EXECUTIVE pay is among the most extraordinary (some would use another word) social and economic phenomena of our time.

Conventionally, chief executives’ pay is determined by markets and performance. An influential branch of academic inquiry, agency theory, has legitimised the idea that pay should be used to incentivise managers to boost performance to the benefit of shareholders.

Corporate governance codes have striven to put this into operation – last week the Association of British Insurers (ABI) was congratulated in the press for updating its remuneration guidelines and announcing that 70 per cent of the FTSE-100 met standards designed to ensure that executives are generously rewarded only for outstanding performance.

They must be joking. The best efforts of US and UK researchers have failed to unearth a link between pay and corporate performance in the short term. But some explosive research from academics at Manchester and Royal Holloway business schools* blows away the idea of any correlation between CEO pay and performance in the long term as well.

The results, says Manchester’s Professor Karel Williams, one of the authors, are ‘pretty devastating’. They show that from 1983 to 2002:

* Real CEO pay in the UK and US rose by 25 per cent a year, come rain or come shine, compared with sales and profits growth of less than 3 per cent

* Aggregated, while real sales and pre- tax profits of FTSE firms increased just over 50 per cent over the period, CEO pay shot up more than 500 per cent over his (and we do mean his) tenure of seven years, a chief executive could expect to see his salary double twice

* While the real market value of the firms increased substantially (350 per cent), this indicator has least to do with management, being largely the product of the long stock-market boom and steady additional flows of investment funds

* Although meaningful markets for top managers do not exist, a ‘going rate’ for FTSE-100 CEOs has been established at around pounds 1 million, regardless of the level of performance

* While soaraway CEO pay has towed other senior managers in its wake, there has been no spillover to average employee pay. The cats are relatively as well as absolutely fatter: CEOs now pocket around 50 times as much as ordinary employees compared with nine times 20 years ago. In the US, disparities have risen from 50 to 281 times.

In terms of individual companies, the value creation vs pay story is even less ‘outstanding’. Of FTSE survivors, only GlaxoSmithKline showed long-run real sales and profits growth in line with extravagant increases in CEO pay, the paper says. Of the three other companies where CEO pay had gone up most – more than 1,000 per cent – Aviva had seen pre-tax profits plunge by 152 per cent, GUS by 22.3 per cent and Marks & Spencer 25 per cent.

Of course, such calculations are greatly affected by the chosen beginning and end points. But in sales terms a surprising number of the companies were actually smaller than 20 years before.

The fundamental points, says Williams, are that giant firms are ‘GDP companies’ – they grow more or less at the speed of the economy, whatever happens but although managers do little to create long-term value, they are ‘uniquely positioned to enrich themselves without obvious victims as neither shareholders nor labour lose directly en masse’.

In this light, says the paper, ‘pay for performance’, and corporate governance in general, can be seen more as ideological incantations designed to sell ‘market capitalism with responsibility’ and high pay as an element of that, rather than a realisable programme.

Paradoxically, the academic theory that sets out to explain performance pay and the regulatory framework to keep it in check have served to free it from any other sort of control. As the paper notes, time after time outcry over ‘excessive’ pay has preceded ineffectual attempts to regulate it that have only succeeded in setting a higher baseline.

Pointing out that the emperor has no clothes arouses indignation. But, as Williams says, breaking the link between pay and performance allows for very different thinking about executive salaries – and a more promising agenda than bankrupt agency theory debates.

On the first, the paper suggests that today’s corporate managers are somewhat like landed aristocracy in the 19th century, or political elites of the Third World: the benefits they receive, and any value they create, are the result of the prevailing form of development rather than any real functional contribution. That leads to important questions, some of which will be studied at a new Economic and Social Research Council centre for studying socio-cultural change, and in a forthcoming book.

What is strategy in giant firms growing no faster than GDP? Shouldn’t inclusion embrace top earners soaring out of sight as well as the bottom? Why should one set of managers be paid on a completely different scale from others having tasks of at least equal complexity and responsibility – prime ministers, permanent secretaries and generals, for example? And what should be the going rate for a large company CEO? On a long-term view, how many deserve any increase at all in the years ahead?

*’ Pay for corporate performance or pay as social division: rethinking the problem of top management pay in giant corporations’ by Ismail Erturk, Julie Froud, Sukhdev Johal and Karel Williams

The Observer, 12 December 2004

SCIENCE, INNOVATION and skills is the new government mantra for UK plc. Gordon Brown’s emphasis in the pre-Budget report on the three magic words only reinforces the message delivered by the five-year science strategy and the DTI’s sudden metamorphosis from dull trade and industry bureaucrat to the caped miracle worker of technology and innovation. British enterprise needs to turn off the crowded ‘low road’ of competition through low wages and other input costs and join the more select class of competitors purring along the ‘high road’ of high wages, high investment, and high added value.

Few would disagree with this prescription. There’s little future in competing on commodity products and services with China and India. The CBI may be exaggerating slightly when it says there will soon be no unskilled job vacancies in Britain, but not by much.

However, although in that sense the notion of ‘moving up the value chain’ is uncontroversial, let no one think it will be easy. It is much more than individual firms deciding to spend more on R&D. Innovation and non-innovation are not the mirror image of each other, but completely different things. Shifting the economy from one to the other poses the biggest peacetime challenge to the economy for at least a century.

The challenge is twofold. The first, emerging from research by the Advanced Institute of Management Research, is to do with the institutional framework which conditions the way business operates. To a marked degree, economic policy over the past 20 years has favoured market-type reforms: privatisation, labour and financial market liberalisation, curbing trade union power. Britain is now one of the least regulated, most business-friendly countries in the world.

