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Executive Expectations

What expectations should we have of our leaders? For example, is it sufficient for a chief executive to simply take the “traditional approach” and maximise his company’s income for the financial year? Can his performance be measured simply by looking at the balance sheet at the end of the year?

In the past the answer might have been “yes” but I don’t think it ever should have been and I don’t think it will be in the future. Simply maximising the profit of an organisation is too simple. If that’s all the CEO does why does he get paid so much? All of the decisions we seem to hear about are the simple, obvious ones. I could make those decisions so why are these “geniuses” being paid so much to make them?

A specific example of this phenomenon has come to the fore recently when the CEO of New Zealand’s railway company, KiwiRail, made the decision to source new equipment from China instead of having them made by his own company’s workshops here in Dunedin.

The price from China was a bit cheaper (around 20% is the number I heard) and there is a suggestion that the time to deliver the equipment would have been less, but are these advantages sufficient to negate the disadvantages of removing work from the local economy (which has already lead to job losses)? Also, is the quality of manufacture likely to be as good from China and are other factors such as the environmental and social aspects likely to be the same?

I suspect not, and that extra 20% of cost seems to be well worth it. And if the time taken to fulfill the contract locally is a bit longer why wasn’t it offered with a greater amount of time available? I suspect there was never any question about where the contract would go. The easy and lazy answer was to have the manufacturing done in China. Other factors such as the environment would have been effectively ignored.

So if it’s really so simple what are these CEOs actually doing? I suspect, like most management, basically nothing. Of course we can’t really blame them. If I could get paid a lot of money for doing very little and just applying some simple formulaic “best practice” rules to running a company I would probably accept the position. Actually I wouldn’t because unlike most senior managers I have moral values.

So these managers are unlikely to suddenly take a fresh approach and seriously consider all the relevant points when making their decisions, and their lack of morality means they are unlikely to take social and environmental factors into account. What is the answer?

Realistically the government needs to be providing more guidance to the private sector (and to state-owned enterprises like KiwiRail). Social and environmental effects can be factored into business. Climate change can be made part of business decisions through the use of carbon trading schemes (although I would far prefer a carbon tax). Why not have a social credits trading scheme as well? The government could offer incentives for maintaining the local workforce and disincentives for having work done in polluting “slave labour” economies like China. That seems like that is the only way that business could really contribute to the big picture.

It’s no secret that I’m not a great fan of capitalism but realistically there is little alternative. But at least let’s control it and steer it in the right direction. The unthinking ideologs who think that free markets and unrestrained capitalism the answer to anything except social and environmental disaster have already lost their credibility.

It’s time to move on to having a more complete aim for business success rather than just a few simple numbers on a balance sheet. It’s time we had higher expectations of business executives. And if they can’t do their job properly we should throw them out and hire someone who can. It won’t be easy, but why should it be?

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