Why don't we hang bad admirals of industry?

• 
• • Robert Heller
  • The Observer,
  • Sunday August 24 2008
  • Article history

In a corporate landscape littered with failures, there are plenty of potentially suitable cases for the 'Byng treatment' - that is, swiftly identifying and removing failed management.

As with many management techniques, however, it is less than convincing in application. John Byng was a British admiral executed in 1757 for not chasing the French fleet hard enough, inspiring Voltaire to write that, from time to time, the British executed a senior officer, regardless of his guilt or innocence, 'pour encourager les autres' - and that line has made Byng famous to this day.

Today's admirals of industry are not so severely encouraged. Indeed, it is rather the reverse idea that seems to reign: that top-ranking failure should be swept under the carpet, concealed and even rewarded, as in the absurd notion that the top manager who messed up is the best person to head the clean-up - for, having created the shambles, he knows best where the bodies are buried.

After a year of the near-fatal credit crunch unleashed by their stupidities, few of the lords of the financial universe have been Bynged. The Times counts just half-a-dozen axed CEOs in the UK and US combined, although the senior body count must be higher if the top echelons of Bear Stearns and Northern Rock, the epicentres of the Wall Street and City horrors, are thrown in (or out).

Even though the departed include powerhouses such as Charles 'Chuck' Prince of Citigroup and Stanley O'Neal at Merrill Lynch, the numbers are laughably small compared to the gargantuan losses inflicted on shareholders. The more readily aroused anger of US investors, and the more impressive retaliation of the regulator and courts, make swift justice more likely than in the UK. But that hardly seems to have enhanced efficient prudence in Wall Street.

The Byng-type execution is only the most extreme expression of the carrot-and-stick theory. This holds that corporate donkeys will be stimulated to give of their best by a tempting incentive - and if they aren't, the stick of punishment is there as a looming threat, with dismissal and possibly disgrace taking the place of the block or the gallows.

But the sub-prime crimes offer no support for the long-held belief that the stick is a great deterrent. Managers are too often taken at their own valuation. Northern Rock was applauded, not pilloried, for the highly hazardous 'business model' that threatened to shatter Britain's entire financial structure.

In the US, the criminal charges and prison sentences of fallen stars, led by the Enron team, would seem to provide heftier sticks. But, on the evidence, nobody can seriously believe that the fate of these conspicuous sinners discouraged other managers from forging ahead with novel, apparently super-profitable, but actually fraudulent business models. Very little time separated the Enron scandal and Wall Street's latest mayhem.

The Street's top managers could presumably read about Enron's misdeeds. In fact, they hardly needed reminding - many were wildly enthusiastic accomplices to the venality, which couldn't have succeeded without their aid. The system encourages bosses (see Conrad Black) to act as if their companies are their private property. Hired hands should not suffer from this delusion, but the evidence that they do is alarming. The gigantic remuneration of today's corporate bosses encourages delusions of grandeur, which generate sloppy leadership and overarching ambition.

Moreover, employment contracts and incentive schemes generate personal wealth that makes dismissal financially immaterial. There is no stick. Directors approve these fat-cat follies for a very simple reason: they all drink from the same trough. It's a strange carrot that gives a failed executive more for failure than success. Cast-iron contracts and boardroom acquiescence in excessive rewards are supposedly justified by the need to attract high-fliers with wonderful living standards - and to maintain the latter after Icarus falls to earth.

Whatever the merits of that case, the argument for generosity somehow doesn't apply as you move down the ladder. In lower realms, the carrot is generally much less important than the stick. Highly sophisticated firms like Intel and GE base their payment schemes on ratings whose consequences are automatic; fall below a given score and you're out. This inhumane treatment has nothing in its favour, not even better performance.

That great teacher W Edwards Deming made managers play competitive games to prove that achievement is largely random and that in any team, somebody inevitably comes bottom. Belabouring that unfortunate loser does nothing for overall performance. Treating people as individuals and helping them to succeed and improve is the true answer. Top managers who don't know or practise that truth don't deserve employment, let alone incentives.

· Simon Caulkin returns next week