Executives Who Can't Manage

Management consultant to companies in the United States and abroad, ERNEST DALEhas been associated for the past eight years with the Graduate School of Business and Public Administration at Cornell University. He was for many years economist for the American Management Association and is the author of articles and books on management, the latest being THE GREAT ORGANIZERS.


JUST before Pearl Harbor, American businessmen, still smarting from the loss of prestige they had suffered in the early 1930s, were pleased to be supplied with a new and flattering picture of themselves. James Burnham’s book The Managerial Revolution offered a new way in which they could “think greatly of themselves,” as Alfred North Whitehead had urged them to do in the twenties.

Burnham separated the managers from the capitalists — that is, from the owners or stockholders — and identified the managers as a new type of professional with command of essential skills quite distinct from and towering above the capabilities needed for the fairly routine jobs of production men, engineers, and accountants. And he identified these skills as the mark of a new ruling class whose ascent to power was inevitable.

True, these ideas had been advanced before, sometimes by businessmen, more often by academicians. But Burnham stated them in a way that hit home and crystallized management thinking. Since Burnham wrote, the trend toward the separation of ownership and management has continued as stock ownership has become more widely diffused and large blocks of stock have fallen into the hands of financial institutions and foundations, which seldom attempt to buck a management. Thus, though the managerial revolution has not yet occurred in all large companies, it has come to pass, as predicted, in many of the biggest. Managers who hold only negligible amounts of stock, or even none at all, in many cases serve on boards of directors; even more commonly, they control the nominations to the boards. Stockholders are powerless to fire the managers, and the latter can, in fact, set their own compensation and appoint their own successors.

When businesses are controlled by their owners, the managers’ power rests on the right of private property, a form of legitimacy unavailable to those who are appointed by other managers and form a part of a self-perpetuating group that the owners, the dispersed stockholders, find almost impossible to dislodge. But both the managers and the defenders of managerialism are staunch supporters of private capitalism and have been unwilling to work for legitimacy in the way Burnham predicted it would be achieved — through state ownership, with managers in control. For this reason, they have had to seek a new rationale to justify their power, and they have found it in the idea of professionalism.

As professionals, they hold, they are not mere deputies of the owners but people uniquely qualified to represent the interests of all groups affected by their corporations — the employees, the suppliers, the customers, and the public at large, with the stockholders no more important than any of the other groups. Freed from subservience to mercenary owners whose primary interest is return on investment, the professional manager is supposed to be competent to act as umpire when the interests of any one of these groups appear to conflict with those of any other, or with the interests of the manager himself.

WHAT are the peculiar skills of management, as opposed to such technical skills as engineering or accountancy? There are various definitions, but theory here seems closely analogous to that of the educators who believe that a teacher who has learned to teach can teach successfully with minimal knowledge of the subject to be taught. Thus, the management skills are often listed as planning, organizing, staffing, directing, and controlling, and in the textbooks on management used in the colleges, and in other material widely read by managers, it is frequently contended that these skills, once acquired, can be applied successfully no matter what is to be planned, organized, staffed, directed, or controlled. A manager who possesses them is supposed to function equally well as a production manager or a sales manager, as president of a steel company or a department store, or as head of an army or a political party, for that matter.

In many of the colleges, young men destined for business now solemnly study “principles of management,” which treat all these activities in the abstract. They learn, for example, that in planning they must a) get all the tacts; b) consider the alternatives; c) then make a choice among the alternatives. Or they memorize such definitions as “Coordination is the orderly synchronization of efforts to provide the proper amount, timing, and direction of execution resulting in harmonious and unified actions to a stated objective.” There is little emphasis on learning how the facts may be acquired or applied; the true manager is a generalist and can easily hire specialists to get the facts for him. How he can separate the experts from the charlatans without any knowledge of the subject matter is not disclosed.

Finally, the new manager is, above all, an expert in human relations. Some even equate management entirely with human relations. Like the teacher who teaches children, not subjects, these managers declare that management is the direction of people. What the people should be doing and how they should be doing it are, again, the problem of the specialists.

Interest in and education for the role of manager have grown by leaps and bounds. Companies send their executives to seminars, meetings, and courses at which the new viewpoint is stressed; many of them conduct their own courses. And the literature on the principles of management has piled up. A good many of these theories had been expounded in the thirties or even earlier, but only in the last twenty years has business attempted to act on them in a big way in its hiring and training practices. Now, after two decades, many of the managers schooled in the new philosophy have risen to positions at or near the top, and it is pertinent to inquire how much better management has become in the meantime.

