34 BARRON’S October 12, 2020
OTHER VOICES
To show balance, leaders must personally
violate the core rule under which they are
asked to operate: More is always better.
How Endless Maximization
Is Ruining Business
B
alance is widely ac-
cepted as an essential
feature of human
health. When we
lack balance, we be-
come fundamentally
unhealthy: obese,
workaholic, narcissistic, or obses-
sively thrill-seeking, for example.
Paradoxically, the modern worlds
of economics and business have ad-
opted as their core rule the opposite
of balance: the maximization of a
singular objective. The implicit as-
sumption, bizarrely, is that what is
good for the individual is bad for the
collective, and vice versa. But that
assumption is making business and
the economy fundamentally un-
healthy. Because what is good for the
individual is actually good for the
collective, we need to reverse course
before the sickness destroys us.
The maximization of shareholder
value as the singular goal of the cor-
poration is the most frequently de-
bated manifestation of this core rule.
I am on the record as agreeing that it
is perhaps the dumbest idea in the
world.
But it is merely a symptom. The
problem is that the worlds of both
economics and business have ad-
opted the view that without a simpli-
fying, unitary objective, an organiza-
tion will be unable to make robust,
consistent, and societally optimal
decisions. Luminaries such as eco-
nomics Nobel laureate Milton Fried-
man and superstar finance professor
Michael Jensen have made the argu-
ment so convincingly that it has ef-
fectively become embedded doctrine:
There should be a unitary objective
whereby more is always better.
This is why the implicit rule in
most incentive systems is that selling
more is better—always. At Sears
Auto Centers in the 1990s, more re-
pairs per customer was better, with
no upper bound. At Wells Fargo in
the 2000s, more accounts opened
was better, with no upper bound.
With no balance consideration evi-
dent, employees followed the rule to
such extremes that they created exis-
tential reputational threats for their
organizations. Both companies apolo-
gized and agreed to settlements.
In energy, more proven and proba-
ble reserves is always better, so we
get dangerous drilling and relatively
unlimited hydraulic fracturing. In
managing labor costs, greater “labor-
cost efficiency” is always better, so
there is limitless outsourcing of jobs
to low-cost jurisdictions. In antitrust
policy, more short-term efficiency is
always better, so mergers are now
enabled by the efficiency defense. As
part of the Washington Consensus,
more deregulation and fiscal auster-
ity is always better, so countries en-
gage in deregulation and austerity to
comply. In the health-care system,
more efficient use of working capital
is always better, so minimizing buffer
stocks of personal protective equip-
ment made all sorts of sense—until a
pandemic hit.
When scandal unfolds, we tend to
be baffled at why the leaders involved
didn’t show more of our natural incli-
nation toward balance. We shouldn’t
be. To show balance, leaders must
personally violate the core rule under
which they are asked to operate:
More is always better. Thankfully,
many do; they try to use their own
personal instincts toward balance to
guide their actions. But not enough
leaders take that approach.
Unrestrained pursuit of labor-cost
efficiency has left tens of millions of
American workers earning less than
a living wage while the top 1%
achieve unprecedented wealth. Anti-
trust authorities worshipping at the
altar of efficiency have facilitated the
widespread consolidation of indus-
tries into fewer, more-powerful play-
ers. Judging company performance
solely on the basis of short-term
shareholder value increase has
caused executives to give short shrift
to long-term stewardship of their
employees, communities, and the
environment.
The only way to stop these prac-
tices is to recognize that while sim-
plicity is handy for guiding action, it
ceases to be effective if it is, in fact,
simplistic. That means tearing down
an entire infrastructure of simplisti-
cally extreme rules in business and
economics and building a set of prin-
ciples and practices that seek to
achieve healthy balances. This must
go far beyond making empty state-
ments about balancing the interests
of stakeholders, as with last year’s
statement by the Business Round-
table. Change won’t happen as long
as business, economics, and public-
policy schools still teach the impor-
tance of a singular objective function,
whether explicitly or, more often,
implicitly. And it isn’t going to hap-
pen as long as reward systems are
geared around achieving singular
goals—like achieving this year’s bud-
get, which is still the dominant goal
in much of American public- and
private-sector life.
The good news is that people are
used to struggling with and making
decisions that seek balance. If we stop
putting them in artificial environ-
ments that attempt to negate that in-
stinct for balance, they will thrive.B
Roger L. Martin is professor emeritus at
the Rotman School of Management at
University of Toronto. He is the author
ofWhen More Is Not Better: Overcoming
America’s Obsession with Economic
Efficiency.
By Roger L.
Martin
Illustration by Chiara Vercesi