We just passed the 20th Anniversary of The Simpson Murders. This has resulted in a spike of media interest in the "Trial of the Century". It wasn't but it is definitely one of the most important trials in the twentieth century. I am going to spend most of this post talking about the trial. But, in the interests of completeness and in an effort to reduce confusion let me briefly present some background.
OJ (technically Orenthal Julius) Simpson became famous as a College football player. He went on to have a distinguished carrier as a professional. His tenure as a pro was of intermediate duration. He was extremely talented. But at that time professional football made no attempt to protect franchise players from injury. Since he was the heart of the offense defensive players focused on him and punished him with excessively viscous hits. It was considered part of the game to "injury out" players on the opposite team. So his carrier was not as long as it should have been because a series of injuries reduced his performance.
Simpson was one of the first black professional athletes to try and parlay sports fame into success in other endeavors. He became the spokesman for the Hertz rent-a-car company. He did a number of well received commercials featuring him jumping over things like luggage in airports. (This was a simpler time and on one saw this sort of thing as a security problem.) He also had parts in a number of movies, most notably the "Naked Gun" movies. He became one of the regulars on "Monday Night Football" in the era when this was a very highly rated show that was carried on ABC rather than a sports cable channel.
In all these endeavors he had considerable success. But in all these endeavors he was one of the first blacks to do this. There were few black actors. There were few blacks starring in commercials. There were few blacks in the announcer booth on sport shows. And he was never accorded appropriate respect. I think he would be the first to admit that he was not a great actor. But he never represented himself as such. He pretty much played himself. His Hertz commercials were a big success. They drove a lot of traffic the company's way. And he was just trying to provide "color" and a little insight on "Monday Night Football". He might not have been the most brilliant but he was not an embarrassment either. In my opinion he was never in any of these endeavors accorded the respect he would have gotten had he been white.
At the time of the events we are going to be involved in his star had waned. He was past his peak in all the endeavors I have mentioned above. But he had been well paid for them so he was in excellent financial shape. And along the way he married a beautiful blond white woman named Nicole Brown. Then Nicole Brown Simpson, as she came to be known, and her boyfriend Ron Goldman were found brutally murdered on June 13, 1994. The police quickly focused their attention on OJ. On June 17 the famous "Bronco Chase" occurred. OJ was supposed to turn himself in to the police on that day. Instead he was found to be cruising the LA freeway system in a white Ford Bronco that was being driven by Al Cowlings, a friend. All the LA TV stations had news helicopters equipped to transmit video. By the time it was done the "chase" took 4 1/2 hours, plenty of time to get the 'copters airborne and on the air. As it was going on it became a national story being covered wall to wall, even by the networks. This event marked a major the transition of what passes for journalism on TV toward trash TV.
The "story" of the chase was significant enough to justify coverage by local cable news channels in LA. It was not significant enough to justify coverage on national cable news channels and certainly it did not deserve to have the networks break into regular programming and broadcast a Bronco driving sedately down the freeway followed by a bunch of cop cars with all lights flashing. But it was ratings gold. And that's all that counts. So you could literally not find anything else on TV while it was going on. And it went on for hour after hour after hour. The Bronco finally pulled into the driveway of Simpson's house. Negotiations ensued and Simpson was taken into custody without further incident. This all set the stage for "The Trial of the Century".
It was not. But it was one of the most important trials of the twentieth century. It was potentially precedent setting but in the end no precedents were set. It could have broken new legal ground but in the end no new legal ground was broken. But, although legally insignificant, the trial was of major importance from a cultural perspective.
The trial ran from November 1994 to June 1995 and featured live TV cameras in the courtroom. OJ ended up being acquitted and no one has ever been convicted in a criminal court of perpetrating the crimes. So as a crime it is still officially unsolved. The heirs and relatives later sued Simpson in civil court and won. And, in a ridiculous coda, OJ is now in the slam as the result of being convicted in a case involving OJ sports memorabilia. And that's part of what I want to talk about.
There are those who think the original jury got it right. There are those who think the trial was ultimately a massive miscarriage of justice, I fall into neither of those camps. Oh, I think OJ did it. But I would characterize the trial as a routine, middle of the road, miscarriage of justice. To see why, let's first delve into the cast of characters. On the prosecution side we had Marcia Clark aided by Christopher Darden. These were two competent but not superstar advocates. The only thing of note here is that Darden is black.
On the defense side we have superstars. The most obvious of these initially was F. Lee Bailey. He was a high profile defense attorney in the style of the fictitious Perry Mason. What the trial showed was that he was long past his "sell by" date. As the trial progressed he was shoved aside by Johnny Cochran. The Simpson case made Cochran's reputation, and justifiably so. He demonstrated that he was the black F. Lee Baily. Cochran came up with the most memorable line to emerge from the whole trial: "if it doesn't fit, you must acquit". His work was as good or better than anything Bailey had done in his prime. Unfortunately, Cochran died less than ten years later and was very ill for the last part of his life. So he could not completely capitalize on his newfound fame. But that's not the end of the list.
Another member of the defense team was Alan Dershowitz. Dershowitz had become famous ten years earlier in connection with the Claus von Bulow case. Von Bulow was accused of murdering his wife. She was bedridden and died in suspicious circumstances. Dershowitz used a scorched earth tactic of attacking every piece of the prosecution case large or small, important or unimportant. He succeeded in throwing enough "reasonable doubt" up to get von Bulow off. With few exceptions (see below) the Dershowitz model was followed in the Simpson case.
There were a number of other superstar lawyers on the defense team (including Robert Kardashian of reality TV family fame) but the only other one I want to point out is Barry Scheck. He has specialized in the use of DNA in criminal cases and has been active in "The Innocence Project" a group that has been able to get over two hundred convictions reversed by using DNA to prove that identifications, especially "eye witness" identifications, were wrong. The OJ trial was the first high profile trial to involve DNA evidence.
Now let me move on to another critical courtroom player, the presiding judge Lance Ito. I credit Ito with being one of the people most responsible for OJ's acquittal. What was his contribution? He was a big fan of Johnny Cochran. One of the big problems the prosecution had was they had a complicated case to present. Part of their job was to help the jury keep everything straight. But Cochran kept popping up with trivial objections. This would interrupt the flow of the point the prosecutions was trying to make. This made it nearly impossible for the prosecution to manage the roadmap jurors needed to keep straight in their minds in order to understand the prosecution's case.
The defense had a much simpler problem. All they had to do was punch one big hole in the prosecution's case. They didn't need a roadmap so a strategy of lots of prosecution objections would not have disrupted them. Ito should have contained Cochran and given the prosecution a fair chance to put their case on. But he didn't. It turns out that the famous "if it doesn't fit, you must acquit" is actually not true. But the explanation is complicated. And, as I will cover below, the jury wanted to acquit OJ. They just needed a reason.
Finally, let me introduce one more player Mark Furman. He was the lead cop on the investigation. The OJ defense team was able over the course of the trial to hang him out to dry. The LA police have run a very effective PR operation for many decades. The Jack Web "Dragnet" shows and others have portrayed the LAPD as square jawed honest upholders of the law who are interested in "just the facts, mam" and don't indulge in hanky panky. The evidence is overwhelming that the reputation is not justified. Any number of 'noir Hollywood movies from several decades have done a much better job of showcasing the bad behavior of the LAPD than I could. And Mark Furman is a poster child for this sort of thing. The trial highlighted a number of instances of Furman taking shortcuts, violating procedures, and otherwise engaging in bad policing. The defense took advantage of this and there was again nothing the prosecution could do about it. The OJ case was high profile from the start. You would think the LAPD brass would have put their top people on it. But they didn't. Besides the Furman antics there was sloppy lab work and other examples of shortcomings on the part of the police.
