Signs of the American economy’s perilous condition are everywhere – from yawning fiscal and current-account deficits to plummeting home prices and a feeble dollar. But something that shows up in none of the economic indicators may be driving many of them: the deterioration of American management, which is undermining not only many of America’s great enterprises, but also its legendary spirit of enterprise.

Paradoxically, one indicator that has been improving steadily in the US – productivity – may be the clearest sign of the problem. When it comes to productivity, managers either invest in employee training, more efficient manufacturing processes, and the like, or they take steps that appear to boost productivity in the short run but that erode it in the long run.

Productivity is a measure of output per hour worked. So a company that fires all its workers and then ships from stock can look very productive – until it runs outs of stock. Of course, no company can do that, but many US companies have been shedding workers and middle managers in great numbers – the figures for January 2008 were up 19 per cent from a year earlier.

Meanwhile, those employees left behind must work that much harder, often without increased compensation. Workers’ wages, adjusted for inflation, fell in 2007, continuing a trend throughout this decade. That, too, is “productive” – until these overworked people quit or burn out.

A sustainable company is not a collection of “human resources.” It is a community of human beings. Its strength resides in its people, its culture, and the goodwill it has built up among its customers and suppliers. So, as workers and middle managers have been departing these companies, they have taken with them not only much critical information, but often also the hearts and souls of their enterprises, with profound effects on American competitiveness.

Consider high technology, where America is supposed to excel. According to a November 2006 report by The Task Force on the Future of American Innovation, made up of prominent universities, think-tanks, industry trade associations, and corporations, the high-tech trade deficit widened in 2005, for the third consecutive year. This is not clothing or cars, but America’s largest, and most renowned, export sector.

This deficit reflects an underlying research deficit. Of the 25 companies granted the most US patents in 2006, only eight were American; 12 were Japanese. Perhaps this helps to explain why, in a survey of more than 60,000 people in 29 countries conducted in 2007 by the New York-based Reputation Institute to rank the “world’s most respected companies,” the first US company on the list appeared in 15th place; the second was in 25th place.

No one can determine how much of America’s productivity gains in recent years have resulted from squeezing human capital, because such things are not measured. But there has clearly been a great deal of reliance on this strategy, with companies shedding employees not only because they must, but often because they have not met Wall Street analysts’ financial expectations.

Managers’ increased focus on maximising shareholder value won many adherents when the idea was introduced in the 1980’s: the impersonal discipline of financial markets would force companies to become more productive and innovative. And, in fact, much of the US productivity increase in the 1980’s and 1990’s can likely be

attributed to large-scale

investment in information and communications technology.

But, as the marginal productivity gains from such investment began to fall, senior managers’ survival and compensation continued to be tied to stock-market performance. As a result, many simply learned to manage their companies’ short-term share price at the expense of attention to their products and customers.

Moreover, because maximising shareholder value is a poor incentive for workers and middle managers, companies’ boards have increasingly centralised power around chief executives, thereby encouraging a “heroic” form of leadership that is detached from the rest of the enterprise. Indeed, in many cases, the CEO – frequently a Wall Street-endorsed “superstar” parachuted in to “shake things up” – now is the company, despite having little knowledge of its products, customers, and competitors.

This shift to “heroic” leadership can be seen in ballooning CEO compensation. According to a January 2008 report by the Hay Group, the CEO’s of the 50 largest US companies are now paid almost three times what their European counterparts receive – which is many hundreds of times more than their own workers.

Until recently, the US asset-price bubble – first in the stock market, then in real estate – masked the underlying depreciation of American enterprises. But the bubble itself resulted from the same management pathologies as those afflicting the real economy. After all, managing for the short run encouraged mortgage lenders to offer artificially low “teaser” interest rates to lure potential homeowners. And then those who bought these mortgages never bothered to investigate their underlying value – a spectacular abdication of managerial responsibility.

Now that the bubble has burst, America’s current economic downturn is likely to be far worse than previous ones, because US enterprises will have to be rebuilt, slowly and carefully. The dramatic weakening of the US dollar may help America to narrow its massive trade deficit, but we should not expect any sustained improvement without drastic changes in American management.

Fortunately, it may be possible to minimise the fallout for the rest of the world. While American economists, politicians, and business leaders have for years sought to sell their model of management abroad, many companies elsewhere have not been buying it. As a result, other key economies remain healthier than America’s. Make no mistake: this problem was made in America, and that is where it will have to be solved.

Henry Mintzberg is Professor of Management Studies at McGill University and author of Managers not MBAs. www.mintzberg.org

Copyright: Project Syndicate, 2008.

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