Business Exposed204
pay between the players on a team. Using this data, he computed
whether clubs were better off equalizing pay, or differentiating
their team’s payment levels.
And, it turned out, it’s the former: that is, baseball teams
performed better if the salaries of the players were quite
similar to each other. The larger the payment differences,
the lower the individual players’ performance, mostly so –
perhaps not surprisingly – for the players receiving the lowest
payment. But – perhaps more surprisingly – also the players who
found themselves pretty high in the payment pecking order,
receiving an above-average salary package, saw their individual
performance being negatively affected by the pay dispersion
within the team.
Finally, team performance: those teams with high pay differ-
ences among players had markedly poorer performance. It seems
substantial differences in pay are more of a demotivator than an
incentive, even for the majority of people who end up in the
high payment bracket! And the team suffers as a result.
What really caused the 2008 banking crisis?
I would argue – as, I guess, so would Sumantra – that the 2008
banking crisis was not really a macro-economic problem, the
result of inappropriate government regulation, failing watchdogs,
or even top management greed. Instead, it is the epitome of the
structural failure of management: a direct consequence of our
erroneous ways of organizing large companies.
Actually, I would say that when you compare the 2008
banking crisis with the Enron debacle, with Ahold’s demise,
or even with the Union Carbide disaster in Bhopal in 1984,
some surprisingly clear parallels emerge. From past chapters,
you should recognize such elements as the success trap, over-
exploitation, tunnel vision, intertwined links between CEOs,
analysts and boards of directors, heavy bouts of imitation,
bandwagons and hubris, all overshadowed by the vast wings
of Icarus.
2058
n
A rock or a soft place?
Because one central element in each of the disasters, including
the banking crisis, stems from the division of labour and special-
ization within and across organizations. In the case of investment
banks, nancial engineers drew up increasingly complex nancial
instruments that, among others, incorporated assets based on the
American housing market. Yet, the nancial engineers didn’t
quite understand the situation in the housing market; the people
in divisions and banks participating in the instruments didn’t
understand the nancial constructions or the American housing
market; and when it all added up to the level of departments,
groups, divisions, and whole corporations, top managers certainly
had no clue what they were exposed to and to what degree.
Similarly, in Enron, managers did not understand what its energy
traders were up to; Ahold’s executives had long lost track of the
dealings of its various subsidiaries scattered all over the world;
and Union Carbide’s administrators had little knowledge of the
workings of the chemical plant in faraway Bhopal. The complexity
of the organization, both within and across participating cor-
porations, which had grown as a consequence of over-exploitation,
had outgrown any individual’s comprehension and surpassed the
capacity of any of the traditional control systems in place.
Another crucial role was played by the myopia of success. Initially,
the approach used by the companies involved was limited and
careful, while there were often countervailing voices that expressed
doubts and hesitation when gradually less care was taken – there is
certainly evidence of all of this in the cases of Enron, Ahold, and
Union Carbide. However, when things started to work and bring
in nancial returns, as in the case of the banks, the usage of the
instruments increased, sometimes dramatically, and they became
bolder and more far-reaching. Iconoclasts and countervailing
voices were dismissed or ceased to be raised at all. For example, in
Ahold and Enron, the nancial success of the rms’ approaches
suppressed any doubts about their business strategies.
This caused a third element to emerge: herds. It actually became
improper not to follow the approach that brought so much
success to many. In the case of investment banks, other banks
Business Exposed206
and nancial institutions that did not participate to the same
extent as others received criticism for being “too conservative”
and “old-fashioned”. Investors, analysts, and other stakeholders
joined in the criticism, and watchdogs and other regulatory insti-
tutions came under increasing pressure to get out of the way and
not hamper innovation and progress.
Similarly, Enron was hailed as an example
of the modern way of doing business, while
analysts (whose investment banks were greatly
proting from Enron’s success) recommended
“buy” till days before its fall. Similarly,
Ahold’s CEO Cees van der Hoeven continued
to receive awards when the company had
already started its freefall. All of these organi-
zations’ courses of action had been further spurned and turned
into an irreversible trend by the various parties and stakeholders
in its business environment.
Banks and their top managers were all but forced to imitate each
others’ over-exploited practices, till the whole herd went off the
cliff, dragging the world economy with it in its fall.
‘‘
Enron was
hailed as an
example of the
modern way of
doing business
’’
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