TO THE average chief executive, the idea of a ‘democratic enterprise’ probably falls under ‘nice on paper, hopeless in practice’, rather like stakeholding or being kind to the environment.

Not so, insists Lynda Gratton, author of a new book The Democratic Enterprise , (FT Prentice Hall) and a professor of management practice – she says pointedly – not theory , at London Business School. She maintains that democracy is both necessary and do-able.

Although few companies can claim to be perfectly democratic just yet (with the possible exception of Brazil’s Semco), elements of democracy can be found in firms such as BT, McKinsey and BP, and Gratton uses them as the context for her studies of, among other issues, individuals who are taking charge of their working lives. She sees her role as both illuminating the path ahead and giving people confidence to test it out.

‘There are immense pressures to preserve the status quo,’ she says. Search most middle managers and you’ll find a ‘right to manage’ tattoo somewhere about their person. Much widely applied performance management is simply command-and-control with the edges rounded off. The lure of the heroic leader, particularly in times of change, is still strong.

So why should companies want to want to think about the tenets of democracy? For good instrumental reasons, Gratton believes. One is demographic. An alarming proportion of today’s young people – Generation X and Y – are voting with their feet, refusing to replicate what they see as the mistake of their parents in tying themselves to companies that later betrayed them. They are asserting their desire for a different balance by turning their backs on the corporate sector.

A second factor is technology, which is enabling (at least in theory) ever- closer relationships between a firm and its customers – so why not with employees, Gratton reasons. ‘Firms do lots of things that cost money and benefit neither the firm nor its people – like forcing them to commute to expensive city offices when they could work at home,’ she says. ‘That’s poor management – and poor management not to change it.’

There are some powerful performance arguments for democracy, too. By promoting justice and fairness and finding solutions -such as remote working – that work for both sides, the democratic enterprise benefits from more engaged employees.

In turn, engaged employees build shared purpose and alignment, creating more agile, adaptive organisations. This is particularly important in times of change and turbulence, and for promoting innovation. Finally, committed employees, confident that they work for a just organisation that has their interests at heart, can be the difference between the success or failure of a merger or other large new venture.

Such an inclusive organisation overcomes many of the theoretical and practical disadvantages of present-day organisations: the need for complicated incentives and punishments to deter opportunism and align conflicting interests hierarchy to tell people what to do and the denial of any moral or ethical dimension of management.

Yet Gratton argues powerfully that justifications for enterprise democracy go well beyond the bottom line. Democracy, she says, ‘exists for the benefit of its citizens, while also advancing the interests of the institution’. The two go together. In a democracy, individuals have the opportunity to become themselves, to flourish and find meaning in working lives governed by choice and shared purpose.

That is important in itself. Yet the implications go wider still. Gratton believes that currently accepted models of state democracy have virtually been reduced to voting for a leader. It is above the level of the individual citizen and a travesty of the real thing. The ‘real thing’, to the contrary, is engaged participation in daily affairs and decisions in which participants strengthen the institution as they hone their own democratic skills. By far the most important economic and social institution in most people’s lives, the company could- and should – have a large role to play in pro viding fresh energy to redden our thinning political blood.

The idea of the company as saviour of democracy may sound strange, but it is objectively no stranger than the idea that – with all the technological, physical and philosophical possibilities at their disposal – companies continue to lock themselves into a single organisational model that condemns them to concentrate on constraining human behaviour rather than liberating it, and turns management into an exercise in control and manipulation.

Gratton’s book is timely and important. She is one of a small but influential band of business academics who have begun to question the ‘ideological gloomy paradigm’ – the overwhelmingly negative assumptions about human nature that historically underpin management theorising. The Democratic Enterprise is one of the first interventions to crystallise these dissatisfactions and offer steps to a positive alternative model.

A ‘delightful organisation’, one that you would be happy to have your children join? Why not? ‘There’s a sea change going on,’ she believes. ‘The economic view of people has gone as far as it can. The pendulum is beginning to swing back to a more rounded vision of human nature.’ The revolution is democracy, and it starts here.

The Observer, 8 February 2004

WORKPLACE bullying is part of the dark side of organisational life. And it is taking on disturbing proportions. One study in 2000 found that 10 per cent of UK employees had been bullied – that is, suffered persistent, demeaning harassment – over the previous 12 months and 25 per cent had in the last five years.

When Mercer HR Consulting investigated two years later, it reported that one in five employees said they had been bullied in the last year – and even more in the case of middle managers, nearly 24 per cent of whom had been victims. Seventeen per cent of senior managers said they had suffered the same way.

The bullying of managers was particularly worrying, according to Mercer, because it suggested that the practice was endemic.

This suspicion is reinforced by the extraordinary incidence of bullying in occupations such as healthcare (28 per cent in the last year) and the City (50 per cent, according to a hard-hitting BBC documentary, The City Exposed , last year). Although they are at opposite ends of the earning and status spectrum, it’s no accident that these professions are similarly disfigured: both are fiercely target-driven, fear-ruled cultures in which the pressure on managers to make demanding, if not impossible, figures is systematically transmitted down through the ranks.

In the public sector, abuse often takes the form of what might be called bullying by bureaucracy: making unreasonable demands of people doing repetitive work with no control over their working conditions (call centres spring to mind).

