What can bosses know?

The dead trees' reporting of business is deadly boring. One reason for this is that journalists are, bizarrely, more interested in people than in ideas. This leads them to miss all the interesting questions. Take this:

Kevin Lomax, chairman and chief executive of Misys, the financial software firm, came under fire from the City yesterday after issuing a shock profits warning, just months after hailing a return to growth.

The story is presented as merely a question of Mr Lomax's "credibility" and competence:

Some investors also questioned whether the problems had, in part, resulted from Mr Lomax devoting too much attention to his other role as senior non-executive director at Marks & Spencer.

This misses pretty much all the important questions. Is it possible for bosses to really know about their own businesses and markets? How much foresight can they have? What tools do they have for acquiring such foresight? To what extent are bosses prone to the problems of bounded rationality, inherently limited knowledge or cognitive biases, as proposed by Herbert Simon, Friedrich Hayek and Kahneman and Tversky, among many others?
Joutnalists systematically avoid these questions. Every management failure is presented as an exception to a general pattern of competence. But is this really the case? Could it be that bosses have less control and foresight than they pretend, and that success often results not from management's deliberate interventions but simply from force of habit or the fact that success breeds success? Could it be that the power, importance and money we give chief executives is therefore unmerited?
I don't know the answers to these questions. But I do know that the dead trees rarely ask them. But then, you wouldn't expect journalists to challenge hierarchies, would you?

Comments

[dsquared]

I think that the answers are, in turn: yes, about six to twelve months (depending on the length of the ordering and billing process), management accounts and sales reports, and the same as the rest of us, but they are paid (and indeed required by the Companies Acts) to give an accurate report of the company's trading to its members and this is not an unreasonable thing to ask. Journalists report on the basis of assuming that profits warnings are departures from the norm because they *are* departures from the norm. Look back at most management guidance and in general you will see that it is very good as a near-term forecast of operating prospects. Whether or not bosses get too much or too little credit, it ought to be possible for any firm with an order book to tell the market whether that book was full or empty, expanding or contracting.

[Paddy Carter]

puzzling post (and comment) - companies often 'forecast' their performance in a pre-close statement just days before the period ends, and as a rule analysts update their numbers 3 months before the period in question ends. So (dsquared) you might be used to seing companies hitting their numbers, but if you go back to forecasts made 6-12 months before the actual trading period begins, guidance is much less reliable. In fact I'd say it is normal that material revisions are necessary.

Some CEOs do screw up and give foolish guidance, but all forecasts contain uncertainty - how does an outsider tell the difference between a sensible forecast gone awry, and a daft one? Now there's a question journalists would do well to ask themslves. Lomax might have been an idiot calling an upturn after a good month, or he might have had good reason.

Order books are not much help - even companies with 80% of the year's sales under contract frequently miss profit numbers by miles because the remaining 20% does not come in - profits are made at the margins. Of course the degree of predictability does vary from business to business, but I would not say that, in general, companies give 'very good' guidance 6-12 months out.

But so what? The ability to predict sales with the degree of accuracy needed to predict profits within 10% is not what a CEO is paid to do. Spotting longer term trends and directing investment accordingly is more like it, and here CD I think you are skewering a bit of a straw man. OK, some bosses may overate their abilities here, and congratulate themselves on good fortune, but many acknowledge the uncertainties they face, and surely being a good CEO is about acting sensiblly under uncertainty. Also, some CEOs are better at seeing which way the wind is blowing than you might think, or at least, so it seems to me.

[Rob Read]

In the age of ERP systems, would it not be possible to allow for a company like CISCO to host live website access to aggregated information from it's ERP systems?

It might be fun to see what a great deal more transparency does to the stock price!

[Kevin Carson]

The only way to get around the irrationality of large organizations is

1) to replace all administrative relationships within the organization with contractual market ones; or
2) to make authority flow from the bottom up (election of management), so that the costs and benefits of every decision are fully internalized by those who make it (the workers).