And this brings me to a larger point. OJ is black. Most of the jury was black. The black community in LA has been the victim of bad and frankly racist policing for decades. If you could get honest answers out of them I am sure it would have turned out that jurors had a very poor opinion of the LAPD. True or not, and I'm inclined to the opinion that there were many cases of "true", the black community felt that the LAPD had railroaded innocent black people into jail and let guilty white people who had committed heinous crimes against black people off the hook. So "if it doesn't fit, you must acquit" was good enough for them. I think they were wrong but they weren't that wrong.
And there is another similar point. OJ was rich. And even if he hadn't been the case had such a high profile that it would attract top tier talent to the defense team. This is not true of most cases. Usually the defendant is poor and the case is not that interesting. This means that the defense does not have the resources to put on a Perry Mason quality (or F. Lee Bailey quality or a Johnny Cochran quality) defense. One reason for Mark Ferman's behavior was that he was used to getting away with it because the defense did not have the resources to catch him out. This is also true of the lab work. I don't think the lab got anything wrong but their procedures, documentation, etc., were shaky enough to give the defense something to talk about. This is again a case where most defendants do not have the resources to uncover this sort of thing and exploit it. This sort of thing usually cuts in favor of white defendants, especially rich ones (i.e. Claus von Bulow and everyone Perry Mason ever defended) but in this case it cut in favor of a black defendant.
I have tremendous sympathy for the Brown and the Goldman families. As far as I can tell the victims were both nice and good people. The did not deserve to be brutally murdered. And if they must be murdered then the guilty party should have been found, convicted, and put away for a long time. But many many many black people who were nice and good people have been murdered in Los Angeles. And, as a result of bad policing the crime was not prevented and the guilty party or parties were not arrested, convicted, and put away for a long time. The best thing would be for the LAPD to do its job well. Lacking that, OJ getting off is not the worst thing that could happen.
This next point will sound harsh. As I have pointed out the victims did not deserve to die and OJ got away with it. But, as I have also pointed out above, he did not really get away with it. He ended up in the slam in the end. And what about all those black men that would take OJ as a model and start killing white women wholesale? I was never worried about that outcome. And let me point out that, in fact, the opposite did and does happen. White men have killed black men and women with impunity in far too large numbers. And a significant number of them have gotten off. And this actually did encourage other white men to kill black men and women on the theory that they could get away with it. Again the best situation would be for killers, black or white, to get caught and appropriately dealt with whether their victims were black or white. But we still have not gotten to that point. Absent that then the OJ case can be said to balance the scales. It is a bad outcome but not the worst outcome.
I pointed out above that the defense adopted a scorched earth approach to most of the prosecution case. As an example there was a pair of gloves. They had OJ try them on late in the case. They did not fit even though they were OJ's because they had shrunk in the mean time. (That's the hole in the Cochran argument.) But the visual of OJ struggling to get the gloves on was compelling. They attacked the lab work and other physical evidence. But one thing they did not touch was the DNA evidence. As I said above, DNA was not as well understood then. This was the first time it was being used in a high profile trial. At the time everyone was wrestling with what the proper procedures for collecting and analyzing DNA. They were also wrestling with the proper interpretation of a DNA result. So thee was plenty of room for mischief on the part of the defense.
At the time Barry Scheck was the most experienced lawyer on the subject of the proper use of DNA in the courtroom. So the defense had the capability to put on a show and cast doubt here too. But ultimately they didn't. I was relieved. As a "science guy" I felt at the time that DNA held out a lot of promise. But I was concerned that it's reputation would be sullied as a side effect of this case before it had a chance to establish a solid reputation. Since the defense chose to not challenge the DNA evidence no one puts "DNA evidence" and "The OJ Trial" together. Today, due to procedures and techniques developed after the OJ trial, DNA evidence is now the accepted "gold" standard. It is even more golden than the old standard, fingerprints. So my biggest worry (seriously) about potential negative effects to the broader society caused by the OJ trial, namely calling DNA evidence into question, did not materialize.
It would be nice to be able to say that the LAPD learned its lessons. It should have improved its investigatory procedures and moved on to a more color blind approach to policing. I think the LAPD has made progress on both fronts but it still has a long way to go.
The trial was covered "wall to wall" on a cable channel called Court TV. Court TV got massive ratings. It tried to repeat its success with other trials but never quite could. And Court TV has since morphed into something called "tru TV". But the trial has left its mark on the cultural landscape. Cable TV routinely covers sensational trials, sometimes for months on end. Sometimes there is a TV feed from the courtroom as there was in the OJ trial. If not then they get creative and find ways to fill hour after hour after hour without it. Judge Ito has been broadly criticized for how he ran the trial. He's still on the bench but his reputation, generally good before the trial, was in tatters by the end. No judge wants to suffer the same fate. So they are much more careful in how they handle lawyers in these situations. I'm sure that attorneys on both sides have absorbed lessons. But since neither side in the OJ trial really did a bad job the lessons are much more small bore. And it is still easy to get a good argument going as to whether the verdict was right or wrong even though its 20 years later. There are very few trials for which that is true and that's why it is such an important trial.
Finally, I have some sympathy for OJ. He was a brilliant athlete. Most of the time he seems to have comported himself well and seems to have generally come off as a nice guy. He tried hard (both creatively and just in terms of effort) to leverage his sports stardom into a more durable carrier off the football field. That's commendable. But he did not get the success and especially the respect his skill and efforts deserved. He had a temper. Under the circumstances that is understandable. He should not have (presumably in a fit of temper) killed two people. That is not forgivable but it is understandable.
Monday, June 16, 2014
Wednesday, June 4, 2014
The Stupidity of Corporate Management
The recent news that the pay (actually total compensation, a difference without a distinction that its meaningful in this context) of Fortune 500 CEOs has just topped $10 million seems an obvious justification for this post. But it actually stems from a conversation I had with an out of town cousin who was visiting recently. But, in case you missed the CEO compensation news, here's a link to one of many stories about it: http://www.npr.org/blogs/thetwo-way/2014/05/27/316336449/median-ceo-pay-tops-10-million-for-the-first-time. I am going to use The Boeing Company as a poster child for what I want to talk about. Why them? Because they are "the local boy" so I have followed them more closely than other companies. But I consider them typical rather than unique. The details may differ from company to company or executive to executive but the story line remains the same.
My academic credentials are nearly nonexistent on this subject. I took a single one semester class on Business Law in High School. I took some American Institute of Banking classes decades ago when I worked for a Bank. What you are getting is a worm's eye view of the situation, what things looked like from the other end of the organization chart. Like many, I have repeatedly asked myself "why did they do that?" when some particularly spectacular piece of management stupidity surfaced either at work or in the news. The same kinds of things kept happening over and over so there had to be some underlying method to the apparent madness. It took me a long time to extract the method as the "usual suspects" were of no use. None of what I am about to reveal is to be found in any MBA curriculum, academic publication, or in the prodigious output of the "business press" (Forbes, CNBC, etc.). But these are iron clad principles that have the force of law in actual business practice.
But first, how could this be one of my posts without a digression? So let me digress, but only for a very short time, and ask "how do CEOs justify their large compensation packages"? Their answer is that "they work hard and they are smart". And by "smart" they really mean something more along the lines of skillful. They have to be very smart to understand the complex problems they wrestle with on a day to day basis. But they also have to apply the very best judgment to solving these problems. So more than just raw "smarts" are required. So, in their eyes, they really are very special. Let me first address the "hard work" issue as it can be easily dispensed with.
