Market-Based Management®

How much is too much?

Mary Kay Ash, founder of Mary Kay Cosmetics, once said, "People are definitely a company's greatest asset.  It doesn't make any difference whether the product is cars or cosmetics.  A company is only as good as the people it keeps."  Properly aligned incentives, including compensation, ensures that the right talent is attracted, motivated and retained.

I agree with Mary Kay; however I am perplexed by a recent survey of MBA students.  The Committee of 200, a self-identified professional organization of preeminent women entrepreneurs and corporate leaders, conducted a survey with interesting results.  Among MBA students, a majority of women (61%) and men (49%) say businesses pay their executives too much.  Equally interesting is the fact that 28% of women and 24% of men had a "neutral" response to the survey.

My question to the MBA students is how much is too much?  According to Walter Williams, "Scarcity is a situation whereby human wants exceed the means to satisfy those wants.  Human wants are assumed to be limitless, or at least they don't frequently reveal their bounds."

I would be curious to know how much money the MBA students that participated in the survey would like to be paid when they enter the workforce?  My guess is they would think to themselves, and possibly answer "as much as possible."

Sarbanes-Oxley: The seen and unseen costs keep mounting

In the Wall Street Journal Today (no subscription required) the mounting costs of Sarbanes-Oxley are discussed. Some of these estimates are huge, suggesting the average public company is paying an additional $4.4 million for S-Ox auditing per year.

These dollar guesstimates are merely the 'seen' cost of S-Ox. What of the unseen? The article points out that in addition to the rise in auditing costs "[one survey found] that 21% of public companies were considering going private or selling the company "as a result of new corporate governance and disclosure reforms."

But even if a company decides to remain public the increasing the cost of governance pushes the company to invest less in the non-mandated areas of governance.  For example, experienced and qualified outside directors will now seek to reduce their own personal liability by reducing the number of boards on which they sit. This reduces the availability of quality outside directors who help govern public companies resulting in a decline in the quality of the average outside board member. If the involvement of outside board members is crucial to good governance, and the sponsors of S-Ox believe it is then this decline in quality is a very undesirable consequence of the legislation. 

S-Ox is simply another example of legislation producing unintended consequences which often undermine their well intentioned objectives.

Debt forgiveness: The African Panacea?

President Bush has recently praised the democratically elected leaders of five African countries.  He also believes that debt reduction will help turn the tide of poverty on that continent. In his own words:

"We believe by removing a crippling debt burden, we'll help millions of Africans improve their lives and grow their economies."

Public opinion seems to think that debt forgiveness is a marvelous way to help the poor of developing nations. Unfortunately for its advocates there is no evidence supporting this argument. In fact debt forgiveness may well have a detrimental impact - increasing the default rate and therefore increasing the interest rate responsible borrowing nations face. 

It would be nice to believe that our AID dollars are helping the world's poor. However evidence suggests the worlds poorest countries are mired in corruption with weak property rights.  Giving the governments of these countries money does not help the poor and in fact may hurt them - a ruler channeling money to his Swiss bank account enjoys the benefit while the poor of his country will share in the repayment of that loan through future taxes while missing out on any potential benefit. 

An interesting question might be - perhaps a country that isn't corrupt with secure property rights would benefit from AID loans.  However, the research indicates that the loan doesn't make any difference because the country is growing and will continue to grow.  Research has found loans making no difference in this case.

Anyone interested in reading more about the failure of the development project and the institutions who run it (the World Bank, IMF and USAID) would enjoy Easterly's The Elusive Quest for Growth a very accessible critique of 50 years of development programs from an insider.

The Troubles of a Free, Complex Society

[Editors Note: Authors' views in this blog are their own.]

Imagine you're in a car being driven by your best friend.  This person's whole life has been about cars -- he loves everything about them, dreams about them, never stops talking about them.  He's not a very good driver, though - but he gets really defensive if you bring it up - if you even look like you'll bring it up.  So... presently you're both in the car and he's driving 95 mph and happens to be heading towards a cliff.  Do you encourage him to go faster?  Do you tell him what a good driver he is?  Would this be doing either of you a favor at this point?

It seems obvious that we won't make farmers more competitive by taking the pressure off of them to be competitive, by protecting them from competition. But that's what subsidies do.  We're not shocked that some farmers are throwing tantrums over the current proposal to cut some subsidies -- they're like the car nut driving us over a cliff and they're defensive as heck about their inability to compete.

