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3月25日 The Wonderfull World of ScorecardsSuppose you are managed under a scorecard system: you have a numeric objective (i.e. numeric) criteria and you follow it, even knowing that might leave “something to be desired” or “it might not be the absolute best for the company”.
Let me give you an example: suppose you are an executive in the financial arm of a major insurance company. Your scorecard tells you that you get big cash bonuses if you sell “XYZ” financial instrument, say insurance against default on a AAA-rated package of crappy loans, a product you might have some mixed feelings about. Anyway you sell it left and right and cash in your bonuses. What else can you do? You are just a peon on the check board. Someone high up in the hierarchy must know better and have reasons to act this way. They do, BTW – and their reasons are similar to yours: High in the Sky there’s this Godly thing called “Wall Street” that scorecards the top executives of all public company every three months and commands their bonuses, jobs and lives.
Despite all the recent turmoil in the financial industry, the Gods are doing fine and didn’t lose their ways. Treasury Secretary Tim Geithner recently said: “AIG highlights broad failures of our financial system…Compensation practices encouraged risk-taking and rewarded short-term profits.”
Alan Greespan, of all people, didn’t know that the Gods were evil – or even existed. He found “a flaw in the model I perceived was the critical function in the structure that defines how the world works”… “I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that that they were best capable of protecting their own shareholders and their equity in the firms.”
Besides the “short term issue”, scorecards are an attempt to transform essentially subjective things in objective ones, but many times they end up like trying to fit a circle in a square hole. One can hope that even if the score cards were not precise, there would at least be a correlation between the points and what is best for the business.
Unfortunately that’s the way for an individual to survive in this environment. In March 2006 I wrote about this: http://maurosjungle.spaces.live.com/blog/cns!F3CEB0849B03B6CC!130.entry.
Obviously a good alternative is a system where the selfish interests of the executives are aligned with the selfish interest of the owners. Currently the owners of public US companies, such as a retirement fund, see a 20+ years horizon. The executives see a three months to one year horizon. One wonders why they sink the ship for a quick buck.
In places where you have a more “oligarchical” capitalism, where companies are owned by families or small groups you don’t see them doing this sort of blunders (well you see other blunders, but that’s another story).
Recently The Economist Magazine ran an article on how the Brazilian banks were spared from the recent financial massacre (http://www.economist.com/world/americas/displaystory.cfm?story_id=13331179). They attributed it to the high interest rates in Brazil, which made the banks “neglect” other “sources of profit”, as if they were fools. Ha ha ha. This is my explanation: all the major banks are tightly controlled and don’t give too much credit to what Wall Street says, so they didn’t join the “subprime gold rush”. They are no fools at all. 评论 (3)
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