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Henry Mintzberg, BEng'61, is among the world's most distinguished management thinkers and the author of ten successful books on the subject. Within McGill's Faculty of Management, he specializes in executive education. Mintzberg is a founder and former president of the Strategic Management Society, which has members in 44 countries, and currently holds a joint appointment at the prestigious INSEAD school in France.
Why are so many business scandals occurring now?
I think the real source is the collapse of communism in Eastern Europe and the assumption that capitalism had triumphed. In fact, I think balance triumphed, in the sense that western countries were balanced between government, the private sector and the social sector. But because people believed that capitalism had triumphed, we started going out of balance. There has been a swing everywhere toward the market side and the corporate side. We've been emasculating governments; what's left of government is supposed to act like business. Non-profit organizations, hospitals and universities are supposed to act like businesses. There have been no counterbalancing forces, so basically business has gone nuts.
This isn't just an Enron or WorldCom problem. It's a problem of legal corruption -- in the sense that business is out of control -- and these are the worst examples. Corporate executives taking these huge salaries and bonuses is all part of the ongoing corruption.
What about creative accounting? Is that also a factor?
Creative accounting is a manifestation of the problem. Someone sent me an email recently referring to (Enron auditor) Arthur Andersen's non-auditing functions. I wrote back saying I didn't know that Andersen had any auditing functions. We have auditors who don't audit.
You mean they rubber stamp whatever a company gives them?
They're hired by a company, paid by them, they have all these consulting contracts with them, and they're the ones who are supposed to be checking the books. It's laughable. The Securities and Exchange Commission in the U.S. is controlled by a guy who was a lawyer for accounting firms; the U.S. government is completely controlled by business. Newspapers reported a few months ago that a guy from Enron was telling outsiders that certain people would or would not get a position in the government, as if Enron was dictating who would be appointed to the Bush administration. It's mind-boggling.
Has business been labouring under the assumption that as long as the bottom line is strong, public confidence is secondary?
Corporations exist to serve society, not vice versa. If they don't serve society, they have no reason to exist. The popular argument is that by serving shareholders, they make everyone wealthier, which is fallacious. In the U.S., the distribution of wealth has tilted completely in one direction, so that ordinary people are no better off, and the very poor are worse off. The U.S. is the wealthiest developed country, and it has the highest poverty rate of the developed countries.
How did all this happen?
The executives made sure that they got as much money as they could, the corporations were paying off the shareholders, and I don't think they thought much beyond that. What we have is a coalition of corporate greed and economic dogma, and that's the real issue. What justifies the greed is the economic dogma that says that if you get as rich as possible, and if you make as much profit as possible, society will be a better place.
What's good for GM is good for the country.
Exactly. So corporations didn't have to think about these issues, because the dogma told them that if they made profit, they were doing good. They've been told that for decades, by (economist) Milton Friedman, and others who followed. They didn't have to be socially responsible, because by making money, they assumed they were socially responsible.
That's dead wrong, because you can't separate the economic and social consequences of decisions. You will never find an economist -- or any thinking person -- who will tell you that social decisions don't have economic consequences. So how can economists argue that economic decisions don't have social consequences? They have all kinds of social consequences, but this dogma has made it convenient for business to ignore them.
In the '90s, didn't corporations go one step further? If they weren't making money, they settled for the appearance of making money. That's what creative accounting is all about, right?
Yes, but you can only take that so far before it collapses. If the market is rising, and you're declaring as revenue something which is not yet revenue, the assumption is it's okay because it will become revenue this year or the year after. As long as youaccelerating your growth, you're just a bit ahead of yourself. But when the market falls, what you claimed as profit this year doesn't turn into profit next year, and you're screwed. That's what happened.
Has the fixation on maximizing shareholder value at the expense of serving society actually hurt shareholder value?
Of course, if you held Enron stock, how could you argue otherwise? Or if you hold any shares in the falling stock market.
Is the current bear market more than just a cyclical downturn?
I got out of the market a long time ago, and I jokingly told my broker to buy back all my stocks when the Dow Jones hits 5,000. I'm not trying to forecast, but I don't think the bear market is over. I think it's going to get much worse before it gets better. A lot of the bull market was driven by foreigners investing in the U.S. market. Are they comfortable investing in the U.S. market now?
You've criticized the "lean and mean" philosophy of job cuts. What are the consequences of a decade of downsizing?
All the productivity gains by business may turn out to be productivity losses, because those gains came from firing people left and right. Say you're running a company and you have a warehouse full of stock; you fire everybody and then ship inventory for the next year. The productivity figures look really good, because you're getting all these sales with no employees. And within a year you'll close down.
It takes time for a business to train people, to gain people who believe in you. There is a contract between employers and employees. All these things are destroyed by downsizing. And, by the way, customer satisfaction indexes are going down because customers are being badly treated.
Isn't downsizing the only hope for struggling companies like Nortel?
There's been a lot of downsizing that wasn't driven by losses. In the telecom sector, they have been, but in other sectors, a lot of it was just because they didn't meet their earnings targets for a quarter. It's mindless.
You've also criticized the hero worship of CEOs. What has it done to the quality of leadership?
It's destroyed leadership, because, unfortunately, most people take it seriously. Hero worship doesn't make them better; it makes them worse. The press builds people up as something larger than life or godlike. The big problem is when CEOs start to believe it.
What is fair compensation for the head of a corporation?
Imagine if the head of a corporation didn't really care. That would be mind blowing, wouldn't it? What if he said, "You're going to pay me substantially, that's nice, I'll have a nice house. But I'm really busy, I don't have time to spend it."
Today it's all about keeping score. It has to do with "mine is bigger than yours." So executives are causing all these problems just to show their friends how much money they make. They've done that so heavily and in such a gross way that in some cases, they killed their own corporations.
In situations like Enron, we hear about CEOs walking away with millions while employees lose their jobs and life savings.
It's even more insidious than that. When you become a chief executive, you protect yourself on the upside and the downside. On the upside, you have stock options. On the downside, you have a golden parachute, so no matter what happens, you win. It's not hard to imagine a case in which someone does manipulations to get the share price up, cashes in his stock options, gets fired, and cashes in the golden parachute. It must have happened already.
I read an article in Fortune magazine about the CEO of Hewlett Packard. She went on and on with a gambling metaphor, referring to HP's takeover of Compaq. What kinds of gamblers are CEOs? What kind of a gambler wins no matter what happens? They're gambling with other people's money. Executives get bonuses just for achieving mergers, whether or not the merger works. And we know that most mergers fail. If the stock option game were changed so that there was risk for executives -- if they were risking their futures, their pensions -- you would see very different behaviour.
What should we expect of corporate leaders?
How about leadership? To really believe that the company exists for the long run, and that people really are their greatest asset. To refuse golden parachutes and bonus plans that single them out. To realize that the only way you become a hero is by making other people heroes. Building strong businesses instead of running around buying everything left and right.
What is the role of business schools in bringing leadership and ethics back into business?
I'm writing a very long book called Developing Managers, Not MBAs. I wouldn't say business schools are responsible for what's going on, but they're big contributing factors. Ethics is just another subject to them; they're teaching shareholder value, not ethics.
As for leadership, business schools should be training people who are managers, instead of taking kids who never managed anything, and pretending they are turning them into managers. All they are doing is creating hubris.
Henry Mintzberg was interviewed by Montreal writer Sylvain Comeau.