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Wednesday, July 28, 2010

How an A grader kills his company



This summer while interning with a leading FMCG company globally,I was working on a project that required development of some new machines in house.As my internship drew to an end,the mantainace engineer who had tried unsuccessfylly designing a new machine asked me if I could approve his project ,as he was having his mid term review soon.His reasoning was simple and crisp.We both stood to benefit from commissiong and both wont be there long to see what happened afterwards.
The incident aptly sums the driving force behind the 2008 financial crisis,the BP spill and the unmatched risk taking across big companies globally.The short term manager retention is one common factor affecting companies globally from petrochemicals to investment giants.The average retention for mid level managers has dropped from 8 years in mid 1970's to just two years in the investment banking domain.The stats might be a notch better for other industeries but still grave enough to pose a new corporate challenge alltogether.
How smaller retention periods at mid managment level affect company performance and risk taking is quite easy to understand.Most of the companies,specially ones having a high performance culture put a large amount of focus on short term performance.Moreover,in a quest to make reviews more quantitative and increased importance of these quantitative performance matrices in determing mouth watering annual bonuses,managers are found to be fighting a constant race against time,in order to achieve high standards demanded by the company.The problem becomes even more acute at top managment level,with most CEO's under pressure to deliever spikes in short term performance to financial markets.Apple for instance tried to delay recall of its newly launched Iphone 4 not because it could prove to be a loss taking proposition but because of the impact of recall on Apples stock would have been disastorous.
The above is infact strengthened by a close analysis of the recent financial cycles,all of which seem to be shortening.The Oct 2008 financial crisis was quickly overtaken by a bull run the very next year.Only one year among the bulls and bears are already threatning us with the soverign crisis in Europe,the spill by BP and political fallouts across the globe.Compare this with average 6-8 years of economic cycle in the past 200 years.Clearly our increasing focus of short term managment performance is affecting our macroeconimics.
The crisis is infact limited not only to corporates but also extends to governments across the globe.The EU in order to keep its citizens happy in short run chose to forgo the harsh measures relating to foregoing of social security etc.While this helped to keep its citizens happy and better than other souls across the world,it now stands at doors of a soverign crisis and threatens to affect the whole global economy in a major way.Similarly China in a quest to mantain its high growth rates,is still not ready to make its currency free float.What looms in background of this short term gain is everybodys guess-political instability,economic downturn and regional fallouts.It seems governments today are more concerned about making their citizens happy rather than making a long term assesment and planning for the economy.In India for instance the 5 year plans have been reduced to mere draft documents.
Its clear that short term performances are far weighing long terms one and the implications for the same is going to be disastorous.Its about time we start giving proper weightage to long term measurment.Many investment banks have started introducing the concept of long term bonuses and deffered share allotments.However we need to move beyond that.We can begin by making changes at the top.The CEO's should be selected for a minimum of 10 years duration (average age of an economic cycle) and share allocations be defered for 5 years atleast.At the mid level manager level we should move away from short term performance evaluation method.Senior managment should evaluate the project in terms of its long term feasability .Also promotions should be deferred and compromise needs to be made between a spiky short term performance and a long term survuval strategy.A significant step in this step could be a long term strategy audit on lines with compulsary saftey and accounting audits done today.This would act as an internal watchdog and help in correcting any deviations
At end of the second World War both Japan and USSR were in shambles.While the visionary leadership in Japan helped in founding one of the largest econmies from the least of resources,a short term focussed policy framework in USSR eventually created a large political economic and social faliure.Today we stand at similar avenues...whether we decide to become Japan or USSR depends on us.

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