Rewarding Management for the Wrong Reasons

The U.S. auto industry didn’t collapse in 2008-2009 just because credit markets froze. It collapsed because of bad management.

Top executives at OEMs, Tier 1s and the UAW consistently made bad decisions, even when they knew it likely would create problems in the years to come.

And yet they went ahead and did it anyway because their organizations rewarded them for taking the easy way out. The Great Recession merely exposed years of kicking the can down the road.

Most U.S. businesses place too much importance on short-term results. They “close the books” every three months, and woe to anyone who misses their numbers. Financial discipline is critically important in business, but when you’re in an industry where it takes three years to develop a product that will be in production for another eight years after that, shooting for near-term results only encourages managers to take shortcuts, slap on band-aids or simply delay programs.

But these actions are rewarded because management provides Wall Street with “guidance” on how it expects the company to perform in the coming year.

Analysts use this guidance to predict how the stock price will react, and recommend their customers sell or buy the stock accordingly. If you’re off your numbers by even a little, the stock can take a pounding and heads will roll.

But hitting your numbers is like hitting the lottery. The financial rewards can be huge.

It’s the job of the board of directors to hold management’s feet to the fire. But at most companies the CEO also is chairman of the board. So, the entity whose job it is to keep an eye on management is headed by someone from management. Not a good arrangement if you believe in checks and balances.

Many boards have members who have served for over a decade, running the danger of becoming too friendly with management. Besides, it’s a nice gig to get. Board members typically get a company car and earn about $300,000 for attending a handful of meetings or so a year. Board members who dare to rock the boat may find they’re not invited to serve another term.

None of this matters at companies run by executives with integrity and honesty. But these days it almost seems like you get that by luck. There are so many examples of bad behavior in corporate America that you should call it for what it is: a systemic problem.

The whole #MeToo movement uncovering sexual harassment in the workplace has been shocking at how common and widespread it is. And yet it existed for so long because it was tolerated by so organizations – just like they’ve tolerated bad business decisions that reward short term results above all else.

All these problems are laid out in detail in a book titled, “Leadersh!t.” Yes, it’s a crude title but it sure does get the point across.

The book was written by Rande Somma, who was a top executive at JCI’s automotive operations from 1998 to 2003 and now coaches and mentors business students and young professionals.

He served on the supplier advisory councils at GM, Ford andDaimler-Chrysler. And he has served on other corporate boards, including as chairman and vice chairman, and on the boards of non-profit and charitable organizations. In other words, he’s had a front-row seat to see what works and what doesn’t.

If you’re in management, or serve on a board, or even aspire to someday, the book is thoroughly worth reading. I’m sure it will get you thinking, and maybe even change your management style.

If you believe in the power of leadership, and I do, then this book tells a story that everyone in the auto industry can relate to.