No More Junk Management Science!

 

Last week’s blog, where I called out the Drake Equation as fraudulent using some of Michael Crichton’s material, I was asserting that much of what passes for management “science” is of a similar structure, and is also vulnerable to quackery.  “But Michael!”, you say, “didn’t you cover much of that in your recently-released, must-have book, Game Theory in Management?” Yes, I did, but I would like to pass along one very handy device for quickly ascertaining if you are being bamboozled by business-related pseudo-science, or not. This is an old device, and it’s very simple.

You ask Aristotle.

Remember that scene in Ghostbusters when Dr. Venkman (Bill Murray) first goes to Dana Barrett’s (Sigourney Weaver) haunted apartment? He goes over to the piano, lifts the key guard, and plays two high-pitched notes back and forth, in quick succession. “They hate this” he explains.  Well, start talking classical logic and Venn Diagrams to your typical management “science” prognosticator, and he absolutely hates it.

Now, real scientists love Aristotle. His ideas of logic are the underpinnings of the (real) scientific method. A theory is considered scientific if it has the following characteristics:

·         It is observable.

·         It is repeatable in an experimental setting.

Let’s take that basic tenant of the asset managers, that the point of all management is to “maximize shareholder wealth.” Interesting hypothesis, and very widespread – but is it scientific? If you were to Venn Diagram that assertion, that the point of all management (A) is (=) to maximize shareholder wealth (B), you would have two identically-sized concentric circles, A and B. So, if we were to present even one case of an A that was not a B, that assertion would be revealed as invalid, right?

Consider the hostile takeover. For some very silly reasons, the organizations and people who participated in this perfectly legitimate business tactic were vilified in movies and pop culture back in the 1980s, as if they were doing something borderline illegal, and certainly immoral.  A hostile takeover usually involves one company buying up the shares of a rival, with the intent of liquidating the rival’s assets and driving them out of business. With the elimination of the rival, the acquiring company hopes to increase market share, and perhaps eventually become more profitable.

Here’s the problem that the hostile takeover presents to the “maximize shareholder wealth” axiom. When a company becomes targeted for a hostile takeover, its stock typically jumps in value. The shareholders are confronted with two options if they believe (or even desire) that the takeover will take place: they can sell their suddenly inflated shares, or they can hold on to them in anticipation of what they will receive once the company is liquidated (in the event that the then-stock price was seriously devalued). In short, their wealth has been maximized. Therefore, no targeted company of a hostile takeover should ever resist, right?

Meanwhile, the acquiring company is having to expend resources in order to – well, do what, precisely? They’re not enhancing their own product line, nor benefitting employees, nor “maximizing shareholder wealth.” They’re actually striking a blow against their own shareholders’ wealth, since the target company’s prices are jumping artificially, but must still be acquired. Therefore, no acquiring organization should ever even attempt the hostile takeover, right?

In reality, though, hostile takeovers are undertaken all the time, and their targets typically resist. Clearly we have an episode of an A (point of all management) not equaling B. There are actually plenty of other examples, but, according to the rules of logic, we only needed the one. The management science tenet that the point of all management is to maximize shareholder wealth is invalid. Period. End of discussion.

I am now going to engage in a little less-than-scientific analysis myself. I can’t provide instances of direct observation of the following ideas, other than anecdotally, nor can I recreate outcomes in an experimental setting. But, based on my experience and research, the “maximize shareholder wealth” is only relevant in the realm of asset management, which, itself, only represents one of three main arenas in management science. The research (as well as the supporting logic) is spelled out in detail in my previously-mentioned, recently-released, must-have book.

But at least I’m not insisting that everyone acknowledge my assertions as management “science.”