Friday, November 9, 2007

Entrepreneurial CEO's Make Substitutions

American CEO's and their Chinese counterparts have something in common, a desire to maximize company profits and their personal income. Both are skilled at substitution. U.S. businessmen replaced American jobs with cheap foreign labor in an effort to improve profit margins. Nearly one third of publicly traded executives backdated stock options, otherwise known as cheating to maximize their compensation. They granted the award on the lowest stock of the quarter instead of the specified date, costing shareholder's dearly.

What do Chinese executives substitute? It turns out they grant themselves the freedom to replace ingredients with lower cost versions, saving the company much in expenditures. Paint with lead is much cheaper than the lead free version. The latest example is a glue used with a beaded toy. The maker was supposed to use 1,5-pentanediol, a non-toxic compound found in glue, but instead contained the harmful 1,4-butanediol, which is widely used in cleaners and plastics. An AP news report had this to say about the ingredient:

The Food and Drug Administration in 1999 declared the chemical a Class I Health Hazard, meaning it can cause life-threatening harm. Both chemicals are manufactured in China and elsewhere, including by major multinational companies, and are also marketed over the Internet. It's not clear why 1,4-butanediol was substituted. However, there is a significant difference in price between the two chemicals. The Chinese online trading platform ChemNet China lists the price of 1,4 butanediol at between about $1,350-$2,800 per metric ton, while the price for 1,5-pentanediol is about $9,700 per metric ton.

It appears the Chinese have caught on to the American version of leadership. Where's the customer in all this? No where to be seen. U.S. employees expect to have a good, fair paying job. Shareholders want executives to follow established policies even when it involves their compensation. And mothers want their kids to play with toys without life threatening harm. American and Chinese business leaders are clearly intelligent enought to deliver on all three, they just employ theory and methods that do the opposite. It's time they got educated.