The good news is that the companies which have survived this dose of market discipline are fitter than they were. The bad news is that ‘business-friendliness’ is a two-faced ally. In Britain’s case, market-based institutions have encouraged firms to compete through just those low-cost production factors – particularly cheap, flexible labour – that are now keeping it in the slow lane. Outsourcing is a striking example of service companies playing the cost card (when a portion of its customer base, incidentally, might prefer quality).

So one task for managers and policy-makers is to ween companies off today’s institutional supports (eg, financial engineering and cheap labour) and proactively begin to craft new ones – close-coupled supply chains built on trust and a more skilled workforce, for example.

The second challenge is transforming the institutions of the firm itself – and that may be even harder. In a research report commissioned by Microsoft on the future role of trust in work, LSE’s Dr Carsten Sorensen points out that innovative services cannot be managed in the way companies have always managed mass production.

In a seller’s market, where the only issue was to meet production quotas, companies could get by turning out standardised products using command-and- control methods with a hierarchy to enforce them – basically, central planning. That never worked very well – see the Soviet Union – and still doesn’t, but for services the results are even worse.

This is because services, and even more innovation, are subject to huge variation at the point of delivery. This means that the knowledge critical to delivering them is ’emergent’ – it appears as part of the process.

‘It is at the front line of the supply chain that decisions emerge they cannot be decided in detail beforehand,’ says Sorensen. In other words, they cannot be commanded. Traditional command-and- control breaks down. There is no alternative to a bottom-up approach.

In Sorensen’s view (and naturally Microsoft’s), technology and trust have the potential to reconcile the need for individual autonomy on one hand with that of performance management on the other. Indeed they do. But that does not make it a foregone conclusion. Even Microsoft accepts that technology on its own is not the answer: used to command and control, it can actually erode trust and make innovation less likely, not more.

And for many reasons, command-and- control is heavily ingrained in the British management psyche. One is the institutional framework already referred to. Another, as Sorensen perceptively notes, is culture. This is partly a matter of class: in the UK, management is a position, not a role, and the position is one of superiority, ie, command. In contrast to Sweden, where highly paid individuals are trusted to manage themselves, ‘there is perhaps in the UK with significantly lower labour costs a tradition of employing one person to do the job and two to check the job is done’. Piquantly, the UK’s obstinate productivity gap may be something to do with the proportions of chiefs and indians: having too many managers who add no direct value and not enough skilled workers who do.

This may be why, in another piece of Microsoft research, British workers are so lowkey about the prospects for innovation. Six out of 10 office workers complained that it was complicated and difficult to get good ideas turned to money-making account, and three out of 10 feared they would lose ideas or fail to gain support to put them into action.

Strengthening the UK science base, persuading companies to do more R&D and getting them to invest in the skills of their workers are all a necessary part of making UK plc more innovative. But they may be the easy part.

As Microsoft UK managing director Alistair Baker puts it, unless there is a change in the historical command-and-control management mentality, ‘no amount of IT investment, however innovative, will deliver the desired productivity gains that we must see to keep Britain competitive’.

The Observer, 5 December 2004

GOODHART’S Law – an insidious Catch-22 decreeing that targets are fine until you start using them to manage by, at which point they are irredeemably corrupted and therefore useless – is not just a public sector phenomenon. As a reader points out, it is alive and well in corporate governance, where it has the same debilitating effects.

John Drummond, chief executive of consultancy integrity works.com, told a Chatham House conference last week that corporate governance was becoming ‘a mile wide and an inch deep’.

He notes that lots of indices and specifications have been developed for use by investment groups to establish governance quality, but most of them put the emphasis on structural elements – type, quality and independence of non-executive directors, separation of chairman and CEO and so on.

‘All companies are being judged this way, with little regard for how employees are enlisted in the quest for good governance and sound conduct,’ he complains. ‘This disconnection means that the surface is getting lots of attention and what really matters – the culture – is getting none.’

In theory, everyone is against the deflection of attention from substance to form that has become known as box- ticking, but many believe that that is what is happening. Even in the UK, where the Higgs reforms were business-led or at least formulated, there is talk of ‘governance fatigue’ in the US, discontent with the Sarbanes-Oxley act is reaching mutiny proportions.

Enacted in 2002 with the attention of heading off more Enron and WorldCom-type scandals, Sarbanes-Oxley runs to 1,100 sections and complying with it, companies grouse, has become an industry in its own right. Meeting its requirements costs large firms about $9 million a year each, according to one survey, and the burden of detail is leading some European companies to considering delisting from New York to escape it.

Of course, many people would shrug and say that companies have brought tighter regulation on themselves. It wouldn’t have happened if they hadn’t misbehaved in the first place. Although there’s some truth in that, there’s a deeper issue. The late Sumantra Ghoshal pointed out that meta-analysis of 85 separate academic studies showed that neither the proportion of non-execs on the board nor splitting the top two roles had the slightest bearing on company performance. As for promoting better governance, Enron had in place many of the things that today’s codes recommend: independent directors, separate chairman and CEO, independent directors in charge of key committees and regular self-evaluation by the board.

Because of the underlying assumption that the board’s primary job is to police the actions of opportunistic and untrustworthy executives, Ghoshal argued, the codes had put in place a set of prescriptions based on ‘ideologies, unfounded opinions and myths’. Not only did they not prevent wrongdoing; they had the effect of making it harder for the board to do its job of encouraging innovation and legitimate risk-taking.

At the same time, by prescribing precise legal limits, they encourage executives to work right up to them rather than change their behaviour. Anything that isn’t forbidden is permitted compliance is with the letter rather than the spirit of the law. In fact, corporate governance is a particular subset of a larger case. The more extensive and detailed any regulation is, the greater the scope for unintended consequences (what we might call Goodhart effects). Take the financial services industry, where it is at least arguable that poor regulation has had the opposite effect to that intended. In the effort to foresee and forestall abuses, the rules are now so complicated and draconian that it’s actually quite hard to buy or sell savings products. The result is that pension firms are closing funds and people who should be saving are buying property instead. Abuses may be fewer – but an improvement bought at the price of a property bubble and a pensions crisis is a Pyrrhic one.