The City, however, has taken bullying to another plane. In parts of the Square Mile, management is just a euphemism for institutionalised bullying. The BBC programme and some lurid court cases have painted a picture of tyrannical, abusive, even pathological, behaviour that seems more more appropriate to a prison or the Mafia than to a twenty-first century workplace. Last year broker Cantor Fitzgerald had to pay a former employee nearly pounds 1 million compensation for months of obscenities, threats and public humiliation.

Depressingly, these extre-mes are often tolerated as the price to be paid for exorbitant salaries. In some cases they are worn as a badge of honour.

Cantor appealed against the judgment. One City head-hunter told the BBC: ‘Why should it be changed? If you can’t stand the heat, get out of the kitchen. This is a Darwinian City… If you are not fit enough to survive you will be killed off – and quickly.’

This, not to put too fine a point on it, is bollocks. Bullying is evidence of dysfunctional, out-of-control organisations and people, and carries huge direct and hidden costs. For individuals, these include loss of earnings, esteem and identity, leading in some cases to breakdown and even suicide. According to the 2000 study – by Umist, the University of Manchester Institute of Science and Technology – bullying victims had the worst health, mental and physical, the highest sickness absenteeism and intention to leave, the lowest commitment and job satisfaction and the poorest productivity.

More insidiously, says Lancaster Business School’s Professor Cary Cooper, who co-wrote the report, there seems to be a ‘passive bullying’ syndrome where those who witness it are similarly demoralised.

It’s hard to make precise calculations of the overall cost to organisations of this kind of behaviour. In a report for the International Labour Office on violence and stress at work, Cooper noted that to the direct cost of days lost should be added a possible drop of between 1.5 and 2 per cent in productivity, the cost of complaints and grievances, retirement costs and reputational damage.

He estimates that these could cost some firms the equivalent of between 5 and 15 per cent of turnover – ‘for large companies the difference between profit and loss’. Cooper sees the City’s bullying culture as the product of a high-stress, performance-driven environment, coupled with the fact that newly promoted managers are usually good brokers or traders with no preparation for managing people. ‘As managers they assume they have to reproduce what was done to them,’ Cooper says. ‘This makes the City a perfect breeding ground for bullies.’

It’s true that in many high-pressure occupations the ‘stressometer’ needle sometimes lurches into the red – newspapers are not for shrinking violets, and jour nalists are known to become boisterous on occasion. But there is a world of difference between robustness and sadism, and the line is increasingly being drawn by the courts. As new legislation takes effect, a host of damaging court cases against City firms is expected in the next few months.

That’s one reason why things may start to change in the City (the public sector may be another story). The other is that in an unpredictable world extreme command and control, of which bullying is the extension, is a losing strategy.

Fear, it has been well observed, makes people stupid, and an organisation based on it is an evolutionary dead end. As with the first Neanderthals, good riddance.

The Observer, 1 February 2004

I BET Martin Johnson never went on a leadership course. Unlike his predecessor, I doubt whether England’s World Cup winning rugby captain, who has announced his international retirement, will write a book about leadership either. In fact, how ever you look at it, the man under TV’s best known beetle brows is an unlikely leadership totem all round.

Uncommunicative, less than media friendly, Johnson is pitch- rather than book-smart. He is, as he would say himself, an ordinary bloke. An accidental, initially reluctant captain, at first he was too taciturn to be a really good one. As he admits in his autobiography, he was also at heart a conservative one.

But he led by example. And my, how he learned. In the World Cup final, the captain as captain was the real difference between the two teams. Jonny Wilkinson may have delivered the winning points, but Johnson made that possible by providing the unwavering self-belief and keeping the side’s head together, not only in the palpitating final minutes but also through some nervous performances in previous games.

How to explain the paradox? That Johnson is large and imposing was no hindrance. But on closer inspection, Johnson’s England captaincy was a sophisticated and subtle affair, perfectly illustrating the way notions of leadership are changing to cope with a networked age.

Much of the mountainous literature and most of the development material on leaders and leadership concentrate on personal characteristics of managerial elites. But personal development, points out Mike Pedler, co-author with John Burgoyne and Tom Boydell of the excellent A Manager’s Guide to Leadership (McGraw Hill), doesn’t necessarily provide a helpful guide to action for the organisation. It does, however, lead directly to the disastrous ‘lone hero’ model of leadership that has wreaked such havoc on Western, and particularly US, corporations over the last few years.

Personal qualities are of course important – Johnson’s combination of intense professional will and profound personal modesty were critical, and his essential honesty carried him unerringly through the tricky transition to professionalism.

But a better way of thinking about leadership, suggests Pedler, is as a response to challenge. This puts the emphasis on the here and now, a task and a context. Leadership is a performance art, he says, which has little meaning in the abstract.

For all its dangers, leadership is also becoming increasingly important. In an age of networks, knowledge and self-motivated professionals working in teams, administering resources isn’t enough. The job is to animate them. So management is leadership: the ability to mobilise collective action to face a challenge.

This is a very different animal from the centralised, hoarded leadership of the past. Too often, says Pedler, leadership gets confused with the office holder, so power is tightly held in one place.

In contrast, today’s leadership needs to be decentralised and distributed to every part of the organisation so those on the periphery who are first to spot challenges can act on them instantly.

This kind of inclusive leadership increases the organisation’s agility and power to act at the same time as it serves the political end of diminishing the all-too-present dangers in centralised, charismatic authority. Leadership isn’t authority it’s everyone taking responsibility for making each decision as robust as it can be, by contest if necessary.

