Failure of Business Leadership and the Grand Self-Delusion of the “Perfect Storm” Metaphor.

“A bit of unsolicited advice to business executives trying to explain why their company or their industry is suddenly in the soup: Please spare us the “perfect storm” metaphor. ~ Steven Pearlstein, Journalist

In Sebastian Junger’s gripping account of a shipwreck that popularized the notion of the “perfect storm”, Billy Tyne, the skipper of the Andrea Gail, received urgent and repeated warnings that he was heading into what could be a monster storm off the Grand Banks — warnings that Tyne and his crew chose to ignore.

After all, the weather immediately around them had been relatively calm, and the swordfish had been tantalizingly plentiful. And there were always worrywarts warning not to do this and not to do that. If Tyne had listened to them, the Andrea Gail would never have left port, let alone become one of the most successful sword boats in Gloucester, Mass.

In an article by Steven Pearlstein, journalist writes: “The reason the perfect storm is such an appealing metaphor for these shipwrecked captains of industry is that it appears to let them off the hook. Who can blame you if the ship goes down in one of freak, once-in-a-century storms that result when three weather systems collide? It’s an act of nature that nobody could have predicted — or so the story goes.”

Sam Zell, the real estate tycoon, who was smart enough to sell out at the top of the commercial real estate cycle, only to dive into the newspaper and broadcast business of the Tribune Company just as circulation and advertising revenue were about to collapse, then claims the “perfect storm” as the reason for the Tribune’s business failure…

Auto executives tried to convince us that the only reason they were running out of cash was a sharp drop in vehicle sales brought on by sky-high gas prices, a credit crunch and rising unemployment; it was the “perfect storm”, rather then their failure in leadership… Robert Rubin, the Treasury secretary turned boardroom consigliore, conjured up the “perfect storm” to explain how Citigroup and the rest of Wall Street nearly brought the global financial system to a grinding halt, vaporizing trillions of dollars in wealth and putting large swaths of the economy on government life support…

Pearlstein writes: “The first thing to understand about the “perfect-storm” defense is that these guys actually buy into this nonsense. The rest of us want desperately to believe that what brought us this economic crisis was some combination of greed, fraud and negligence…. What the populist critique ignores, however, is that at the heart of any economic or financial mania is an epidemic of self-delusion that infects not only large numbers of unsophisticated investors but also many of the smartest, most experienced and sophisticated executives and bankers.”

Fundamentally, they’re wrong: The only “perfect storm” was the one that resulted from the collision of Zell’s ego, his arrogance and his utter ineptitude in running a media empire, along with a total disregard for the financial well-being of thousands of employees whose retirement assets he commandeered for a financing scheme that gave him control of the company while putting in very little of his own money.

I suppose we can have a bit more sympathy for the car guys, who might not have understood that the reason Americans were buying record numbers of foreign vehicles in recent years had nothing to do with cheap credit or mortgage cash-outs and everything to do with the superior styling and quality of other auto makers products…

Pearlstein writes: “When it comes to self-delusion, however, Wall Street’s top bankers and financiers take the prize. The most common rationalization is that because housing prices had not fallen nationwide since the Great Depression, nobody could have anticipated the current meltdown in the housing and mortgage markets…how about all those discussions back in 2005 about whether there was a housing bubble? Or, were there clues when housing prices nationally were increasing two and three times the rate of inflation, year after year, which was also without recent precedent?”

What capsized the economy was not a “perfect storm” but a widespread failure of business leadership — a failure that is only compounded when executives refuse to take responsibility for their misjudgments…

The article “Perfect Economic Storm” by Kent Gilbreath, professor of economics, writes:  Modern history of the American economy teaches us that unanticipated (exogenous) events can sometimes have serious, negative economic consequences.  The forces of change do not have to be dramatic to be consequential.

Potentially individual negative economic forces, by themselves, would not constitute the “perfect economic storm” but, together, these negative forces can weaken the foundation of the American economy and produce most unwelcome consequences for recovery the next time a major exogenous force strikes the economy… There are some disconcerting economic trends and forces on America’s economic horizon, clouds that, coming together, may produce the “perfect storm” for the U.S. economy:

  • Decline in the “real” wages or “real” personal income
  • Decline in real income for millions of families
  • Decline in the labor force participation rate of women
  • Decline in the labor force participation rate of men
  • Drop in the rate ofAmerica’s personal saving
  • Growth in the level of government, personal and family indebtedness