I have frequented several sandwich shops over the years. The ones I frequent (and here I am specifically talking about the non-chain shops, e.g. Subway) have been run in many cases by Korean women of a certain age. I have no idea how many hours they put in but its a lot. They are there from dawn till dusk. In one shop I now frequent all the pastries are baked on site every day. So the proprietor is there from before sunup until the shop closes late in the day. These ladies put in an unbelievable number of hours. And this applies to many small businesses. I have frequented establishments run by both sexes and all ethnicities. Many small businesses depend heavily on the proprietor. And they depend on that person putting in long hours every day and having the flexibility and skill to perform multiple duties. I would stack up the range of skills and the work ethic of these proprietors against any "ten million dollar man" (and they are nearly all men) helming one of these corporate behemoths.
The rest of this post will address the intelligence and judgment components.
General Ledger
Ok. I was not altogether honest. Because I need another digression. The term or art for the corporate books is General Ledger. Some of you may be familiar with Quick Books, an inexpensive software package designed for use by small businesses. And a thorough discussion of General Ledger systems would span several weighty volumes. But there are only a few things you need to understand. And those things can be covered quickly.
General Ledger systems have what's called a "chart of accounts". This is a list of buckets (e.g. accounts) into which items of income or expense are placed. There is a separate chart of accounts for each department. Each account for a department is "rolled up" to create a division total. These totals are rolled up through larger and larger portions of the corporation until you finally get to the top. Then all the top accounts are rolled together to figure out how the corporation as a whole is doing.
General Ledger systems fulfill several roles. So it is useful to have lots of separate accounts. In a store there can be an account in the "shoe" department for "men's shoes" and another for "women's shoes" and one for "socks" and so on. So each time a pair of men's shoes is sold the amount is added into the correct account. In a similar manner the sale of a pair of women's shoes goes into its account. And so on. And we can have an account for "sales tax" and other accounts for other things. So in order to find out how the department is doing you can add all these accounts together. But you can also add the accounts for "men's shoes" together from all the shoe departments in all the stores to see how "men's shoes" are doing over all. This should give you the flavor of how General Ledger works and why most General Ledger systems have lots of separate accounts.
And so far, I have talked about income accounts. There are also expense accounts. The shoe department might have a "salary" account. But, in the same way it was useful to have lots of income accounts, it might be useful to have an "overtime" account and a "bonus" account (shoe sales people might get an extra "bonus" for selling a particularly large amount of shoes). And there might be a "lighting" account and an "advertising" account and so on.
So that gives you a flavor of how General Ledger works at its most basic level. And I demonstrated how it might be useful to add the accounts up in different ways. Corporations of any size add the accounts up in at least three different ways. (1) They add them up one way to calculate their Income Tax bill. (2) They add them up a second way to produce the "Annual Statement" for stock holders. And (3) they add them up a third way to assist management in running the company. Why do they do this? Because each "way" serves a different purpose. In the first case the idea is so show the least profit so the Income Tax bill will be as low as possible. In the second case the idea is to show the most profit so the stock holders will be happy. In the third the idea is to shed light on what parts of the business are doing well or badly and which managers are doing a good or a bad job.
As an example of this, Boeing is one of several companies that is not profitable, at least when the accounts are added up in the proper way. How do we know? Because they have not paid any Income Tax in years. However, if we add things up in the "Annual Statement" way, Boeing is very profitable. So it is only fair that their senior executives should be paid millions. And, as far as I can tell, Boeing does a terrible job properly adding things up in the third way, the way that allows them to make good management decisions. Because they have made a lot of really boneheaded decisions over the past couple of decades. With that digression complete let me get back to the main line of analysis. My first issue of management stupidity is:
General Ledger Visibility
What do I mean? Well, a few years ago Boeing was going through hard times. This resulted in a laser focus on expenses. This in turn resulted in an edict from the top echelons of the company to trim the use of office supplies and to cut travel expenses. What? Boeing is a multibillion dollar company. In this environment accountants have a term for things like office supplies and travel expenses. It is "not material", as in "this will not have a material effect on the financial situation". So why did Boeing management highlight these two tiny expense categories even though completely zeroing out all expenses in these specific categories would not have affected Boeing's profitability in a noticeable way? It is because small though they are they are "visible" in General Ledger. Each department has a General Ledger account for each. If the amount of expense in either or both of these accounts goes down the reduction will directly increase profit. But, you say, what about doing something that would make a big difference like say making Boeing engineers more efficient?
There are lots of engineers. They have relatively high salaries (not senior management salaries but definitely not janitor salaries either). If you were to say increase the efficiency of engineers by 1% wouldn't that save lots more money than you would by dinging the office supply and travel accounts? It turns out surprisingly the answer is no? The thinking goes that Engineers are on salary. If you increase their efficiency by 1% their payroll cost does not change at all. They just end up sitting on their hands for a few minutes over the course of a week. So no number in General Ledger changes so there is no savings. Is this right? It doesn't matter. Management thinks it is right. So since, to management's way of thinking, reducing office supply costs and travel costs changes the numbers in General Ledger, albeit by a small amount, it is better to do that than to try to increase the efficiency of Engineers because the latter change will not show up in the General Ledger numbers.
This General Ledger Visibility problem raises its ugly head in even more perverse ways. One way to restate the problem is "General Ledger is more real than reality". In the early days of the space program there was a process called "ground truthing". NASA people would look at satellite pictures or other measurements. Then they would go out and actually look at what was on the ground, the ground truth. They wanted to understand how much of what the satellite said was really real. Then they could figure out how far to trust the satellite data. In many cases the satellite data gave a better picture of what was going on than you could get from the ground. In other cases there were various fixes and adjustments that were necessary to get the satellite data to align with reality. And in still other cases the satellite data was misleading and could not be trusted.
General Ledger systems are like satellite data. Sometimes they tell you what is going on better than any other method. Other times they can be trusted after the appropriate adjustments and fixes have been applied. And other times they just plain mislead you. Many executives, however, are true believers when it comes to the numbers General Ledger systems spit out.
Manageable versus Unmanageable Costs
Let me be clear what I am talking about here. If an executive believes that actions he takes can affect a cost then that cost is manageable. Otherwise, it is unmanageable. Let me give you an example, in this case an example that has nothing to do with Boeing. A company I worked for used a lot of natural gas. Now this cost was visible in General Ledger. It had its own little line in the chart of accounts in a particular department. And the amount was large, millions of dollars per year. So that was not the problem. The problem was that the company had almost no control over the cost of natural gas. So to a great extent the cost was unmanageable. Now they did what they could. They put a great deal of effort into using the gas efficiently so they used as little as possible. They also tried to be smart about how they bought gas. If the thought the price trend was up they would sign up for a long term contract at a fixed price. If they thought the price trend was down they would avoid long term contracts and buy on the "spot" market.
Now the above example is a set of specific circumstances. So I'm going to move on to a more general situation. (I don't know if it applies to Boeing but likely it does.) Companies occupy buildings. In some cases they own the buildings but the trend is toward leasing. These buildings involve operating costs, specifically power for heating, lighting, air conditioning and other machinery, etc. The prime consideration that goes into how most buildings are built is construction cost. They are typically built as cheaply as possible and no thought is given to whether this will result in high operating costs. So typically these buildings are very inefficient to operate. In the last decade or so a lot of effort has gone into studying this. And it turns out that a lot of ways have been identified to reduce operating costs, particularly costs associated with energy use. And some of these ways turn out to have very good cost/benefit ratios. I have a brother who has studied this area thoroughly. He says that a lot of these "retrofits" pay for themselves by reducing operating costs dramatically. A typical payoff period is 18 months. That is a fantastically quick return on investment.