Now look at how this plays out in the England rugby team. Pedler’s book quotes Gerard Egan: ‘If your organisation has only one leader, it is probably short of leadership.’ No chance of that. In his chapter on captaincy, Johnson notes that England have a ‘captain’ for every area of the game: for the scrum, for the lineout, and two for defence, with senior players also having their say. Players can and do take responsibility for decisions – not always to the glee of the captain: ‘Some of [the team’s] best moments, scorching tries scored… after a quick tap-and-go, have come with me screaming in the background, ‘No, no… go for the three points!’ ‘

Every organisation needs captains all over the pitch, says Pedler, and the fact that Johnson leaves so many behind is another notch to his credit. It also, as he admits, made leading much easier – as did the immaculate supporting framework provided by coach Clive Woodward and the backup staff.

Leadership, as Pedler notes, is indivisible from the context that creates it. Johnson couldn’t have been the undisputed leader he was without Woodward’s ambitious planning and the support of great players.

But equally the team was only as good as it was because of Johnson’s ability to focus the collective will and translate it into a simple, believable imperative: England would win the World Cup. Hardened internationals have said that he gave them confidence just being on the pitch.

The real test of all good leaders is an organisation that can survive and improve on them. No one can guarantee that, but Johnson, like a series of Australian cricket captains, has given England the best possible chance.

Come to think of it, in his characteristically honest, tell-it-as-it-is autobiography (sales 350,000 and rising) perhaps Johnson has written a leadership manual after all. A better casebook would be hard to imagine.

The Observer, 25 January 2004

THE DTI’S inquiry into the call-centre industry, announced last month by Patricia Hewitt, will have plenty to get its teeth into. Call centres are at the heart of a number of issues, all more interesting than the simplistic ‘India eats our jobs’ theme that has recently been hogging the headlines.

As a new report for the Health and Safety Executive (www.hse.gov.uk) again confirms, much call-centre work is white collar production-line activity – repetitive, fragmented and subject to the iron control of automated systems. As such, call centres exemplify the fundamental sin of Anglo-Saxon management: the separation of work from decision-making, with consequent automatic disengagement of hearts and minds. Exporting these jobs to Asia just makes the separation explicit: ‘They are organisationally as well as physically distant,’ says Warwick Business School Professor Harry Scarbrough, head of a national research programme on the evolution of business knowledge (www.ebkresearch.org).

This kind of call centre is set up not primarily to create knowledge or value but to process codified and standardised information at the lowest possible cost, he notes. This is what mass production is. In these circumstances, offshoring (in the ugly jargon) to low-cost locations is as inevitable as the fact that any advantage will last only as long as it takes for a competitor to buy the same technology and hire the same operators.

Defending UK call centres on the grounds that UK agents take 25 per cent more calls an hour, as an industry spokesperson tried to do, is almost comically irrelevant. As industry iconoclasts like Vanguard Consulting’s John Seddon (www.lean-service.com) have established, at least half the work of most call centres currently consists of trying to fix problems that shouldn’t have occurred in the first place and over which they have no control. The proper response is not to fix faster – ‘doing the wrong thing righter’ – but to prevent the problems happening in the first place. This is almost impossible to do at long range, but in any case the way contracts are drawn up – on the basis of transaction and activity levels rather than value – gives no incentive to prevent problems.

The fact is that in its current shape, the call centre industry is a ‘solution’ devised by outsourcers and the IT industry (often one and the same) to fix symptoms whose causes they can’t reach and have no interest in solving. In this perspective call centre location is sublimely irrelevant. As psychologist Abraham Maslow once remarked, ‘If something isn’t worth doing well, it isn’t worth doing at all.’

Call centres don’t have to be damaging and unfulfilling places to work, any more than factories do. Indeed, using the same principles as good factories – thinking of organisations as systems for delivering value to customers and devising measures to support that purpose – a few companies have learned to use call centres as essential instruments for diagnosing issues and improving customer service. IT habitually plays a much less dominant role and people can use their full range of skills. Employees are tightly integrated with the rest of the company and much less likely to be outsourced or exported.

The performance of the majority of call centres calls into question the DTI’s boast that they represent ‘one of our service sector success stories’. Their 400,000 jobs often provide poor value for customers and employees. They also appear to do little for the productivity of the service sector as a whole.

According to new research by the Advanced Institute of Management (www.aimresearch.org) it is now much-vaunted services that are holding back the UK’s productivity performance. Although the overall gap with the US remains at 40 per cent, it is no longer manufacturing which is the main contributor: in fact, apart from machinery and equipment, especially computers, UK factories have now made up most of the difference. At the same time some of the service industries in which the UK is supposed to be most competitive, including retail and financial services – a heavy user of outsourcing and call centres – have been falling back. These two sectors now account for fully one third of the total productivity gap with the US, according to AIM.

In an even wider context, the inevitable export of commodity call centre services to India and elsewhere only highlights the need to accelerate the UK’s shift towards a globally successful knowledge-based economy, believes Scarbrough. There is always movement of activities along the value chain as IT systems encode and standardise previously inaccessible knowledge and allow it to be processed anywhere on the globe. What’s important is to retain and encourage innovation and knowledge-creating activities.

In the long term, UK call centres will only survive if they are doing something that can’t be replicated anywhere else.

