Global crisis highlights major management shortfalls in modern businesses
Although the current global economic crisis — which, according to top global political and business leaders, is the most geographically widespread as it has inflicted the highest number of countries ever, and the most destructive since the Great Depression going by the number of already ruined corporations, is still far its climax — some preliminary conclusions on what actually went wrong in world economy that initiated the crisis and the best probable exit scenarios from the unprecedented financial mayhem are now being done, both locally and internationally, as governments and investors explore a post-crisis future.
As we all know, some of the unprecedented anticrisis monetary and fiscal policy strategies being adopted globally today to fight the current financial meltdown, such as the near-zero interest rates and simultaneous massive injections of trillions of dollars into the world economy and other non-standard measures, are ‘terra incognito’ to contemporary economists. Most experts have, indeed, complained that they do not know how economies and businesses will actually perform in new conditions of ‘unchartered waters’ of unprecedentedly low interest rates, global financial system collapse, downbeat sentiments among investors and rising consumer insolvency, etc., a situation, which is further exacerbated by conflicting theoretical postulations on these issues and a lack relevant past case studies to turn to for guidance out of these problems.
IGSM Director Boris Kagarlitsky: "All the aspects of modern business management will undergo radical changes, including the methods of personnel selection and employment criteria, etc.”
Understandably, these issues are prompting major researches in several leading analytical institutions, which are not only studying the underlying reasons and the major driving forces behind the current crisis and its consequences, but are also carrying out comparative analysis with the previous crises. These studies are aimed at developing the most appropriate anti-recession reactions that will help accelerate the exits from the current difficult financial conditions in the local and global economies. However, some of the findings from experts’ brainstorms are likely to radically change the established local business modus operandi and global business management practices from what we have got accustomed to since the epochal Bretton Wood Conference in 1944 that laid the current architecture for the post-WW2 global economy.
The fact is that these preliminary findings, which are to become the basis for the formulation of new steps and assertive strategies that will enable businesses to ‘less painfully’ pass through the remaining stages of the so-far-recalcitrant crisis, will become the foundation for the successful reorganization of corporations for the continuation of core business activities in the post-crisis era or will force them to start entirely new kinds of business operations altogether. So far, experts have grouped their preliminary findings and conclusions into three key groups. First of all, the current crisis has exposed all the defects of the modern corporate business management practices both locally, in Russia, and globally, especially in the EU and United States, which were not very obvious in the safer and more economically buoyant pre-crisis times.
Secondly, these gaping shortcomings, which were easily and adequately compensated for by companies’ other aspects of corporations’ business operations in periods of robust financial soundness and overall economic health, have become ruinous to corporations in crisis times. Thirdly, companies’ survival rates in today's realities of world economic conditions depend on the urgent recognition of these shortcomings — both at the management level and concrete ways of running corporations — and, then taking feasible moves toward their eliminations, mitigations and/or radical improvements. And, lastly, all such restructurings must be done without inflicting serious damage on companies’ core business activities, a rather difficult task in these unprecedented conditions of a global financial catastrophe.
Bad management is particularly destructive in crises
The most excruciating problem of a company can have, especially during crises, is non-professional management, a reality that has once again been proved to be the case in today's crisis in the overwhelming majority of Russian companies. For fairness sake, it needs to be noted here that this problem is not specific to Russia, evident in stunning headlines in the international business press, carrying news about the unacceptable behaviors of Wall Street titans and other cheerleaders of western capitalism, who have — without shame or guilty conscience — taken state loans earmarked for bolstering their corporations from imminent bankruptcies, to pay themselves and their ‘closest buddies’ fabulous salaries and multimillion bonuses for their seemingly ‘brilliant administrative prowess and managerial abilities.’ These CEOs were largely unbothered by the glaring fact that their ‘their ingenious actions and epochal decisions’ have pushed the companies under their watch to the verge of bankruptcies, total ruin and nationalizations by governments.
Vasily Koltashov, the director of the Center for Economic Research at IGSM: “Workplaces in offices and companies in general throughout Russia are often reserved for the most loyal, rather than the most competent and qualified employees.”