Let’s be clear. The argument is absolutely not the free-market one that there should be no regulatory constraint on companies’ ability to make money for shareholders, nor the often mealy-mouthed plea for self-regulation as a way of softening the options. Rather the reverse: safeguards are needed, but they need to be real rather than bolt-ons.

As with corporate social responsibility, the only way of circumventing the diabolical consequences of Goodhart is to bring regulation inside the company. Internal regulation enforced by values is both more efficient and more effective than external regulation enforced by the compliance police.

In this context it’s perhaps depressing to note that the Institute of Business Ethics, which among other things monitors the ethical temperature of the business world, notes declining interest in ethics in business schools – especially on MBA courses, where ethics, if it exists at all, is often taught as an elective rather than a mainstream part of business.

This, too, is a Goodhart effect, at least partly the result of business-school rankings that are heavily weighted towards before-and-after salaries as a criterion of merit.

Corporate governance is a means, not an end. Apparently impeccable behaviour on all the dimensions of Higgs or Sarbanes-Oxley, which drives out enterprise, may in the larger picture be a sterile bargain. The two don’t have to be in opposition but reconciling them requires everyone in the company to know what their purpose and values are and stick by them. As with quality, you can’t inspect good governance in after the event. Like letters in a stick of rock, it has to run all the way through.

The Observer, 28 November 2004

THE OBSERVER is moving offices next week, and I’m dismally contemplating a life-endangering heap of business books on my desk that I shall have to deal with before the removal men arrive. Why, oh why, are there so many? Do I have to read them all? Why, as Mark Twain once put it, do most of them seem like ‘chloroform in print’?

The short answer is that, despite the health hazards, like chemical substances they are addictive. Although publishers say that appetites are more discriminating than in the roaring 1990s, when almost any management title would sell, business is still good business. People buy basic ‘how to’ and ‘self-help’ titles year in, year out, there is a sizable textbook market (business is the single most popular undergraduate and postgraduate course), and while blockbusters have become fewer with the fall of the charismatic CEO, a big autobiography – Giuliani or Jack Welch, say – can still turn out to be a bestseller.

But business books are much more than commodities. Publishing can be seen as an essential part of the the much larger ‘management ideas industry’, where the prizes are much higher. In the volatile market for ideas, business books form a key conduit linking idea-producers (often consultants or academics) with their target manager-consumers.

Moreover, in a neat piece of positive feedback, books recycle ideas back into the business schools, where as teaching aids they indoctrinate a fresh crop of potential consumers. So as well as being consumer items, books are also producers – of gurus and stars, of fashions, and thereby also, crucially, of markets for consultancy, whose rewards dwarf those of publishing.

A successful book, itself often an expanded version of an article in Harvard Business Review, can easily catapult an author from humble academe to the consultancy stratosphere. The speaker circuit alone can bring in a seven-figure income. Quick to twig the benefits, consultancies have become rich closed-loop publishing markets in themselves – both writing and then buying large numbers of books as selling tools and as a means of demonstrating so-called ‘thought leadership’.

Management books are thus more slippery and complex than they might appear – at once a product and a vehicle, the medium and the message. As products, it is easy to dismiss most of them as trivial or worthless. As in any other branch of publishing, or indeed any other human endeavour, the 80/20 rule applies: ‘Ninety per cent of everything is crap,’ as science-fiction writer Thomas Sturgeon more colourfully put it. There’s a less dismissive way of looking at it, however. The crap is the soil from which the stuff of real value grows. In any field you can’t have only masterpieces: masterpieces grow from, and define themselves against the lesser material.

Paradoxically, while the unappealing pile on my desk serves a boring but necessary function, the ‘masterpieces’, or at least the bestsellers, are much more problematic. This is because, like cookbooks but unlike fiction, people act on them. As Keynes famously remarked about the impact of economists, practical men, who believe themselves immune to intellectual influences, are usually the slaves of some defunct theorist, in managers’ case acting out in their daily lives the ideas of Adam Smith (division of labour), FW Taylor (mass-production techniques) or even Dilbert (fear, uncertainty and doubt).

A poor recipe is unlikely to kill you. But bad management advice can, and regularly does, lay waste whole companies. Fortunately for the rest of the world, ‘Chainsaw Al’ Dunlap’s brutal version of shareholder capitalism was discredited before his book Mean Business could make too many converts. Not so Michael Hammer and James Champy’s phenomenally successful Re-engineering the Corporation. Although the success of re-engineering (the concept) is moot, Re-engineering (the book) certainly caused mayhem: at the height of the fashion in the mid-1990s, three-quarters of large US and UK firms were reportedly engaged on three re-engineering projects each, and 500,000 people lost their jobs.

Books on theory may seem dull, and many are. But ironically, it’s the absence of theory that makes many ‘practical’ books potentially much more dangerous. Without a robust underlying theory, giving managers bold prescriptions about re-engineering or transformation is like giving me a scalpel and sending me off to do a little brain surgery.

Lack of a theoretical tether, too, encourages fashion bubbles as managers rush all over the place to adopt the next thing, while the practices of the book trade only increase the publishing churn. The result is not only that all those predictions of change and turmoil become self-fulfilling prophecies, but also that the noise makes it harder for more reflective, less prescriptive texts to be heard, or perhaps even written in the first place.

