ACCORDING to a study by the consultancy Booz Allen Hamilton, of all the value destroyed by the largest US companies between 1999 and 2003 (including Enron, Tyco and friends), just 13 per cent was the result of failures of regulatory compliance or board oversight. Eighty-seven per cent was caused by strategic or operational error.

In other words, investors’ health is, now as ever, at much greater threat from managerial cock-up than conspiracy. As Bob Garratt, visiting professor at Cass Business School, puts it: ‘Think of Marconi, Equitable Life and Morrisons – the issue here isn’t financial propriety, just basic competence.’

Yet, over recent years, the governance agenda has increasingly been driven by the former, impropriety. Britain was the early leader in code-setting: starting with Cadbury in 1992, through Hampel, Turnbull and finally Higgs in 2003, a succession of reports and ensuing codes have elaborated and refined the apparatus of corporate control.

Other jurisdictions have enthusiastically followed: there are now 273 governance codes in place around the world, according to Garratt. The current culmination of this trend is the US Sarbanes-Oxley Act, Sox for short, which takes a giant step further by making executives personally responsible for signing off the accounts, on pain of criminal sanction.

Now investors need to be protected from fraud, of course – but the effect is nullified if the cure exposes the patient to an even greater hazard. The results of governance’s reverse Pareto effect (spending 80 per cent of attention on the state of the stable-door lock and 20 per cent on whether a contented horse is still inside) are now coming home to roost.

Interviewing chairmen, directors and other usual suspects for a new report, The Role of the Board in Creating a High-Performance Organisation , researchers John Roberts and Don Young found that the constant pressure on boards to spend more time on investor relations and meeting regulatory requirements was diverting attention from strategic and operational issues, thus perversely increasing the chances of corporate failure.

This likelihood was greater for those boards that they characterised as ‘investor-driven’ – that is, highly reactive to often conflicting short-term shareholder pressures and in which non-executives were cast in a primarily policing, compliance role. By contrast, ‘strategy-led’ companies aim to resist short- term City pressures in favour of long-term improvement. Their boards operate as a unified team, and non-execs are expected to be more than policemen, adding value by acting as a resource whose distinctive knowledge is available to the rest of the business.

Everyone agrees that the intentions behind the codes were good, but, especially in the US, regulation has gone ‘miles too far, as even the Sox authors acknowledge’, says Garratt. The orgy of box-ticking has ‘developed into a bonanza for the people who got us into this mess in the first place, who are gold-plating the already onerous requirements. This is the theatre of the absurd.’ Not only is compliance expensive – pounds 50 million and up for a UK firm, says Garratt – but it is also eroding the propensity to take risks. Sarbanes-Oxley is a greater threat to capitalism than Karl Marx, he concludes.

The effects are less marked in the UK, where the codes explicitly mention the need for boards to contribute to strategic direction. But the direction of travel is inexorably the same. This is not surprising, since all contemporary corporate governance principles share the same theoretical underpinnings: the enormously influential agency theory.

In brief, agency theory suggests that the prime role of the board is to ensure that executive behaviour is aligned with the interests of shareholder-owners. Otherwise, self interested managers will use their superior information to line their own pockets. This is the justification for the separation of the chairman and CEO roles, huge senior executive salaries, the overriding requirement for non-exec independence, and much more.

Putting the theory into practice, however, has revealed at least three main faultlines. First, prescriptions based on it don’t seem to work. ‘Good’ governance according to the codes may or may not prevent fraud (Enron ticked all the boxes at the time), but it doesn’t by itself stop catastrophic strategic mistakes nor is there any evidence that it improves performance. As the report notes, governance is necessary but not sufficient to create high performance.

Second, the theory is viciously self-fufilling. As even its main progenitor, Michael Jensen, now acknowledges, the share options that he advocated as the remedy for agency problems didn’t so much align directors’ self-interest as create it. They generated perverse incentives for fund managers and executives first to collude in hoisting share prices above their underlying value and then to use any means to keep them there Enron, again, and the internet bubble are the classic examples. It encourages the idea that, opportunism and greed being the norm, anything that isn’t explicitly banned must be OK this, in turn, justifies the need for even tighter controls. Hence Sox.

Third, even the description of market actors as agents and principals collapses in today’s market conditions. Where there is a reported 90 per cent churn of FTSE stockholdings annually, the idea of ownership and the primacy of shareholder rights, the fountainhead of agency theory, simply dissolves.

Paradoxically, if we want companies to create value rather than destroy it, boards may need to pay less rather than more attention to corporate governance as it has come to be understood. To be clear, this is not a matter of ignoring investors, but of creating their own code and thereby snapping the cord that is too often used to yank investor-driven boards around between conflicting priorities. Boards’ first responsibility is the long-term sustainability of the organisation, not complying with investor demands for certain kinds of board structure and composition. Good governance is a means, not an end not just about seeking conspiracies but averting cock-ups, too.

The Observer, 27 November 2005

PETER Drucker, who died last week just before his 95th birthday, once said that the 20th century would have been impossible without management. It was a typical Druckerism: no one before him would have conceived of management in such large, even flamboyant, terms – and in doing so he helped to make it come true, with all that that means in terms of both good and ill.

As he proclaimed himself (he was never one to hide his light under a bushel), Drucker was the first to identify management as a distinct function and managing as distinct work with its own responsibilities. In Concept of the Corporation (1946), an analysis of General Motors, he put forward a seminal view of the company as not just an economic but a social entity (GM, in the middle of a bitter 113-day strike, hated it and tried to have it suppressed).

He also claims to have given currency to such now-familiar terms as ‘post-modern’, ‘privatisation’ and ‘knowledge work’. He predicted a time when companies would be owned by employees’ pension funds (‘pension-fund socialism’), wrote presciently of corporate responsibility long before it became a fashion, and was way ahead of the field in picking up the importance of not-for-profit organisations (the focus of his eponymous Foundation, set up in the 1990s).