The Observer, 18 January 2004

PHEW. That’s the festivities over for another year, then. But though you may be dismayed by the commercialism and appalled at the state of your liver, this column can give you good reason to take heart from your participation in the annual orgy of giving and receiving: you are helping to blow a Father-Christmas-shaped hole in conventional management theory and practice.

No, really.

Everything a firm does, from the way it decides strategy or manages people to its structure and board constitution, reflects some management theory.

Strategy is based on Michael Porter’s ‘Five Forces’, the nature of the firm on transaction-costs theory, and so on. In turn those theories are founded on some fundamental assumptions about individual human nature. And the most fundamental assumption in management is that human beings are members of the race Homo economicus, rational maximisers of self-interest.

Homo economicus has been softened a bit round the edges over the years. Since people plainly aren’t omniscient, rationality is acknowledged to be bounded rather than complete. But the direct and indirect consequences of an uncompromisingly economic view of human nature still fundamentally affect the life of organisations.

One outcome is the idea of the company as a hierarchy. Despite lip service to participation, the deep-down archetype is that managers know ‘more’ and ‘best’, and that their job is to control employees and make sure they do as they are told.

Another consequence of the Homo economicus view is that the interests of employees and managers, and managers and owners, differ. From there it is a short step for theory (but a very large step for mankind) to agency theory. Agency theory – the notion that the interests of ‘agents’ (managers) need to be aligned with the overriding goal of ‘principals’ (shareowners) for maximum returns by a range of incentives and punishments – is central to Anglo-Saxon corporate governance.

It is behind the splitting of the chairman and chief executive jobs, the perceived need for independent directors, and much else in the combined codes. It is the justification for high executive pay, stock options, and all the other lucrative incentives for managers to pursue shareholder value.

So theory governs practice. But suppose theory is wrong?

Back to Christmas. In a delightful piece of seasonal research, a US economics professor gravely announced last month that Christmas was ‘inefficient’. Recipients, he discovered, generally put a lower value on the presents they receive than the donor has paid. In terms of efficiency, he concluded, it would be much better for the giver to hand over the cash and let the receiver do her or his own choosing.

Of course. The only surprise is that anyone could be surprised. Christmas is one more proof of what is perfectly obvious to everyone except economists and management theorists: homo economicus is a caricature that exists only in the world of theory. Homo economicus would not tip taxi-drivers he’ll never see again, offer expensive presents to people who may not reciprocate, or indulge in any of the spontaneous acts that brighten every day. In short, if homo economicus existed, Christmas wouldn’t.

The truth is that in real people self-interest co-exists with other more generous behaviours and impulses, such as integrity, trust and altruism. Some serious management writers are now beginning to ask why these positive qualities shouldn’t be admitted into theory alongside the negatives – and what it would do to the shape of our companies if they were.

After all, an organisation based on a single dimension of human complexity is likely to be as much of a travesty as the original assumption. It would be narrow, undersocialised and undernourishing to the spirit at best, at worst brutal and driven to destruction: Enron, WorldCom and Sunbeam Electric, for example.

Is it possible to conceive of an alternative – a company that, as it were, believed in Father Christmas? In her new book The Democratic Enterprise, London Business School professor Lynda Gratton quotes Warren Bennis: ‘It is possible that if managers and scientists continue to get their heads together in organisational revitalisation, they might develop delightful organisations – just possibly.’

Given the dominant theory, it’s not surprising that delightful role models are rare. But a few exist – indeed, some have figured in this column (see box, left). But even from these small numbers, it’s plain that their common features are the exact opposite of what the dominant theory assumes.

Since these companies have a shared purpose, agency theory and its logic of incentives and punishment don’t apply. Being based on trust and respect, they don’t need a hierarchical authority system. People other than managers can contribute to ideas and strategy. Founded on an organisational vocation, these companies don’t buy and sell other companies, financial engineer or outsource at the drop of a hat.

In short, they can be something more than strictly economic units, and that’s because they are based on a more balanced, and realistic, view of human nature than the one-eyed assumptions that currently prevail.

It’s thus not just in religious terms that Christmas redeems. Delightful organisations depend on the same impulses. So keep up the festive inefficiency – and have a cheerful New Year.

The Observer, 11 January 2004

MANUFACTURING is not generally speaking a matter of life and death. But it was in Iraq, where the non-delivery of ceramic plates for an army flak jacket was in at least one case the difference between the two.

A report earlier this month by the National Audit Office sets out a damning catalogue of logistics shortcomings that casts a deep shadow over the overall success of the military mission.

Some troops in Iraq lacked basics such as desert boots or clothing, were given body armour without the armour and had no protection against chemical and biological attack, says the report. Meanwhile, tanks and other machinery had to be cannibalised to provide spare parts for front-line equipment.

In some cases supplies existed but no one knew where – up to 200,000 sets of plates for flak jackets ‘seemed to have disappeared’, according to the NAO. In other cases the gamble of reducing operational stocks to cut costs backfired because ‘the Department could not engage with industry early enough to allow the required items to be delivered in time’.

It was left to File on Four , a BBC radio programme, to spell out the sombre cost in human terms: some soldiers were crippled by boots that were the wrong size or fell to bits, while others preferred to buy their own equipment. Sergeant Steve Roberts, a tank commander who had ironically spent hundreds of pounds on his own kit, was killed after he gave up his body armour to more exposed infantry troops and his pistol jammed.