So what is the thinking manager browsing the airport bookshop – or me surveying my desk – to do? Caveat emptor, is the answer – understand where these books are coming from and the motivations that brought them into being. It’s not that they’re all bad. The best are clever and thought-provoking, even inspiring. Just remember that you can’t outsource responsibility for reflection, contextualisation and critical judgment as to how applicable they are.

As Stanford’s Jeffrey Pfeffer has noted, managers ‘must decide whether they will be swept up in the fads and rhetoric of the moment or will recognise some basic principles of management and the data consistent with them’. Unless, of course, managers are so anaesthetised by the din that their mind is already made up. Perhaps Twain was more literally right than he supposed.

The Observer, 21 November 2004

W ITH AN election looming, public services and their improvement – or lack of same – have climbed to No 2 on the political agenda just below Iraq. As with foreign policy, it promises to be a white-knuckle ride. For while there’s clear water between the two main parties on the public sector – the government’s focus is on improvement, whereas the Tories’ is on cost-cutting – ministers face a growing problem of evidence.

Basically, voters refuse to believe public services are improving as fast as the government says they are. Unease at the ‘perception gap’ is almost palpable. Nick Raynsford, the local government minister, has already puzzled over the fact that local authorities’ customer satisfaction scores are going down at the same time as their official performance indicators are going up. The same theme was a subtext to many of the presentations by Whitehall bigwigs at last week’s Economist conference on the public sector.

For every area of policy, the conference heard, almost all the government’s traffic-light performance indicators are green. There are more doctors, nurses, policemen and teachers. Crime is down, school achievements up, NHS waiting lists are shorter. Speaker after speaker told the conference that from where they were sitting, services were getting better – it was only the extent of the improvement that was in doubt.

What’s more, as the presentations documented, this is in the perspective of a government for which public services really are important. They are seen, rightly, as an essential component of a competitive economy and, at a guess, No 10’s performance management system, at least in form, is by some distance the most sophisticated ever put in place.

So why isn’t it delivering? Identifying answers has become a Whitehall industry in itself. One suggestion is poor expectation management: people expect too much. Another is a time-lag between the personal (‘the hospital treated me quite well’) and the general (‘the NHS is getting better’). For Raynsford, more bizarrely, it appears to be something to do with a lack of public leadership.

But there is a much simpler explana tion to hand. The signals ministers are receiving do not mean what they think because they are not transmitted by service users but by service managers. They reflect a corporate rather than a public experience, not the same thing at all. Yes, it’s the old problem of targets.

Last summer a borough chief executive predicted to me the divergence between his government and public satisfaction figures. ‘The targets and specifications handed down from the centre oblige us to do things the public don’t care about,’ he explained. A striking example is e-government – web-enabling public services. In the latest round of specifications, councils are encouraged to make it possible for citizens to browse their council tax online. ‘How sad would I have to be to want to browse my council tax payments online?’ mused another service director.

Across the field, public service managers are diligently ticking off and reporting what matters to government, not to citizens. This explains baffling (to the public) rankings like three-star NHS trusts or ‘excellent’ councils. ‘Improvement’ or ‘excellence’ is in the eye of the government, not the public. Hence the gap.

But this is in the very nature of targets. The particularly ingenious Catch 22 to which they are subject is so well documented it has a name. The social-science equivalent of the uncertainty principle in physics, Goodhart’s Law states that the instant a measure is used as a target, it loses all value as a measure.

This is because managers understandably devote their efforts to meeting the target, not what the target stands for. Targets, as Michael Barber, director of the Prime Minister’s Delivery Unit, helpfully reminded the conference, are ‘representations’, abstractions from the aim beneath. Indeed: and that’s the problem.

It’s sensible that all A&E casualties should be treated as quickly as possible consistent with clinical need. But as soon as that is represented as ‘all emergencies must be seen within four hours’, as currently mandated, doctors divert attention from juggling patients according to clinical need – which may mean operating on one person within two minutes and leaving another for six hours under observation – to cramming everyone through the arbitrary threshold to avoid a waiting-time ‘breach’.

Where the target and common sense are in conflict, staff employ a variety of recording ruses to reconcile them. As Goodhart predicts, the measures are no longer reliable – doubly so, since the target was an inadequate representation of a complex aim in the first place.

Compounding the problem, as Lucy de Groot, executive director of the Improvement and Development Agency, reminded listeners, is that ‘the target regime is derived from silos’ – individual departments or agencies, or even sometimes departments within departments. Being un-joined-up, they fail to coincide with the lived experience of citizens.

At worst, as documented in a previous column, that leads to a situation where a water company has measures in place for how long it takes to answer the phone or make an appointment, but none for the end-to-end time to fix a burst main. It can meet all its service standards – and thus proudly claim ‘excellence’ – while it leaves the water running for weeks.

The government is now well aware of some of the shortcomings of target regime. It has cut their number from about 700 to 100 departmental Public Service Agreement targets, according to Barber. A full-scale assault is being launched on the pounds 11 billion regulation industry – an initiative welcomed by Audit Commissioner James Strachan, a champion of the need for regulatory value for money.

And it is saying all the right things about getting away from top-down control and giving service deliverers the freedom to deliver ‘personalised’ services. Former Treasury adviser and prospective MP Ed Balls suggested that the Bank of England should be the model for future public sector reform, offering a stable framework within which specialists could make decisions unencumbered by short-term politics. ‘One of the things we’ve learnt is that we need to get systems, rather than individuals, right,’ he said.

But the government still cannot help getting targets in a twist. Witness the new goal of halving MRSA infections in hospitals in the next three years. Think what this looks like from the patient’s point of view: in three years’ time, I will have half the chance of being killed by going to hospital than I do now. The only acceptable ‘target’ here, as in all such cases, is perfection, and the only acceptable measures those that show both public and providers how progress towards it is being achieved, year by year.

