Category: Free post

Leading measures

Measurement. It sounds boring and technical, and that’s how most companies treat it. In fact, as made clear in a fascinating (and frightening) recent event on ‘results-based management’ run by the consultancy Vanguard, what to measure may be the single most important management decision a company makes.

For an indication of why, take the case of a typical local authority child protection department which operates to two standard measures. For children at serious risk, it must carry out a fast initital assessment of 80 per cent of cases within seven days. For a full core assessment, the standard is 35 days. The department meets both standards; under the widely-used ‘traffic-light’ signalling system (red-amber-green) it rates a green, so managers judge that no further action on their part is necessary.

Now look at the same department through a different measure: the end-to-end the time taken to do the assessment from first contact to completion. The picture that emerges is very different. The urgent assessment predictably takes up to 49 days, with an average of 18.5, while the 35-day assessment takes an average of 49 days, but can equally take up to 138. Worse, the clock for the core assessment doesn’t automatically start when the initial assessment finishes but only when it is formally opened. So the true end-to-end time for the 35-day assessment is anything up to 250 days. ‘Now tell me Baby P and Victoria Climbié were one-offs,’ says Vanguard consultant Andy Brogan, who gathered the data, grimly. ‘They weren’t – they were designed in.’

So how could the department have been meeting its standards? Consider what has happened to the department’s purpose. From assessing and protecting children, the imposition of the government-mandated measures, plausible but arbitrary (why seven days? why 80 per cent?), has shifted the de facto purpose to meeting the standard within officially laid-down parameters – which it does by recategorising, shutting and reopening cases as permitted by the guidelines.

No learning takes place, because these measures are not about learning but ‘accountability’, in this case to government. Remember, management thinks that because it is meeting the standards, no further action is necessary. It’s not far from here to Mid Staffs, where Sir Robert Francis was strumped to ascribe blame because everyone met their targets and thus covered themselves (which is what accountability really means). In the end he could only attribute the failings vaguely to ‘the culture’.

Unlike standards, the end-to-end measure on the other hand throws light on how well the department is meeting its purpose. Learning takes place. The workplace conversation is no longer about how to meet the standard but what accounts for variation and how to how to save time in assessments to make children safer. Contradicting the traffic lights, action is urgently needed. As the process is repeated, improvement becomes continuous.

Momentous conclusions ensue from looking at measurement this way. The ‘why’ of measurement (purpose) precedes the ‘what’. If the measures are not related to real purpose, the measures become the purpose, and better ones signal improvement that is dangerously illusory.

The bottom line is that measures can be used for either accountability (outcomes, targets) or for learning (purpose-related, commonly end-to-end times or total not unit costs) – but not both. Yes, this is our old friend Goodhart’s Law (which says that the moment a measure is used to manage by it loses its validity as a measure) in a different guise. It’s management’s uncertainty principle. Accountability measures can’t be used for learning and improvement because a) they don’t aay anything useful about what works and why, and b) as in the child protection department, the story they tell is a false one. Measures for learning and improving, on the other hand, dial down the need for external ‘accountability’, since they cause people to respond directly to the customer or person in need.

Importantly, the choice of measure affects many other aspects of organisation, including structure. An organisation using outcomes-based measures like targets and service levels to manage performance naturally adopts devices designed for accountability such as incentives, functional organisation, outsourcing, shared services and separate front and back offices – ‘dangerous idiocies’, in Brogan’s words, that effectively blind managers to what is really going on in their organisation. When things go wrong, it is not because people are wicked, stupid or uncaring; it’s because they are working in a system where data is constructed not for learning and improving but holding people to account.

The horrible results of bad measures, from banks that bankrupt societies to hospitals killing their patients, are all around us. Given the evidence that hitting the target so often misses the point, why is the stranglehold of the ‘dangerous idiocies’ so complete? One reason, argues the Newcastle University researcher Toby Lowe, is that the problems are conceived of as technical challenges that are capable of solution, for instance by sharpening sticks and carrots and increasing accountability. The result is an ever sharper focus on doing things better that shouldn’t be done at all. Jeremy Hunt’s proposed criminal sanctions for hospitals that fiddle their mortality figures fall straight in this category.

