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Mister Magoo in the C-Suite

While Americans watch transfixed as swine flu spreads across television maps, another debilitating disease has been infecting our economy for much longer than the H1N1 virus has been attacking our bodies: managerial myopia. Shortsightedness on the part of corporate executives has led our largest auto companies to the brink of bankruptcy (and beyond, in one case so far), homebuilders into freefall and Wall Street traders into creating a national economic crisis of nearly unprecedented proportions.

Eight years ago, myopic auto executives lobbied hard against increased Corporate Average Fuel Economy (CAFE) standards, claiming they would cost 100,000 jobs by curtailing sales of SUVs and pickups. Instead, by failing to foresee consumer demand shifting away from gas-guzzlers, the auto companies lost three times as many jobs. How many of those jobs would have been saved if management had understood the changes under way in the market and embraced fuel efficiency instead of battling against it?

Of course, rejecting CAFE is not the only example of managerial myopia in the auto industry.

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Consumers have long complained that the quality of American cars simply does not measure up to that of Japanese vehicles. In a marvelous analysis that includes chronicles of his own experience on assembly lines for both GM and Toyota, MIT Professor Steven Spear documents the ways in which those quality differences stem from the failure of GM’s management, which apparently was beguiled into believing that past performance guaranteed future results.

Homebuilders also presented clear symptoms of myopia in recent years. With home prices increasing, builders thought delivering more and more houses to the market each year was a recipe for riches. However, by 2006 analysts were estimating that demographic and financial trends would reduce demand by 15-20 percent, but builders kept building and when supply far outstripped demand, prices collapsed.

What accounts for these and other failures to anticipate and adjust to change? What forces transform intelligent executives into a gaggle of Mister Magoos, unable to see much beyond their noses?

Part of the answer lies in the human tendency to assume tomorrow will be just like today. When my children were younger and woke up for school at an ungodly hour, they would yell down asking about today’s weather so they could select appropriate clothes. Unwilling to carry my sorry self downstairs to get the paper, or even to look at my BlackBerry, I would simply yell back, “Like yesterday.” It was a pretty good guess, and certainly the easiest forecast available. However, though I was right more often than not, by assuming incremental change I always missed the big shifts. I had no idea when yesterday’s sunshine would turn into today’s thunderstorm.

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So it is with auto executives, homebuilders and stock traders. Assuming small changes is natural, but it blinds managers to tectonic shifts.

A second cause of managerial myopia is the relentless focus on maximizing shareholder value. A survey of CFOs found most operationalized this goal by focusing on the short term, on maximizing quarterly earnings. A majority even said they would pass up long-term value-creating investments if making those investments would mean missing stock analysts’ estimates for their quarterly earnings. This perverse criterion actually demands myopia; it requires setting aside long-term value creation in favor of short-term earnings.

While scientists rush to produce a vaccine for swine flu, someone ought to be developing a cure for the managerial myopia that will continue to sap our economic health, even after the current crisis eases.

Mellman is president of The Mellman Group and has worked for Democratic candidates and causes since 1982. Current clients include the majority leaders of both the House and Senate.