Climate change is at its core a systems problem and requires management to adopt systems-based solutions. Executive compensation is interconnected to climate change to the extent that it helps or hinders management in cultivating an organizational culture with an appreciation for business as a system.
In discussing the executive pay on Wall Street over the last few years, a recent article in the New York Times points out how bonuses were all too real even though profits proved a sham. Which reminds me of something a great teacher of mine once said. “Pay for performance is meaningless.” W. Edwards Deming was 90 years old when he taught a course at Columbia’s Graduate School of Business. Deming felt American management lacked the understanding to build sustainable profitability. He taught that for profitability to be sustainable it must be the consequence of a corporate strategy rather than the aim of one. Short-term executive “performance” and long-term shareholder value were very likely inversely correlated.
The results on Wall Street over the last year seem to bear Deming out. John Thain, the current bad boy of executive compensation was awarded over $50 million in 2007 from Merrill Lynch – the highest in the firm’s history – only to see the firm near collapse in 2008. Clearly, whatever Mr. Thain’s “performance” was in 2007, it did little to insure long-term shareholder value. More likely it drove the risky bets that resulted in Merrill’s demise. Billions of dollars in performance-based pay was doled out to Wall Street executives and traders who thrived while taking big risks and putting the global financial system at risk. If pay for performance were a reality, that pay would be callable.
Deming saw each business as a grouping of interrelated and interdependent processes in the service of an aim. In breaking apart the business and measuring the performance of each component in isolation, Deming feared the loss of appreciation for the "system-ness" of the business - the ability to attribute appropriate value to things that are not easily measured, such as the effect of a great boss or an involved employee, the flow of information or degree of cooperation within an organization, or the extent to which management decisions are aligned with the overall aim of the business.
An appreciation for the “system-ness” of business is going to be a necessary characteristic of 21st century management if humanity is to address one of the greatest systems problems of our time or any time – human-induced climate change. From a systems perspective, the global economic system has become such a powerful force within the overall system of the earth’s biosphere that unless we align the aim of the global economy with the aim of the biosphere – and fast – we will live with the consequences of that misalignment: sub optimization, decay and the ultimate destruction of the system.
If good management is about an appreciation for a system, we are going to need a lot more of it in the 21st Century. “Management is prediction …”, Deming said, continuing “… rewarding an executive for an increase in stock price is a lot like paying the weatherman for a nice day.”