But in spite of this it is very rare to see buildings retrofitted. Why? Well, let me trot out a very lame excuse first. Many building leases are "all in". The price of the lease requires the landlord to pay operating costs like energy bills. So if the building is retrofitted it will be disruptive to the company using the building and, since the rent is fixed, there will be no cost savings. This is lame. If the retrofit is done and the rent is reduced but by less than the savings both sides benefit. The land lord has more money left over after his operating costs have been deducted from the rent check and the tenant sees cost savings because the rent is now lower. So why doesn't this happen? Because management sees rent as an unmanageable cost. It doesn't matter how high it is. It's unmanageable so efforts are turned to reducing costs in other areas. Is management correct? No!
Red money, Green money, and Blue money
If you think at all about the color of money you probably think it's all green. A nickname for U.S. currency is "greenback" because that's the predominant color of our currency. I used to also believe that all money was the same color too. This led to a lot of frustration.
In a previous job (not at Boeing) I was responsible for selecting and procuring computer equipment. This was back in the old days when a nice computer ran several million dollars. So we are talking decisions that involved very high levels of management because the equipment was very costly. (The company was far smaller than Boeing so a million dollars was a very big deal.) I am going to skip over all the "do we really need to do this" part of the discussion. Let's assume that everyone has agreed that the investment needed to be made and we were just trying to figure out how the acquisition should be structured.
What I mean by "structured" is "buy, rent, or lease" and "new or used". The idea was to pick among the various possibilities. Now naïve old me, I cranked up the spread sheet and starting calculating the cost of the various options. My assumption was "all things being equal" (and I wrangled all the technical issues to make sure that all things in fact were equal) we just wanted to structure the deal to result in the lowest overall cost. This is where I learned the hard way about red money, green money, and blue money. What do I mean?
Well part of that whole General Ledger thing is what is called a budget. Before the year starts all the income and expenses for the next year are estimated. Then the idea is not necessarily to make income go up and expense go down. It is to hit your budget numbers. (I must say that if you missed your income numbers on the high side and your expense numbers on the low side people would be pretty happy even though technically you missed your numbers.) But part of the process of creating the budget was to guess what would happen, money-wise. So the budget might include money for our piece of computer equipment. And an assumption would be made as to whether it would be bought, rented, or leased. Needless to say, there were separate "buy" "lease", and "rent" General Ledger accounts. So typically one of these budget accounts would have money in it and the others would be empty.
Silly me. I knew that there were separate accounts. But I had heard of money being "reprogrammed" in the federal budget to cover some unexpected event. And I'm a computer guy. I know that all this budget stuff is just numbers in a computer file. It's not that hard to move the numbers around. So I do my analysis. And I figure all I have to say is "if we do it this way we can save a lot of money so we just reprogram the money and everyone's happy". That's when I learned about red money (capital), green money (lease/rent), and blue money (maintenance and other operating costs). Apparently there is no philosopher's stone to turn one color of money into another color.
Now there some good reasons for not changing the color of money. There's fraud. You don't want people just changing things around willy nilly. But it is not hard to put procedures in place so you make sure the changes serve a legitimate purpose (saving money) and not just providing a cover for hanky panky. And there is the issue of "ratios". Most companies operate on borrowed money. And the banks are supposed to make sure that the company can pay the borrowed money back. So they might require a company to maintain a certain "capital ratio". The details don't matter but the result is that a company might not want to make a capital expenditure (buy some expensive piece of equipment) because it will cause the capital ratio to go out of whack. Contrarily, it might be necessary to buy something rather than rent it to keep some other ratio in line. But in my case none of these considerations came into play. Changing the color of money was perfectly feasible. It was just not done.
The Myth of Rationality
The model business people hold up of themselves to the world is that of rationality. They are not swayed by sentiment. "It's just business, mam." They want you to believe that the decisions they make are based on careful analysis and are driven solely by the profit motive. But its not so.
After many years, Boeing seems to have finally gotten the 787 program on track. They are able to build and deliver the planes on schedule and the airlines are able to put the planes in service and keep them there. But a lot of pain, suffering, and money, have been poured down numerous rat holes to get to where we are now. If you listen to management propaganda, then each of the major decisions made at the start of the program was the result of cold rationality applied to careful analysis. Here is a list of the most important and consequential decisions management made:
Taken separately any of these decisions might make sense. But taken together they represented a recipe for disaster. In my opinion, when these decisions were made Boeing management was in poor shape. What is common to all these decisions is that each decision separately would require more and better effort from Boeing management than the alternative "do it the old way" option. This is particularly true of decision #4.
The 787 program has been a fiasco for most of the lifetime of the plane. I thought at the time that Boeing really needed to do #1. But this would be hard to do. So I thought they should focus on it and avoid change elsewhere in the program. Obviously they didn't. The result was chaos everywhere. And chaos is very expensive in the plane building business
There were a number of engineering problems. This delayed things. Then parts came in incompletely or incorrectly assembled. Then the pieces did not fit together very well. And various subcontractors had trouble coming up to speed. In particular, problems in South Carolina were so great that Boeing decided they had to buy the subsidiary responsible for work there so that they could fix management there. Given that early on South Carolina had been a major problem area would you recommend minimizing their responsibilities or doubling down? Boeing decided to double down. In fact, they decided to quadruple down. Not only did they increase the volume of work of the kind originally planned but they also ended up adding in more work. They went so far as to build a full assembly line so they could play South Carolina off against the northwest. And there have been major quality problems with work out of South Carolina as late as as earlier this year. (The current official story is that "everything is good there now".)
There has been similar problems with components made in Italy and other places in the world. And, as a side effect of moving so much expertise and responsibility off shore, we have in effect taught a lot of people around the world a lot about how to build technologically advanced airplanes. This has major impacts from both a civilian perspective (China is in the process of getting a commercial airplane manufacturing capability off the ground, as are a number of other countries) and governmental perspective (the dual use nature of this technology makes it militarily important both for offensive (building better military planes) and a defensive (getting better at shooting down our military planes) perspective). People get wound up about Edward Snowden and not at Boeing. That's because Boeing has a lot of political clout and a good PR operation and Snowden doesn't. But Boeing has done a better job of providing aid and comfort to potential adversaries than Snowden has.
Anyhow, this overload caused by management overreach has resulted in a lot of problems for the 787 program. It seems back on track after many years of delays. A number of analysts think the program will never make back its costs. I think it eventually will, perhaps a decade from now.
The Boeing 787 program is a classic example of the maxim "if they want to do it they will find a way and if they don't want to do it they will find an excuse". I have seen innumerable projects that penciled out just fine. But management didn't want to do them (e.g. retrofit buildings) so they didn't. I have seen innumerable projects that did not pencil out (e.g Boeing moving their headquarters to Chicago) but management found a way. If you ask management they will say that in each case "it was simply a cold hard business decision" but you will be hard pressed to find a business case laid out in detail and that that actually pencils out.
Across the board cuts
Boeing, and lots of other companies have announced (and implemented) "across the board" budget cuts on a number of occasions. This is where you cut the budget of each part of the business by the same percentage. Turn the issue inside out and see what it looks like. If the answer is "across the board cuts" what does the result of the "hard nosed business analysis" have to be to justify this action? It has to be that all parts of the business are exactly as efficient/inefficient or important/unimportant? What are the chances that is actually true? "A snowball's chance in hell" overestimates the likelihood.