War, says Professor Mike Sweeney, a manufacturing specialist at Cranfield Management School, is the ultimate test of process and personnel management. In this perspective it emerges strikingly poorly from comparisons with another famous victory, England’s triumph in the rugby World Cup. In his autobiography, captain Martin Johnson reflects on the remarkable change in attitude wrought by coach Clive Woodward’s decision that the England players would no longer have to cart around their own luggage, stay in the cheapest hotels or travel cattle-class between fixtures.

It was the moment they began to be treated as world-beaters, Johnson says, that it dawned on the team that they could and should be. The new conditions weren’t a reward they were the measure of ambition and a means to the end of allowing them to concentrate 100 per cent on the job in hand. By contrast: ‘If you send me out in a hostile and dangerous environment with poor basic equipment and underprepared, what does that say about my value? What does that do for morale?’ asks Professor Sweeney.

The parallel is apt, agrees defence analyst Paul Beaver. ‘It’s boots on the ground that win battles – individual soldiers, not people sitting pushing buttons in fancy machinery,’ he says. ‘It’s utterly unacceptable that we are asking soldiers, sailors and airmen to put their lives at stake without giving every one of them the best possible equipment,’ – for the cost, he calculates, of about two joint-strike aircraft.

The UK has been extremely lucky to emerge from the conflict so lightly, Beaver believes. In several cases, skimpy preparations meant the margin between success and disaster was wafer-thin. For instance, the assault brigade with the crucial task of preventing Iraqi troops from blowing up the Ramallah oilfields got new machine guns the day before and had no time to practise with them beforehand.

Another source describes a frantic hunt for combat identification tape when it was discovered that US battle troops couldn’t recognise the profiles of British vehicles. It took an enterprising A rmy major to bypass Treasury rules and buy up the last remaining world stocks, and contractors and soldiers working through the night to get the job done, according to this report. Beaver says: ‘Essential supplies should be in the right place at the right time – people running around with Amex cards isn’t good enough. ‘Just-in-time’ is too often just too late – as it was, inexcusably, for Steve Roberts.’

Daniel Jones, a consultant and author of Lean Thinking , notes that beginners often jump on just-in-time logistics because they mistakenly think it is easy to do and automatically involves the drastic reduction of inventory costs. ‘It’s about linking activities in an unbroken stream, not running down stocks,’ he says. ‘It would be crazy to run down stocks below the level at which they can be quickly replenished.’

Professor Sweeney, who has experience of army thinking, argues strongly that the current defence department approach to supply is at odds with battlefield reality. He points out that rapid response – as all recent conflicts involving UK forces have been – requires an ‘agile’ supply chain which can react equally quickly.

The corollary is that previous price-driven supply relationships won’t work. Instead, says Sweeney, the department needs close partnership arrangements enabling strategic stockholding of items that take a long time to make, and steady building of supplier capacity, both human and mechanical, to turn on a sixpence when needed.

The other essential, observers agree, is the vastly improved tracking and control of supplies. At one stage 1,000 containers full of urgent supplies were reportedly floating around the Gulf but no one knew what was in them or their exact whereabouts. This led to massive over-ordering as commanders on the ground reordered goods already in transit, at higher priority. Just 8 per cent of top-priority orders were delivered on time, according to the NAO. This, too, is inexcusable. The ‘beer game’, which graphically illustrates the pitfalls of supply-chain mismanagement, is a first-year business-school exercise. Meanwhile, Jones observes, ‘consignment tracking isn’t rocket science any more – you can look up the location of a FedEx or UPS package on the web in real time’.

Supermarket groups routinely track delivery and inventory levels of 40,000 stock items with huge seasonal fluctuations – computer systems to do so have been around for years. What the multiples can do for trainers and toys, the department ought to be able to do for boots and body armour – in deadly earnest.

Simon.caulkin@observer.co.uk

Missing in action: catalogue of failure

* Body armour plates, 200,000 of which ‘seem to have disappeared’ since the Kosovo war

* Desert boots and clothing – a quarter of the Desert Rats fought the campaign in Northern European kit

* Nerve agent detector units – 40 per cent shortfall

* Nuclear, biological and chemical kit ‘misappropriated’ from supplies by troops desperate to get hold of them

* Spares for tanks and howitzers – German equipment is being cannibalised instead

* £14m worth of ammunition written off because of ‘reduced life expectancy’ in high temperatures also air-conditioning units

* ‘A robust tri-service inventory system… and an information system to support this technology’ even though the need has been known ‘since the Gulf Conflict in 1991’ (‘Operations in Iraq – Lessons for the Future’, MoD)

The Observer, 21 December 2003

THE COMPANY is an inevitable and remarkable invention. A prodigious amplifier of human effort, it is certainly ‘the most important organisation in the world,’ as John Mickelthwait and Adrian Wooldridge note in their brisk and entertaining The Company: A Short History of a Revolutionary Idea

It is the company, not blind market forces, that carries on the innovation and trade that push economies forward. As London Business School’s Professor Sumantra Ghoshal has shown, there is a strong correlation between national prosperity and the proportion of population working in relatively large companies. We live in an organisational, not a market, economy. It is the combination of companies and markets that did for communism, not military might.

Historically, too, the company has been a force for civilisation, thriving best in conditions of trust, honesty and respect for contracts. It provides people with identity and community as well as economic livelihood.