Gilbreath continues: To truly test the “perfect economic storm” hypothesis, it is first necessary to know if the economic “clouds” actually exist, and, if they do, what is their magnitude; and what is the timing of their potential convergence?  As with most economic clouds, it is important to remember that clouds often produce only a brief squall and then blow away leaving only a few tattered sails. If there is, indeed, a serious economic threat economists must ask; “what can be done to prevent any dire consequences?” Recommended remedies might include changes in public policy or suggestions that the marketplace will take care of the problems…

In the Blog “The Rising Revolution: A Perfect Storm is Brewing“ by Robert Reich writes: The elements are there; wealth concentrates at the top, record contributions flood our democracy, and the populace fumes over a government that raises taxes…reduces services…and the lack of jobs. It’s a “perfect storm”.  A relatively few wealthy people are buying our democracy as never before. And they’re doing it completely in secret. Hundreds of millions of dollars are pouring advertisements for and against candidates in the election cycle — without a trace of where the dollars are coming from…

The Federal Election Commission says only 32 percent of groups paying for election ads are disclosing the names of their donors. By comparison, in the 2006 midterm, 97 percent disclosed; in 2008, almost half disclosed… The third part of the ‘perfect storm’: Most Americans are in trouble. Their jobs, incomes, savings, and even homes are on the line. They need a government that’s working for them, not for the privileged and the powerful. Yet their state and local taxes are rising. And their services are being cut. The roads and bridges are crumbling, pipelines are leaking, schools are dilapidated, and public libraries are being shut. Unemployment insurance doesn’t reach half of the unemployed…

Much of the income of the highest earners is treated as capital gains… The ‘perfect storm’: An unprecedented concentration of income and wealth at the top; a record amount of secret money flooding our democracy; and a public becoming increasingly angry and cynical about a government that’s raising its taxes, reducing its services, and unable to create jobs. We’re losing ‘democratic capitalism’ to ‘plutocratic capitalism’…

According to Nobel Laureate Michael Spence; U.S. companies with global interests have contributed almost nothing to American job creation since the 1980’s. The investments that U.S. global companies have made have been in the high growth markets of Brazil, China and India. These three nations create 50 plus million new consumers every year.

So, tax incentives, abatements, corporate welfare, or subsidies, none of these incentives have resulted in these companies creating jobs in America. The only firms creating jobs in America have been companies whose total business is American…hotels, retail and health care are some examples.

In a report “Pathway to Global Product Safety and Quality” the FDA said two-thirds of the fruits and vegetables consumed in the United States and 80 percent of the seafood eaten domestically are imported. Half of the medical devices sold in the country and “80 percent of the active pharmaceutical ingredients in medications sold here are manufactured elsewhere,” the report said. “There has been a ‘perfect storm’ — more products, more manufacturers, more countries and more access.

A dramatic change in strategy must be implemented,” FDA Commissioner Margaret Hamburg said. “FDA regulated imports have quadrupled since 2000,” she said. The FDA outlined four steps to increase its reach and efficiency. The steps included forming partnerships with regulators around the world and developing “international data information systems.” The agency also said it would “focus on risk analytics and information technology” and “leverage the efforts of public and private third parties and industry.”

In the article “Pharma Sector Faces ‘Perfect Storm” by David Seemungal writes: The pharmaceuticals industry is facing its biggest challenge yet. In 2011-2012, the patents for 20% of current drug sales will expire and with a lack of adequate replacements in the pipeline, low sector growth and investor apathy, pharmaceutical groups are being forced to consider how they will tackle these issues; and sooner rather than later.

The industry has been reluctant to indebt itself in the past, maintaining a strong cash-rich position on the back of the threat of litigation and the need to remain flexible in order to take advantage of investment opportunities. With the looming off-patent threat, which has been referred to as the sector’s “perfect storm”, and a tightening of regulations, the industry is clearly facing problems that could see a more aggressive use of balance sheets as companies can no longer sit back and rely on their portfolios.

An article “Buying a Business: The “Perfect Storm” by Brauer & Harper, accounting and consulting firm, write: Given the recent stock market volatility, political uncertainty, high unemployment, massive federal debt and ongoing spending, and the bleak economic outlook in general, it’s no wonder investors are fleeing “risky” investments to simply sit on cash and gold.

However, our current economic environment could have created the “perfect storm” for business buyers, and now could be the best time in decades to invest in small business given the factors as follows: Aging Population, Low Business Valuations, Low Financial Projections, Low Interest Rates, Tight Credit, and Quality Workforce.

Warren Buffett’s Principle: “Be greedy when others are fearful.”  Amid a struggling stock market and lagging economy, Buffett told reporters: “Now is the time to invest and get rich”.  Buffet was right.  Our current economic “storm” could again provide a tremendous opportunity to take advantage of the buying opportunities at a time when most others are fearful…