For all these things he is unreservedly lauded. At Judge Business School in Cambridge, Charles Hampden-Turner, a seasoned international observer, notes that he was a guru before there were such things and his work as a consultant pre-dated academic striving for ‘relevance’. ‘He got there long before anyone else – the work he did half a century ago is remarkable,’ he maintains.

Charles Handy is another admirer. ‘Drucker was the great conceptualiser,’ he says. ‘Management research looks backward he was able to look forward. He had the gift of seeing the future in the present and showing us what it was.’

Part of Drucker’s authority derived from his experience and the extraordinary range of his reference, uncommon in business. Born in Vienna, where his family knew Sigmund Freud and the great economist Joseph Schumpeter, Drucker as a student interviewed Hitler before being forced to emigrate from Frankfurt, where he was by then working, after he had a publication burned by the Nazis. Together with his great cultural and historical erudition, this experience provided a unique framework for his ideas on management.

Management, as Drucker saw it, was a ‘liberal art’. Of course, profit – a tax on the present to provide for the future – and the disciplines to make it were absolutely necessary. But profit did not justify itself: ‘Free enterprise,’ he wrote in The Practice of Management (1954), ‘cannot be justified as being good for business. It can be justified only as being good for society.’

For Drucker, the heart of management was people – orchestrating individual effort so that it became more than the sum of its parts, amplifying strengths and neutralising weaknesses. Management was thus the dynamic, lifegiving part of business but more than that, it had a stewardship role, as protector of institutions from ‘the dark forces that lurk just beneath the thin veneer of civilisation that we had thought to have repaired during and after World War Two’.

There is some irony here. On the one hand, Drucker is venerated by his peers and regularly tops the poll in surveys of the most respected management thinkers. ‘Drucker comes in head and shoulders above everyone else,’ says Des Dearlove, of Suntop Media, producer of ‘Thinkers 50’. ‘In a fad-driven industry, that’s a remarkable achievement.’ On the other hand, never have his views about business been less fashionable.

Although a professor of management for half a century, Drucker was never a conventional business academic, and his brand of ideas-based rather than research-based scholarship – what the late Sumantra Ghoshal termed ‘the scholarship of common sense’ – was increasingly edged out of the mainstream as business schools tried to turn management into a science.

Drucker himself was aware of this, and made no secret of his disapproval. ‘I am not a fan of business education in its present form,’ he observed in 1999. ‘Management education has focused far too much on (a) being academically respectable, which means forgetting that management is a practice, not a science, and (b) believing quantification is management.’

He admitted being ‘appalled – and rather scared – by the greed of today’s executives’. ‘I have said frequently that it is both obscene and socially destructive for chief executives to get a $20m bonus for firing 10,000 workers,’ he said. ‘And I am not impressed by the way many businesses – including old friends and clients of mine – are being managed.’

But this too is part of Drucker’s complicated legacy. Among his other firsts, he invented not only the importance of management but also, perhaps inevitably, the importance of managers – with less favourable consequences. As Chris Grey of Judge Business School points out, Drucker was uniquely of his time and place, and when in the 1950s and 1960s he held up to corporate managers the flattering mirror of themselves as new cultural and economic heroes, they were dazzled by what they saw.

That they revelled in the image, but progressively trivialised before abandoning the humanist substance that Drucker had erected to carry it, was not his fault, but it was deeply wounding. There is similar ambivalence around management by objectives – perhaps his most famous management prescription. While many admire the negotiating of individual and corporate aspirations that were characteristic of his original version, others believe that with hindsight it was the first step on the road to the crude regimes of rigid imposed targets and quantification that he hated and that dishonour so much management today.

Drucker, says Henry Mintzberg of McGill University, was indeed ‘the father of modern management, with everything that that entails. His contribution was phenomenal. He was also a wonderfully warm and engaging human being.’ As Mintzberg suggests, the contribution and the humanity go together. If managers are to make sense of their difficult inheritance, they will need the latter attributes just as much as the business insights and wisdom of the founding pioneer.

The Observer, 20 November 2005

I F YOU had to write your organisation’s obituary, what would it say? Would there be any mourners? Has it made any difference to anyone? Would the world be worse off without it? Would anyone actually notice?

Faced with this question, say Klaus Fog and Christian Budtz, most chief executives are struck dumb, with no idea how to reply – a telling indication of the tenuousness of their companies’ hold on their purpose and meaning. If those inside the firm cannot encapsulate the core story, how can those outside be expected to understand it?

Both Fog and Budtz, of the small Danish communications group Sigma, believe that in a world of trivia, artifice and information overload, ‘the story’ is critical not just to a company’s brands, but to its whole existence. In most companies it is lost under accretions of history and bureaucracy it takes the obituary test to uncover and reinvigorate fundamentals.

Together with Baris Yakaboylou, Fog and Budtz have written a book about their findings (Storytelling: Branding in Practice, Springer). Significantly, Fog and Budtz have a newspaper and media background, but for all of them ‘the story’ is primordial.

The argument goes like this. In the West, we live in a world of material excess. Almost everything is in oversupply and whatever it is, you can probably buy a knock-off Chinese version that is cheaper and not much inferior to the original (which was probably made in China anyway).

Given this, traditional marketing methods lose their effectiveness, which is why so many brands are in trouble. This is partly a matter of messages becoming lost in the clutter – each consumer is exposed to an estimated 3,000 messages a day, almost all extolling a product’s features and how much better it is than rivals. But more importantly it is because, while companies have not changed, we have: we are not even listening to this kind of advertising any more.

Fog and Budtz invoke Abraham Maslow’s hierarchy of needs: consumers’ physical needs having been satisfied, they are now looking for sense or meaning, something they can use psychologically to realise their own potential.

Here is where the story comes in. Stories go back as far as humankind, for the good reason that the world is incomprehensible without them. By establishing relationships between things, a story permits meaning and memory. Plain lists are notoriously hard to remember: stories and theories act like mnemonics, allowing elements to be strung together and interrogated. Uniting emotion and intellect, stories can recount a complex technological narrative with breathtaking economy.