The Observer, 14 Noember 2004

THIS IS the year the employee went missing. On a notorious weekend in August, BA almost imploded for the feeblest excuse of all, staff shortages. Meanwhile, Royal Mail was incentivising postmen and women to deliver the mail rather than stay in bed by entering good attenders in a prize draw to win a car or holiday vouchers. And last week the Cabinet Office admitted that civil servants had stayed at home an average 10 days each in 2003, defeating attempts to reduce Whitehall sick leave to private-sector proportions.

In business, absence doth definitely not make the heart grow fonder. Absenteeism costs business pounds 11.6 billion a year, according to the CBI. In its 2004 survey, the Chartered Institute of Personnel and Development (CIPD) found that average sickness absence last year was 9.1 days per employee, fluctuating around 4 per cent of all working days, as it has done for the last few years.

‘Absence management has been going up the agenda as companies – and the Chancellor – see it as a way of improving productivity and cutting costs,’ notes CIPD employment relations adviser Ben Willmott.

Kneejerk reactions to all this are evident everywhere. Companies instinctively tighten up sanctions or institute incentives (bribes). Heart-sinkingly named ‘integrated absence management packages’ are something every well-equipped HR manager’s gotta have, like gunbelts in the Wild West, and for much the same reasons: track down the offenders, persuade them to see the error of their ways, and if not, use force.

Seems reasonable? Of course, absenteeism matters, but it doesn’t follow that the best, or even a sensible, way to manage it is directly. Absenteeism, like unhappiness, is an epiphenomenon, a by-product of a system. Managing it directly is like trying to manage a dog by holding its tail, yielding little purchase, or insight, on the behaviour of the rest of the animal. Indeed, yanking its tail has a good chance of making it forget its previous grievances and bite you instead.

Obviously, absenteeism equals people not wanting to come to work. What makes people so unhappy with their jobs that they don’t turn up, with all the knock-on effects for colleagues and customers? Apart from coughs and colds, the answer, attested by the CIPD research, particularly for white-collar workers, is stress related to workload, management style, organisational change and the need to meet targets.

Stress-related dissatisfaction and absence are increasing. Apart from the CIPD figures, research from the University of Kent has identified a 10 per cent drop in job satisfaction over the last decade – at first sight surprising, since wage and employment levels are buoyant. But those advantages may be outweighed by perceived intensification of work and diminishing levels of control over the job.

Remind you of anything? These are exactly, and depressingly, the same complaints made against the factory system from the 1920s onwards. Offices, particularly in the target-obsessed, low-paid, inflexible public sector, are today’s alienating, top-down mass-manufacturing plants. Recent concerns about bullying as a factor in absenteeism, confirms Willmott, are not coincidence, though there is a fine line between legitimate and illegitimate pressure: ‘Where managers are themselves under pressure to meet quotas or targets, it’s all too easy to pass it on down the line.’

The conventional HR response is to say that absence management, while no panacea on its own, is needed as part of the bundle of practices – clear aims and roles, training, reward, etc – that make up the ‘high-performance workplace’. A more radical approach is to say absenteeism is a form of waste, and, as with any other waste, the only real answer is to design it out of the system.

A straw poll of the staff who work for Observer Business revealed that absenteeism here is a tiny fraction of the national average. How so? A combination of high adrenaline, crystal-clear expectations (miss a deadline? I don’t think so), extreme flexibility in meeting them, peer pressure and dependence (‘teamwork’ in the jargon), and the instant gratification of seeing your work in print at the weekend, means that, despite routine grumbles, the attractions of playing hooky are not as great as those of doing the job.

An exception? Well, no. It’s true that media and telecoms have low absenteeism nationally, as does consultancy. But most work has some of the same elements, and all work can be well or badly designed for its purpose. According to recent figures, employees at Lincoln City Council took an average 18.2 days – more than three weeks – off sick last year, a staggering four times more than the best performer, Hampshire’s Hart District Council, where employees were absent just 4.7 days. Even assembly-line work can (no, should) be designed to give employees control over what they do. Car workers at Toyota can stop the line if there’s a problem they cannot solve, but that’s not a people issue – it’s to do with ensuring that the job is done right in the first place.

Absence management, like appraisal and bureaucracy in general, is part of the heavy cost of a badly designed work system. It adds complexity to management and no value to the customer. The solution is therefore not to manage it better – a classic case of doing the wrong thing righter – but to get rid of the need for it altogether. The best kind of absence management is conspicuous by its absence.

The Observer, 2 November 2004

ARE THE wheels coming off the luxury German charabanc? For a long time as closely identified with quality as sauerkraut was with wurst, the exclusive image of German cars is taking a battering in the area it can least afford.

* DaimlerChrysler recently admitted that quality problems at Mercedes had kicked a hole in group profits this year and would do so again in 2005. The three-pointed star has tumbled from top of the influential JD Power US reliability rankings to 28th in a decade.

* Volkswagen, once a byword for reliability, has sunk to 33rd in JD Power. The VW division, with fleets of unsold cars, is in ‘a clear loss situation’ and faces labour unrest at home as it seeks to slash costs by a third.

* Uber-aspirational BMW, too, is not immune to quality woes. ‘If only everything in life was as reliable as… a Japanese car,’ quipped the Which? headline on its annual reliability report in August, noting that the Munich firm and Audi had joined VW among the least reliable makes.

* Even Porsche, the best-placed German marque, was only average in the Which? ratings, while in another hefty dent to German bodywork, the VW Polo, the old-model Mercedes E-class and super-trendy Audi TT had the worst record of all new cars for breakdowns in the first two years.

