Does Government Need a Business Saviour?

Scott Proudfoot, Hillwatch Principal, September 2016

Donald Trump’s run for the Presidency is a smorgasbord of stimuli, so it is simplistic to suggest the only premise of his campaign is: “I am a successful business leader and CEO, therefore, qualified to be President.” Nonetheless, this is his central claim. And his supporters seize upon this claim to explain their voting intentions and belief he will be ‘successful’ in office.

Many voters on the Right are attracted to the idea that Government needs a business saviour. And, it is not Mr. Trump’s pitch alone.

Carly Fiorina, who ran for the Republican nomination against Mr. Trump and Mitt Romney, the previous Republican nominee, had much the same pitch, if not so red-blooded. It is the pitch most former business leaders make running for office at the local, state/provincial or national level. It seems to be much more common in the US than in Canada.

Typically, the ‘We need a business saviour argument’ is based on a series of stated and unstated assumptions.

  • Government is wasteful and inefficient. It should run like a business.

  • A successful CEO will make the tough decisions necessary.

  • Someone from outside needs to blow up a dysfunctional system; pull government out of the ditch, and put it back on the road to national greatness again.

Next to BBQ, Capitalism is one of Homo Sapien's greatest inventions, but these ‘business saviour’ assumptions depend on wildly incorrect ideas about how business and government work!

Business Success Is Not Automatically Transferable

First, it is not apparent success in one line of business automatically translates into success in another line of business; so why assume business success translates into political success?

Most successful CEOs are tough, determined, talented and hard-working. If their companies are successful, the CEO receives most of the credit. Successful CEOs become stars. If you are the CEO of such a company, you will get a disproportionate share of the credit for that success. And if the business fails, you will get a disproportionate share of the blame. This has been labelled the ‘Halo Effect.'

But, a funny thing happens. Many successful companies do not stay successful over time. And many star CEOs do not succeed when they move to a new company or new line of business.

Success in one area does not necessarily translate into another because of the pivotal role of luck and regression to the mean.

There is already broad acceptance of the role of luck and regression in one area of business—financial investment.

Multiple studies show mutual funds and other active investment vehicles over time under-perform the market after fees. According to S&P Dow Jones Indices, some 88 percent of U.S. equity funds trailed their benchmarks in the five years through 2015. Similar studies show a little better or a little worse results but tell the same story. Managers outperform the market for a period but, then, fall or under perform. Investors chasing the hot managers end up disappointed. A smaller percentage of investors do outperform the market over time (eg., Warren Buffet, George Soros) but they are outliers.

That these research results have become widely accepted is demonstrated by the growth in passively managed index-type investments. In 1970, index funds held less than 1% of the market but now control a third of a larger investment pie

Although harder to measure, we would expect similar trends to apply across most businesses. Mr. Trump is an example of this phenomenon. He has been successful in a couple of businesses but unsuccessful in many others.

Daniel Kahneman, the Nobel Prize-winning behaviour economist, sums it up:

“Stories of how businesses rise and fall strike a chord with readers but offering what the human mind needs: a simple message of triumph and failure that identifies clear causes and ignores the determinative power of luck and the inevitability of regression. These stories induce and maintain an illusion of understanding, imparting lessons of little enduring value to readers who are all too eager to believe them.”i

In Kahneman’s formulation: “Success = talent + luck; great success = a little more talent + a lot of luck.”

The track record of business executives who become national leaders provides a limited number of examples, but results are poor to mixed.

In the last hundred of years, the United States has had five Presidents with a business background.

  • Warren Harding built a successful small- town newspaper. He is regarded as one of the worst US Presidents.

  • Herbert Hoover was a successful mining executive and had impressive success as a public official before and after the First Wold War. As President, he was on the wrong side of history. He is remembered for being beaten by FDR.

  • Harry Truman had a mediocre career as a Missouri Farmer and Haberdasher, but a successful political career and his predecessor’s death placed him in the Presidency. Many contemporaries thought him unsuited for the job, but his reputation has grown as historians reassessed his legacy.

  • Jimmy Carter had an impressive naval career and turned a near-bankrupt peanut farming operation into a successful business. He was a one-term President and historians tend to compliment his post-Presidential path rather than his time in office.

  • George Herbert Walker Bush was a decorated war hero and a millionaire in the oil business by the time he was 40. He had an impressive political and official career before coming to the Presidency – House of Representatives, Ambassador to the UN and then China and CIA Director. He had a one-term Presidency but he is now seen as strong foreign policy President both for his accomplishments and in contrast with his son’s lack of them.