An example. A journalist in San Francisco is trying out his iPod as he waits for a bus. A young woman joins him at the stop, also with an iPod. Observing her neighbour, she wordlessly switches their earphones, so each is suddenly listening to the other’s music. As her bus arrives, she switches the earphones back, flashes a smile and is gone.

Now, some people will hate that story. But, says Fog, it encapsulates Apple’s cool ease of use in a way the company has never been able to do with its computers. No accident then that only now is the Mac making inroads into the Microsoft-Intel dominance as it bathes in the radiance of the iPod halo.

The important story can come from almost anywhere. What first drew Fog’s attention to the phenomenon was the launch of the world’s first digital hearing aid in 1997. Developed by a then little-known Danish company, Oticon, the device was presented as a ‘computer in the ear’ devised by the best audiologists and computer specialists. However, to the company’s surprise, in testing users reported not only that they could hear better, but that they experienced an unexpected flush of well-being. How could that be?

A neurologist friend of the CEO identified it not as a psychological but a physiological effect. With the computer filtering out the extraneous noise, the brain is freed up to do other things, such as noticing the surroundings, the food being eaten, and so on.

The scientific story was picked up by the Washington Post and then other media. By launch time, the company had a full order book and a reputation as a digital pioneer. Its stock price trebled in a year.

Underlying these stories are several key points:

* the story must be authentic: with all that practice, consumers home in on bullshit

* a corollary of the above, the story comes first. It cuts across the silos of marketing, sales and advertising

* the story is ‘out there’ – it’s a question of finding not creating it (a good place to look is the customer-service department’s filing cabinets)

* you cannot control it: it’s what consumers do with it that matters. ‘Viral marketing is having a good enough story to tell your friends,’ Budtz says. An unfavourable story travels as fast as a favourable one, maybe faster.

Of course, storytelling has always been part of marketing. In public eyes, 3M was a boring industrial company until the often-told invention of ‘Post-it’ notes established it as an innovator. It could be argued that the whole global bottled-water industry is ultimately built on the legend that 2,000 years ago Perrier was an essential ingredient of rest and recreation among the Romans.

What is new is that a brand without a narrative has literally lost the plot. On the other hand, with a strong enough story it can not only survive but rewrite its own obituary. The cult notebook Moleskine, now expensively on sale at a stationer near you, has served as a jotter for writers and artists from Van Gogh to Hemingway. Bruce Chatwin never undertook a journey without a stock – until the small French manufacturer stopped making them in 1986.

‘Now,’ recounts an insert in the revived version – a perfect example of the product-as-story – ‘the Moleskine… has set out again on its journey. A witness to contemporary nomadism, it can once again pass from one pocket to another to continue the adventure. The sequel still waits to be written, and its blank pages are ready to tell the story.’

The Observer, 13 November 2005

LIKE Victory in Europe and the Queen’s birthday, stress is now considered to be so important that it has its own day. Stress Awareness Day, which was on Wednesday, hopes to raise awareness of the condition and to ultimately achieve a 20 per cent reduction in work-related stress levels by 2010.

Stress at work is serious: it costs pounds 3.7 billion and 13 million lost working days, according to estimates by the Health and Safety Executive, with the unknowable costs thought to be much higher.

‘Stress makes people stupid,’ in the words of Daniel Goleman in Emotional Intelligence. It stops them thinking straight and doing their jobs properly. It makes them give up psychologically before they start.

It is also on the increase. In a recent survey by the Chartered Institute of Personnel and Development (CIPD), 40 per cent of employers reported a rise in stress-related absence. Innumerable individual surveys find employees complaining of increasing stress as workloads and pressures intensify, leading to steadily declining job satisfaction, particularly in the public sector.

Human Resources magazine talks of ‘a silent epidemic’. The government is so concerned that employers now have a legal obligation to have effective stress-minimising policies in place in the workplace. But hang on, there’s a bit of a contradiction here. Where are these pressures coming from? From the organisations that are now being enjoined to install stress-management schemes.

Stress is the physical symptom in individuals of the darker side of organisational life. In a recent pamphlet, Demos talks of ‘hyperorganisation’: the relentless spiral of pressure from capital markets (and governments apeing them) for ever more effort and efficiency – faster! longer! harder! Workloads, change, targets and management style all figure largely among stress generators, according to the CIPD. But even this is not enough. Increasingly, as Madeleine Bunting noted in her book Willing Slaves, organisations demand not just physical effort, but employees are made to feel guilty if they don’t give their souls too. No wonder people feel stressed.

Unfortunately, applying stress-management techniques to this kind of systemic issue is like treating leprosy with sticking plaster. To stay with the medical metaphor, stress is the management equivalent of MRSA: an organisation-induced complaint for which palliatives and partial targets (who decides which 20 per cent are de-stressed?) are not an acceptable answer.

Like absence, with which it is closely related, stress doesn’t need managing with yet more policies, techniques, and check-boxes. It needs getting rid of, so it doesn’t require managing at all. That might sound fanciful, but it’s not. Consider the causes of stress, classified by the HSE as to do with (overdemanding) workload, (lack of) autonomy, (poor) support, (low-trust) work relationships, (unclear) roles and (incomprehensible) change.

But turn these around and they become stress neutralisers rather than creators. Research on what makes for a ‘good’ job invariably emphasises control over work as the number one determinant, fol lowed by good relationships and support, a clearly understood role and security. As the Work Foundation points out, stress is psychological, pertaining to the individual.

Where the right psychological ingredients are in place individuals turn hard work and change into a positive challenge and opportunity for growth. And control over the job, clarity of roles and all the other elements of the good job aren’t just stress-moderators for individuals: they are essential components of good management in the 21st century, the only way organisations can move from today’s outmoded mass-production management systems to the flexible, customer-centred organisations of tomorrow.

Control, or autonomy, is critical. One of the most important qualities distinguishing ‘lean’ from traditional management systems is the placing of decision-making control with the people who do the work – enabling the assembly-line worker to stop the line when there’s a problem, or the call-centre agent to decide individually how to respond to a customer inquiry or complaint, for example. This is more efficient as well as more humane, or to put it another way it eliminates human as well as material waste.

