The May 3 issue of Fortune contained its annual “Fortune 500 List.” The banner headline reads, “Fortune 500: Profits Bounce Back — the flip side of all those job cuts is a historic surge in productivity. The companies on this year’s list slashed costs so fast and so deeply – especially labor – that even in a feeble recovery, their earnings soared.”An accompanying graph bears this out. Even with steeply declining revenues, profits soared. In fact, it’s “the second largest in the list’s 56-year history, approaching the recovery of 2003.” What could be better than that? Does it mean our troubles are finally over?Lehman Brothers had its most profitable year ever, just before it went under. If you recall, Merrill Lynch, Bear Stearns and others were doing pretty well before the subprime mortgage bubble burst.I have to believe Dick Fuld, Stan O’Neil and other former CEOs wish they could undo some of their high-profit strategies. No doubt, their shareholders and employees do as well.Don’t get me wrong — I love profit, but not at the expense of long-term survival.Remember Jack Welch, the iconic head of GE? He is perhaps one of the most celebrated CEOs ever. Under his 20-year leadership, GE had a long run of sustained profitability, and many admired and even tried to emulate him.He was a master at cutting costs. They called him “Neutron Jack,” after the neutron bomb, a device that leaves the buildings and infrastructure standing, while getting rid of the people. R&D was one of his favorite targets. When he retired in 2001, many of GE’s products were old technology.His successor, Jeff Immelt, practically had to rebuild much of GE’s R&D from scratch, and he did it in India, where it was much more affordable. How long can you sell outdated products?Welch’s critics made a strong case that he mortgaged some of GE’s future to deliver those results, and GE has been struggling to get back on track ever since.
A questionable obsessionWe never seem to learn. We’re still reeling from the mortgage mess, but we’re still implementing similarly greedy strategies for high profits, and we’ll worry about the future later.Since it’s not a good idea to cancel R&D or ignore diversification to overstock subprime mortgages, is destroying our markets any more rational? That’s what we’re really doing with all those layoffs. Unemployed people don’t buy things, which reduces demand and causes more layoffs, which further reduces demand. Where will it end?The late Peter Drucker said it well: “The purpose of business is to create and keep customers.”Is our obsession with increasing shareholder value actually destroying it? Is this really something to celebrate? Is this the sort of thing we really want to encourage?Perhaps they’re only trying to highlight the silver lining in a very dark cloud, but how many CEOs already think workforce shrinkage is the way of the future and will be reinforced by this? Do they think additional tax burdens from high unemployment and welfare are more beneficial than paying salaries from which, with proper management, they could earn a profit, especially when you consider the attendant loss in purchasing power?Anyone can jettison people. To me, the justification for those high executive salaries is in being able to find something profitable and productive to do with the people, whose previous jobs may have been eliminated by technology.Don’t wait for the government — it can’t solve this problem. We need smart business leaders doing smart things to rebuild our economy.Nearly everybody agrees our present path is not sustainable. We need to change direction. Real leaders don’t wait until everyone else is doing something. They don’t need someone to follow.Ronald J. Bourque, a consultant and speaker from Windham who has had engagements throughout the United States, Europe and Asia, can be reached at 603-898-1871 orRonBourque@myfairpoint.net.
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This article appears in the June 4 2010 issue of New Hampshire Business Review