‘Having lost sight of our purpose, we redoubled our efforts’, as W. Edwards Deming sardonically summed up this process half a century ago. It’s time for a change. A choice has to be made. Either we go on using accounting and accountability measures to manage performance in a predetermined way, in which case we shall continue to be surprised when the things they bring about go spectacularly wrong; or we switch to measures that, as Brogan says, ‘help and act on the causes of variation in performance so that we can connect actions with consequences.’ That’s what changes management from a succession of hunches t a systematic, scientific endearvour; that’s why measurement is a leadership not a technical issue.

Why regulation is not the answer

When something goes wrong the knee-jerk reaction is to demand tighter rules to stop it happening again. Whether it is children at risk, NHS hospitals, banks, MPs’ expenses or bankers’ pay, as night follows day the enquiry set up to investigate the scandal/tragedy/accident at one point recommends stricter rules and regulation to corral behaviour into ever narrower channels of compliance.

The regulatory reflex is understandable. Dating in its present form to the wave of privatisations in the 1980s, regulation seems to offer a pain-free means of taking the edge off market excess on one hand and monopoly public-sector indifference on the other. In that sense, regulation is an attempt to find a middle way between the two extremes.

It is true that a framework of ground rules is essential for both a functioning market and functioning public services. As Michael Porter showed in an important HBR essay in 1995, positive regulation that frames broad objectives but crucially leaves method open to experiment can be a powerful incentive for innovation. But good regulation is rare. As is becoming increasingly clear the other kind – prescriptive rules that specify method and detail what is and isn’t permissible – is deeply problematic. And there is now so much of it about that the problems it has thrown up are as bad as, or in some cases worse than, the ills it was expected to cure

Leave aside for a moment the ever-present issues of information asymmetry and potential regulatory capture. The bottom line is that the regulatory reflex drives a dynamic which makes it ever more intrusive, ineffective and costly.

Regulation is a substitute for trust. We apply it to the private sector because we don’t trust companies not to extract rents from customers, suppliers and society to transfer to shareholders (and executives). We use it in the public sector when we don’t trust managers and civil servants not to put the producer interest first.

Mid Staffs and horseburgers show that the cynicism is understandable. But here’s the thing. Regulation does nothing to solve the underlying problem. Rather, it makes it worse, systematically manufacturing and amplifying the mistrust so that it becomes self-defeating.

Like targets and inspection, regulation focuses attention on what’s being regulated, to the exclusion of what isn’t. It thereby sets up an arms race between regulator and regulated that, as Said Business School’s Colin Mayer points out in his provocative new book, Firm Commitment, turns compliance and risk departments into their mirror-image – compliance-avoidance and risk-augmentation units.

Given the aforementioned information asymmetries and the impossibility of foreseeing all available avoidance ploys in advance, it’s not surprising that regulators are usually one if not two steps behind. By the time new regulation comes into force the horse has long departed to another unlocked stable. Sarbanes-Oxley, passed in the wake of the Enron and WorldCom scandals, was perfectly impotent to prevent the dotcom rip-offs and even less the 2008 financial crisis. In the same way the 2010 Dodd-Frank Act is fit for the purpose of preventing the 2008 crash but not the next crisis that is even now gathering in the wings.

The enquiry into Mid Staffs is a good example of the regulatory ratchet in action. As Nicholas Timmins noted in the FT, ‘Too much of the Francis report… works on the assumption that the answer to failed regulation… is yet more regulation.’ Doctors and nurses are already regulated. The beneficiaries of additional rule-making will be the parasite parallel industries that always spring up to exploit them, in this case ambulance-chasing lawyers. And the threat of criminal sanctions will not only make life even more difficult for whistle-blowers (who will understandably hesitate to put colleagues behind bars) but may well also deter potential board members from coming forward to do what is already a thankless job.

Much though one sympathises with MEPs who want to curb bankers’ bonuses and Swiss voters who have backed tough restraints on all high pay, it’s the same with pay. The case against regulation is not that overpaid chief executives don’t deserve to be cut down to size – they do – but that by deflecting attention from the real issue regulation will make matters worse. Focusing managers’ and HR departments’ attention on pay rather than the job will do nothing to benefit customers, and with their inbuilt information advantage they will surely drive a a phalanx of Rolls Royces through the rules.

In the meantime the real debate – not about the size of bonuses but about the flawed and deeply unscientific payment-by-results mentality that creates the perceived need for executive incentives in the first place – will not take place. In the same way, the crisis of the meat-processing industry of which uninvited horsemeat is the symptom is not poor regulation but the non-existent trust and excessively transactional relationships in the UK supply chain, something that is outside the ability of regulation to fix.

