The modern American economy is dominated by finance. By size, for example, the finance and insurance industries accounted for 7.4% of US GDP in 2018, up from 2.8% in 1950. Does that not sound like much? In 2013, finance and insurance accounted for 37% of corporate profits. Power comes from profits, and finance is now so powerful that companies routinely hurt themselves to satisfy Wall Street’s demands. A Duke survey of Chief Financial Officers found that78% of them were willing to “give up economic value” and 55% of them would cancel a project with a positive net present value in order to fulfill Wall Street’s desire for “smooth” earnings.
It’s worth taking a moment to reflect on this statistic. More than three-quarters of CFOs were willing to hurt their corporations to give Wall Street what it wants. This weakens corporations and makes them vulnerable, and highly monetized economies grow more slowly and are more likely to suffer currency crises. In the first component of this series, I explained how the most damaging crises arise from unfounded assumptions. In the second component, I described how specialization in global source chains is a hidden factor. driving force of the crisis. Here I will describe how monetary thinking leads corporations to disaster.
Focusing on finance makes companies forget why they’re in business
It is harmful to focus on the short term and run businesses based on numbers. But this is not the most insidious way in which financialization makes corporations more crisis-prone. The biggest threat is that focusing on finances will make corporations understand why they are in business. Preventing this from happening is one of the most difficult responsibilities marketers and business leaders face.
Financialization’s biggest danger might have been best described by the legendary auto executive Bob Lutz in his book Car Guys vs. Bean Counters. Lutz shows how the American automotive industry rode high when it was run by people who were passionate about cars – in other words, about making great products. Over time, however, those companies’ leadership shifted their focus from making great cars to making short-term profits. The result was the disastrous downfall of the industry at the hands of its Japanese competitors.
It’s not just about cars. Let’s take a look at the accident at Boeing, one of the largest companies in the United States. Boeing was founded a few years after the Wright brothers invented the airplane. For decades, it pushed the barriers of aviation technology. His B-17 Flying Fortress played a huge role in the defeat of Nazi Germany. His B-52 was designed in a single weekend in 1948, but it was so well designed that 72 years later it remains a mainstay of the United States Air Force. On the civil side, Boeing airplanes, from the 707 to the 777, necessarily explained civil aviation. If you’re flying, chances are you traveled on a Boeing. All these triumphs became imaginable thanks to an undeniable fact. In the words of journalist Jerry Useem, “Boeing has always been less a corporation than a group of engineers committed to building incredible flying machines. ”
Then everything went wrong. Forced to approve by Defense Secretary Bill Perry, Boeing merged with its historic rival McDonell Douglas, a company on the verge of collapse because its executives had focused on cutting prices instead of making airplanes. But when a company run by engineers merges with a company run by financiers, well, you can probably guess what happened next. The leaders and culture that had brought down McDonnell Douglas finally took control so completely that it has become a common bitter joke that “McDonnell Douglas acquired Boeing with Boeing’s money. “
Nothing symbolizes Boeing’s new direction better than its resolve to move its headquarters from Seattle to Chicago, as its CEO at the time, Phil Condit, believed that “when the headquarters is located near a core business, like ours in Seattle’s corporate center is inevitably involved in daily business operations. In other words, Boeing’s CEO didn’t need to be distracted by building airplanes. One has to wonder what Condit’s idea his company is doing.
Condit’s successor, Harry Stonecipher (former CEO of McDonnell Douglas), said: “When other people say I refreshed the culture at Boeing, that was the intention, to have it run like a company and not like a giant engineering corporation. » It was this technique that served McDonnell Douglas so well that it had to be stockpiled through Boeing Alan Mulally, an engineer who in my opinion is the most productive American business leader of his generation, headed Boeing’s airliner department on enough time to actually launch the 777. However, he was not selected to update Stonecipher and had to save Ford in one of the biggest turnarounds in corporate history.
Disaster followed. In 2013 Boeing’s 787 Dreamliner was grounded for months after several had dangerous battery fires. This was only the prelude to the catastrophic safety failures of Boeing’s 737 MAX. In both cases, the root cause was that Boeing’s Board, focused on cost-cutting and the asset light strategy so beloved of Wall Street, in the words of aviation analyst Richard Aboulafia, “would rather have spent money on a walk-in humidor for shareholders than on a new plane.”
So for the 787 Boeing’s leaders insisted on outsourcing as much of the manufacturing as possible while Boeing retained only the final assembly. The Dreamliner ended up $12-18 billion over budget, delayed, and, of course, crippled by battery fires. This outcome wasn’t just predictable – it was actually predicted. A brilliant 2001 paper by a Boeing engineer, L. Hart Smith, foresaw exactly what would happen and pointed out that this strategy had destroyed Douglas and would do exactly the same to Boeing.
Unsurprisingly, the new Boeing wasn’t going to to listen to an engineer about the pitfalls of something as trivial as building airplanes. After all, in the words of a Wall Street analyst who dismissed a Boeing engineer’s concerns about de-emphasizing engineering, “You think you’re different. This model works for everyone. It works for ladies’ garments, for running shoes, for hard drives, for integrated circuits, and it will work for you.” The Boeing 787 is the most complex machine ever mass-produced and any failure of a Boeing plane can kill hundreds in an instant, so the belief that Boeing needs to be managed differently from Victoria’s Secret seems at least plausible to anyone not wearing financial blinders.
As for the 737 MAX, the most important failure lies in Boeing’s refusal, motivated by Wall Street, to invest in a new plane. Instead, the company spent $17. 4 billion on dividends between 2013 and 2019 (including $80 million for Jim McNerney, the CEO it tapped to upgrade Mulally). Array your last 3 years of paintings only). Boeing evolved the 737 MAX because it was less expensive to overhaul the 1960s-era 737 than to expand a new plane to compete with Airbus’ A320neo. The overhaul of the 737, however, required new engines, and those new engines were so much larger that they had to be fixed further forward on the wings than the old ones. This meant that the MAX behaved very differently than its predecessor when near the stall point, and Boeing promised its consumers that 737 pilots would not want to retrain. So he created software called Maneuvering Characteristics Augmentation System (MCAS) to push the nose down if the plane was close to a stall. However, when a sensor failed, MCAS activated when it should not. This directly caused the crash of two 737 Max aircraft. More than a year later, the plane still has not received clearance to fly.
As an entrepreneur or executive, you’re going to be faced with the same choices that bedeviled automotive executives in the 1960s and Boeing’s in the 2000s. Are you in business to make money? Or to make something great? The first path might take you to short-term profits, but it will leave little of worth behind, and it might do incalculable harm. But if you want to build something great, you’ll have to run your company that way. You’ll need to prepare for the shocks created by other companies that have sacrificed their real missions to answer the siren song of short-term stock prices. And be ready to take advantage of their mistakes when they stumble and fall.