The Hindu Business Line : Putting the spotlight on managerial decisions

Have you ever wondered about the apparent divergence between management theory and practice? Managers invest a good deal of effort, time and money in implementing various classes of decisions hoping for specific and beneficial outcomes in their companies. Do they really succeed? You will find that management research over the last 40 years has subjected the very same classes of decisions to close scrutiny only to find no correlation between the effort and the results du e to these decisions.

These research findings seemed to be on the side of sceptics within companies who have intuitively held that such decisions may be fanciful and do not produce the intended outcomes. It is not as if these managerial actions are isolated and happen only rarely in companies; every day, one encounters many managers who make decisions that lead to doubtful results. It is therefore important to be conscious of such decisions before we commit all our organisational energy to them or invest our emotions in them to make them successful.

Financial decisions

Financial decisions such as stock splits and bonus issues are routinely taken in the hope that investors will reward such decisions with higher stock prices. Yet, in practice, after studying countless cases researchers have concluded that stock prices immediately adjust themselves proportionately, in the same ratio as the stock split or bonus shares, and there is really no benefit accruing to the shareholders from these manoeuvres. Since these decisions by themselves do not increase the market capitalisation of the company, the shareholder is exactly where he was in terms of the total value of stocks owned — only the unit value and the market price of shares will have changed in proportion to the split or bonus ratios. A resounding example to show stock splits or bonus shares do not matter in improving the stock price is the case of Berkshire Hathaway, Warren Buffett’s company. Its class ‘A’ stocks are traded at around $120,000 per share and they have not declared splits or bonus, since, perhaps, the beginning.

Similarly, companies declare increasingly larger rates of dividend to show progressive improvement over previous rates of dividend, even when their current year’s profit performance does not justify paying out more. There has actually been an inverse correlation found between companies’ profit performance and the rates of dividend declared, indicating that managements are hoping that shareholders will be mollified by a higher dividend when the company’s results are actually poor. While finance theory would talk about a steady dividend payout ratio based on a policy and the need to conserve funds for continuous growth, such considerations rarely determine the dividend rate decision. In the US, there are several growth companies that declare no dividends at all for 10 or 15 years — Digital is a good example from the 1980s — to be able to fund their explosive growth.

The other example of finance decisions of doubtful validity is the stock repurchase programme or buy-back. Egged on by dissident shareholders to shore up the company’s trailing stock prices, many managements decide on the buy-back manoeuvre. Again, the effect is that the unit stock prices go up exactly in proportion to the buy-back percentages.

For example, if a company buys back 10 per cent of its stock, the current market cap, unchanged, is distributed among the remaining 90 per cent of the shares. While the management may think it is signalling its confidence in the company’s share prices to move up through the buy-back decision, short-term operators have a field day selling the stock at better than usual prices to a company committed to buying them at a premium.

Studies have shown that companies have routinely bought their own stock at prices higher than what would prevail a few weeks after the whole exercise is completed.

Operational decisions

In operational terms, there are many examples of wasted effort on unachievable objectives. Many companies change their brand image by changing their logo or sporting a new tag line every few years. Done in isolation, as an end in itself, the new brand identity along with its expensive launch campaign is seen as just the ‘same old’ entity.

Genuine makeovers involving a complete overhaul of the company’s interactions with its constituents are when a new brand identity is an effective signal of ongoing changes. When a poorly performing airline known for lousy customer service, changes its entire fleet’s colour scheme and adopts a new logo, nobody is fooled into believing that it has become an efficient performer overnight.

Then there are examples of companies spending their administrative energy on getting quality certifications or winning a big name award for good management practices. Research has shown that these short-term bursts of process initiatives may pull up the company’s quality image, but they don’t make a difference to building sustained process orientation.

Another area where theory violently militates against practice involves acquisitions. Many acquisitions and mergers fail to achieve their objectives or even bring down the market value of acquiring companies substantially. There must be something in the acquisitive managers’ bloodstream making them thirst after grand acquisitions, sometimes even cross-border ones, to become a bigger, but not necessarily better player.

A classic case of companies practising what has been proven to be impractical in theory has to do with the management of succession plans. Study after study has shown that when the incumbent CEO is around in some capacity or the other, he is most unlikely to encourage a prospective successor or even somebody close enough to succeed him to perform well without interference. If the successor has to do well, it is by at least partially overturning the policies of the earlier incumbent; but in many situations the earlier honcho is still around to ‘help or guide the newcomer’. Everyone knows the failure rate of such flawed succession processes, but that is what happens repeatedly.

One could add more to the list. Decisions such as periodic organisation structure changes without meaningful outcomes, adoption of the latest management fads like reengineering, extensive and prolonged use of external consultants, the list is endless. The real question is if these decisions are so obviously counter-productive, why do several generations of managers not learn from research findings? Why do they insist on plunging their companies down the same unproductive paths? A possible answer is that managers believe that their situation is unique and they or their companies possess that special ingredient to make such decisions work. Alas, research shows that the odds are against them.

Facing this situation, one yearns for the business equivalent of Hippocrates’ oath in the medical profession, which exhorts practising doctors ‘to first do no harm’. If all senior managers reflect on the negative consequences of their major initiatives, the business and economic landscape would be very different from what it is today. People at all levels within companies would be spared several unwanted distractions and would be asked to get on with their main business. An enchanting thought, but distant.

(The writer is a management consultant and heads Alter-Ego Consulting. He can be reached at avrammohan@yahoo.com)