What across the board cuts tells you is that management does not understand the business they are supposed to be experts in managing. There should be strong parts of the business and weak ones. There should be parts that are more important and other parts that have less importance. And it is the primary job of management to know exactly which parts those are. Then you cut more heavily in the weak areas and more heavily in the less important areas. It even makes sense to not cut a weak area if it is critical. But you should have been shoring that important but weak area area up long before the need to cut arose. Why weren't you?
Championing across the board cuts is prima fascia evidence of incompetence. Whoever champions this should be fired immediately for cause. The only defense is if the executive in question can prove that he was literally forced to adopt equal cuts by outside forces. And if he received only moderate pressure he should be fired for not finding a way to effectively counter the pressure.
But across the board cuts are common. As are other less obvious signs of incompetence. Every time I see a management decision I ask myself the simple question "does this decision and its rationale demonstrate a deep and honest understanding of the organization"? Frequently it doesn't. As another example, various large financial institutions almost completely crashed the economy of the entire world a few years ago. Executive after executive said "I didn't know my subordinates were engaged in dangerous/unethical/risky practices" or "I had no idea that these procedures could crash the economy (or. perhaps more importantly, destroy my company)". At a minimum these statements demonstrate an ignorance of critical aspects of the business these people are charged with managing (and paid outrageous sums to manage effectively). They should have all been fired for cause for incompetence, I don't care which. I believe that many of them knew that bad behavior was rampant on their watch. But that same bad behavior resulted in them being paid massive amounts of money.
Management Responsibility
In this last example (Wall Street a few years ago) we see a question of where management's responsibility lies. I would like to turn the problem around. I often found myself with a situation where I thought that management should take some action. Frequently they didn't. It took me a long time to figure out what the real problem was. Management certainly does not want subordinates making decisions that management feels are properly in their domain. And they are diligent about asserting themselves in these situations. But what about the situation where assuming responsibility is, shall we say, inconvenient? I have found that management is equally diligent at dodging these "opportunities", usually by inaction. I came up with the following formulation years ago: "it's not a problem if it is not causing management problems".
We see this everywhere. There is a certain amount of work to do. Management doesn't want to pay for all of it to be done. The obvious solution is "off the clock" work by subordinates. If everything gets done and we stay within budget then, viewed from the management perspective, there is no problem. If there is no problem then there is no need for management to do anything. So we see a lot of creativity deployed to create situations where subordinates, for one reason or another, end up doing a lot of work that is uncompensated or undercompensated. You can root around in pretty much any newspaper during pretty much any week and you will find one or more examples of employees doing work that benefits the company but is not fully reflected in those employee's paycheck's. The company and the techniques and the justifications vary from case to case but the result is always the same. That's bad. There is worse.
Boeing was in a dog fight a few years ago over the "military tanker" contract. About fifty years ago Boeing built a bunch of airplanes that were used for in-air refueling. Needless to say, it was long past time to replace these planes with newer ones. But tankers are unsexy. So there was always some other sexier place to spend DOD money. So Boeing was having a hard time getting the government to sign on the dotted line for new planes. To be fair, Boeing tried all the legitimate techniques for getting the business first. But year after year passed by and no signed contract materialized. What's a Boeing manager to do? Well, there's always the illegitimate techniques? But they are at best a public relations problem and at worst are flat out illegal. This is a case where no manager wants their fingerprints visible on anything. What does the actual management playbook (as opposed to the one they teach from in school) say to do in these circumstances? You glower at your subordinate(s) and say "I don't care how this gets done, just do it.". If anyone asks later, you say "well, of course everyone knew that I expected them to behave in a legal and ethical manner at all times. That goes without saying.".
I don't want to re-litigate the whole tanker incident. Frankly, it was a few years ago and I remember only some of the details. And it represents an extreme example. The details ended up in the public domain. And important people were fired. Other important people went to jail. But "I don't care how, just do it" is a common strategy for providing management with plausible deniability.
Usually, what's involved is pretty mundane. My ex-boss used to work a horrific number of hours because management provided inadequate resources and he felt a responsibility to get the job done and done well. My cousin was talking about her company being too cheap to buy her a color printer. She had to jump through a bunch of unnecessary hoops to get what should have been a simple job done. Besides the "just do it" component the other point of commonality in all these cases is this. The job got done. It got done in a way that was invisible to General Ledger. The fact that it got done and that there were no visible negative consequences meant that from management's perspective there was no problem,
I spent years trying to bring my now ex-boss around to my point of view on this. He finally saw the light a couple of years after I retired. He no longer works horrible hours. And the company seems to get along ok now that his efforts are no longer heroic. Once management sees something that affects them negatively then they have a reason to take action. But the other thing I told my manager is that this sort of thing is dangerous. If you can turn your problem into management's problem without leaving any of your fingerprints visible then you're fine. But it is often impossible to do that. So the manager knows (or should know) what's going on. At that point he may decide you are not a "team player" or you are a "troublemaker". In other words, he can work things so in effect his problem becomes your problem. But the thing to remember is he could have done that anyhow.
Conclusion
You have no doubt correctly concluded that I think senior management of large companies is wildly overpaid. So let me conclude with a quick note about how this came to be. How would like it if your friends and family and softball buddies set your pay? And, oh by the way. you are the one who gets to pick the specific set of friends, family and buddies that serve on your "compensation committee". That's how it works in these large companies. Senior executives and members of the board of your company decide how much you as CEO get paid. You have come up through the ranks with the senior executives so you probably like and respect each other. As CEO you have more say than anyone else as to who serves on the Board of Directors of your company. So who do you pick as board members? Friends, possibly some members of your executive team, and CEOs (or senior executives) of other companies that you are friendly with. Everyone knows it's a "you scratch my back - I scratch yours" situation. If everybody decide that these positions should pay extremely well then everybody (or at least everybody we care about) does extremely well. But wait, there's more.
The possibility exists that this might look bad. Luckily someone came up with a great way to deal with this a few decades ago. Companies that specialized in determining "appropriate" compensation for senior executives were invented. Officially they are expert in impartially determining what a "fair" compensation package looks like. So they provide complete cover. "We hired this highly respected company to figure all this out then we did exactly what they recommended." Problem solved. It's just another one of those "hard nosed business" situations. But guess who picks out which "compensation specialist" company gets the job? The CEO. And no one has to tell anyone anything for these companies to figure out that their job is twofold. First, they come up with an astronomical number, the more astronomical the better. Second, they come up with a bunch of really high quality BS to justify the number. This second part is where they really earn their money.
And any "compensation specialist" company that does a really superior job deserves to be paid accordingly, right. It's only fair, after all. So, once a company is able to develop a bit of a reputation, it does really well. In the real world, the group made up of your friends, family, etc. would do a poor job compared to the job these companies do. Your friends would not come up with a figure that was nearly high enough. And the fact that these "compensation specialist" companies are so expert at coming up with an astronomical number and then papering the whole thing over with truly awesome BS is why they get paid the big bucks, baby.
My academic credentials are nearly nonexistent on this subject. I took a single one semester class on Business Law in High School. I took some American Institute of Banking classes decades ago when I worked for a Bank. What you are getting is a worm's eye view of the situation, what things looked like from the other end of the organization chart. Like many, I have repeatedly asked myself "why did they do that?" when some particularly spectacular piece of management stupidity surfaced either at work or in the news. The same kinds of things kept happening over and over so there had to be some underlying method to the apparent madness. It took me a long time to extract the method as the "usual suspects" were of no use. None of what I am about to reveal is to be found in any MBA curriculum, academic publication, or in the prodigious output of the "business press" (Forbes, CNBC, etc.). But these are iron clad principles that have the force of law in actual business practice.