The common quality dip in German cars is no coincidence – and it may be serious. ‘It’s attacking the German manufacturers at the core of their brand and business model,’ says Mike Sweeney, professor of operations management at Cranfield Management School. ‘It’s a real challenge.’

The Germans face not one but two testing issues. The first is how to manufacture increasingly complex and sophisticated products. Traditional vertically integrated operations – doing everything in-house – have served German firms well in the past but are increasingly difficult to do cost-effectively as complexity outstrips even the capabilities of a legendarily well-trained workforce. So firms are outsourcing sub-assembly to ‘prime suppliers’, which instead of delivering individual parts now send whole modules – a complete power-train, for example – to the production line.

For the final assembler, says Sweeney, modular build has the advantages of simplifying production, shifting responsibility for managing the supply chain to first-tier vendors, and dramatically reducing investment needed in its own plant and equipment.

In the long term, it should yield substantial cost and quality gains. In the short term, however, there are big transition problems as suppliers grapple with unfamiliar tasks of managing global supply chains and advanced manufacture, while final assemblers come to terms with concomitant loss of control. ‘There’s a big decision to make now,’ notes Sweeney. ‘Do they go in and sort things out or wait for the suppliers to get it together?’

But systems engineering is only part of the problem. Anxious to underline their reputation for cutting-edge technology, German manufacturers have eagerly embraced electronics in everything from engine management to navigation. But if integrating and managing mechanical systems is difficult enough, in electronics it is a nightmare.

‘Of course, technology is part of their marketing strategy,’ says Dan Jones, co-author of The Machine That Changed The World and chairman of the Lean Enterprise Academy. ‘But they went beyond the capability of the electronics they were using. There are some red faces at the likes of Bosch – the systems were just not robust enough for the auto environment.’

To get the reliability ratings back on track, German carmakers are now hastily backtracking on electronics. But having built their reputations on advanced technology, will they continue to be in a position to demand today’s high prices after the debacle?

This links to a third question. ‘There’s a big debate in Germany about diesel,’ notes Jones. ‘While they’ve been concentrating on diesel, everyone else is looking at hybrids’ – notably Toyota, whose second-generation electricity and petrol-powered car, the Prius, is well ahead of the competition. Hybrid, says Jones, promises ‘guilt-free motoring’, an especially alluring message in the US, land of gas-guzzling SUVs and pickups. Toyota’s next hybrid is a top-of-the-line SUV Porsche has adopted the technology for its Cayenne.

Until now, with a few niche exceptions, German carmakers have hogged the autobahn with high-tech, high-margin cars. But this may be changing. Thomas Bayne, chairman of ad agency Mountain View, who has worked with several motor industry clients, points out that competition is much greater at the top end of the market than it used to be. With cars in oversupply, the real issue now is differentiation, he believes, not quality as such – witness the Mini and Audi TT, both of which have become cult cars despite reliability ratings that would have taken less sexy designs straight off the road.

In this context, he speculates that the problem for firms like Mercedes and Volkswagen may be a loss of status and desire: ‘the badge may not mean what it used to’. In which case, better quality is not the answer. As for BMW, having introduced an entry-level 1-series, how far can it stretch the brand in search of volume without destroying the aspirational qualities that drove its success?

German manufacturers can thank their stars that they currently face little threat from the cash-strapped US Big Two: both Ford and GM lost money on cars last year, and some observers think Chapter 11 is a possibility for at least one of them.

But that still leaves the juggernaut bearing down on everyone: Toyota. The Japanese firm, which announced its own results last week, has money to burn, in the last half year overcoming tough conditions to record an operating profit of $8bn. Up until now, the company has been thought of as a cautious copier rather than high-tech innovator. But with its superior engine technology, its upmarket Lexus marque adding style to its formidable build quality and its adoption of electronics to add to its peerless manufacturing prowess, it is now poised to offer a serious challenge in the luxury sector. Toyota’s next-generation cars will be simpler, smaller, smarter, cutting out a new layer of cost as well – the opposite of the German approach. Roll over, Beethoven?

The Observer, 7 November 2004

I F YOU DID a psychological profile of the corporation, what would it look like? Self-interested, manipulative, avowedly asocial, self-aggrandising, unable to accept responsibility for its own actions or feel remorse – as a person, the corporation would probably qualify as a full-blown psychopath.

Sensationalist? Joel Bakan, whose provocative film documentary, The Corporation , is due out at this month and whose book of the same is in the shops (Constable, pounds 9.99), doesn’t think so.

The opposite of a blunderbuss-wielding Michael Moore, Bakan is a Canadian law professor whose brief is as well- ordered, concise and sober as the accusation is grave: behind its benevolent face, he argues, the most important institution of modern capitalism is a Frankenstein’s monster that has broken its chains and is now consuming the society that created it.

Three key legal interventions have made the corporation what it is, Bakan says. The first two were the innovations of limited liability and the granting to the corporation of a legal personality. At a stroke, ‘the corporate person had taken the place, at least in law, of the real people who owned corporations’. And the company, previously dependent on government grant and charter, could now be seen as an independent being, a ‘natural entity’ with the same rights to exist as an individual.

The corporation turned out to be a work of genius, a brilliant amplifier of capital and effort that has made possible the sensational improvements in living standards (in the developed world) of the past 150 years. But it is a flawed genius, and the flaw, perhaps fatal, is the third enabling condition: exclusive emphasis on profit.

This is expressed in the book’s subtitle, The Pathological Pursuit of Profit and Power. On the basis of case law, Bakan insists, ‘managers and directors have a legal duty to put shareholders’ interests above all others’ and no authority to serve any other interests – the ‘best interests of the corporation’ principle.

The combination of these three conditions (Bakan could have added a fourth, which is that, unlike a human being, the corporation has no natural life span. It can in effect live and get bigger for ever) has far-reaching consequences.