Yet this ‘unsettling organisation’, as Mickelthwait and Wooldridge call it, also has a dark side. Even though the company saw off the challenge of central planning, the end of history has turned out to be more eventful than many predicted. Part of the reason for that is the contradictions at the heart of our present-day corporations.

During the past two decades the shareholder-first principle has increasingly pitched companies into conflict with societies’ social and environmental priorities.

Pleading the pressure of capital markets, companies have plunged into an infernal cycle of ‘asshole management’: the pursuit of ever-increasing speed and efficiency in the name of shareholder value that has had the effect of dehumanising work, damaging the environment and stripping management of its moral dimension. The abuses at Enron, Tyco and WorldCom are the direct outcome of this reductionism.

Hence the paradox that although we are more dependent on the corporation than ever, and its potential for good has never been more urgently needed, it is going through a traumatic crisis of legitimacy.

Companies and those who run them have rarely been more distrusted – in polls of ethical standing, managers come out lower than politicians or journalists. Liability lawsuits – for obesity, firearms violence, even global warning – are piling up.

Does this matter? Yes, it does. With its Dr Jekyll and Mr Hyde sides struggling for supremacy, the company is standing at one of its periodic crossroads.

As Mickelthwait and Wooldridge show, this is not the first time that corporate excesses have been followed by a legal and emotional backlash. The cause of the joint-stock company may have been set back a century by the distrust engendered by the South Sea Bubble, for instance.

It wasn’t until 1844 that companies were freed of the need to obtain a special charter and 1856 before limited liability was automatically granted.

This time round, companies’ hasty adoption of corporate social responsibility programmes is not saving them from the increasing attention of regulators determined to limit surprise and prevent abuses.

Yet addressing the negative problem may run the danger of throwing out the positive, too. As Ghoshal points out, there is no evidence that (for example) splitting the top job or increasing the number of independent directors has any effect on company performance.

Meanwhile, these arrangements institutionalise the breakdown in trust between business and society, a trust that is at the heart of overall success and is abandoned at our peril, as Business in the Community chairman David Varney recently noted.

There is an alternative, however, which involves rejecting the determinism that lies at the heart of asshole management and returning to first principles. As history shows, the marvel of the company is that it is a separate ‘legal person’. It is this entity that owns corporate assets, not shareholders, whose rights are restricted to residual cash flows.

So the company has both the right and the obligation to fix its own purpose, to which employees contribute human capital and shareholders financial capital. It can choose to be an engine of stewardship rather than expropriation, a ‘collaborative’ organisation in which the interests of stakeholders converge in the knowledge that human wellbeing is integral to its purpose, not a tacked-on programme.

Because purpose is shared, it can operate on distributed initiative and leader ship rather than hierarchical command and control trust rather than sharp incentives.

The choice is a poignant one, because the paths diverge. Crucially, management’s starting assumptions are self-fulfilling. An organisation run on ‘asshole-management’ principles breeds people motivated by greed and power who don’t care how they get it – in a word, ‘assholes’. Enron is the locus classicus. The converse is also true.

Which company will provide the next evolutionary chapter? The odds are on the assholes, because that’s where the weight of conventional theory lies. But that’s not inevitable: as Mickelthwait and Wooldridge usefully remind us, legally the company was shaped by political decisions – and political decisions can reshape it as well.

The Observer, 14 December 2003

LAST month Network Rail announced that it was bringing all its pounds 1.3 billion annual maintenance business in-house and restructuring itself around its main routes – that is, to fit with its operating company customers. A total of 18,500 people will be transferred from the private engineering companies to the track operator in the biggest shake-up since rail privatisation in the mid-1990s. The move is also unusual. Insourcing of any kind runs so counter to trends that it is worth stopping to ponder what it means.

Conventional wisdom of the past 20 years is that the more companies can outsource routine tasks to specialist providers, the better. ‘Outsource everything except your soul!’ exhorted Tom Peters. What started with catering, security and other low-level tasks now embraces training, logistics, IT and even HR. IT outsourcing particularly is now a massive business.

The argument for outsourcing is that it imports market discipline. ‘You can see what the service costs and change the provider if you aren’t satisfied,’ says Iayn Clark of International Strategic Management, a provider of specialist services for ad hoc assignments – due diligence for banks and high-level training, for example – for which organisations cannot cost-effectively maintain full-time teams. In theory, too, specialised providers of ‘commodity’ services should be able to do it more cheaply through focus, economies of scale and access to the latest technologies.

But, as ever, the reality is more complicated. Even a cursory look at the literature reveals that at least half of all outsourcing projects fail to live up to expectations. Only a few save substantial amounts, and even outsourcing providers suggest cost-cutting is not the place to start. Once the profit margin of the provider and cost of managing the contract – anything from 4.5 to 10 per cent of the fee – are taken into account, the figures look a lot less attractive.

Experience also shows, counterintuitively, that it is rash to outsource something you do badly or don’t know much about. Faced with a supplier whose core competence is negotiating contracts and knowing what the costs really are, you’ll end up locked in and paying too much in the long term if not in the short. This is the paradox of outsourcing: to do it properly you have to know as much about the function as the provider, in which case why not do it yourself.

But why would you want to do routine stuff in-house? Back to Network Rail. In this case, what suffered was not cost (at least not directly) but quality. Faced with declining payments to take account of anticipated efficiency savings, the companies protected shareholders and prof its by cutting costs at the sharp end, with unfortunate results for the operation as a whole, to say the least.