So why is lean management, despite some lip service, still so much the exception, rather than the rule? For the answer, we need to go back to control. Most Western companies are run from the top down. In this view, managers have to give orders (that’s what hierarchy is for), otherwise workers wouldn’t know what to do. Given that initial premise, it’s not surprising that most managers respond to any performance challenge by tightening control, not loosening it. A good example is the way mobile communication devices, touted as a means of liberating people from office constraints, are in practice becoming the opposite: an additional means of surveillance which, in the words of one recent report, ‘will simply translate into round-the-clock working for some employees.’ Thus the remedy makes things worse. No amount of well-meaning policies can prevent these tendencies from generating more stress.

Turning organisations inside out so that orders come from customers, not remote senior managers and their computer schedules (more logical, no?) goes completely against the grain for most managers, whose instinct is always to turn the pressure up and then try to mitigate its worst effects. But this just increases their own stress.

Better to bite the bullet. Giving control back to people who perform the principal customer-related tasks not only removes one of the principal causes of work-related stress for individuals but given proper support it can halt the vicious circle of hyperorganisation and set in train a benevolent one of engagement and improvement that benefits the entire organisation. In other words, de-stress the system, not individuals: that way everyone benefits – including top managers, some of the (self-created) worst sufferers.

The Observer, 6 November 2005

THE FT reported last Tuesday that salaries for senior City of London staff rose 9.2 per cent in the year to September – before the annual bonus round, which promises to be high. On the next page, an international productivity comparison showed that in financial services – covering high street banks, pension and insurance advisers, international banks and investment institutions – the UK ranked 14th out of 15 countries.

Some mistake surely? The official line is that financial services are one of the UK’s most profitable and internationally competitive industries, a pointer to the sunny uplands of post-industrialism. Meanwhile, in accord for once, the Prime Minister and Chancellor lose no opportunity to laud the City of London for its exports, job creation and power of attraction – British dynamism at its best. In short, the City is the UK’s jewel in the crown.

That’s the authorised version. But the gap between feeble productivity on one side and soaraway profits and salaries on the other supports a quite different construction that puts a less comforting slant on the Square Mile.

In this interpretation, the City doesn’t give a used fiver about productivity, either its own or that of its clients in the wider economy. For itself it doesn’t have to, being an oligopoly that can charge fat margins whatever its methods: ‘The usual relationship between inputs and outputs doesn’t apply,’ notes Don Young (www.havingtheircake.com), one-time Redland director and now consultant and author.

To the contrary: the enormous profits and salaries that are the norm in investment banking are the result of ‘perhaps the biggest case of market failure the world has ever seen’, in the words of Evening Standard City editor Anthony Hilton. Witness the inability of either savings institutions on one side or client companies in the ‘real’ economy to keep the banks’ eye-watering fees in check. In truth, they have no incentive to. It’s not the institutions’ money, after all, and since their fortunes, and the salaries of their fund managers, depend on measuring up well against their rivals in the next comparative league table, they are willing to pay almost any price for a good deal that puts them ahead.

As for company executives, they are in no position to counter the influence the City wields over their investment strategies. City and media pressures to meet performance targets now govern senior executives’ lives, research shows, while governance codes have become more ‘investor-centric’. At the same time that going against the City grain is career-limiting, those who comply with its dictates can expect rapid elevation to the elite of super-earners, albeit not quite on City scales, since that is what they are measured on.

In this context, clients’ productivity is simply irrelevant, since institutions are no longer investors in any real sense. Short-term pressures on fund managers mean that ‘churning’, as opposed to long-term holding, is rife. This has been given a mighty boost by the rise of the hedge funds, which are now estimated to account for up to 45 per cent of stock market trades in London and New York.

Unregulated, opaque, with close ties to or sometimes owned by the banks themselves (conflict of interest, anyone?) – hedge funds, Young points out, don’t even pretend to invest in the future of companies. They bet on the movement of share prices, often not even owning the shares they are speculating with, borrowing them instead.

The results of the de facto collusion between the City and top management are incalculable. One, in whole or in part, is the pensions crisis. Pleasing the institutions has been a powerful if unspoken reason why managers have rushed to close their defined benefit schemes with such unseemly haste (albeit ensuring that their own schemes remain largely untouched). How else to account for the fact that last year, at the height of the pensions concern, the top 100 UK companies paid out pounds 39 billion in dividends, nearly four times as much as they invested in their final pension schemes?

Another consequence is the emphasis on the deal. Hence City veneration for companies such as Rentokil and Hanson, and in the US Enron and WorldCom, even as they run themselves into the ground. Never mind the evidence that they mostly destroy value: deals provide fee income for investment banks and share movements for hedge funds to bet on. They are the only conceivable way that companies can reach the short-term targets that institutions have obliged them to set – and if they don’t, well, breaking up the company will do just as well. ‘If your company doesn’t enable me to meet my short-term investment objectives, no matter how misguided my judgments, it is the company that must give way – even if it is destroyed,’ as Young sums up the institutional attitude.

As usual, Keynes had it right when he predicted that capital development as the offshoot of a casino was likely to yield dodgy results. The deal-orientated, short-term form it has taken in the UK leaves no time, money or understanding for the patient organisation-building work that is the foundation for enduring companies and real wealth creation, nor for large-scale investment in technology. It is no accident that the UK supports so few big high-tech firms (farewell, Marconi, dismembered and sold off last week) and noticeable that the exceptions, the pharmaceutical and aerospace companies, have what is effectively a regulated relationship with one of their main buyers: the government.

The City retains barely a shred of its initial purpose of supplying capital for long-term corporate development, now only for deals, which may be why the number of SE-quoted companies is shrinking. Yet its influence is pervasive. It is the spiritual home of asshole management, the source of the relentless demand for overperformance that demoralises employees, causes managers to jeopardise their companies and, as City court cases demonstrate, can easily tip over into bullying and harassment.