But first, how could this be one of my posts without a digression? So let me digress, but only for a very short time, and ask "how do CEOs justify their large compensation packages"? Their answer is that "they work hard and they are smart". And by "smart" they really mean something more along the lines of skillful. They have to be very smart to understand the complex problems they wrestle with on a day to day basis. But they also have to apply the very best judgment to solving these problems. So more than just raw "smarts" are required. So, in their eyes, they really are very special. Let me first address the "hard work" issue as it can be easily dispensed with.
I have frequented several sandwich shops over the years. The ones I frequent (and here I am specifically talking about the non-chain shops, e.g. Subway) have been run in many cases by Korean women of a certain age. I have no idea how many hours they put in but its a lot. They are there from dawn till dusk. In one shop I now frequent all the pastries are baked on site every day. So the proprietor is there from before sunup until the shop closes late in the day. These ladies put in an unbelievable number of hours. And this applies to many small businesses. I have frequented establishments run by both sexes and all ethnicities. Many small businesses depend heavily on the proprietor. And they depend on that person putting in long hours every day and having the flexibility and skill to perform multiple duties. I would stack up the range of skills and the work ethic of these proprietors against any "ten million dollar man" (and they are nearly all men) helming one of these corporate behemoths.
The rest of this post will address the intelligence and judgment components.
General Ledger
Ok. I was not altogether honest. Because I need another digression. The term or art for the corporate books is General Ledger. Some of you may be familiar with Quick Books, an inexpensive software package designed for use by small businesses. And a thorough discussion of General Ledger systems would span several weighty volumes. But there are only a few things you need to understand. And those things can be covered quickly.
General Ledger systems have what's called a "chart of accounts". This is a list of buckets (e.g. accounts) into which items of income or expense are placed. There is a separate chart of accounts for each department. Each account for a department is "rolled up" to create a division total. These totals are rolled up through larger and larger portions of the corporation until you finally get to the top. Then all the top accounts are rolled together to figure out how the corporation as a whole is doing.
General Ledger systems fulfill several roles. So it is useful to have lots of separate accounts. In a store there can be an account in the "shoe" department for "men's shoes" and another for "women's shoes" and one for "socks" and so on. So each time a pair of men's shoes is sold the amount is added into the correct account. In a similar manner the sale of a pair of women's shoes goes into its account. And so on. And we can have an account for "sales tax" and other accounts for other things. So in order to find out how the department is doing you can add all these accounts together. But you can also add the accounts for "men's shoes" together from all the shoe departments in all the stores to see how "men's shoes" are doing over all. This should give you the flavor of how General Ledger works and why most General Ledger systems have lots of separate accounts.
And so far, I have talked about income accounts. There are also expense accounts. The shoe department might have a "salary" account. But, in the same way it was useful to have lots of income accounts, it might be useful to have an "overtime" account and a "bonus" account (shoe sales people might get an extra "bonus" for selling a particularly large amount of shoes). And there might be a "lighting" account and an "advertising" account and so on.
So that gives you a flavor of how General Ledger works at its most basic level. And I demonstrated how it might be useful to add the accounts up in different ways. Corporations of any size add the accounts up in at least three different ways. (1) They add them up one way to calculate their Income Tax bill. (2) They add them up a second way to produce the "Annual Statement" for stock holders. And (3) they add them up a third way to assist management in running the company. Why do they do this? Because each "way" serves a different purpose. In the first case the idea is so show the least profit so the Income Tax bill will be as low as possible. In the second case the idea is to show the most profit so the stock holders will be happy. In the third the idea is to shed light on what parts of the business are doing well or badly and which managers are doing a good or a bad job.
As an example of this, Boeing is one of several companies that is not profitable, at least when the accounts are added up in the proper way. How do we know? Because they have not paid any Income Tax in years. However, if we add things up in the "Annual Statement" way, Boeing is very profitable. So it is only fair that their senior executives should be paid millions. And, as far as I can tell, Boeing does a terrible job properly adding things up in the third way, the way that allows them to make good management decisions. Because they have made a lot of really boneheaded decisions over the past couple of decades. With that digression complete let me get back to the main line of analysis. My first issue of management stupidity is:
General Ledger Visibility
What do I mean? Well, a few years ago Boeing was going through hard times. This resulted in a laser focus on expenses. This in turn resulted in an edict from the top echelons of the company to trim the use of office supplies and to cut travel expenses. What? Boeing is a multibillion dollar company. In this environment accountants have a term for things like office supplies and travel expenses. It is "not material", as in "this will not have a material effect on the financial situation". So why did Boeing management highlight these two tiny expense categories even though completely zeroing out all expenses in these specific categories would not have affected Boeing's profitability in a noticeable way? It is because small though they are they are "visible" in General Ledger. Each department has a General Ledger account for each. If the amount of expense in either or both of these accounts goes down the reduction will directly increase profit. But, you say, what about doing something that would make a big difference like say making Boeing engineers more efficient?
There are lots of engineers. They have relatively high salaries (not senior management salaries but definitely not janitor salaries either). If you were to say increase the efficiency of engineers by 1% wouldn't that save lots more money than you would by dinging the office supply and travel accounts? It turns out surprisingly the answer is no? The thinking goes that Engineers are on salary. If you increase their efficiency by 1% their payroll cost does not change at all. They just end up sitting on their hands for a few minutes over the course of a week. So no number in General Ledger changes so there is no savings. Is this right? It doesn't matter. Management thinks it is right. So since, to management's way of thinking, reducing office supply costs and travel costs changes the numbers in General Ledger, albeit by a small amount, it is better to do that than to try to increase the efficiency of Engineers because the latter change will not show up in the General Ledger numbers.
This General Ledger Visibility problem raises its ugly head in even more perverse ways. One way to restate the problem is "General Ledger is more real than reality". In the early days of the space program there was a process called "ground truthing". NASA people would look at satellite pictures or other measurements. Then they would go out and actually look at what was on the ground, the ground truth. They wanted to understand how much of what the satellite said was really real. Then they could figure out how far to trust the satellite data. In many cases the satellite data gave a better picture of what was going on than you could get from the ground. In other cases there were various fixes and adjustments that were necessary to get the satellite data to align with reality. And in still other cases the satellite data was misleading and could not be trusted.
General Ledger systems are like satellite data. Sometimes they tell you what is going on better than any other method. Other times they can be trusted after the appropriate adjustments and fixes have been applied. And other times they just plain mislead you. Many executives, however, are true believers when it comes to the numbers General Ledger systems spit out.
Manageable versus Unmanageable Costs
Let me be clear what I am talking about here. If an executive believes that actions he takes can affect a cost then that cost is manageable. Otherwise, it is unmanageable. Let me give you an example, in this case an example that has nothing to do with Boeing. A company I worked for used a lot of natural gas. Now this cost was visible in General Ledger. It had its own little line in the chart of accounts in a particular department. And the amount was large, millions of dollars per year. So that was not the problem. The problem was that the company had almost no control over the cost of natural gas. So to a great extent the cost was unmanageable. Now they did what they could. They put a great deal of effort into using the gas efficiently so they used as little as possible. They also tried to be smart about how they bought gas. If the thought the price trend was up they would sign up for a long term contract at a fixed price. If they thought the price trend was down they would avoid long term contracts and buy on the "spot" market.
Now the above example is a set of specific circumstances. So I'm going to move on to a more general situation. (I don't know if it applies to Boeing but likely it does.) Companies occupy buildings. In some cases they own the buildings but the trend is toward leasing. These buildings involve operating costs, specifically power for heating, lighting, air conditioning and other machinery, etc. The prime consideration that goes into how most buildings are built is construction cost. They are typically built as cheaply as possible and no thought is given to whether this will result in high operating costs. So typically these buildings are very inefficient to operate. In the last decade or so a lot of effort has gone into studying this. And it turns out that a lot of ways have been identified to reduce operating costs, particularly costs associated with energy use. And some of these ways turn out to have very good cost/benefit ratios. I have a brother who has studied this area thoroughly. He says that a lot of these "retrofits" pay for themselves by reducing operating costs dramatically. A typical payoff period is 18 months. That is a fantastically quick return on investment.
