or useful pictures of the business.
What all this jiggery-pokery has in common is this: aiming a business at a series of short-term targets encourages everyone involved to do whatever it takes to deliver as required, regardless of the consequences later. In addition, it simplifies the whole messy, complex, demanding, and fascinating process of running a successful business to meeting a few simple, numerical goals—as if those figures accurately represented the business as a whole, instead of being something dreamed up by accountants and financial markets, often for some entirely different purpose. The figures are not the business. They are not always even very accurate or useful pictures of the business.

There is yet worse to come. If all that matters is “meeting the numbers,” does it matter how you do it? Let’s set aside the truly dishonest and criminal ways some executives have answered this question. They are extremes and rather uncommon (we hope). Let’s look at the way such an idea operates day-to-day.

Many companies pay executives according to incentives that are tied to movements in the stock price. Such measures are so vague and unspecific that it’s hard to see what message is being given to the executives in question. Nor do such incentives relate clealry to the work that the executives do, or the direct results of their actions. The stock price moves according to the whims of thousands of traders in the stock markets of the world; a process that has been accurately summarized as “the random ravings of an unbalanced manic-depressive.” They go up, or down, for no rational reason at all, or for reasons that have little or nothing to do with the actions of the managers of the business. Profits may rise, but the share price will fall. Announce major lay-offs and cost-control activities (surely a sign the business is in trouble) and the share price will soar in anticipation of those lovely, spurious, short-term profits.

Consider also the stealthy changing of past figures. The “adjustments” and “restatements” that can wipe away imaginary profits that once fueled a stock-price surge. The over-estimation of reserves, strange valuations of property, odd ways of accounting for the supposed value of inventory or “good will”—all doing their job of producing the right results at the time, then quietly changed afterwards. Imagine doing your tax returns this way: making all kinds of dubious statements and changes of the facts to ensure you get a great tax refund, then quietly admitting to the chicanery later and putting the figures straight—and all without being penalized or asked to pay back the refund. If you or I did it, we would land in jail. When corporations do it, few people even notice.

Pretty soon, top leaders were being fed a steady diet of numerical summaries in place of leaving their ivory towers to go and see what is really going on. It suited everyone this way.
This reliance on figures began innocently enough, with people using the new power of computer spreadsheets to analyze various aspects of the business, and look for indications that should draw their attention to something real that needed action. Used like this, numerical methods are still valuable tools in the management arsenal. But then people started to treat their figures themselves as if they were real events, not merely indicators. Pretty soon, top leaders were being fed a steady diet of numerical summaries in place of leaving their ivory towers to go and see what is really going on. It suited everyone this way. Less work for the top guys, who could look at a page of figures instead of needing to understand the business itself. Simpler for their subordinates, who could make sure the figures looked right and rely on a combination of the boss’s uneasiness with math and their own ability to obfuscate to head off any awkward questions. Easier all round in an age when people move quickly in and out of jobs. You don’t need to understand the business, just how to use a spreadsheet. It’s the ultimate in “transferable management skills.”

Leadership by numbers is like painting by numbers: it won’t produce anything you can be proud of hanging on your wall, but it is sure easier than taking the time, energy, effort, and years of practice you would need to become a true artist. So, if you’re happy with cheap fakes, in art or leadership, go right ahead. Just don’t try to pretend what you’re doing is worth a handful of beans.

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