The first is that among the interests the corporation has no business serving are those of the society that framed its governing rules. In the interests of shareholders, the corporation is not only entitled but obliged to offload on to others as many of the costs of making profits as possible.

In short, says shareholder activist Bob Monks, quoted by Bakan, the corporation is ‘an externalising machine, in the same way that a shark is a killing machine’ – not because it’s malevolent but because that’s the way it is designed. This in turn makes the whole notion of corporate social responsibility a logical nonsense, permissible only when it is in the best interests of the corporation (in which case it’s not corporate social responsibility) or when, ironically, it is insincere (ditto).

CSR, says Bakan baldly, ‘is an oxymoron’. You might just as well ask a great white to be nice to fish or a fox to go vegetarian. When it comes down to it, responsibility always takes second place to shareholder interests, in the name of which corporations constantly test the edges of legality and far overstep those of morality.

This truly is a world where, as he says, legal compliance is just another cost-benefit analysis. Bakan has hair-raising and gruesomely entertaining sections on spying, cheating and amazingly unethical marketing devices. He also notes three pages of alleged legal breaches by corporate role model GE sweatshops turning out goods for Nike and Wal-Mart and American companies’ reluctance to cease their involvement in Nazi Germany because it was good business for their shareholders.

Extraordinarily, Bakan recounts a fortunately inept but serious (and authenticated) business-backed plan to depose Roosevelt and install a fascist regime in the US in the 1930s.

The corporation has been much more successful by persuasion, to the extent that swathes of what used to be the public sphere and interest have been surrendered to it. And it still wants more.

But as the dominance grows, so do the flaws. In a nightmare version of the effect of the invisible hand, everyone pursuing their own self-interest increasingly produces results no one wants or intends (in the extreme, planetary collapse), but for which no one is responsible. And the pathologically narrow and materialistic view of human nature that underpins today’s corporate form not only dominates economic activity – it is also altering humanity.

‘In a world where anything or anyone can be owned, manipulated, and exploited for profit, everything and everyone will eventually be,’ Bakan warns. The sorcerer’s apprentice is running amok the corporation is remaking us in its own stunted and undersocialised image.

This lucid and urgent book does leave a couple of stones unturned. It perhaps overestimates the global hegemony of the US model (although not its fundamentalist zeal for hegemony) shareholders certainly own rights in companies, but the assets themselves?

Then again it underestimates, or rather does not address, the formidable extent to which the model is underpinned by dominant academic theory. And, perhaps not surprisingly, Bakan’s remedies are less well thought-out than his cool and authorititative analysis.

He is, though, undoubtedly right that it’s time to destroy the pernicious and self-serving idea of the corporation as a ‘natural entity’. It’s not. It has a right to exist because society gave it one.

The corporation was created as an instrument of public policy, and its licence can still, theoretically, be revoked. The presumption of freedom from regulation is otiose. The corporation needs to be re-made in our image – in law, in theory and in practice.

The Observer, 24 October 2004

ONCE UPON a time, all of, oooh, 20 years ago, the press was full of strident headlines about site closures, the decamping of jobs to Asia and the inability of the West to compete with low-wage countries in the East. Business Week dubbed the phenomenon ‘the hollowing of the corporation’ and wondered if the US economy would survive.

Then, of course, the subject was manufacturing. We know what happened: manufacturing survived, but metamorphosed, with Dell, Cisco, Microsoft and Intel replacing General Motors, Ford and GE as the motor of the US and world economy. Out of the new order emerged an unprecedented phase of expansion that was only reined in when the dotcom boom toppled over its own exuberant overconfidence three years ago.

We should do well to bear the parallel in mind when thinking about the current outsourcing/offshoring boom. On the one hand, ‘[Offshoring] is nothing new,’ notes Ananda Mukerji, chief executive of fast-growing Indian outsourcing service provider ICICI One-Source (I-OneSource). Twenty years ago, multinationals discovered the advantage of global sourcing of physical goods now the technology exists to do the same thing with business processes, ranging from payroll processing and account handling to customer service.

On the other hand, it’s pretty clear that after the current reconfiguring of comparative advantage is done, it won’t be business as usual. The potential for fresh combinations of resources being created will almost certainly see to that.

Mukerji’s company, astutely set up by a leading bank in 2002 to specialise in ‘business process outsourcing’ to UK and US firms, mainly in financial services, is a good example of this potential. Now boasting a workforce of 4,800 and six processing centres, I-OneSource grew by 134 per cent last year and is projecting annual expansion ‘faster than the industry’s 50 per cent’ for the next four or five years.

The Indian outsourcing sector will employ 1 million Indians by 2008. The same number of IT professionals will be writing software and running offshored IT contracts. And if you thought their advantage was just low cost, think again.

‘In practice, the cost proposition only comes into play if quality is up to scratch,’ Mukerji says. ‘As an offshore vendor, you have to be even better before people will consider you.’

Typically, I-OneSource is seeking to hop quickly up the value ladder from commodity transaction supplier to fully fledged business partner, offering not just an end-to-end service but also advice and consultancy in the mould of an IBM or Accenture. In a nutshell, firms such as I-OneSource are positioning themselves squarely at the leading edge of the knowledge economy.

Given India’s output of more than 2 million graduates a year (although not all of the highest standard), this is not far-fetched. A year ago, says Mukerji, the choice of location for a world-class processing centre was down to Mumbai or Bangalore now eight or 10 cities are jostling to be chosen.

It is a different story in the UK, where service companies should be preparing for a shake-up quite as fundamental as the one that hit manufacturing for six two decades ago.