But in spite of this it is very rare to see buildings retrofitted. Why? Well, let me trot out a very lame excuse first. Many building leases are "all in". The price of the lease requires the landlord to pay operating costs like energy bills. So if the building is retrofitted it will be disruptive to the company using the building and, since the rent is fixed, there will be no cost savings. This is lame. If the retrofit is done and the rent is reduced but by less than the savings both sides benefit. The land lord has more money left over after his operating costs have been deducted from the rent check and the tenant sees cost savings because the rent is now lower. So why doesn't this happen? Because management sees rent as an unmanageable cost. It doesn't matter how high it is. It's unmanageable so efforts are turned to reducing costs in other areas. Is management correct? No!
Red money, Green money, and Blue money
If you think at all about the color of money you probably think it's all green. A nickname for U.S. currency is "greenback" because that's the predominant color of our currency. I used to also believe that all money was the same color too. This led to a lot of frustration.
In a previous job (not at Boeing) I was responsible for selecting and procuring computer equipment. This was back in the old days when a nice computer ran several million dollars. So we are talking decisions that involved very high levels of management because the equipment was very costly. (The company was far smaller than Boeing so a million dollars was a very big deal.) I am going to skip over all the "do we really need to do this" part of the discussion. Let's assume that everyone has agreed that the investment needed to be made and we were just trying to figure out how the acquisition should be structured.
What I mean by "structured" is "buy, rent, or lease" and "new or used". The idea was to pick among the various possibilities. Now naïve old me, I cranked up the spread sheet and starting calculating the cost of the various options. My assumption was "all things being equal" (and I wrangled all the technical issues to make sure that all things in fact were equal) we just wanted to structure the deal to result in the lowest overall cost. This is where I learned the hard way about red money, green money, and blue money. What do I mean?
Well part of that whole General Ledger thing is what is called a budget. Before the year starts all the income and expenses for the next year are estimated. Then the idea is not necessarily to make income go up and expense go down. It is to hit your budget numbers. (I must say that if you missed your income numbers on the high side and your expense numbers on the low side people would be pretty happy even though technically you missed your numbers.) But part of the process of creating the budget was to guess what would happen, money-wise. So the budget might include money for our piece of computer equipment. And an assumption would be made as to whether it would be bought, rented, or leased. Needless to say, there were separate "buy" "lease", and "rent" General Ledger accounts. So typically one of these budget accounts would have money in it and the others would be empty.
Silly me. I knew that there were separate accounts. But I had heard of money being "reprogrammed" in the federal budget to cover some unexpected event. And I'm a computer guy. I know that all this budget stuff is just numbers in a computer file. It's not that hard to move the numbers around. So I do my analysis. And I figure all I have to say is "if we do it this way we can save a lot of money so we just reprogram the money and everyone's happy". That's when I learned about red money (capital), green money (lease/rent), and blue money (maintenance and other operating costs). Apparently there is no philosopher's stone to turn one color of money into another color.
Now there some good reasons for not changing the color of money. There's fraud. You don't want people just changing things around willy nilly. But it is not hard to put procedures in place so you make sure the changes serve a legitimate purpose (saving money) and not just providing a cover for hanky panky. And there is the issue of "ratios". Most companies operate on borrowed money. And the banks are supposed to make sure that the company can pay the borrowed money back. So they might require a company to maintain a certain "capital ratio". The details don't matter but the result is that a company might not want to make a capital expenditure (buy some expensive piece of equipment) because it will cause the capital ratio to go out of whack. Contrarily, it might be necessary to buy something rather than rent it to keep some other ratio in line. But in my case none of these considerations came into play. Changing the color of money was perfectly feasible. It was just not done.
The Myth of Rationality
The model business people hold up of themselves to the world is that of rationality. They are not swayed by sentiment. "It's just business, mam." They want you to believe that the decisions they make are based on careful analysis and are driven solely by the profit motive. But its not so.
After many years, Boeing seems to have finally gotten the 787 program on track. They are able to build and deliver the planes on schedule and the airlines are able to put the planes in service and keep them there. But a lot of pain, suffering, and money, have been poured down numerous rat holes to get to where we are now. If you listen to management propaganda, then each of the major decisions made at the start of the program was the result of cold rationality applied to careful analysis. Here is a list of the most important and consequential decisions management made:
- They would move from a plane made primarily out of aluminum to one made in large part out of carbon fiber.
- They would transition from a "send a lot of small parts from subcontractors to a Boeing plant for final assembly" to a "send large pre-assembled pieces of the plane to a Boeing plant where they will be snapped together" construction method.
- Instead of Boeing doing all the design and "integration" (making sure all the parts fit together) work a lot of the design and integration work will be done by contractors with Boeing supervising.
- Instead of almost all of the plane being built in the U.S. large parts of the plane would be farmed out to foreign countries.
Taken separately any of these decisions might make sense. But taken together they represented a recipe for disaster. In my opinion, when these decisions were made Boeing management was in poor shape. What is common to all these decisions is that each decision separately would require more and better effort from Boeing management than the alternative "do it the old way" option. This is particularly true of decision #4.
The 787 program has been a fiasco for most of the lifetime of the plane. I thought at the time that Boeing really needed to do #1. But this would be hard to do. So I thought they should focus on it and avoid change elsewhere in the program. Obviously they didn't. The result was chaos everywhere. And chaos is very expensive in the plane building business
There were a number of engineering problems. This delayed things. Then parts came in incompletely or incorrectly assembled. Then the pieces did not fit together very well. And various subcontractors had trouble coming up to speed. In particular, problems in South Carolina were so great that Boeing decided they had to buy the subsidiary responsible for work there so that they could fix management there. Given that early on South Carolina had been a major problem area would you recommend minimizing their responsibilities or doubling down? Boeing decided to double down. In fact, they decided to quadruple down. Not only did they increase the volume of work of the kind originally planned but they also ended up adding in more work. They went so far as to build a full assembly line so they could play South Carolina off against the northwest. And there have been major quality problems with work out of South Carolina as late as as earlier this year. (The current official story is that "everything is good there now".)
There has been similar problems with components made in Italy and other places in the world. And, as a side effect of moving so much expertise and responsibility off shore, we have in effect taught a lot of people around the world a lot about how to build technologically advanced airplanes. This has major impacts from both a civilian perspective (China is in the process of getting a commercial airplane manufacturing capability off the ground, as are a number of other countries) and governmental perspective (the dual use nature of this technology makes it militarily important both for offensive (building better military planes) and a defensive (getting better at shooting down our military planes) perspective). People get wound up about Edward Snowden and not at Boeing. That's because Boeing has a lot of political clout and a good PR operation and Snowden doesn't. But Boeing has done a better job of providing aid and comfort to potential adversaries than Snowden has.
Anyhow, this overload caused by management overreach has resulted in a lot of problems for the 787 program. It seems back on track after many years of delays. A number of analysts think the program will never make back its costs. I think it eventually will, perhaps a decade from now.
The Boeing 787 program is a classic example of the maxim "if they want to do it they will find a way and if they don't want to do it they will find an excuse". I have seen innumerable projects that penciled out just fine. But management didn't want to do them (e.g. retrofit buildings) so they didn't. I have seen innumerable projects that did not pencil out (e.g Boeing moving their headquarters to Chicago) but management found a way. If you ask management they will say that in each case "it was simply a cold hard business decision" but you will be hard pressed to find a business case laid out in detail and that that actually pencils out.