The tail is wagging the dog, the means has become the end. It’s symbolic that the vast bonuses announced for City accountants last week have been generated not by creating new enterprise but by compliance work – policing the governance rules that have been installed to control the excesses of the deal culture itself. Alchemy or what? No wonder the government loves it.

The Observer, 30 October 2005

JEFF IMMELT, chief executive of GE, laments that 40 per cent of GE consists of unproductive administration and back office work. He wants to halve that in five years.

Management consultancy Proudfoot calculates that on average a whopping 37 per cent of all working time is wasted – that’s equivalent to 7.5 per cent of UK GDP. A Mercer-Gallup survey finds that while 73 per cent of workers are ‘disengaged’ from their organisation, 19 per cent would happily sabotage it.

GE rates as one of the best managed companies in the world (hang on to that for a minute). Many lesser firms are so cluttered with waste and bad feeling that they can barely move.

Take General Motors, which last week announced a net quarterly loss of $1.9 billion. GM had already jettisoned its parts supplier, Delphi – which has just gone into Chapter 11 and is demanding drastic pay reductions from its 33,000 US employees.

Now GM is selling a controlling stake in its finance arm, its sole profitable business. It has also negotiated a $3bn reduction in healthcare costs with the trade unions.

But these can only win temporary respite. The truth is that both GM and Delphi are in a death spiral. Their real problem is not healthcare costs, the official excuse, even though the latter total $1,500 per car. It is a business model that ensures that for every car sold, GM realises $6,000 less in dollars than Toyota. In other words, even discounting health costs, GM is $4,500 per car less effective than its Japanese rival.

The responses are another twist on the downward spiral. Who would want to work for an outfit that demands pay cuts on one side while setting aside 10 per cent of its equity as a bonus for management when it emerges from Chapter 11, as Delphi has done? Whose only reaction is quarrelling with the union, like GM?

Never underestimate the power of disengagement. As an airline pilot noted with a malevolent grin when faced with similar cutbacks, ‘There’s no way they can cut my wages faster than I can raise their costs.’

As that suggests, the full-service airlines are also in a death spiral, and for much the same reasons. The fact is that the business model of GM, the legacy airlines, and indeed most of the world’s large traditional companies, is played out, knackered, off its perch – the Norwegian Blue of business models.

Consider GE. GE, remember, is the most admired, best managed old-paradigm company in the world. Its training is legendary, its top managers exceptional, its commitment to good practice unquestioned, the pressure to perform so relentless that the lowest performers are culled each year. So if this paragon is only 60 per cent productive, what hope is there for anyone else?

The Proudfoot 2005 international productivity report throws some light on this. It found that almost everyone was ‘busy doing the wrong things’ to raise productivity. Thus, while executives (and ministers) think it is all a matter of capital investment, in fact it’s much more important to get the most out of existing resources – eliminating wasted time, for instance. It’s management, stupid.

‘The tendency to exaggerate the importance of new projects… is also reflected in over-optimistic expectations of cost savings and productivity gains from offshoring [and outsourcing],’ adds the report.

The source of the ills can be narrowed down further. According to Proudfoot, three-quarters of the wasted time is down to poorly planned and managed work and inadequate supervision. Supervisors, Proudfoot found, were spending more than half their time on administration and non-value-adding activities all managers overestimate their effectiveness.

Proudfoot sees the answer as a better and more tightly operated command and control process. ‘Having a well designed and effective management operating system,’ says the report, ‘is the single most important change firms can make to improve labour productivity.’

Well, yes. Yet while there is undeniably scope to make existing conventional systems work better, GE’s experience graphically demonstrates their limits. Beyond a certain point, planning and command and control aren’t the solution – they’re the problem.

Ever more detailed budgeting, forecasting, planning and allocating are not only non-value-adding (think of all those management man-hours and complex IT sys tems), they are often value subtracting – for all the planning, GM spends too much time building motors no one wants to buy.

The tragedy is that there are perfectly viable alternatives. It took 25 years before anyone copied the successful low-cost, point-to-point model of Southwest Airlines (which pays its pilots 50 per cent more than some rivals).

No western carmaker has fully absorbed the lessons of Toyota, even though they’re hardly a secret. It gives competitors guided tours of its plants, for goodness sake.

When Toyota took over responsibility for GM’s plant in Fremont, California – a factory afflicted with world-class levels of drug and alcohol abuse – the same workforce promptly doubled productivity and quality, with no extra pay.

In complex human systems, autocratic control is an illusion. The only way of retaining control is to give it away, producing to real demand and placing decision-making on the front line, nearest to the customer. This is the case for service companies as well as manufacturers.

GM is probably past hope. But unless it can make the shift, even GE will struggle to bring its management overhead much below that crippling 40 per cent.

The Observer, 23 October 2005

WHEN Tony Blair at the Labour Party conference invoked ‘the patient courage of the changemaker’ to describe the mission of his third term, he was making three colossal assumptions:

1) change is good

2) change will be unthinkingly resisted

3) given sufficient patience and courage, one-off change can be achieved by managerial effort, after which the organisation will have been successfully turned round and will be facing in the direction the changemaker intended.

When the Prime Minister added that in every case in retrospect he wished he had pushed his reforms further, he was effectively turbo charging these assumptions.

Yet each one of them is as trustworthy as an Alastair Campbell denial. That change is inevitable, non-stop and pervasive as never before is the biggest management cliche of all. As Chris Grey, professor of organisational theory at the Judge Institute, puts it in his indispensable and subversive Studying organisations, change has become a fetish.

Yet this self-serving narrative is undercut time and again by both statistics and common sense. Job tenures have not shortened, and full-time employment is still the norm. On many measures the world economy is no more globalised now than at the end of the nineteenth century. Despite the internet, the laws of economic gravity still operate. And it is hubristic narcissism to think that change today is more wrenching than it was, say, during the Industrial Revolution in the late eighteenth century.

In fact, the most salient fact about today’s change is how much of it, rationalised by the fetish, is both self-created and self-defeating. The fatal starting point is the idea that change can – and must – be imposed by the ‘changemaker’ top down. Thousands of examples show that this is a fantasy, and both theoretical and practical considerations suggest why.