It’s often forgotten that all regulation carries costs both direct (the cost of employing regulators, inspectors and data-processors) and indirect (the cost and opportunity costs of gathering information and of doing the things that regulation demands even when they’re useless) and those costs rise dramatically the more the bureaucratic friction intensifies. As LSE’s Michael Power notes in his book The Audit Society, the societies that have attempted to insitutionalise checking in the shape of regulation, inspection and audit on a grand scale ‘have slowly crumbled because of the weight of their information demands, the senseless allocation of scarce resources to surveillance activities and the sheer human exhaustion of existing under such conditions, both for those who check and those who are checked’. That’s seems like a pretty good description of what’s happening to the NHS right now.

Is there an alternative to that depressing prospect? Yes, there is. It consists of managing properly, that is, using measures related to purpose to gather evidence of what works and then use it to improve, in the way scientists do. More on that next time.

Mid Staffs shows everything that’s rotten in the house of management

Read me on the continuing Mid Staffs saga here

Control or chaos?

Read my article, ‘Control or chaos’, a commentary on a Foundation Forum on 5 February 2013, here

Wicked problems and self-inflicted wounds

The world has its fair share of ‘wicked’ problems – global warming, conflict in the Middle East, drugs, antibiotic immunity, and various tragedies of the commons come to mind – agonising dilemmas to which there is no one right answer, only less wrong ones. In these cases, as Goethe sagely pointed out, ‘The only answer to the problem is another problem.’

But there is a whole other class of serious issues that are entirely self-made. As Sumantra Ghoshal wrote in a celebrated essay on the role of the business schools, we don’t need to do a lot more to prevent such issues arising: we just need to stop doing a lot that we currently do. We don’t need to run our national health service like a Soviet tractor factory. If the financial sector has hijacked the economic system it is supposed to serve, it’s because humans have designed it to do so. We want to eat beef rather than horse, or indeed the reverse? So stop creating supply chains that allow confusion of the two, just as we should stop dehumanising needy and vulnerable people and driving them into care homes in the name of care. We know the liberating effects of ceasing to do such things from the exhilarating cases where independent thinkers have chosen to do just that.

What this says is that never mind the economic downturn, it is perfectly within our grasp to transform people’s lives for the better without spending a penny on infrastructure, massive top-down reorganisations or giant IT products. We don’t need the permission of David Cameron or Mervyn King. We just need to reverse the ideas about how we run our organisations to make people happier and more productive. The efficiency improvements come free.

The current wrongness of management is systematic and fractal – it looks the same at every level, from the individual to the economy as a whole.

Start with the latest Employee Outlook from the Chartered Institute for Personnel and Development (CIPD) which shows employee engagement at work at 35 per cent, the lowest level yet. Only four per cent are actively disengaged, but that leaves 61 per cent neutral – they don’t care one way or the other. Worryingly, says the CIPD, it is the more recent hires who are more engaged; the longer they stay, the less engaged they become. The CIPD surmises that the dip reflects disillusion with senior managers: only a net 11 per cent agreed that managers treat employees with respect, and nearly one-third more people said that managers didn’t consult them on big decisions than did.

To repeat: this is a choice. Managers are allowed to consult employees; they don’t have to treat them with disrespect. Indeed, as Julian Birkinshaw and co-researchers at London Business School showed conclusively last year, organisations that manage people well (basically giving them a good job to do and letting do it) get better results than those that manage them badly. Good places to work tend to be more productive, which for most people is not a surprise.

Economic theory says that you don’t find £5 notes lying in the street because someone will have picked them up. So why don’t managers pick up the free ones lying around in employee engagement? One reason is socio-cultural. Ninety-nine point nine per cent of management literature is written from the point of view of managers (the other 0.1 per cent is Birkinshaw), and that’s a tough bias to shift. Culture is supported by ideology. Ninety-five per cent of management literature assumes that the job of management is to command. In this view only managers know what it takes to deliver value to shareholders, and they must oblige employees to carry it out with carrots and sticks, otherwise they will shirk, cheat and dissemble to further their own self interest.