  • George Walker Bush had a spottier business career. His success seemed tied to his father’s circle of friends. He made the leap from Texas Governor and served two terms in the Presidency. His legacy involves fiscal profligacy, the Iraq and Afghanistan Wars and the 2008 Recession. History’s verdict will not be kind.

In Canada, we have had R.B. Bennett, Brian Mulroney, and Paul Martin:

  • R.B. Bennett was a successful lawyer and businessman who made a personal fortune in several utility and manufacturing ventures. He became Prime Minister after an extensive political career but served only one term. He had the bad timing of being elected in the middle of the Depression. His policies were unsuccessful. He became hugely unpopular with his party and the country. It took another 20 years for his party to get back in power.

  • Brian Mulroney was a successful labour lawyer and CEO of the Iron Ore Company of Canada. He came into politics with long experience in the backrooms of the Progressive Conservative Party. He won two successive majorities in Canada. But, in the end, Mulroney was one of the most reviled politicians in Canada. He bears significant responsibility for his party being reduced to two seats in the following election and then taken over by a new Conservative Party built on the wreckage of his reputation. Mulroney had big successes and big failures. In sorting out his reputation and legacy, historians have their work cut out.

  • Paul Martin was the successful CEO of Canada Steamship Lines. Martin was one of the best Canadian Finance Ministers before he succeeded Jean Chretien as Prime Minister. But for all his success and promise, he became a victim of the Peter Principle. After a couple of years, he was booted from office.

The paramount importance of luck and regression to the mean is just as important in politics. Truman was no one’s first choices as Vice President and came to the Presidency because Roosevelt died. The failure of the Iran rescue mission undid Jimmy Carter’s re-election bid. George H.W. Bush lost because Ross Perot syphoned off enough votes to let Bill Clinton slip into office. A scandal inherited from his predecessor torpedoed Paul Martin.

In comparing these leaders to Donald Trump, there is a huge differentiation. They all had considerable political experience in addition to their business experience.

None of this proves that someone with a business background cannot be a successful political leader. It just suggests business success is no predictor of political success.

There are other reasons why the business saviour argument is shaky.

Business Already Part of Government

Government and Business are different, but they are not separate. Government is permeated with techniques, processes, and technology borrowed from business. Hundreds of thousands of businesses supply government. Thousands of business help government design and deliver services, infrastructure, buildings or manage them for Government. Business does not have to be brought into Government; it is already there!

When introducing a new program or implementing a new technology; Government looks to two sources: equivalent practices in businesses and equivalent practices in other governments (who often borrowed from business in the first place). Often, there is a competition, and the successful company gets the job. Typically, companies take something from their larger commercial practice and adapt it for Government.

Sometimes this works quite well. For example, Canadian Governments recently completed many business service re-engineering projects. Following the 80/20 rule, they focused on the most common services used by the largest number of people. Processing a tax return used to take eight weeks. It now takes 7 to 10 days, and citizens can submit it online. It is now easier and quicker to obtain your passport; old age pension, birth certificate, health card, etc.

Other times Government borrows from business, and it is a flop.

Recently, the Canadian Government decided to consolidate all its separate departmental pay systems into on big system. It was intended to save $70 Million a year over the previous labour-intensive approach. It has been a debacle!

Eighty thousand of the 300,000 public servants were unpaid for months and often wrongly paid. First, the fix was predicted to cost another $20 million. Now, the price tag is $50 million and counting. Good-by, savings! When dissected, this cock-up will be traced to a series of bad decisions by a layer cake of officials and committees. But, the project also had guidance from a high-level business advisory board; IBM provided the software, and it is overseeing the implementation. Presumably, these businesspeople bear some culpability.

The assumption that a successful business leader from outside needs to show Government how to run like a business ignores their existing co-dependence. They are mixed; like the ingredients of a marble cake!

Waste and Inefficiency Not Exclusive to Government

As to the trope that Government is wasteful and inefficient and that business is not, consider the evidence in front of your eyes.

Half of all small business fail during the first five years. Business history is a long string of products that had their day in the sun until deposed by more successful competitors – the Model T, the IBM Typewriter, Sony Walkman, the Fax Machine, the Alta Vista search engine, the Blackberry phone.