Network Rail’s predecessor, Railtrack, was also fatally split, with the needs of shareholders fighting for priority with those of the network. Boundaries between companies are shifting all the time. There will always be a flow of work in and out. But it should be guided by principle, not fashion.

And what happened to the rail network is a classic example of outsourcing for the wrong reason: the fashionable fallacy of treating companies as if they were markets. The idea was that by contracting in the market, and managing those contracts, Railtrack (as it then was) would be able to use its maintenance resources more efficiently. And not just for maintenance: there was so much outsourcing going on at one stage, according to one employee, that the company had outsourced the outsourcing process.

But companies aren’t markets. They obey different operating logic and have different roles. Markets evolve blindly, guided by the invisible hand towards the most efficient short-term use of resources. Unfortunately, although Railtrack didn’t realise it, there is no guarantee that short-term efficiency coincides with the larger purpose of the company. For companies do have purpose. That is their point. They are intentional entities. They can choose to sacrifice some short-term efficiencies for the sake of innovation that increases their store of resources in the long term.

Ironically, it is only now that it is no longer a private-sector company in the normal sense that Network Rail can develop that long-term dynamic efficiency by focusing on the things it should be doing: hence the reorganisation. ‘Our focus is now on engineering: rebuilding and maintaining the railway,’ says a spokesperson.

Having already taken one contract back in-house, precisely to get a hands-on feel for how maintenance was being managed and costed, Network Rail believes it can save pounds 200 million to pounds 300m from the overall bill – and do it better.

But even if it weren’t cheaper in the short term, if Network Rail is to build its organisational vocation as a great engineering company – which it must do for long-term efficiency – then maintenance has to be in-house.

Renewal stays outside (as it was in the days of British Rail), but understanding maintenance will enable it to make more informed and timely decisions about rebuilding, Network Rail believes. Maintenance is its soul, and has to be treated with due reverence.

The Observer, 30 November 2003

WHY has Tetra Pak, the very private Swedish packaging firm owned by the Rausing family, launched a pounds 4 million national advertising campaign, its first ever? The company concedes that it is an unusual step for a firm that has no direct relationship with consumers.

The short answer is that Tetra Pak wants to persuade us of the environmental and food goodness benefits of buying milk and juice in its paper-based cartons. So far so normal. But a longer answer says something very interesting indeed about responsibility and sustainability – not as an irrelevant business cost, as many claim it is, but as a strategic competitive weapon.

First, some background. Tetra Pak, founded in the 1950s, is one of the world’s largest packaging companies for milk, juices and other drinks. It produces 100 billion aseptic cartons a year worldwide, equal to 5 per cent of the overall market for liquid food packaging.

Tetra Pak has always had a strong sustainability streak. Founder Reuben Rausing was prompted to devise the original tetrahedron-shaped carton by observing the massive waste of food through perishing as it moved through the supply chain. ‘Packaging should save more than it costs,’ he said. The firm’s current strap line ‘Protects what’s good’ refers both to the carton’s claimed food-protection qualities and to the fact that, being paper-based, it is a renewable resource.

The reason for calling attention to these properties now is, as the company freely admits, competitive. In its core market – dairy – carton is coming under increasing pressure from plastic. Paper needs to fight back. But what makes the campaign of general as well as particular significance is the terrain the company has chosen to fight on.

Shifting the competitive arena from, say, price to environmental performance certainly entails costs – not just pounds 4 mil lion to raise the awareness of the UK public, but the hugely greater costs of making sure the company can actually meet its environmental claims. These are: ensuring and certifying sourcing from sustainable forests, increasing eco-efficiency and becoming carbon-neutral in manufacturing, and improving the UK’s lamentable record in carton recycling. Through the UK trade association, it has helped set up this country’s first reprocessing plant capable of separating carton substrate from its thin protective layers of aluminium and plastic.

The conservative view of this social and environmental do-gooding, articulated by economist David Henderson and Martin Wolff of the the Financial Times and traceable back to Milton Friedman, is that it is not just a distraction but a dangerous dereliction of the duty to maximise value for shareholders. The business of business is business if shareholders want to clean up the environment, they can choose to do so themselves.

Tetra Pak challenges this head on because in effect it makes a business case for environmental responsibility. As a new study by Forum for the Future for the DTI, Sustainability and Business Competitiveness , points out, the business case has hitherto been as elusive as rugby player Jason Robinson – definitely there, but impossible to pin down and quickly out of sight. Tetra Pak hauls it back into view, while the report suggests how it works in practice.

Briefly, the study supports recent findings by the Work Foundation and others that shareholder value is best served by not putting shareholder value first (which is one kind of answer to the corporate social responsibility conservatives). It also reiterates the importance of intangible assets: in a competitive and increasingly weightless economy, companies need to orchestrate ‘unique, or hard-to-replicate, capabilities, competencies and quasi-assets’ to innovate their way out of competition and stay ahead of the game.

This pretty much describes Tetra Pak’s strategy. It accepts the costs of improving its environmental performance because it plays to and reinforces its distinctive strengths. Both plastic and carton are cheap and technically recyclable, offering little potential for differentiation. But only carton comes from renewable resources. So Tetra Pak has an obvious interest in increasing consumer awareness of the issues around renewability and recycling.