Where this reductive view of human nature leads is described in a damning academic research report on performance management published by the Scottish TUC. Self-explanatorily entitled ‘Performance Management and the New Workplace Tyranny’, the report traces the trajectory of performance management from benign, enlightened expression of shared interest (as it is still presented in the literature) to a direct instrument of management control, systematically used to intensify work, drive down cost and ‘manage the exit’ of those identified as ‘underperformers’. As the report puts it, the only thing left of the original is the smile on the face of the Cheshire cat’. Like ‘lean working’ and Human Resources Management (HRM), as in a horror film it has morphed into its opposite – synonymous ‘not with developmental HRM and agreed objectives but with a claustrophobically monitored experience of top-down target driven work’.

Low-trust management like this is self-defeating. The phenomenon is so well known that it has a name – the ‘superviser’s dilemma’, in which tight supervision and monitoring lead to demoralisation, disengagement and worse performance, apparently justifying a further turn of the supervisory screw. Just as aapplied to individuals this leads to Mid Staffs, at the level of the supply chain it gives us horseburgers. Scaling up the same tyranny, the big supermarket chains play suppliers off against each other, enforce short-term contracts and force prices down. The result: a British meat industry that is in long-term crisis and decline, unable to defend itself against less cannibalistic European counterparts.

I bore myself saying this yet again: it doesn’t have to be this way. You don’t have to take my word for it: here’s the verdict of Manchester’s Centre for Research on Socio-Cultural Change (CRESC). ‘There are better ways to organise the supply chain through vertical integration to ensure participants take responsibility for the overall health of the supply chain… The better way, which delivers on broader economic and social objectives, is represented by the integrated national models of the Danish and Dutch pig industry or the directly-owned processing operations of Morrisons, which competes on price in the mass market and uses a higher proportion of British meat than any of the other major supermarkets. The Morrisons model aligns the interests of firm, supply chain and society through directly-owned processing plants which run at full capacity and proves the benefits of plant loading. Our accounting research show that Morrisons increases margins and reduces costs. Society gains through reduced import dependence, stable employment and the capacity to address animal welfare and climate change.’

If Morrisons can do it, so could Tesco and Sainsbury. Why don’t they? Because they are signed up to the top-down, short-term performance management agenda, locked in place by the equally reductive and simplistic belief that their only job is to make money for shareholders (and themselves), and hang the consequences for the rest of the supply chain, let alone the wider society.

As that suggest, there’s yet another level that the poison has permeated. For all that it is fatally flawed in both theory and practice, shareholder value is the basis of and embedded in all the official governance codes, and, as Said Business School’s Professor Colin Mayer makes clear in a telling RSA lecture on the consequences of that belief, the revision of company law in 2006 did nothing to weaken its destructive grip. So at the level of the economy as a whole, the result of thousands of companies doing what they believe is in their own self-interest is the adversarial supply chains and self-defeating competition that CRESC chronicles. Once again, as with performance management, HRM and the supposed marvel of the market, we end up with the opposite of what the bright official rhetoric promises: not the high road of the high-commitment, high-wage knowledge economy but the low road: the low-innovation, low-commitment, low-wage and high-insecurity economy embodied in Prêt and Amazon.

Dilemmas are dilemmas because the decisions are difficult. Getting rid of bad management is not a dilemma; there are simply no arguments against it. Do the right thing and economic recovery will take care of itself. What, I wonder, is Ed Milliband, or indeed any other ambitious politician, waiting for?

Mid-Staffs: NHS in intensive care

In one of two voluminous reports on the disaster of the Mid-Staffs Hospital Trust, where between 400 and 1,200 people may have died unnecessarily, Robert Francis QC noted that those giving evidence used the phrase ‘in hindsight’ 378 times.

In hindsight, his reports write the damning epitaph not just of a dysfunctional hospital organisation (Mid-Staffs was ‘the most shocking failure in the history of the NHS’, according to Health Secretary Jeremy Hunt), not just of the national healthcare system , but of the entire public-sector management paradigm.

The first Francis report graphically described the appalling suffering caused by and to individuals under the regime of ‘targets and terror’ in a single organisation.

The second equally mercilessly documents the failure of every one of the plethora of watchdogs, regulators, inspectors and superior management tiers, up to and including the central NHS cadres in Whitehall, to notice what was happening, let alone raise the alarm or do anything to stop it.

The failure was complete, embracing every actor in the drama, from lowliest auxiliary to the minister and top civil servant in charge. To provide the finishing touch to this masterpiece of failure, it is Teflon-plated, not a shred of accountability or responsibility attaching to any of the parties involved.