In the first ten years of the New Jerusalem, the managers seemed to be making progress to ward their goals; all their various publics prospered as never before. But those were the years of the ready-made markets growing out of wartime needs and pent-up demand for civilian goods in the period between World War II and the Korean War. Moreover, many of the older managers untrained in the universal still had their hands on the reins during this period. The real test, therefore, has come in the last ten years.

Take first the stockholders, who are, after all, the only public to which the corporation is still legally beholden. Corporate profits after taxes were about the same in 1960 as in 1950, even though corporate sales approximately doubled. If accelerated depreciation were taken into account, the figures might reveal some increase, but this may well have been offset by the decline in the purchasing power of the dollar. And the result is all the more disappointing in terms of stockholders’ expectations: the share prices of the stocks in many of these companies have been rising sharply since 1950, on the average by as much as 300 percent. Moreover, the failure of profits to rise has occurred during a period when the compensation of corporate officers increased approximately 75 percent (excluding, in most cases, the value of the stock option plans).

Next, take employees. Their average weekly income rose more than 50 percent in the 1950s, it is true. But the rate of unemployment rose more than 25 percent. In 1961, there were about 5 million unemployed, or 7 percent of the labor force. The number of long-term unemployed has more than doubled since 1950, and in the spring of 1962, one out of every six unskilled workers was jobless.

Though U.S. wages rose less than those of Germany and England, export prices of U.S. manufactured goods have risen faster than those of either country. And the principal reason has been that in the years since 1953, productivity has been growing more slowly in the United States than in Japan and leading countries in western Europe.

Looking at the performance of the U.S. economy as a whole, we find that from 1950 to 1959 there was an average annual increase of about 3.2 percent of gross national product in constant dollars, which is considerably less than that of the countries mentioned above (5.5 percent per annum) and Russia (7 percent per annum), especially during the last few years. Gains in physical output per man hour in manufacturing in the United States were at an average annual rate of 4.6 percent from 1923 to 1929, as compared with 2.8 percent from 1953 to 1960,

The consumer finds his cost of living higher by approximately one fourth since 1950 and by one eighth since 1951. Some of the products he purchases appear to be less serviceable and durable than they used to be, to require more repair and fiercer struggles with overcharging tradesmen.

As for the public at large, it has been somewhat disillusioned by the conflict-of-interest cases, the fixed quizzes on television, and the arrest and imprisonment of top officials of the electrical industry for price fixing — all of which appear to indicate that the professional ethics of some of the new managers are somewhat less than fully developed.

The record I have presented in broad outlines here is not, of course, applicable to all companies or all managers. Some stockholders have fared extremely well during the 1950s, even in terms of earnings, though most have had to be content with capital appreciation that may turn out to be illusionary if it remains unsupported by rising corporate income, and others have not gained even that. Some companies live in harmony with their labor unions and have raised both wages and profits, and lowered prices as well. There are some large earners of foreign exchange that simultaneously benefit the economies in which they operate — in petroleum and office equipment, for example. And it may be that employees no longer have quite the drive and sense of urgency that made for more rapid productivity increases in the past. Also, the increases in productivity in foreign countries represent to some degree the recovery from low levels partly owing to war and dislocation, and may, therefore, be expected to be large in percentages.

But the overall record is not good judged by the managers’ ostensible standards of efficiency, and many individual cases in which the new managers have done less well than the older models could be cited. Take Montgomery Ward. For years the world of management reverberated with all the terrible mistakes of Sewell Avery. But net profits, which had been $35.8 million in 1956 under Avery, dropped under new and modern management to $30 million in 1958, and were down to $15 million in 1960 — lowest since 1936 — and this in spite of record sales volume. It is interesting to note that the modern managers at Montgomery Ward have recently been replaced, and the company is now headed by a man with many years of successful merchandising experience.

How, then, have the new management theories tended to make for poorer performance?

In the first place, they have increased administrative costs. The manager who believes he is grandly superior to such mundane matters as production and sales is likely to surround himself with expensive experts and assistants, who in turn acquire large staffs of their own. And if he removes himself too far from what he considers details, he may not know what is happening to his company until it is too late to check a decline.

