Managing Very Large Organizations

Simon Johnson of The Baseline Scenario has an excellent article on one of his favorite topics - breaking up the big banks. In this article he disses Dodd and Corker for their arguments in favor of the big ones. There are a number of comments as usual. I found the following from Edwin Lee particularly trenchant about managing organizations.

Having been a CEO for 16 years, my first concern about large banks is that they can only be managed too poorly to serve the needs of a healthy market. It’s a matter of scale. Size allows dominance by otherwise feeble management, which is just what is happening.Let me cite some structural issues:
1. A top executive can only make so many executive level decisions in a year. (At least half dealing with internal issues) The larger the institution the more complex the decisions and the more time and accurate information it takes to make good ones. The larger the institution the lower the percentage of well thought out decisions; more and more get made on a handful of myths and personal relationships with loyal lieutenants. (Big government has the same limitations for Executive or Congressional decisions)
2. Leaders of large organizations tend to deal with comparably large consequences… you don’t manage a $100 billion corporation making $50 million decisions. (However, they also tend to spend more time making trivial decsions because these are the only ones with immediate, self gratifying outcomes) Thus, management looks for huge pools to muck around in… like housing pools, government debt (Goldman Sachs in Greece), etc. The little guy isn’t dealt with as an individual, merely part of some large pool. But note, you have less competent people dealing with much larger and more complicated pools… thus the recipe for disaster.
3. Leadership of large public organizations is chosen by others on the basis of loyalty, loyalty, loyalty and reputation, not competence. Robert Rubin and Larry Summers are examples example of this reputation and loyalty principle. Entrepreneurs who lead small organizations and who grow large successful organizations self select and are pruned by market forces. In a sense, leaders of large organizations inherit their jobs by being loyal followers for decades. Hardly the best screen for creative and intelligent leadership.
4. An industry dominated by a few large organizations hasn’t the structural surpluses to develop and screen out the next generation of competent leaders. Metaphorically, it lacks a farm system in which to develop and screen outstanding future talent. This is also the failing of dictatorships, the next generation of leaders tends to be toadies who were loyal within the system.
5. No industry should have insitutions that are too large to fail in the marketplace in a way that allows for orderly distribution of their assets. For financial institutions this size is about 3% of the overall national financial market (due to interlocking activities and the critical role of money and credit to the economy)…. to allow for a healthy apoptosis process (as in FDIC distribution of failed institutions’ resources) as opposed to a necrosis process in which one institution’s failure cascades throughout the system. Given the 3% upper limit, growth through mergers and acquisitions should be prohibited when an institution reaches 1% of the national market.

I have posted more on breaking up the behemoths on my own blog. What is blantantly obvious to someone who has led a business in a highly dynamic marketplace of hi-tech seems to escape Corker, Dodd and most economists.