Indeed, there are dozens of examples of such modern business management gurus in western corporations, who have put their personal financial interests above those of their corporations, shareholders, etc. Suffice it to name just two of the most scandalous cases, which involved former CEOs of the Royal Bank of Scotland (RBS) in the Great Britain and investment bank Merrill Lynch in the United States. Thus, RBS’ Fred Goodwin issued himself a severance payment of 16mln. Pounds and a life pension of 703,000 pounds per year. This is unprecedented, considering that RBS, one of the most powerful and oldest banks in the Great Britain, suffered a financial fiasco under his management in 2008, having lost about $34.6bln in one fiscal year, a new record loss in the whole of the British corporate history. A lion’s share of these losses stemmed directly from the decision by RBS, which headed an international consortium of several European banks, to acquire ABN-Amro, the Netherlands-based bank, in October 2007 for 70.2bln.euros, about 93% of which, according to the acquisition terms, were to be paid in cash. This subsequently undermined the financial solvency of one of the richest British banks, and thus forced the government to ‘almost nationalize’ this private bank with almost a 300 year history, so as to protect the assets private depositors and corporate investors/clients.
Another shameful example belongs to John Thain, now the ex-CEO of Merrill Lynch, a former pride of Wall Street. Thain, despite the gloomy conditions of the bank, spent about $1.2mln. on the ‘luxurious repair’ of his office at the company’s New York headquarters in 2008 and also insisted on his entire $10mln bonus stipulated in his labor contract for the fiscal year. Again, this was notwithstanding the fact that Merrill Lynch incurred record losses. Indeed, the bank’s losses in the 4th quarter of 2008 alone stood at over $15.3bln, which compelled it to merge with its competitor, the Bank of America (BofA), within the framework of the White House’s anti-crisis policy aimed at the prevention of a complete collapse of the U.S. financial sector. This BofA acquisition prevented Merrill Lynch, one of the remaining icons of Wall Street, from repeating the sad fate of Lehman Brothers, another Wall Street investment bank icon with an almost 160-year history, which went bankrupt, after failing to get a similar financial support, in 2008.
The CEOs of other Wall Street giants, namely insurance behemoth AIG and Citigroup Inc. amongst others, have also exhibited unrestrained bonus greed for their largely ineffective management. Thus, Citigroup Inc. CEO Vikram Pandit received $10.82mln in compensation in 2008, a year when the U.S. government propped up the bank with $45bln, following a record $85 billion of write-downs and credit losses. However, the former AIG executives’ plans to enrich themselves to the tune of $165mln in bonuses from the $170bln the blistered insurance giant received in federal bailout money has drawn condemnations from across the U.S. political spectrum, with President Barack Obama calling such policies a blatant display of corporate ‘recklessness and greed’ on Wall Street. “How do they justify this outrage to the taxpayers who are trying to keep AIG afloat?” Obama asked rhetorically. “This is not just a matter of dollars and cents. It is about fundamental values.”
It is necessary to note, in the context of general information, that Thain, like Goodwin of RBS, was removed from his post by the BofA management, which has practically become the new owner of Merrill Lynch after difficult merger procedures, bankrolled by the U.S. government through tax payers’ money. Also, it is equally necessary to stress that all the above-listed ‘liberties’ and ‘miscalculations and poor management decisions’ of the top company executives would not have become issues of public concern in normal times among tax payers, company shareholders and governments through their authorized market regulators. But the situations in the economies of all countries have changed radically, and this is why any attempts by CEOs to continue to run companies under their management today as it was in the past, are doomed to fail, because the current economic crisis demands radical changes in all aspects of corporate governance and broader business management practices. This stark reality illustrates the danger that bad/poor management poses for corporations. This underscores the fact that any modern company, irrespective of its size, legal status and ownership structure, which will not streamline and/or comprehensively reorganize all aspects of corporate behaviors among its top management staff, will not have a future in the post-crisis era.