My grandfather always said if someone calls you a donkey, laugh -- but if a lot of people call you a donkey, you'd best buy a saddle and sell rides.  That was his way of saying listen to the market -- it tells you what everyone values and how you stack up compared to that.  He'd say you have to work hard at the right things -- just working hard isn't enough.

The vast majority of us figure that out pretty early on in our endeavors to eek out a living.  So what gives some farmers the illusion that they have a birthright to farm?  What gives some of them the audacity to demand that the rest of us have our hard-earned dollars forcibly diverted away from our childrens' college education and other more useful and valued purposes -- just so they can take them and dump them into a black hole of uncompetitiveness? 

My family's history was built on agricultural efforts in Maine.  We don't operate dairy farms and apple orchards anymore.  Now we are bankers, artists, educators, marketers, lawyers and computer geeks.  Living in Kanasas, I have great friends whose families once made -- or continue to make -- their living from farming wheat, sorghum, corn and other ag products.   But they aren't farmers themselves. They're entrepreneurs, doctors, machine shop workers, firemen, educators, and so on...  Where would this country be if all of those bright energetic people had been forced to stay in farming? 

I care a lot about all of them.  I love my kids and my younger brothers, too.  And I have the same message for all of them:  a life worth living means connecting with reality (the world as it is, not how you want it be) and constructively dealing with it so you can apply your unique gifts and talents to add real value to your family, your community, your country, your world.  Add real value -- not the illusion of value.  Not take value away from others.  Add real value.  Value happens to be defined by all those individuals that make up your family, your community, your country, your world -- that is, value is not defined by you.

That makes for hard work in this day and age -- because the very freedom and prosperity that allows for an uncomprehensible myriad of specialization out there in the global markets makes it quite difficult for you to find your place within it.  But that's what you have to do -- just like the rest of us.  And noone else is responsible for getting it done for you.   

"There is perhaps no more poignant grief than that arising from a sense of how useful one might have been to one's fellow men and of one's gifts having been wasted.  That in a free society nobody has the duty to see that a man's talents are properly used, that nobody has claim to an opportunity to use his special gifts, and that, unless he himself finds such opportunity, they are likely to be wasted, is perhaps the gravest reproach directed against a free system and the source of the bitterest resentment.  The consciousness of possessing certain potential capacities naturally leads to the claim that it is somebody else's duty to use them.

[...] The necessity of finding a sphere of usefulness, an appropriate job, ourselves is the hardest discipline that a free society imposes on us.  It is, however, inseperable from freedom, since nobody can assure each man that his gifts will be properly used unless he has the power to coerce others to use them.

[...] It is of the essence of a free society that a man's value and remuneration depend not on capacity in the abstract but on success in turning it into concrete service which is useful to others who can reciprocate.  And the chief aim of freedom is to provide both the opportunity and the inducement to insure maximum use of knowledge that an individual can acquire.[...]" -- F.A. Hayek, The Constitution of Liberty

There have been times in history when societies have believed so passionately in an indivudual's right to be free from the coercion of others that a lot of people were willing to sacrifice their lives to achieve and maintain it for the rest of us who have benefitted greatly.  They knew that without freedom, the human race is doomed to extinction.  Freedom doesn't guarantee anything but opportunity.  But if you work hard, listen to the market, become a life-long discoverer and learner, you probably will succeed.

Be Willing to Be Wrong

One of the best commentaries I've read in some time was recently penned by one of my personal heroes, Thomas Sowell.  In it, he points to the sad state of affairs we've found ourselves regarding the ability to disagree with each other. 

From my Grandfather, my Dad, and many others, I've heard over and over that it is imperative to really listen to what someone is saying -- to understand it, think about it -- before responding.  And any response should be with humility, intellectual honesty, and a deep respect for the other person no matter what's been said (even if it may have angered or offended you).   I think Covey communicates this idea with the phrase "seek first to understand." 

Now, I never said that I listened to what my betters told me -- anyone who knows me is already nodding their head as they read this.  But what they said is an ideal I wish to someday approximate in my conduct.  So I try, at least, to pay attention to it in what I read and what I write, how I talk to others and how they talk to me. 

Opinion pages, probably by definition, are not big on understanding the other side of an argument.  But what bothers me most about them is their typical disdain for the opposing side.  What drives me nuts is their frequent use of the ad hominem attack -- otherwise known as the "attack to the man" (as opposed to the argument or idea itself).  Back in my day, one had to take an informal logic class to graduate from university.  In that class if you remembered anything, it was the ad hominem fallacy.  That's right -- fallacy.