Unlike politicians and the press, which assume that every management debacle has special causes, mostly in the shape of flawed individuals, no one who has thought even for a minute about the organisation as a system will be surprised by this cascade of failure.

It is built into a system that might have been designed to fail every practical and human test.

As to why, a Scottish TUC research report published last week under the self-explanatory title ‘Performance Management and the New Workplace Tyranny’ handily describes just the cycle of work intensification, cost cutting, task-standardisation and IT-monitoring that (often coupled with outsourcing) decisively broke the link with compassion and care.

This is the morally and economically bankrupt ‘deliverology’ that New Labour built, the public-sector variant of the ideological shareholder-first, externalising travesty that in the private sector presented us with sub-prime, Lehman, and the financial meltdown. Unwittingly emphasizing how closely they are related, David Cameron’s dismal addition to Francis’ 290 recommendations is to propose performance-related pay for clinical staff – the very thing that in the finance sector almost brought the walls of capitalism tumbling down.

Performance management, with its relentless focus on individual targets, is the link between the two. Targets simplify, fragment and pull teams apart, focusing workers (whether clinical or professional, public sector or private) on themselves, bosses and regulators rather than customers or patients. Targets being invariably arbitrary, bearing no relation to the capacity of the system to make them, the only way workers can reliably meet them is by working on the one thing they can control: the numbers. They cheat. As a recent Guardian article noted, ‘’target-based performance management always creates ‘gaming’ ‘. Not sometimes. Not frequently. Always’.

This means that the numbers managers receive are wrong. This matters, since as Francis observed, Mid-Staffs managers managed by numbers and abstractions rather than interaction with the front line. Here is one reason why they were blind to what was going on under their noses.

But they are usually the wrong numbers anyway. To serve as a guide to improvement, a measure must be related to purpose from the customer’s point of view – the end-to-end time to let a property, do a repair, diagnose and treat a patient. Most of the measures managers are obsessed with (standard response times, call-handling times, agreed service levels) measure activity, not purpose. So even if the numbers had been correct managers would have still been in the dark: in the blackest of satire, patients died while managers fretted about people meeting irrelevant targets.

Let’s sum up. The NHS is an organisation where staff face in the wrong direction, the numbers are fiddled and the measures irrelevant, and managers spend the vast majority of their time beating up on individuals instead of attending to their real job, seeing to the system.

In this light the only surprise is that there aren’t more mistakes; brutally, if lives are saved it is despite, not because of, a system that mass-produces care packages to meet abstract meta-targets – cutting MRSA by half, a four-hour wait in A&E – rather than to respond to individual need. The system simply isn’t set up to do care and compassion. But since people experience care as individuals, even when targets are hit patients feel no improvement. Try boasting about success in cutting MRSA to those still infected, for example.

The management of the NHS has itself become a disease. Responding to the Mid-Staffs disaster by piling on more regulation and inspection, setting service standards for compassion, intensifying the performance management regime and threatening criminal charges is like trying to bludgeon a patient back to life. Instead, we need to start at the other end, with the patient, and design an organisation that can respond to patients,’ not ministers’ or commissioners’, needs. Unless and until the NHS sickness is wiped out, there will be more Mid-Staffs (five more hospitals are being investigated) not fewer.

A matter of trust

As any blues singer will remind you, you never miss your water till your well runs dry. The same is true of trust – just ask the consultants at Arthur Andersen, which dematerialised overnight in the wake of the Enron collapse in 2001, or more recently the News of the World journalists whose livelihoods went up in a puff of smoke in the chain reaction triggered by the phone-hacking revelations of July 2011. This – and the subsequent arrest of News International hacks – throws into sharp relief questions of individual and collective trust that were explored in an illuminating discussion at the launch of PR firm Edelman’s 2013 Trust Barometer, now in its 13th year.

The Barometer tracks attitudes to trust in various institutions and individuals in 26 countries across the globe. For one panellist at the UK launch, FT.com managing editor Robert Shrimsley, there was a twinge of sympathy for some NOTW journalists caught up in a culture not of their own making: if everyone else is getting otherwise inaccessible stories by employing private eyes and bugs, it takes a conscious and public effort to go against the cultural grain. (For a less charitable professional reaction, see Sir Harry Evans, the long-time Sunday Times editor, here.)