Businesses fail; people lose jobs; careers derailed; technology by-passed. Efficient businesses win by climbing on the corpses of the losers. Then, they have a price on their head and succumb to new competitors, in turn. When told, the economy has created a million new jobs in the past year that means millions of jobs disappeared, and millions of jobs were created, but there was a net gain of a million. Business is all about the churn or, in Freidrich Hayek’s phrase – “creative destruction.”

Capitalism is the greatest wealth producing machine invented, and massive amounts of failure and waste are an integral part of how it works! Business is an ever-evolving ecosystem and not a magic wand. When Government borrows or buys from business, it has no way to predetermine whether is borrowing the efficient bits or the soon-to-be discovered inefficient bits.

How Do Your Measure Success?

Government can always be better run, and it can continue to borrow from business. But, Government cannot run like business because the same yardstick is not used to measure success.

In business, most people agree what success is. Businesses need to generate shareholder value and sustain profits over time. Some would add-in corporate responsibility or the treatment of workers and suppliers, but profitability tops most lists.

Ezra Klein, the Editor of Vox, wrote an article arguing that: “Barack Obama is officially one of the most consequential presidents in American history.” He makes an interesting case. However, the audience of Fox News would dismiss the argument outright. They think Mr. Obama is incompetent and a Pussy. Some Democrats don’t buy the argument. They don’t think Mr. Obama has been progressive enough. Some activists in the African-American community don’t believe he has done enough to raise the issues of race in American. And after Mr. Obama is gone; his importance, record, and legacy will be re-litigated again and again by successive generations of historians.

This illustrates one clear difference between politics and business. In politics, people cannot agree on what success is and what government should do—and the arguing never stops!

People who want Government run like a business probably do not believe Government should generate a measurable bottom-line profit. Or, if they do, they can’t explain how it would work. Nor, have they identified a specific set of prescriptive practices used by businesses to make government more efficient. They just don’t like some of what Government does, and they don’t like the people running it.

They want a magician or some authoritarian figure to fix it. But, the first option is a too silly (Harry Potter is not real) and the second is too dangerous. So they settle on a business leader to whom they ascribe magical powers and the ability to leap over large obstacles in a single bound. It is just more arguing. And like most arguments in politics, it is fact-lite and BS-heavy.

Try Running a Business Like Government

It is easier for us to understand how hard it is for Government to run like a business if we reverse the question and ask what would happen if a successful business ran like Government.

Imagine if Apple ran like the Canadian Federal Government. CEO Tim Cook would appear in Question Period, at the same time, several days each week to take questions from critics who sit opposite him and want his job. Senior Apple executives would devote several hours a week to this same inquisition. Johnny Ives, the renowned Apple Design Chief, would be called before a special committee to be grilled on every decision regarding new products. Why did you bend this IPhone curve just so instead of another way? You got rid of connected headphones. What are you going to do for poor people with old headphones? Could you use the IPOD to promote more Canadian artists? And shouldn’t part of your product be made by unemployed fishers in Newfoundland?

That is just the start. There would be independent public bodies with the right to investigate every aspect of your business - pricing, privacy, store closures, outsourcing practices - and report on it to the public. There would be hundreds of Apple employees answering the thousands of Access to Information Requests received each year. All your expenses would be questioned. Apple executives would not be appointed by the CEO and the Board, based on ability. The CEO chooses them from the lucky few who manage to get elected. They may or may not be competent. And here is the real kicker: You have a monopoly, so you do not compete. People will be forced to buy your product whether they like it or not.

Executive would spend all their time responding to the public and seeking re-election; Apple would lose their ability to innovate. Its products and services would become crap.

All these factors that would run Apple into the ground are due to long-established and accepted practices of democratic scrutiny, accountability, transparency, competitive party politics, and representational government.

A Plan or Just Talk?

If a business leader comes along and states that he or she can run Government better (and do so without dismantling democracy), we should be all ears. But, if that same business leader cannot explain their ideas and simply offers clichés about reducing waste; being more efficient, and firing people, we can safely assume they have no plan. They are blowing smoke up our collective posteriors.

There are good arguments for wanting more business people running for political office, but they are different arguments. And none promise a simple fix to what ails government – perhaps because there are no simple fixes.

As business careers go, Mr. Trump’s in chequered and controversial. But, even the most exemplary and gifted business person does not have some secret sauce that, once spread around, will make most of the disliked features of Government disappear.

i Daniel Kahneman, Thinking Fast and Slow.

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