An example might be, "why, that guy Fred over there, he says smoking should be banned from public spaces, but he's a smoker himself and besides, his dog poops in my yard every morning and he never cleans it up, so he's not very conscientious."   Being a smoker, or worse, a never-clean-up-after-your-own-dog smoker, may cause us to question your motives for your argument, but it has nothing to do with the argument itself --- "bad" people can still give good arguments. 

The argument or the idea being argued either stands on its own merits or not.  Using an ad hominem is sort of like shooting the messenger who brings you bad news.  It's not the messenger's fault that the news is bad, and the news isn't going away just because the messenger is dead.  But it does offer the convenience of giving you an excuse to ignore reality --- and it encourages others not to remind you that reality exists.

When ad hominems, or other silly disputatious mechanisms are used to counter an argument, it provides an easy way out for the other side -- they can quickly point to the fallacy or exaggeration and brush you off without having to grapple with more difficult ideas that could improve our knowledge or perspective. 

After all, that used to be the whole point of debating issues -- two sides with opposing views respectfully disagreeing, using logic and evidence coupled with intellectual honesty, humility, and respect to challenge each other and arrive at a better place for having had to defend their positions.  The necessary adaptation to the other's perspectives and counter-arguments leads to better perspective -- good arguments win, bad ones go away, and we are better off.

The most egregious example of ad hominem that I find being used ever more frequently is to call someone a Nazi, Hitler, Stalin, a Communist, etc. -- either directly, through metaphor, or any number of other subtler means.   Such terms are fantastically disrespectful and give an immediate excuse for those opposing your opinion to brush it aside. They typically result in an adult version of a ten-year-old name calling contest.  Why not just put on gloves and fight?  It's the verbal equivalent. 

You might instead consider trying: "that's an interesting position, how did you come upon it?  What is your evidence?  By what logic did you arrive to your conclusion?"  Ben Franklin constantly peppered his speech and writing with, "it seems that..." and "it might be the case that..." and "I'm quite likely to be mistaken, but I've observed that ..." and "it occurs to me..." 

If truth, or some approximation of it, is on your side, then the world would benefit from your sharing it in a way that invites inspection and consideration.  Using disrespectful ad hominems, or carelessly misusing language in general, to appeal to the emotions of those who already agree with you, prevents that truth from emerging.   But then, as Whatley said in his "Essay on the Love of Truth," it is one thing to wish truth to be on your side, and another thing entirely to wish to be on the side of truth.

The only way to be on the side of truth is to put all other questions / issues / concerns aside regarding an issue and asking, "what is the truth?"  After that you can decide your position.  And if you hope to have it get air time, you will present it with humility, intellectual honesty, and seek out those who can challenge it in order to improve its veracity.  By being open to challenge, curious, and always willing to be wrong, you will find yourself improving the odds of being right.  You will become an example to follow and improve our collective capability for discovery.

Free Trade, Lost Jobs?

Next time someone tries to tell you that agreements like CAFTA and free trade in general destroy jobs in the US, let them know that the facts don't support it. 

The (Senate)  Joint Economic Committee, quoting Bureau of Labor Statistics data, reports that although imports as a percent Gross Domestic Product (GDP) have increased steadily from 1960, unemployment has trended down.

Another important statistic is that in the last two years, the U.S. has net created over 3.5 million new jobs. 

And finally, it's interesting to note that although the U.S. has a current account deficit (who cares?), in the category of services it carries a surplus...

We shouldn't ignore the very real hardship and tragedy that can come from losing a job... and jobs are destroyed in the tens of thousands each month all across the U.S.  This is the destructive side of Creative Destruction.  But at the same time, as many -- actually more, as shown by the BLS data -- are created.  Some doors close, more open up.    Far from dismaying, this high churn of creative destruction in the job market demonstrates a vibrant, healthy economy that is constantly exploring new opportunities.

Hayek once said, "we shall not grow wiser before we learn that much that we have done was very foolish." 

For example: In book 4 of The Wealth of Nations, Adam Smith soundly thrashed the idea of mercantilism in the 18th century.  But as Steve Hanke at Johns Hopkins has pointed out, today's mercantilists are trying to hoard jobs, rather than gold, and they use protectionist and xenophobic rhetoric to do it. 

It was silly then.   It's silly now -- and we should know better, as we've had centuries to see it played out.  Free trade doesn't destroy jobs, it creates opportunities, increases productivity, and increases prosperity.  And the vast majority of humanity is better off for it.

House of Cards

Yesterday the CEOs of Delta Airlines and Northwest Airlines told Congress that they would need bankruptcy court protection, pressing lawmakers to give the airlines longer to pay pension obligations.  This revelation comes on the heels of United Airlines being allowed to dump their failed pension plan on taxpayers through the Pension Benefit Guaranty Corporation (PBGC).