But this is exactly why the role of the individual in trust is crucial, noted another panellist, the academic Sarah Churchwell, who made a crucial distinction between accountability and responsibility (something I have also written about). Accountability is imposed from the outside – something owed to a customer or, more problematically, a hierarchy or central regulator. Responsibility on the other hand is internal – an inner voice that tells you what is right or wrong. It may involve expressly refusing the mechanisms of bureaucratic accountability (ticking boxes, doing things right) in the name of doing the right thing. Whistleblowing or choosing to be accountable to citizens rather than inspectors or regulators are cases in point.

At News International, the generalised collapse of trust in the shape of a mass withdrawal of advertising was the direct result of irresponsible behaviour by journalists in the performance of their jobs. Interestingly, the macro story mapped out by Edelman in this year’s Barometer makes also makes a link between the individual and the wider evolution of trust in general, albeit a slightly different one.

Perhaps the most striking development in the narrative of the last few years is the growing trust gap between institutions and their leaders. Thus while with some exceptions (banks, media in the UK) trust in institutions has gradually been recovering ground since the low point of 2008, the same cannot be said of institutional leaders, who their underlings view with a much more jaundiced eye. Among the general population, only 13 per cent say they trust government leaders to tell the truth, compared with 41 per cent trusting government as an institution, the equivalent fitgures for business being 18 per cent and 50 per cent. These differences are unprecedented and ‘nothing short of extraordinary’, according to Edelman.

There are of course some obvious reasons for the thumbs-down for individuals – Edelman singles out the continued high-profile outing of individuals such as former McKinsey managing partner Rajat Gupta, Barclays CEO Bob Diamond and Chinese government official Bo Xilai, together with the drip-feed of poison from the ongoing Libor and phone-hacking affairs.

But together with other complementary findings, they have some sobering implications for CEOs and business leaders. In 2008, before the full implications of the financial crisis had hit, corporate reputation depended above all (76 per cent) on operational excellence: the ‘what’ of performance. In 2013, in another ‘extraordinary transformation’, executing well has become just table stakes – one of the basic competences necessary to get into the game. More important for reputation, and getting more so, are ‘how’ questions about the way business is done: does the company behave ethically, is it a good employer, does it put customers before profits and is it transparent and open in business affairs – all issues that in the past could be dealt with with a bit of lip service, but which in practice interfered little with the drive for shareholder value

That alone should put many traditional CEOs on red alert. But even if they start making the right noises now, it won’t be enough – for the very good reason that, as we have seen, people don’t believe them any more. According to Edelman, people now need to see or hear something three to five times in different places before they’ll accept it’s true.

But there’s more. If not their bosses, who do people believe? Experts and academics is one answer, but also peers – ‘people like us’ – who are twice as credible as CEOs or government officials.

What this means is that CEOs can no longer just push their chosen messages down to a mass audience from on high, as in the past. Just as important are continuing real-time conversations and assessments between consumers, employees and other stakeholders. The implications are profound. For the message to be believed, these constituents have to be engaged too. Or rather, the message from on high has to be consistent with the one that is being spontaneously generated from below. As Richard Edelman puts it: ‘The hierarchies of old are being replaced by more trusted peer-to-peer, horizontal networks of trust.’

Think about this for a moment. I’ve always been sceptical about the lasting significance of social media, at least in business. But could it be that the true, unexpected vocation of Twitter and FaceBook is not to peddle tittle-tattle, spread news or even organise flash crowds, but finally to kick out the foundations of top-down corporate management? The tweeting of the sacking of HMV headquarters staff this week is just a small illustration of the disruptive potency of the message from below. The emerging storyline of trust is: it can’t be pushed into existence. It’s reciprocal. That means that the individual’s role is critical, in both its creation and destruction. And accepting and exercising that responsibility just may be the most important, liberating thing that individual does.

The art of leadership

Read my article on managment as a liberal art, FT Business Education, 28 January 2013, here

The end of the line for shareholder value

Dell, a former titan of the computer industry, is shortly due to go private in a deal worth $22bn. As the PC sector is reshaped by competition from tablets and smartphones, Dell reportedly believes that its strategic shift from commodity PC manufacturer to purveyor of business services is best carried out ‘behind closed doors’ of private rather than public ownership.