But it also has an interest in meeting its promises. Reputation, as the report points out, is now understood to be an important source of competitive advantage. To support it, the company obliges itself to upgrade its manufacturing performance. It also has powerful incentives to innovate both to lower costs and to make it possible to make even higher environmental claims. That is indeed what it is doing, seeking in the long term to find renewable alternatives to aluminium and plastic.

In this perspective Tetra Pak’s environmental spending makes sense as an investment, not a self-imposed expense, since it thereby makes itself more sustainable in the future. This is the other answer to the CSR doubters, and it suggests, provided useful measures can be developed, that ‘corporate sustainability management [could shift] out of public affairs into business strategy,’ according to the report. This is about internal management, not external reporting. ‘Our view is that management of key stakeholders and environmental impacts is central to the successful management of many companies.’

Tetra Pak’s experience demonstrates another important proposition: the importance of the interaction between regulation and markets. Part of its business case is indirectly made by the regulatory obligation to recycle, which plastic manufacturers met with PET containers. Carton manufacturers then had to seek competitive advantage on another front: with further environmental improvements.

There is an even larger implication, however. Tetra Pak is one example of the power of market forces to generate environmental innovations when that’s what is driving competition. It follows that ‘if there is a strong case for corporate sustainability, then business could play a major role in environmental protection and social development’ – a point also made in a recent report by AccountAbility. That may seem a long way from an ad for a milk carton, but to adapt the pay-off from one of them: ‘No business is environmentally perfect, but at least we’re working on it.’

The Observer, 23 November 2003

‘WE’RE just not a high-performance economy. We don’t want it enough,’ says Rebecca Harding, lead researcher on a ground-breaking study of UK productivity by the Work Foundation.

The report, The Missing Link: From Productivity to Performance , was sponsored and led by business and takes a novel line on a problem that has dogged the UK for well over a century, defying the best efforts of countless panels, task forces, commissions of inquiry and academics. UK productivity lags behind that of the US, France and Germany by 15-25 per cent depending on the measure used, a gap that makes everyone in the country pounds 6,000 worse off, according to a Treasury calculation.

Why has the gap been so persistent? Part of the reason, suggests the report, lies in the different language economists and companies use to frame the issue. Economists tend to attribute productivity differences to quantitative factors such as capital investment and workforce skills, both areas in which the UK trails. That may be true as far as it goes, but it’s not very far. Unlike markets, which evolve blindly, companies are entities that make choices about organisation and strategy. So they need to be looked at through a lens that tries to identify why they don’t make the choices that lead to higher productivity, and what actions they could take to do so.

Fundamentally, the report found that companies simply don’t see productivity as a useful measure. High performance is seen as a much more useful way of approaching issues of underperformance, say the researchers, who have constructed an ambitious ‘high-performance index’ to measure the difference between good and poor performers and indicate where the latter need to raise their game.

The Work Foundation identified five areas that companies need to manage to drive high performance and business success: customers and markets, shareholders and governance, stakeholders, people, and innovation and creativity. Measuring companies across these broad areas, says Harding, yielded some startlingly consistent results.

At top level, as Harding suggests, the UK is too attached to the status quo to be a high-performance economy. The gap is as much one of creativity and innovation as productivity, with performance undermined by risk- aversion and low skills. Unlike in other countries, the institutional framework is fragmented, so that partnership is rare.

And having exhausted the market reforms of the 1980s, too many companies are still trying to improve performance by making people work harder rather than smarter, with swiftly diminishing returns.

However, the findings at firm level also provide important pointers to what it takes to move forward. First and most significant, top performance is holistic. Not only are high performers consistently superior over all five areas than the laggards, they manage the interdependencies between them better, so that the total is more than the sum of its parts.

Focusing disproportionately on just one of the areas, such as shareholder value, is likely to damage performance. By the same token, ramping up capital investment is not the answer. ‘This disposes of one-dimensional management fads and silver bullets,’ says Harding. Instead, ‘high performance requires an integrated approach, optimising strategy and delivery rather than ‘cherry-picking’ objectives.’

In turn, the key to delivering the synergies is people. The report says: ‘Managing the spaces in between can only be achieved by a workforce that sees the big picture and is enabled and motivated to act, with middle managers able to translate strategy into workforce goals.’

Also necessary (and often lacking) are ambition and adaptability. Aspiration provides the will and stamina to adapt, and adaptability is needed to ride the shocks. Depressingly, just 43 per cent of the sample had an explicit growth goal. The evolving organisation is held together by a common purpose focused on growth and risk-taking, well summed up by Will Hutton as ‘organisational vocation’.

The benefits of high performance for productivity are strikingly large. The Work Foundation model shows that companies in the top half of the index are 42 per cent more productive than the bottom quartile. The average UK firm is 25 per cent off the productivity pace of the top performers. Every 1 per cent improvement across the five areas is reflected in a 0.7 per cent productivity gain.

The implications of the work are clear and in some respects common sense. When it comes down to it, productivity is not about economists’ measures of quantities of capital and labour, but qualitatively how well they are combined and managed.

The biggest intangible is management, and there is no ‘solution’ to underperformance and low productivity that does not engage with the reality of the UK’s woefully undereducated and untrained management cadre.

In turn, enlightened holistic management needs a supportive governance framework that doesn’t put the shareholder cart before the company horse. Shareholder value, like productivity, is the result of high performance, not the cause of it.

The Observer, 16 November 2003