Organizational death is as necessary a part of our economic system as organizational birth. Currently our system pays homage only to the entrepreneurs who create new businesses. Now, and for the next 30 years, we need an equally vibrant exit sector: We need a Death Valley that has equal status with Silicon Valley.
Most organizations engage in both value-creating and value-destroying activities. This is because trial-and-error is an essential part of value generation, and not all activities can be equally successful. A successful oil company may have a value-creating exploration team, but also have a value-destroying refinery. An unsuccessful department store may have a value-destroying appliance department, but also have a value-creating perfume department. Wealth creation hinges on whether value creation outweighs value destruction.
The Information Age is changing this balance for many companies. New opportunities to create value are appearing, but many existing activities, like the branch networks of banks, are becoming liabilities. Companies are, therefore, trying to understand which activities will be future value destroyers, so that they can reengineer, sell, or outsource them.
But many companies will not be able to change enough or change fast enough. Their balance between value creation and destruction will become increasingly negative, and their attempts to survive will wipe out much, if not all, of their accumulated wealth. Unfortunately, it is hard to tell in advance which companies these are, and, even if we could, we have no mechanism for putting them to sleep. But, we can reduce the damage. We can strengthen the natural market mechanisms that help these companies face death. In other words, we can help them die.
First, while we weep over decline, we give no status to organizational undertakers. We still view the decline or death of organizations as failure. Yet from death there is always rebirth. Indeed, we cannot have a vibrant New Economy without some destruction of the old economy. We need to reward and celebrate Chapter 11 consultants, breakup specialists, bottom-feeders, predators, and managers who are more interested in cash than growth. They are the heroes who take the risks and harvest potential sources of value that make it possible for fledgling ventures to thrive.
Second, we need to promote a more efficient market for corporate control. Companies that are destroying value in an attempt to survive need to be disciplined quickly by predators able to put to use the resources others can't. In Anglo-Saxon countries, the barriers to hostile takeovers are still too high, and in many other countries they are impenetrable. The solution is to eliminate technical barriers and force companies to provide more information. Maybe we need a "Public Corporations Freedom of Information Act" that gives shareholders owning more than 5 percent of a company's stock free access to its information files. No doubt this would create extra costs for the company and problems with competitors. However, it's likely the gains from exposing underperformance would outweigh the costs by a factor of two or three.
Finally, we need to reward managers for maximizing value, whether they do it by contributing to growth or by eliminating value-destroying activities. That means we need a composite measure of management performance that includes share price movements, economic value added, and cash generation -- although we know this is hard to do. After all, we have been trying to create better measures of performance for years. The answer may, therefore, involve developing two sets of measures -- one set for managers pursuing growth and another for those generating cash. Managers would need to decide which set of measures they want applied to their performance.
Whether all three of these changes are realistic or not, we need to make significant adjustments to our current business system. If the system continues to be better at corporate birth than corporate death, we will throw away a large slice of the wealth that is being created by the myriad technologies of the New Economy.