Remote atop the already distant management factory, the change leader has no way of knowing how his/her decisions, however ‘courageous’ and ‘patient’, will play out on the ground. So unintended consequences abound – targets being a prime example. But even if managers could foresee the myriad theoretical consequences of a course of action, they would still run up against human agency.

On the one hand, organisations can’t afford to switch human initiative off: a leader can’t do everything alone. But on the other, agency has unpredictable results – people disagree. In the presence of agency, the idea that organisations can be redirected like machines is futile.

Either way, top-down change is an unwinnable battle against unintended consequences, which eventually mandate further change to mitigate the damage. In this sense, as Grey puts it, ‘change management’ is ‘a perennially failing venture’, doomed to reproduce itself in a never-ending loop: change as stasis.

There’s no better example of this self-perpetuating tread mill than the original English patient, the NHS. As Polly Toynbee noted recently in The Guardian , since 1948 the NHS has been ‘reformed’ on average once every six years. New Labour has easily surpassed that. The current overhaul is not only the third in eight years it neatly returns the service to where it was when it came in, although under different terminology.

In this orgy of motionless change, the work is not managing hospital beds or patients, let alone health, but change itself: the mad bureaucracy of targets, relationships that have to be reforged, jobs redescribed and reapplied for – and now new IT and office systems embedded to implement payment by results.

In only one respect can this round of ‘reform’ be said to be succeeding – that of deliberately destabilising the service. The avowed aim is to make it easier to import change. But that is a dangerous game, the likely consequences magnified by the fact that in dealing with the NHS the government doesn’t seem to be able to distinguish between an organisation and a market.

This matters. An organisation is not a market. It has different functions and logic, and treating one as the other is a howler, as sure a means of creating confusion and make-work as the other self-generated reforms. The changes are designed to make health (and education, and as much of the public sector as possible) into a market. To work, a market needs clear rules and strong competition so that good solutions come to the fore and weaker organisations have an incentive to improve.

But where does strong competition come from? From – duh – vibrant organisations, with the autonomy, confidence and capacity for real change: to devise new and better ways of meeting the needs of customers (this is called R&D). The market disposes, but it needs organisations to propose in the first place. The two are symbiotic. The situation in the public sector, with complicated pseudo-markets and organisations crippled by central targets and constant interference, is the worst of all worlds, rule-bound, bureaucratic and unpredictable.

In the final analysis, as Chris Grey suggests, the narrative of change is most often not one of rationality but of ideology: a power play, a cover for the attempt to impose one version of ‘efficiency’ (the market) over another, and to discredit those who disagree as self-evidently retrograde, if not evil. Not so much the patient courage of the changemaker, then: more the self-righteous delusions of the fundamentalist.

The Observer, 16 October 2005

WHY DOES a company spend $1 billion on training? In a word, ‘growth’, says Tom Quindlen, vice president and chief marketing officer of GE Commercial Finance.

With $152bn in revenues and $17bn in net income, GE is one of the powerhouses of the US economy. But although it is one of the world’s smoothest takeover artists, absorbing more than 100 companies a year, its size means that as a matter of arithmetic it takes a bigger and bigger acquisition fix to have an effect on the top line.

As CEO Jeff Immelt has emphasised for some time, the company has to rely for extra performance on organic growth.

If not from buying extra sales, or squeezing costs to boost the bottom line, where will the performance improvement come from to meet the company’s brutally demanding targets? The answer has been termed the ‘middle line’: get ting more from what the company does already every day.

The industrial arm of the 126-year-old, Connecticut-based firm turns out everything from light bulbs to aero engines, medical scanners to environmental technology. But, growing out of customer finance, it also has an increasingly powerful financial services side. GE Commercial Financial Services, previously part of GE Capital, is now the largest single GE division, accounting for $230bn in assets and $4.5bn in earnings last year. Europe accounts for roughly one quarter of those totals.

GE’s long experience of the industrial arena already differentiates it from traditional banking and financial service providers and has served it well among the mid-sized customers which are GECF’s staple buyers. But to meet GE’s growth and earnings goals it needs more. ‘When a customer is making the next buying decision, I don’t want them even thinking of anyone but us,’ says Quindlen. The division is also targeting the very largest corporations, which have historically preferred conventional standalone finance houses, and where the company’s customer base is small.

This is where training and education come in. To get where it wants to be, GE knows it must be smarter. It needs to bulk up its intellectual capital. But to make the most of the stock that it has, it needs something else again. As the director of HP labs once sighed: ‘If only HP knew what HP knows.’ Increasing the middle line means not only GE knowing what GE knows, but being smarter about what it does with it. Unparalleled history and vast accumulated experience are not enough on their own. Being able to mine them for useful knowhow requires social as well as intellectual capital, the type of thing that can only come from networks of formal and informal contacts built up over time across the group.

Part of GE’s social capital therefore derives from a highly unfashionable concept: the career. Quindlen has been with GE for 21 years, which is not unusual for the company, all of whose most senior managers are insiders. His seven moves, encompassing stints in industrial as well as financial services units all over the world, are less typical, although not unique. He says candidly that the possibilities of change and diversity, underpinned by near-continuous training – in his case a formal company session for nearly every year of tenure – were a powerful inducement to stay. In GE’s system, it is training, both functional and leadership, that links personal development with company performance.

‘It all comes back to growth,’ says Quindlen. ‘The investment in training, and the ability to pursue a diverse career within the same company, are powerful inducements to recruit and retain great leaders.’ And great leadership and functional ability, combined with continuity and ‘boundaryless’ networks across the group, make it possible for the group to leverage rich resources in new ways.

One of these new approaches is something called ‘ACFC’ – ‘At the Customer, For the Customer’. ACFC is the kind of free consultancy Marks & Spencer once carried out for its customers, only more diverse and less direct. Apart from the technical stuff, says Quindlen, ‘A lot of customers ask us about the generic things we’re good at: Six Sigma, HR processes, leadership succession, or how to do acquisitions and mergers. So we had the idea of opening up our expertise to customers and partners to solve their business problems.’