The crisis highlights shortfalls in Russian management practices
The two examples of fatal business management practices in leading western corporations were purposely cited to demonstrate the unprecedented depth and scale of shortfalls in modern corporate management practices. But the examples illustrated the problems in the West, and as a Russian popular saying goes, “if only we could have their problems.” This brings us back to the situation and specificity of management problems in Russian businesses. It is a well-known fact that the general condition and quality of business management in all Russian companies, including even the most successful ones, have always left much to be desired, and the current crisis has only exacerbated these issues, thus magnifying and elevating them to an otherwise qualitatively new level, where they can no longer go unnoticed.
“Today’s global economic crisis is compelling Russian companies to rationalize and optimize their business management systems that will leave all the currently existing cumbersome administrative and other inefficient management methods in the past,” according to the data provided by the Center for Economic Research at the Institute of Globalization and Social Movements (IGSM), which has assessed the general nature and scale of influences of the current crisis on the management systems of Russian companies. IGSM is a self-styled independent intellectual center, which is engaged in the development of expert assessments and initiatives aimed at democratic and radical socio-economic transformation of the Russian society. “All the aspects of business management will undergo radical changes, including the method of personnel selection, improvement and upgrading of employment criteria, etc. Some of the current office workers should be retrained for new professions.”
Prior to the economic crisis, most Russian companies had unreasonably ‘ballooned’ office staffs, the IGSM said. “The excessiveness of these companies’ administrative branches accounted for the general mistrust of their managements. For instance, a large number of hired workers were inadequately paid, and thus, a total control and a rigid hierarchical structure were widespread to ensure accountability.” The current crisis has exposed the inefficiency of such systems and the weak professional level of the key figures overseeing such schemes, according to the IGSM.
With the termination of the period of economic expansion, companies are now facing the issues of eliminating their superfluous administrative and other managerial workers. “Decisions on layoffs are being made spontaneously and haphazardly. Besides, staffs are being laid off as a part of a policy on economizing on overhead expenditures, and not as a part of a broader anticrisis program to really boost companies’ overall performances and effectiveness,” IGSM Director Boris Kagarlitsky said. “Today offices of Russian companies have become empty, but their systems of management have remained largely unchanged,” he added. “The old administrative techniques, which are aimed at radically suppressing company employees, continue to dominate, as no serious, forward-looking conclusions from the crisis have been made by Russian companies.”
Placing employees’ loyalty above their professionalism
According to IGSM, most CEOs of Russian companies, in explaining their anticrisis HR policy, say they are only offloading the least useful employees within the frameworks of their optimization programs. “In practice, however, most companies are reducing their staff in much the same way used in building up their bureaucratic pyramids in the past,” Vasily Koltashov, the director of the Center for Economic Research at IGSM, noted. “As a consequence, workplaces in offices and companies in general are often reserved for the most loyal employees, rather than the most competent and qualified personnel,” he added. “This is because, the CEOs today still place, like in the past, more emphasis on employees’ loyalty as a means of ensuring their unconditional readiness to accept corporations’ ideologies rather than taking real measures to ensure the satisfaction of creative employees’ interests,” he added. “This is one of the key reasons, why the results of the anticrisis consolidation policies are very far from being satisfactory today.”
Besides, almost all the CEOs and other top-level managers that had committed strategic errors that endangered their corporations have continued to remain in their positions and keep on running their businesses as before, a policy that has led to serious deterioration in the general psychological climate in such companies. “All these negative factors have led to a sharp decrease in the employees’ overall work output, despite the fact that the management has substantially raised the volume of tasks for every worker in such companies,” the IGSM stated. “There is not rationalization in these polices. As a result, the existing bureaucratic systems in most Russian enterprises are falling apart, as inefficient CEOs remain in their positions, adopting further poor decisions, including dismissals of employees, which further disorganize the activities of such companies,” IGSM noted. “Consequently, the managerial staffs in such companies continue to lose efficiency, and in office employees’ consciousness, the myth about their ‘special social personal role’ in a company has been killed, thus erasing the psychological difference between office employees and industrial workers.”
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