“Young man,” the president of one company told a consultant, “don’t ask me about sales or markets or production processes. I manage just two things: men and money.”His company had plenty of men — perhaps too many—but the money was getting scarce.

Or, to take another, not untypical, illustration: the president of a Southern company, a hardworking successful entrepreneur, took a series of courses in management skills, got the new religion, and began to apply it in his company. As a result, there was a great increase in staff; with a few hundred employees, he had, among other experts, a director of executive development, a training director, an assistant training director, and a training staff. The staff not only ran up the overhead; it delayed decisions by insisting on making detailed studies, and then tended to recommend action (if any) on the lowest common denominator of agreement. Since the president was convinced that he should be “getting things done through other people,” he no longer knew what was going on until his firm almost went bankrupt. Then he came to his senses, fired most of the experts, and again enmeshed himself in the details of his business. He is now making money again. That this is not an isolated case is confirmed by a Federal Reserve Board study which concluded that inflationary trends in the United States might be due more to the increase in administrative expenses than to rising wages.

It is not contended, of course, that a manager should not make use of experts; in fact, in modern large-scale business it is impossible to operate without them. But the manager who believes he can direct them wisely when he knows nothing about the subject matter is likely to be employing more than his company can support and too many whose expertise is actually skill in devising new boondoggles to make themselves appear essential. For example, one company had no less than forty people working full time on organization charts and manuals. Their “full employment” was terminated only after total employment (and profits) had dropped sharply for several years.

Nor is it contended that a manager’s work does not require planning, organizing, and the other management skills. But these skills cannot exist in a vacuum, and successful exercise of them depends largely on a knowledge of what is being planned and organized. The older managers were often the founders of their companies, and they tended to have an immense grasp of the details as well as of the broader questions. One major European tycoon could sit in his office reading reports from worldwide operations and instantly spot a single figure out of line with what he expected.

Another missing ingredient seems to be the instinct for the profitable course. Because the modern manager can avail himself of market research and motivation research to determine what will sell, he may neglect to put himself in the place of the consumer and ask, “Would I buy it?” In fact, his isolation seems sometimes to be so complete as to render him incapable of sound judgment on such matters. Billy Durant, the man who thought up the idea of General Motors and who was a carriage maker before he was a car manufacturer, bought his first company (with borrowed money) after he took a single ride in a new type of horse-drawn cart. He knew it would sell, and it did. In contrast, the Edsel and its potential market were studied by every conceivable type of expert, and yet the new car fell flat on its chassis.

A third shortcoming of the new managers seems to be distrust of innovation in procedures and practices. “What are other companies doing?” is the question most commonly asked management associations, whether the matter is employee relations, marketing, plant location, or production processes. The new manager thinks of himself as a problem solver rather than as an innovator, and as such he seeks a ready-made solution rather than striking out on his own in a search for something better than anyone has yet tried.

Yet success, particularly in a crowded held, often depends entirely on innovation. Thus Ernest T. Weir, founder of the National Steel Company, was able to get his company going in the face of competition from established steel giants by doing exactly the opposite of what they were doing. He moved away from Pittsburgh when the other companies were concentrated there, cut prices when the others were holding them up, introduced new equipment that they were unwilling to try, and sought out markets that the others had neglected.

Finally, the emphasis on human relations has led to the exaltation of the smoothy and the distrust of intelligence. “Brilliant” is now almost a damning adjective. And since the essence of much of the teaching of human relations has been that there are no real conflicts of opinion within an organization, only “failures to communicate,” the tendency is to smother dissent.

The older managers were more authoritarian on the surface, it is true, but they tended to give a more sympathetic ear to honest disagreement and even to encourage it. Pierre S. du Pont, Alfred P. Sloan, Jr., and John Lee Pratt at General Motors sometimes argued against steps they favored in order to encourage dissenters to state their views. They wanted to know the worst that could happen before they went ahead. The modern manager is more likely to say, in a tone that warns a subordinate off further argument: “Perhaps I don’t make myself clear.” Subordinates take the hint, and the manager never learns of possible pitfalls in the course he is proposing.

THE attempt to identify management skills, as distinct from technical skills, was, in the beginning, undertaken in response to a real need. As the founders died off and companies grew larger and more complex, it became imperative to substitute some type of system for the management that worked by inspired hunch plus a knowledge at once broad and detailed.

Thus, while one misses the strength and color of the old managers and their encyclopedic knowledge of the businesses they ran, it would be foolish to pretend that mere replicas of them would be effective today. What is needed is an adaptation of their qualities plus some others.

