Failing Corporations

In the US and other industrial countries, economic booms of the 20th century subsided abruptly on several occasions. In the year 2000, enlarging, merging corporations began to lay off employees by the thousands as economic growth slowed. Large organizations went bankrupt, mergers failed to work, the incompetence and corruption of management was revealed to all. A second bust began in 2007 leading to a deep US recession and chaos in world equity, commodity and currency markets in 2008. Some pundits suggested that recession was no longer a temporary condition and the recovery of economic growth in the 21st century may not be possible. The 2008 collapse of financial institutions in the US and elsewhere could be attributed to many layers of “leverage” that concealed the basic fact that too many individuals and corporations were  selling and buying paper “assets” devoid of  real value and surviving on loans they could not repay.

In a remarkable reversal of ideology, Alan Greenspan, the US Federal Reserve chairman for 18 years admitted to a congressional committee that he “made a mistake” in trusting that free markets could regulate themselves without government oversight. Greenspan conceded a more serious flaw in his own philosophy that unfettered free markets sit at the root of a superior economy. He stated: “I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms. This crisis, however, has turned out to be much broader than anything I could have imagined.” 

The desirability of unlimited corporate growth and mergers is doubtful unless enlarging corporations re-organize around small, semi-autonomous groups. The inefficiencies and failures of enlarging human systems is a product of the distinct cognitive limitations of the participants.  While smart and apparently well qualified people become CEOs of large corporations their limitations eventually become obvious. Experts are people who focus their attention on details of small parts of large and complex systems, but do not understand how the whole system works. Managers develop competence in smaller systems and advance to the level of their incompetence as the company grows. Even the smartest, best-informed human cannot comprehend how large complex systems work overall.

Dick Brass, a former vice president at Microsoft, described internal decay as one of the world’s most profitable companies grew too large, to sustain a creative edge: " Internal competition is common at great companies. It can be encouraged to force ideas to compete. The problem comes when the competition becomes uncontrolled and destructive. At Microsoft, it has created a dysfunctional corporate culture in which the big established groups are allowed to prey upon emerging teams, belittle their efforts, compete unfairly against them for resources, and over time push them out of existence. It’s not an accident that almost all the executives in charge of Microsoft’s music, e-books, phone, online, search and tablet efforts over the past decade have left. As a result, while the company has had a truly amazing past and an enviably prosperous present, unless it regains its creative spark, it’s an open question whether it has much of a future." 

Politicians usually do not have any training in managing large systems. They tend to be inexperienced managers with simple ideas and slogans instead of advanced knowledge and practical experience. The inventible result is poor judgment, incompetence and in the worst case, reckless mismanagement of human and financial resources.

There is little benefit when governments employ experienced CEOs from big corporations since they are often more expert at concealing their limitations and hiding their incompetence than they are at managing a large system. In reference to state governments in the USA, circa 2003, Krugman suggested:” State governments turned into banana republic in part because voters didn't realize that a charming, personable chief executive can also be an irresponsible opportunist, seeking political advantage through policies that ensure a fiscal crisis on someone else's watch. Now the same governing style has moved to Washington and this time there's no safety net.”

While a systems expert may have an outline or overview of how the whole system is organized, the outline is often too abstract and too general to really explain how the whole system actually works. Corporate organization charts show a static model. Lines connect the different departments and simple notations show who reports to whom.  The all important dynamics are missing. A basic component of systems theory is corrective feedback, a dynamic that is essential to correcting bad decisions and adapting to changing circumstances. System analysts have emerged with approaches to understanding how the parts work together, but troubleshooting a complex system that is failing is difficult or sometimes impossible.  Humans are always the irrational components in large systems. As corporations become larger and increasingly dysfunctional, conflicts increase within and hostility increases toward other corporations. Customers often face inflexible rules and are treated rudely or face punitive measures if they do not conform to company policies.

Sorkin described the Directors' Consortium, a program developed by the Wharton School, the Stanford Law School and the University Of Chicago Graduate School Of Business for CEOs of large US corporations. He stated:” The class was not faring well. On its accounting exam the average score was 32 percent… “As I look around the room I'm not sure if this is an executive education program or a support group," said Joseph A. Grundfest, a professor of law at Stanford University. He empathized with the CEOs saying: "I feel your pain."  

Collins, writing in Fortune magazine’s annual addition that lists the top 500 US corporations, reflected on the ephemeral nature of big corporations. Only 71 companies of the 500 best listed in 1955 were still in business in 2007. Most of the 2000 companies that made the list in subsequent years have dropped out.   Collins blames managers for the failures.  He points to examples of corporations that faltered, adapted and continued on a successful path because of new and inspired leadership. While managers are often at fault for corporate failures, I would argue that even the best qualified, most honest managers are just people with distinct limitations who cannot cope with the relentless recurrence and complexity of the problems they face.

Economist Krugman summarized the plight of the US: "We are no longer the nation that used to amaze the world with its visionary projects. We have become, instead, a nation whose politicians seem to compete over who can show the least vision, the least concern about the future and the greatest willingness to pander to short-term, narrow-minded selfishness." 

Persona Digital Books

Human Nature & Group Dynamics is a 21st century description of anthropology,  sociology and psychology - disciplines that need to be integrated as they are in this book. The topics are essential to understanding human nature, its origins and its problems.  You could treat each topic as module of a larger system that develops emergent properties as the modules interact. Each reader discovers the features of human nature in himself or herself and then discovers similar features in others. After you understand more about the dynamics of close relationships, you can look at  larger groups. You can continue by applying your insights into human dynamics to governments, countries and international affairs. Other Persona Digital books  describe the same dynamics but emphasize different vantage points and concerns.

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Human Nature & Group Dynamics is one volume in the  Psychology & Philosophy series, developed by Persona Digital Books. We encourage readers to quote and paraphrase topics from Group Dynamics published online and expect proper citations to accompany all derivative writings. The author is Stephen Gislason and the publisher is Persona Digital Books. The most recent date of publication is 2011 rev 4/10/2011. The URL to the book description is http://www.personadigital.net/Persona/groupdynamics/