The CEO of Northwest Airlines, Douglas Steenland, said, "Northwest has concluded that defined-benefit plans simply do not work for an industry that is competitive and as vulnerable to forces that are largely beyond its control."  Mr. Steenland specifically cited terrorism and oil prices as the culprit's of the airline's vulnerability.

What Mr. Steenland failed to mention was that long before the "forces" of terrorism and oil prices there was competition.  All businesses are challenged to compete in a free market that is beyond their control.  Unfortunately, due to government intervention in the airline industry a house of cards has been created. 

The process of creative destruction has been stifled.  Allowing the process of creative destruction to happen unobstructed provides society with even more valuable goods and services.  Government intervention keeps the house of cards artificially propped-up.  Creative destruction benefits everyone by allowing entrepreneurs to give us what we want, what we value. 

Hypocritical Congress - are you surprised

Given the current social security discussion it is hypocritical for Congress to call the heads of the airlines to account.  United Airlines successfully pursed legal recourse to renege on their pension commitments.  If the Senate Finance Committee was truly interesting in calling to account those who have failed a 'public trust' then they should be requesting testimony from the politicians who are responsible for creating a much bigger hole in the retirement savings of those counting on Social Security.

The CBS News Story lamenting the state of corporate pension programs explains that "More than half of the 100 largest plans had less than their promised benefits on deposit, which the committee's chairman blames on lax rules that are supposed to guarantee full endowment."

Maybe if corporations had the ability to change the laws - as Congress does, then corporations could 'legally' dip into funds they had no right to.  You don't have to worry about accountability before the law if you have the ability to change it to suit yourself. 

It reeks of hypocrisy when congress seeks to hold others to a standard they do not apply to themselves - but are we really surprised? 

When is a "contract" not a "contract"?

We all are familiar with the "Keys to Wealth Creation" that are taught in MBM Academy.  Among those keys is the concept known as Freedom of Contract.  David Boaz of the Cato Institute wrote the following about the importance of contracts:

"When people are able to own property and make contracts, they create wealth.  Free markets and the legal institutions to enforce contracts make possible vast economic undertakings..."

Sounds simple enough unless you are involved with professional team sports.  In leagues such as the NFL and NBA, a player contract seems to describe the general terms of employment until the player doesn't like the deal any longer. 

More and more, players are choosing to "hold out" unless their teams renegotiate their contracts.   These "hold outs" generally stem from the feeling that management does not fully appreciate their contribution to a team's success whether or not that success results in the team actually winning a championship.  Renegotiating a contract also makes for great press coverage.  One player was quoted as saying:

"There's nothing that tugs at the nation's heartstrings more than a professional athlete who is not getting paid his fair market value".  

So what's a team owner to do?  Some hold the line and ask the player to honor the contract.  Others, fearing the fans and the media, give in to player demands.  In either case it's messy business, especially in a nation that pride's itself in honoring the Rule of Law.  But before we feel too sorry for the owners, let's remember that most new stadiums use millions of taxpayer dollars to help finance what are called "public/private partnerships". 

So what's my solution?  Watch more golf!  The last time I checked, pro golfers:

1.  Were paid in direct proportion to how well they played (performance based compensation).

2.  Play on courses that were not constructed using taxpayer dollars (economic vs political profits)

3.  Generally don't  get arrested, write books on steroid use, have tantrums on the course or hurl insults at tournament officials. (code of conduct)

4.  Raise more money for charitable organizations in one year than the NFL does in two.

By the way, who would you guess is our nation's highest paid professional athlete?   Forbes magazine says it's pro golfer Tiger Woods at over $80 million.  Go figure.

Economic fantasy land - the world as most poeple think of it

Not surprisingly a majority (65%) of Americans blame President Bush for the current wave of 'unfair' gas prices.  A recent Gallup poll found that 78% of survey respondents believe gas prices are unfair.  With 67% of all respondents believing that President Bush could lower gas prices if he chose to do so.

I'm constantly amazed at the levels of economic ignorance exhibited by the majority of the population. People need to face reality.  The price mechanism unhindered will provide people with a signal which reflects reality. Burying your head in the sand and pleading for the government to lower the price of some good you wish to pay less for is at best naive.  Market economies must allow the price mechanism to work or before long they cease to be a market economy and begin the slide down a slippery slope to socialism. 

But come to think of it we are already sliding down the slope. I encourage anyone who has not read Susan Dudley's "A day in the life of a Regulated American Family" to check it out.