Friday, October 29, 2010

Zell's Tribune and the Hidden Costs of Bad Management

Bradley W. Bloch
Social networks behind the news

On Friday, Sam Zell finally talked Randy Michaels, the former disc jockey he named to run Tribune Company, into stepping down. By now, of course, the story is well known of how Michaels and his crew -- a traffic reporter who became the manager of the Tribune's storied headquarters building (where he covered up the smoke detectors so they wouldn't interfere with poker parties), the grammatically challenged radio programmer who became "chief innovation officer" and so on -- systematically desecrated the Chicago Tribune, the Los Angeles Times and dozens of other media properties.

"They wheeled around here doing what they wished, showing a clear contempt for most everyone that was here and used power just because they had it," said James Warren, the former managing editor and Washington bureau chief of the Chicago Tribune, in the exposé by The New York Times' David Carr that led to Michaels' resignation.

It's easy to regard this as just another case of corporate buffoonery in an age of excess. But because it's such a blatant case of corporate buffoonery, it actually serves as a useful vantage point from which to consider the larger role that corporations and other types of organizations play in society -- and the rarely recognized social cost of their mismanagement.

How do market economies organize the people within them? Consider the rather remarkable fact that there are 150 million workers in the United States, from CEOs to janitors, and they all reached the positions they hold without anyone telling them where to go. (Helicopter parents don't count.) How is it that people develop skills, take on tasks and organize themselves into hierarchies -- in other words, how do they "find their place" in the work force?

Education plays a role, of course, but from the long-term perspective, it just gets you to the starting line. Medical school explains who becomes a doctor, but it doesn't explain who becomes CEO of a sprawling hospital system and who becomes a general practitioner in a small family practice. There is no less stratification in blue-collar trades: Some become -- and stay -- construction workers, and others go on to run construction companies. How does this organization happen?

As Max Weber pointed out nearly a century ago, it is organizations themselves that do the organizing. Like Richard Dawkins' selfish gene, they use the resources they have at their disposal to perpetuate themselves. But in doing so, they fulfill a critical social function by providing people with the experience, opportunities and networks that move them from point to point in their careers.

An institution like Tribune Company, then, does more than run media properties. It picks up where education leaves off, developing and refining a slice of the nation's collective human capital, from fresh-faced journalism school graduates to wizened publishing executives. And the extent to which a person fulfills his or her potential depends almost exclusively on how well they navigate this process (and the luck they have while doing so). But it also depends on how rational the process is -- how good a job the organization does in recognizing and promoting talent, putting people in the right places, and giving them opportunities for growth.

The societal impact of good or bad management goes unrecorded on any balance sheet. But consider the differences in abilities -- experience, mental health, contribution to the tax base, or any other measure -- between a person who spends, say, two years with a supportive mentor in challenging and meaningful work, and a person who spends the same two years in a place run like a frat house. Now, multiply that by the 4200 people who have lost their jobs since Sam Zell acquired the company, and the social cost begins to come into view.

In theory, market-based economies are supposed to minimize this sort of bad behavior. Because most corporations have the goal of maximizing their performance (whether profit or some other yardstick), they are motivated to behave rationally, and the tendency is to assume that corporations are, almost by definition, coldly rational. After all, even if Sam Zell managed to buy Tribune for $8.2 billion with only $315 million of his own money, it was still $315 million, so one assumes he had the incentive to put the best possible person in charge.

That's exactly what Zell thought he was doing. He, and his board of directors, actually believed putting Randy Michaels in charge was a good idea. "He has the kind of approach that motivates many people and offends others, but we think he's done a great job," is the assessment that one board member gave of Michaels in the Times piece that served as Michaels' death knell. And thus we come to the crux of the problem.

Corporations can't be expected to be any more rational than the people who run them. And it turns out that people, as a general class, aren't very rational at all. One of the central tenets of market economies is the figure of homo economicus, that self interest drives people (and companies) to clinically evaluate options in terms of their costs and benefits and then make the best possible choice. But in the last twenty years, the burgeoning field of behavioral economics, a hybrid of psychology and economics, has provided us with all sorts of evidence that this "rational actor" assumption is deeply flawed.

People have been shown to predictably overestimate their abilities, ignore information that goes against their preconceptions, assign inconsistent values to objects or opportunities and make a host of other errors of judgment. So while people may think they are acting in their own best interest, their track record in actually doing so leaves a great deal to be desired.

When we're operating in a vacuum, our inclination to make poor choices only hurts ourselves. But when we control the environment in which others thrive or wither, the cost of our inclination to be stupid is magnified and spread considerably. And while Zell's Tribune may provide one of the more colorful examples of this phenomenon, it is hardly unique.
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