Across the board cuts
Boeing, and lots of other companies have announced (and implemented) "across the board" budget cuts on a number of occasions. This is where you cut the budget of each part of the business by the same percentage. Turn the issue inside out and see what it looks like. If the answer is "across the board cuts" what does the result of the "hard nosed business analysis" have to be to justify this action? It has to be that all parts of the business are exactly as efficient/inefficient or important/unimportant? What are the chances that is actually true? "A snowball's chance in hell" overestimates the likelihood.
What across the board cuts tells you is that management does not understand the business they are supposed to be experts in managing. There should be strong parts of the business and weak ones. There should be parts that are more important and other parts that have less importance. And it is the primary job of management to know exactly which parts those are. Then you cut more heavily in the weak areas and more heavily in the less important areas. It even makes sense to not cut a weak area if it is critical. But you should have been shoring that important but weak area area up long before the need to cut arose. Why weren't you?
Championing across the board cuts is prima fascia evidence of incompetence. Whoever champions this should be fired immediately for cause. The only defense is if the executive in question can prove that he was literally forced to adopt equal cuts by outside forces. And if he received only moderate pressure he should be fired for not finding a way to effectively counter the pressure.
But across the board cuts are common. As are other less obvious signs of incompetence. Every time I see a management decision I ask myself the simple question "does this decision and its rationale demonstrate a deep and honest understanding of the organization"? Frequently it doesn't. As another example, various large financial institutions almost completely crashed the economy of the entire world a few years ago. Executive after executive said "I didn't know my subordinates were engaged in dangerous/unethical/risky practices" or "I had no idea that these procedures could crash the economy (or. perhaps more importantly, destroy my company)". At a minimum these statements demonstrate an ignorance of critical aspects of the business these people are charged with managing (and paid outrageous sums to manage effectively). They should have all been fired for cause for incompetence, I don't care which. I believe that many of them knew that bad behavior was rampant on their watch. But that same bad behavior resulted in them being paid massive amounts of money.
Management Responsibility
In this last example (Wall Street a few years ago) we see a question of where management's responsibility lies. I would like to turn the problem around. I often found myself with a situation where I thought that management should take some action. Frequently they didn't. It took me a long time to figure out what the real problem was. Management certainly does not want subordinates making decisions that management feels are properly in their domain. And they are diligent about asserting themselves in these situations. But what about the situation where assuming responsibility is, shall we say, inconvenient? I have found that management is equally diligent at dodging these "opportunities", usually by inaction. I came up with the following formulation years ago: "it's not a problem if it is not causing management problems".
We see this everywhere. There is a certain amount of work to do. Management doesn't want to pay for all of it to be done. The obvious solution is "off the clock" work by subordinates. If everything gets done and we stay within budget then, viewed from the management perspective, there is no problem. If there is no problem then there is no need for management to do anything. So we see a lot of creativity deployed to create situations where subordinates, for one reason or another, end up doing a lot of work that is uncompensated or undercompensated. You can root around in pretty much any newspaper during pretty much any week and you will find one or more examples of employees doing work that benefits the company but is not fully reflected in those employee's paycheck's. The company and the techniques and the justifications vary from case to case but the result is always the same. That's bad. There is worse.
Boeing was in a dog fight a few years ago over the "military tanker" contract. About fifty years ago Boeing built a bunch of airplanes that were used for in-air refueling. Needless to say, it was long past time to replace these planes with newer ones. But tankers are unsexy. So there was always some other sexier place to spend DOD money. So Boeing was having a hard time getting the government to sign on the dotted line for new planes. To be fair, Boeing tried all the legitimate techniques for getting the business first. But year after year passed by and no signed contract materialized. What's a Boeing manager to do? Well, there's always the illegitimate techniques? But they are at best a public relations problem and at worst are flat out illegal. This is a case where no manager wants their fingerprints visible on anything. What does the actual management playbook (as opposed to the one they teach from in school) say to do in these circumstances? You glower at your subordinate(s) and say "I don't care how this gets done, just do it.". If anyone asks later, you say "well, of course everyone knew that I expected them to behave in a legal and ethical manner at all times. That goes without saying.".
I don't want to re-litigate the whole tanker incident. Frankly, it was a few years ago and I remember only some of the details. And it represents an extreme example. The details ended up in the public domain. And important people were fired. Other important people went to jail. But "I don't care how, just do it" is a common strategy for providing management with plausible deniability.
Usually, what's involved is pretty mundane. My ex-boss used to work a horrific number of hours because management provided inadequate resources and he felt a responsibility to get the job done and done well. My cousin was talking about her company being too cheap to buy her a color printer. She had to jump through a bunch of unnecessary hoops to get what should have been a simple job done. Besides the "just do it" component the other point of commonality in all these cases is this. The job got done. It got done in a way that was invisible to General Ledger. The fact that it got done and that there were no visible negative consequences meant that from management's perspective there was no problem,
I spent years trying to bring my now ex-boss around to my point of view on this. He finally saw the light a couple of years after I retired. He no longer works horrible hours. And the company seems to get along ok now that his efforts are no longer heroic. Once management sees something that affects them negatively then they have a reason to take action. But the other thing I told my manager is that this sort of thing is dangerous. If you can turn your problem into management's problem without leaving any of your fingerprints visible then you're fine. But it is often impossible to do that. So the manager knows (or should know) what's going on. At that point he may decide you are not a "team player" or you are a "troublemaker". In other words, he can work things so in effect his problem becomes your problem. But the thing to remember is he could have done that anyhow.
Conclusion
You have no doubt correctly concluded that I think senior management of large companies is wildly overpaid. So let me conclude with a quick note about how this came to be. How would like it if your friends and family and softball buddies set your pay? And, oh by the way. you are the one who gets to pick the specific set of friends, family and buddies that serve on your "compensation committee". That's how it works in these large companies. Senior executives and members of the board of your company decide how much you as CEO get paid. You have come up through the ranks with the senior executives so you probably like and respect each other. As CEO you have more say than anyone else as to who serves on the Board of Directors of your company. So who do you pick as board members? Friends, possibly some members of your executive team, and CEOs (or senior executives) of other companies that you are friendly with. Everyone knows it's a "you scratch my back - I scratch yours" situation. If everybody decide that these positions should pay extremely well then everybody (or at least everybody we care about) does extremely well. But wait, there's more.
The possibility exists that this might look bad. Luckily someone came up with a great way to deal with this a few decades ago. Companies that specialized in determining "appropriate" compensation for senior executives were invented. Officially they are expert in impartially determining what a "fair" compensation package looks like. So they provide complete cover. "We hired this highly respected company to figure all this out then we did exactly what they recommended." Problem solved. It's just another one of those "hard nosed business" situations. But guess who picks out which "compensation specialist" company gets the job? The CEO. And no one has to tell anyone anything for these companies to figure out that their job is twofold. First, they come up with an astronomical number, the more astronomical the better. Second, they come up with a bunch of really high quality BS to justify the number. This second part is where they really earn their money.
And any "compensation specialist" company that does a really superior job deserves to be paid accordingly, right. It's only fair, after all. So, once a company is able to develop a bit of a reputation, it does really well. In the real world, the group made up of your friends, family, etc. would do a poor job compared to the job these companies do. Your friends would not come up with a figure that was nearly high enough. And the fact that these "compensation specialist" companies are so expert at coming up with an astronomical number and then papering the whole thing over with truly awesome BS is why they get paid the big bucks, baby.
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