In the first place, management theory would do well to recognize that management cannot be considered apart from what is being managed. As long as the attempt is to teach skills that will be appropriate to the management of any organization, the principles involved will be so broad as to be practically meaningless.

As industry becomes more dependent on science, also, it will be basic for the manager to understand the language and concepts of the physical science on which his industry is based. If he does not, he will not even be able to communicate with his scientists, no matter how great his training in communication.

Second, there must be less emphasis on delegation to the point where the manager is isolated from all practical matters affecting his company. The manager must delegate, but he must not be too devoted to keeping his desk clean to read the reports, ponder them, and pull together the everdisunifying tendencies of his business.

Then there is a need to curb, if not eliminate, the cult of personality that has grown out of human relations and the emphasis on ability to get along with people as the sine qua non for those who hope for promotion. This tends to exalt smoothness at the expense of ability and to bring to the top those who are never in disagreement with anyone because they never stick their necks out by espousing any but the most obvious ideas.

We need recognition, also, that the leadership qualities that business is fervently seeking in candidates for management depend at least in part on knowledge of the field. “We have a foreman who was selected mainly for his leadership ability and his knowledge of human relations,” one unreconstructed manager remarked, “and when someone tries to ask him a question, he hides in the washroom.” Subordinates accept a leader more readily if he knows what he is talking about.

There are, of course, many sophisticated managers who have never taken the management universals seriously and have continued to manage successfully through hardheaded common sense and knowledge of their industries. Many of them have been finding their choice of subordinate executives limited because many of the candidates are too steeped in the management theories to understand what is really required of them.

Both the new managers and the business schools are becoming dissatisfied with the type of education provided and are beginning to realize that some essential spark is lacking in the new management type. Soul-searching among the business schools has been prompted by the revelation that candidates for advanced degrees in business management were near the bottom of the list when candidates in all graduate fields were ranked in order of their showing on intelligence tests. Only those in home economics and physical education had lower scores.

Perhaps the biggest improvement will come when the new managers withdraw from their exalted position as self-appointed arbiters among all the various publics with whom they deal and admit that they have no legal claim to their jobs except as representatives of the stockholders. Happily, the long-term interests of the stockholders and those of other publics often coincide, for the company that disregards its employees, its customers, or its community is likely to find countervailing forces arising in the shape of more militant labor unions, or government action, or both. But since the managers decisions are becoming more public and less private, he needs to develop greater sensitivity to the reality of the conflicts and to look for actual solutions rather than new public relations techniques.

If U.S. industry is to reach its full potential, however, two major changes are required: first, there should be some check on the manager’s power to keep himself in office no matter how poorly he performs; second, writers on management, teachers of the subject, and the managers themselves need to take a fresh look at the managerial job and consider whether it does not require qualifications somewhat different from those now stressed, or a change of emphasis.

An outside board of directors, or one made up largely of men who are neither members of management nor dependent on management in any way, would go far to reinforce the managers’ professional ethics and prevent them from dealing themselves a better hand than they deal the owners or the other publics.

This could be enforced on reluctant managers, either by legislation — which might be cumbersome and entail more evils than it would prevent — or by action of the institutional investors, who together could probably exercise important influence in many of the larger publicly held companies. A nationwide association of stockholders organized by these groups could easily provide itself with skilled independent directors and ensure their election. And if the directors were to be paid salaries based on the earnings of the companies on whose boards they served, they would have every incentive to look after the stockholders’ interests.

Results could be achieved more easily and more quickly, however, if the managers themselves would take steps to provide their companies with independent boards. Honest managers — and there are many — would do well to consider that no one is infallible and that anyone who is completely surrounded by people dependent on his goodwill is likely to be unaware of his own errors until it is too late to do anything about them.

In selecting and promoting managers, and in management training in the colleges, there should be less stress on the qualities that make for surface harmony and more on the old entrepreneurial quality of innovation; less emphasis on leadership in the charismatic sense and more on the leadership of ideas; less stress on personality (and appearance) and more on technical knowledge.

It is notable that in the smaller, newer companies — such as many in the electronics field — where the winds of competition are keener, a different attitude prevails. “We can always hire a general manager,” these companies say, “what we need are design brains.” And if a general manager is defined merely as a coordinator and a promoter of harmony, they are probably right.