In effect, it allows customers to mine GE’s accumulated experience. ‘We lend them our intellectual capital.’ The rationale is that as the customer’s business grows faster, so does its need for financing from GE. Commercial Finance has been particularly adept at this kind of knowledge transplant. It claims to have helped more than 1,200 customers to make a total of $1bn cost savings since 2002, and, although it’s impossible to quantify the impact in terms of new business for GE, most people believe it is substantial.

Particularly attractive to customers has been Six Sigma, a statistics- and tool-based improvement methodology. (A six sigma process is one with fewer than 3.4 defects per million.) But it is controversial: critics charge that it is overly complex and top down, essentially a means for getting people to meet targets.

Quindlen concedes that he was taken aback when asked to take on the job of Six Sigma champion for a commercial finance unit, but came out of it a wholehearted fan. ‘It makes you focus on your core processes from the customer’s point of view,’ he says. ‘When you ask for data, you’re always thinking about the customer.’ Six Sigma has, he notes, changed his view of leadership and made him a better leader.

Coming back to the mantra, it also, he says, helps GE to grow. Better core processes mean better service, so cus tomers come back for more. Six Sigma is in high demand on the ACFC programme, too.

‘Growth,’ sums up Quindlen, ‘doesn’t happen by accident.’ Building a sales organisation is part of it, but it is not simply about sending out more salespeople to rope in new customers. Growth outside can only come from growth inside – organic in more senses than one.

Simon.caulkin@observer.co.uk

CORRECTION: Jeffrey Pfeffer’s article referred to in last week’s column appeared in Academy of Management Review (Jan 2005), not as attributed, and Sumantra Ghoshal’s article appeared in in AM Learning and Education (March 2005). Apologies.

The Observer, 9 October 2005

Who cares about management theory? Well, you’d better. Even if you’ve never read or even heard of transaction cost economics or agency theory, these ideas are re-engineering your world as surely as religious fundamentalism, if a lot more insidiously.

That sounds hard to credit. After all, managers proudly ignore theoretical concerns. Even academics lament that the journals they get brownie points writing for are read by audiences numbering a few thousand – if they’re lucky.

Yet invisible though they are, theories matter. ‘The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood,’ wrote Keynes in The General Theory. ‘Indeed, the world is run by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slave of some defunct economist… Soon or late, it is ideas, not vested interests, which are dangerous for good or evil.’

Keynes was right, even if he greatly underestimated the phenomenon. This is because of something called ‘the double hermeneutic’: where human behaviour is concerned, if enough people believe a theory, even a ‘false’ one, it becomes self-fulfilling and therefore ‘true’.

Crudely, if managers believe that individuals will only work under a regime of sticks and carrots – controlled by hierarchy and incentivised by money – and design companies accordingly, that is what people become.

The converse is also true. Just as distrust breeds cheating and self-interested behaviour that attracts still tighter surveillance (the ‘supervisor’s dilemma’), research shows that assumptions that individuals are hard-working and trustworthy produce workplaces where people are less interested in money and co-operate more.

‘The conventional view is that theories win because they are better at explaining behaviour,’ notes Jeffrey Pfeffer, professor of organisational behaviour at Stanford Graduate Business School. ‘This stands it on its head: theories win because they better affect behaviour, becoming true as a result of their own influence irrespective of their empirical validity.’

Pfeffer, a respected senior researcher, is one of a small but vocal chorus of academics who are increasingly concerned by the damage, as they see it, that theoretical assumptions are doing to the practice of management. Just before his death last year, London Business School’s lamented Sumantra Ghoshal wrote a much-noticed piece for a US journal entitled Bad Management Theories are Destroying Good Management Practices, in which he independently reached some related conclusions. It was no good business schools being pious about Enron and WorldCom, he argued, when ‘it is our theories and ideas that have done much to strengthen the management practices that we are all now so loudly condemning’.

In this view, the damage occurs because the assumptions about human nature underlying all conventional management are overwhelmingly negative. In a paper in the American Management Review, and in a series of punchy presentations sponsored by the Advanced Institute for Management Research (AIM), Stanford’s Pfeffer traces the root of the dynamic to the core principle of economics: that every agent is actuated only by self-interest.

From this, everything else follows. If people are self-interested, they have to be motivated by incentives. Different self-interests lead to endemic conflicts, hence agency problems.

To resolve conflicting interests efficiently, markets are best. Self-interest and markets favour competition rather than co-operation, and mandate hierarchy to keep people in line. They also empty management of all moral or ethical concern. And, indeed, the typical firm has come to be structured around these principles, from governance based on agency theory and shareholder value, to internal markets and performance-related pay, sharp incentives and performance management lower down.

Yet there is little empirical evidence that the assumption of exclusive self-interest is valid. Self-interest exists, of course, but to assume that nothing else does defies common sense as well as well as research findings. Conversely, ‘There is growing evidence that self-interested behaviour is learned behaviour – and people learn it by studying business and economics,’ says Pfeffer.

In an ‘incredibly depressing’ range of studies, business and economics students have been found to be more prone to cheat, free-ride, and violate codes than those of other disciplines. What’s more, unlike contemporaries, they undergo negative moral development during their courses. In other words, they more and more resemble the rational utility maximiser – rational economic man – that is the starting assumption of their disciplines. Economics and business courses, sums up Pfeffer, are ‘hazards to your moral health’.

As both Pfeffer and Ghoshal show, the effects carry over into business itself, irrespective of whether managers have been to business school or studied the individual theories.

Institutional mechanisms such as governance arrangements, social norms – so that people assume that others are self-interested although they aren’t – and language all carry the virus around the world.

The evidence is everywhere. Downsizing (ie firing people), once a last resort, is now done pre-emptively. Incentives are ubiquitous despite zero evidence that pay for performance works. Outsourcing is going through the roof. One study found that, in larger companies, the more MBAs there were among top managers, the more likely the company was to behave illegally.

