PHEW. That’s the festivities over for another year, then. But though you may be dismayed by the commercialism and appalled at the state of your liver, this column can give you good reason to take heart from your participation in the annual orgy of giving and receiving: you are helping to blow a Father-Christmas-shaped hole in conventional management theory and practice.
No, really.
Everything a firm does, from the way it decides strategy or manages people to its structure and board constitution, reflects some management theory.
Strategy is based on Michael Porter’s ‘Five Forces’, the nature of the firm on transaction-costs theory, and so on. In turn those theories are founded on some fundamental assumptions about individual human nature. And the most fundamental assumption in management is that human beings are members of the race Homo economicus, rational maximisers of self-interest.
Homo economicus has been softened a bit round the edges over the years. Since people plainly aren’t omniscient, rationality is acknowledged to be bounded rather than complete. But the direct and indirect consequences of an uncompromisingly economic view of human nature still fundamentally affect the life of organisations.
One outcome is the idea of the company as a hierarchy. Despite lip service to participation, the deep-down archetype is that managers know ‘more’ and ‘best’, and that their job is to control employees and make sure they do as they are told.
Another consequence of the Homo economicus view is that the interests of employees and managers, and managers and owners, differ. From there it is a short step for theory (but a very large step for mankind) to agency theory. Agency theory – the notion that the interests of ‘agents’ (managers) need to be aligned with the overriding goal of ‘principals’ (shareowners) for maximum returns by a range of incentives and punishments – is central to Anglo-Saxon corporate governance.
It is behind the splitting of the chairman and chief executive jobs, the perceived need for independent directors, and much else in the combined codes. It is the justification for high executive pay, stock options, and all the other lucrative incentives for managers to pursue shareholder value.
So theory governs practice. But suppose theory is wrong?
Back to Christmas. In a delightful piece of seasonal research, a US economics professor gravely announced last month that Christmas was ‘inefficient’. Recipients, he discovered, generally put a lower value on the presents they receive than the donor has paid. In terms of efficiency, he concluded, it would be much better for the giver to hand over the cash and let the receiver do her or his own choosing.
Of course. The only surprise is that anyone could be surprised. Christmas is one more proof of what is perfectly obvious to everyone except economists and management theorists: homo economicus is a caricature that exists only in the world of theory. Homo economicus would not tip taxi-drivers he’ll never see again, offer expensive presents to people who may not reciprocate, or indulge in any of the spontaneous acts that brighten every day. In short, if homo economicus existed, Christmas wouldn’t.
The truth is that in real people self-interest co-exists with other more generous behaviours and impulses, such as integrity, trust and altruism. Some serious management writers are now beginning to ask why these positive qualities shouldn’t be admitted into theory alongside the negatives – and what it would do to the shape of our companies if they were.
After all, an organisation based on a single dimension of human complexity is likely to be as much of a travesty as the original assumption. It would be narrow, undersocialised and undernourishing to the spirit at best, at worst brutal and driven to destruction: Enron, WorldCom and Sunbeam Electric, for example.
Is it possible to conceive of an alternative – a company that, as it were, believed in Father Christmas? In her new book The Democratic Enterprise, London Business School professor Lynda Gratton quotes Warren Bennis: ‘It is possible that if managers and scientists continue to get their heads together in organisational revitalisation, they might develop delightful organisations – just possibly.’
Given the dominant theory, it’s not surprising that delightful role models are rare. But a few exist – indeed, some have figured in this column (see box, left). But even from these small numbers, it’s plain that their common features are the exact opposite of what the dominant theory assumes.
Since these companies have a shared purpose, agency theory and its logic of incentives and punishment don’t apply. Being based on trust and respect, they don’t need a hierarchical authority system. People other than managers can contribute to ideas and strategy. Founded on an organisational vocation, these companies don’t buy and sell other companies, financial engineer or outsource at the drop of a hat.
In short, they can be something more than strictly economic units, and that’s because they are based on a more balanced, and realistic, view of human nature than the one-eyed assumptions that currently prevail.
It’s thus not just in religious terms that Christmas redeems. Delightful organisations depend on the same impulses. So keep up the festive inefficiency – and have a cheerful New Year.
The Observer, 11 January 2004