UK manufacturers in particular were slow to react to the threat of global sourcing at first, then rushed pell-mell into out- and offshoring. However they took time to register (some never did), that there’s nothing inevitable about this. As the performance of many, often small or medium-sized, companies has shown, it’s perfectly possible for manufacturing to prosper in the UK – on condition that companies rethink all their processes from end to end and go lean.

Lean is a lot more than the tools and techniques it is sometimes sold as, since it involves reversing the top-down flow of influence and information – from manager-push to customer-pull – something that does not appeal to most managers. This is one reason why take-up was so half-hearted.

As specialist consultancies such as Vanguard, and now mainstream outfits such as McKinsey and AT Kearney, have shown, the lean logic applies equally well to providing service as to making things. AT Kearney, for instance, says the ‘lean leap’ can take 30 to 40 per cent out of the cost of transaction or other processes – after which the offshoring equation takes on a different complexion. It may still be a sensible option, but it is then about something more sophisticated than cost advantage, which is rapidly eroded when competitors follow suit.

Almost all service companies are where manufacturing was 20 years ago, stuffed with waste and offering poor service and value for money. To get beyond the mass-production attitudes that prevent them moving up to the higher-added-value uplands where most people think the UK’s economic future lies, they need to clear out the clutter – irrespective of outsourcing.

The lesson of manufacturing (and of comparative advantage) is that outsourcing to each other’s strengths can and should be a positive-sum game: each party can gain. But to reap that benefit, UK service companies will need to be much cleverer in improving quality and cutting cost than their manufacturing counterparts. Otherwise, Indian companies – which, after all, know a lot about UK tastes – will turn them into, well, curry.

The Observer, 17 Observer 2004

THE GREAT Australian fast bowler Glenn McGrath once noted that cricket was a straightforward game that people were constantly trying to complicate. ‘The hardest part,’ he said, ‘is keeping it simple.’

The same is true of management. Not that management is any easier than getting your bat near, or yourself out of the way of, a 95mph ball. It’s not. But keeping sight of the context is just as hard as laying bat on ball.

Do you hook the bouncer or not? That requires a simultaneous evaluation of the condition of the pitch, the balance of the battle between bowler and batsman and the state of the entire game.

Most management is a vast superstructure of complication erected on a small, simple base: the requirement to deliver a product or service to a customer at a satisfactory quality and price. But the superstructure is now so overgrown that it’s almost impossible to see the true context.

When you get down to it, 95 per cent of ‘management’ is about managing complexity and 5 per cent about doing the simple things that really matter.

Hence the feeling of infinite regression so characteristic of the field: managers pounce eagerly on the latest dragon-taming device (usually IT), only to find that the ‘solution’ is as frustratingly distant as ever.

The answer wasn’t IT after all. But nor is it marketing, strategy, HR or any other single element. It’s to stop obsessively ‘doing the wrong thing righter’ (Russell Ackoff) and strip the organisation back to the original simple idea.

Think of simplicity as a strong force whose unifying principle is ‘pull’. This is in relation to its opposite, the weak force of complexity whose governing principle is ‘push’. Both are self-reinforcing spirals but traditional, complexity-based push management drives a vicious circle.

Most companies make a product or service and then sell it to the customer with a big sales push.

Because they’re manufacturing a guess of what the customer wants, they have lots of product variants in reserve ‘just in case’. This inventory now has to be stored and managed.

As well as IT to track their inventory, companies need computers, specialists and managers to predict demand, order materials and parts and schedule manufacturing for the products they guess the customers will buy.

When companies guess wrongly they must dream up incentives for both their salesforce and customers to get these expensively made and stored mistakes sold. These schemes often cancel out any profit and forced sales also obscure what customers really want.

Push is so ingrained that we don’t notice it any more. Internally rather than externally mandated, it requires forced circulation through the system. Decisions (guesses) and commands about customers, products and quantities are pushed down from the departments where they are made. Communications departments are set up to circulate the information.

Jobs are pushed too, their shape determined by computer-derived abstractions that drive (another significant word) production.

So is much of the training on offer but, as psychologist Abraham Maslow put it, ‘A job that isn’t worth doing isn’t worth doing well.’ These jobs aren’t worth doing well and people know it. So to smooth their edges and cajole performance, managers resort to incentives, palliatives and sanctions, administered by an army of human resources executives.

Now reverse the logic. Suppose the customer pulls the product or service required through your system. Because you’re making what someone has actually ordered, you don’t have to guess or predict sales and production. You don’t have to add extra features or colours to tempt people to buy. If you’re not making things on spec, you don’t need the space, computers or people to store and track the inventory.

Within the factory, computers for complex scheduling and ordering are redundant because the work itself carries the necessary information. The order automatically triggers demand for parts the work triggers the next stage in the process. So jobs also have a clear and present focus: to do just what is needed to satisfy the next internal customer.

Because the information is validated by the customer and inherent in the work, companies need fewer managers to second-guess it or make arbitrary decisions and then correct them. Managers’ jobs change from giving orders to helping others do the job of satisfying customers.

Another of Maslow’s sayings was: ‘If you want people to do a good job, give them a good job to do.’ People doing a good job don’t take sickies, so firms working this way can do without absenteeism measures (absurd and disastrous bribes for people to turn up to work), nor do you need complicated incentives or other sanctions. Pull easily defines appropriate training, information and pay: whatever it takes to enable people to do a better job of satisfying the cus tomer. Decades ago, author and consultant Richard Schonberger termed this virtuous circle ‘frugal’ management. The more smoothly work is pulled through the system, the less wasted time, effort, space, inventory, rework, duplication, computers – and cost.

Oh, yes, and management too. As Peter Drucker once lamented, ‘So much of management seems to be preventing people doing their jobs.’

A better aim for managers is getting out of the way. The best kind of management is no management at all. Simple, or what?

The Observer, 10 October 2004