This is odd. If shareholder control and the metric of the share price, the central pillars of today’s governance, provide the best possible compass for running a company, as the dominant wisdom asserts, why would a company voluntarily forgo them? Even odder is that it’s actually not odd. Dell is far from alone. As the officially sanctioned corporate form loses its appeal, stock markets on both sides of the Atlantic are shrinking. According to research by Grant Thornton, from 1997 to 2009 the number of publicly listed companies in the US declined by 39 per cent, and Will Hutton’s Ownership Commission found a similar trend in the UK.

There’s more. Not only are investors not clamouring for companies to invest in that specifically state shareholder value maximisation as their purpose, they flock to buy shares in firms with A and B-class equity that deliberately weaken shareholder rights, such as Google, Linked in and Zynga. In other words, shareholders themselves don’t seem to value shareholder control very highly. Finally, ponder this. The UK has taken the shareholder-primacy model considerably further than the US (indeed, compared to the latter it is sometimes termed a ‘shareholder paradise’). But if the standard model were truly superior, and companies run accordingly were the most efficient, the UK would be world champion at breeding successful global companies. Which it, er, conspicuously isn’t.

So what’s going on here?

What’s going on, says Lynn Stout in her forensic study of the subject, self-explanatorily entitled The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations and the Public, is the implosion of the shareholder-value paradigm that has held business and academic thinking in a vice for the last four decades.

For sure, by the end of the 20th century the idea that the purpose of companies is to maximise returns to shareholders was entirely dominant. And it continues to hold much sway. In the UK it’s behind Vince Cable’s reforms to give shareholders a binding vote on executive pay. In the US a famous essay termed it ‘the end of history for corporate law’: ‘The triumph of the shareholder-oriented model of the corporation is now assured,’ the authors wrote in 2001, ‘not only in the US, but in the rest of the civilized world’.

Yet it’s a myth. No slogan-chanting revolutionary, Stout is a well-regarded legal scholar who in admirably clear and concise language successively demolishes every one of the props of shareholder hegemony.

In the US, shareholder value’s spiritual home, ‘corporate law does not, and never has, required directors of public corporations to maximise shareholder value,’ she writes. ‘Second, closer inspection of the economic structure of public corporations reveals that shareholders are neither owners, nor principals, nor residual claimants. Third, the empirical evidence does not provide clear support for the proposition that shareholder primacy rules produce superior results. Indeed, once we shift our focus from the performance of individual firms to the performance of the corporate sector as a whole, it suggests the opposite’.

In other words, the 40-year-experiment proves that shareholder primacy is a con. It has neither descriptive nor normative value. Not only is it not a panacea; prescriptions based on it are the cause of many of the things that are going wrong.

Although CEOs and some hedge fund managers have done exceedingly well, it has failed to live up to the promise of making shareholders as a class better off. Worse, says Stout, it encourages amoral, selfish behaviour that erodes the commons and undermines the economy as a whole. Its fingerprints are all over the succession of scandals that culminated in the meltdown of 2008. It is implicated in the slowdown of innovation, the rise of outsourcing and offshoring, and the demise of pensions. In its name, the salaries of CEOs soar while those of ordinary workers are held down. Shareholder value fuels the inequalities that destabilise societies and keep economies in the doldrums.

Shareholder value may be a zombie, but the undead grip is still strong. Why? The central idea has the virtue of being simple and easily understood by the public and the press, for which it plays into the need for strong stories, and by managers too, even when it is leading them astray. By lending itself to numbers and equations, shareholder value serves the academic need for management to look like a science; and it’s hard for scholars to accept that more than a generation’s worth of work was futile. It’s no less difficult to convince shareholders long used to being theoretical emperors that they have no clothes. And CEOs who have grown fat on the comfortable idea that they deserve to be rich as benefactors of shareholders have too much at stake to give up without a struggle. More subtly – and this Stout only hints at – by teaching that the baser instincts are not only normal but desirable in the shareholder interest, it turns the fiction of homo economicus into reality, with incalculable consequences for the future.

There is no longer room for doubt: recovery from the crisis is not a matter of business as usual with an added layer of regulation. It’s kicking out the shareholder-value paradigm and the destructive management model that goes with it. By taking her sharp legal axe to the accepted framework, Stout continues the urgent demolition work begun by Rakesh Khurana’s magisterial account of the betrayal of the business schools, From Higher Purpose to Hired Hands, and Roger Martin’s Fixing the Game (see my interview with Martin here). Stout demonstrates that the edifice was all front and no foundation from the start. Now the cracks are on the outside. So all together now: a few more coordinated shoves and we’re there.