So now we can see why theory matters – not just for academics, but for everyone who works in organisations. As the psychologist Robert Frank wrote: ‘Our beliefs about human nature help shape human nature itself’ – and, as embodied in current management theory and practice, they are in danger of turning us into travesties of human beings: narrow economic actors who are expected to leave moral, ethical and even generous impulses at the door. This is not inevitable, since just as ‘bad’ theory is doubly bad, ‘good’ theory has the potential to be doubly good. But it does mean that theory is all our concern; too important, in fact, to be left to theoreticians.

Simon.caulkin@observer.co.uk

… Unless it’s a bad theory

Transaction cost economics arose from attempts to understand why, and under what conditions companies exist. In essence, companies exist only as a result of market failure, when situations are too complex for market contracts to be drawn up to cover all eventualities. As individuals are opportunistic, managers must exercise authority or ‘fiat’ to ensure they do as they are told to maximise profits, and create strong individual incentives. Implications: hierarchy, incentivisation, markets are best.

Agency theory teaches that self-interest leads to a conflict between ‘principals’ (shareholders) and ‘agents’ (managers). Managers, being opportunists, cannot be trusted to maximise shareholder interests rather than their own. The resulting ‘agency problems’ must be overcome by aligning managers’ and shareholders’ interests, typically through incentives. This was a major justification for the 1990s stock option bonanza. Agency theory is a powerful influence on corporate governance.

The ‘five forces’ strategy model asserts that companies create strategic position by developing power over customers and suppliers (and implicitly employees), increasing barriers to entry and by managing interactions with competitors. That is, profits come from restricting and distorting markets.

The Observer, 2 October 2005

L AST WEEK ‘s column – ‘Adrift in a parallel universe’ – about the perversion of management provoked an eloquent, sometimes passionate, response. The depth of concern about what is being done in the name of management, among both managers and the managed, was sobering and unmistakable.

Something is badly wrong. ‘We’ve failed,’ said one educator simply, convinced that for all its apparent advances, management is worse now than a century ago. Others noted that the bad really was driving out the good, making it ever more difficult for the voice of real management to be heard among the cacophony of fads, numbers, league tables, meaningless exhortations and hucksters selling ‘solutions’.

But, as one reader also noted, it’s not enough to resist the forces of darkness. We also need a campaign for the light. How are we to drag ourselves back from the parallel universe into the real one?

In the spirit of a positive alternative, a prime text is W Edwards Deming’s 14-point programme for transforming management, drawn up in the 1980s. Deming, now remembered as the philosopher of the quality movement, was originally a statistician who was acutely aware of what could and could not be done with numbers.

He would have been dismayed by their casual and ignorant use in public-sector league tables and targets, in the measurements applied by private-sector companies and the massive, unnecessary costs organisations heap on themselves as a result. Although honoured these days mainly in the breach, Deming’s points – and the ‘deadly diseases’ that get in their way – have as much to say now as two decades ago.

Create constancy of purpose toward improvement of product and service with the aim of becoming competitive, staying in business and providing jobs. That is, management is about providing things or services people want to buy, not financial engineering, outsourcing or doing deals. The enemy of constancy of purpose is the deadly disease of pursuing short-term profits.

Adopt the new philosophy. More than ever with the rise of China and India and increasing burdens on the public sector, we can no longer tolerate systems constructed to turn out waste and turn off customers and citizens. Time to transform management from top to bottom.

Cease dependence on mass inspection. This is equivalent to managing for defects, acknowledgement that the process (management’s responsibility) is not up to it, and applies as much to service as to manufacture – much of the cost of banking consists of employing staff to verify each other’s work. The better (cheaper) alternative is to build quality into the service from the start.

End the practice of awarding business on price alone. ‘Price,’ notes Deming, ‘has no meaning without a measure of the quality being purchased’. It’s total cost that matters. Gate Gourmet, endless friction between supermarkets and their suppliers… enough said.

Improve constantly and forever the system of production and service, to improve quality and productivity, and thus constantly decrease costs. Management’s job.

Institute training on the job. A vast amount of training is wasted. It should be on demand as necessary for managers to understand and act on the issues preventing people doing a good job, for all to understand and act on customer needs.

Institute leadership. Deceptively simple. It means helping people and machines to do a better job, no more, no less.

Drive out fear. One of the most interesting of Deming’s points. He knew that fear makes people stupid. But by forcing them to meet arbitrary targets, fear is also the biggest hidden corrupter of the statistical data essential to improving systems and processes in the first place.

Break down barriers between departments. In other words, look at the process as a whole. This single insight was later reformulated and packaged as ‘re-engineering’, making several author-consultants a fortune.

Eliminate slogans, exhortations and targets for the workforce. Targets are among the deadly diseases: ‘What do they accomplish? Nothing? Wrong: their accomplishment is negative.’ They stifle teamwork, create adversarial relationships and, in conjunction with fear, corrupt data. Kill them off.

Eliminate quotas on the production floor and management by numbers and numerical goals. Substitute leadership. It takes a statistician to say that – and to compound it by adding that the most important figures for managing a business ‘are unknown and unknowable’.

Remove barriers that rob both workforce and managers of their right to pride of workmanship. This means getting rid of performance and merit rating and annual review, according to Deming one of the most virulent of management diseases. Statistically, a fair rating is impossible because of variation in the system, which is the overwhelming determinant of performance but in any case, though alluring in concept, the effect of merit rating ‘is exactly the opposite of what the words promise. Everyone propels himself forward… The organisation is the loser.’

Encourage education and self-improvement. It’s hardly rocket science, is it?

Put everyone to work to accomplish the transformation of management practices. It’s everyone’s business.

Some of Deming’s points seem disarmingly simple, others counterintuitive. Note that there is nothing about shareholder value, or, at the other extreme, about being nice to people – just a powerful system for focusing everyone’s attention on doing the important things better. As he often remarked, observing the huge amounts of waste created by management methods in most companies: ‘Doesn’t anyone care about profit?’

The Observer, 4 September 2005