Category Archives: Management Theory

Management theories from Fayol and Taylor onwards

Banking, Company Law, Competition, Corporate Governance, Economics, Fairness, Management Practice, Management Theory, Political Decision

Capitalism to the Rescue

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There are an increasing number of live initiatives for making the capitalist system more sustainable and equitable. Improving environmental, social and governance performance would be steps in that direction. Transparency in terms of measuring and reporting progress would also be important. Including content on sustainability and equitable governance in the mandatory curriculum for all secondary, further and higher education students might start to change the general understanding of these critical issues. Creating an alternative system of ethically focused capital markets and enlightened financial institutions might challenge the financial sector to a more enlightened capitalism role.

These initiatives are all positive and worthwhile. But if the generally held core belief persists, that a successful economy depends on people all seeking to maximise their own material self-interest, such innovations will remain niche, if they remain at all. Their impact would be both limited and short-lived.

The original purpose of the capitalist system was to fund industrialisation. That generated the economic gains for entrepreneurs and their stakeholders and the industrial infrastructure paid for by taxes, as well as providing for the common good by improving health, education and general living standards.
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Banking, Economics, Management Practice, Management Theory

Management and the Next Crash

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The Chancellor of the Exchequer is generally pictured as commander of the economy, driving it through a dangerous jungle at the edge of Armageddon, threatened by mortal danger on all sides. Whether he is conceived of as a hugely intelligent and skilful driver, or an ill-informed purveyor of omnishambolic damage, is a matter of political belief. The fundamental error is in the estimation of his power to drive the economy. At most it extends to steering round relatively gentle corners and having some influence over speed. The effectiveness of these limited powers depends on the ability to see dangers far ahead and to make adjustments accordingly. The currently dominant economic ideology is a particular handicap to achieving such foresight. As Chicago Nobel laureate Professor Robert Lucas told the Queen, the best economic theory can do is predict that such events as the 2007-8 crash are unpredictable.

Lots of lessons have been relearned since Lehman’s bust, yet few substantive changes have been made. So it is predictable, and widely predicted, that there will in due course be another, most probably bigger crash than 2007-8. And after that, if no preventive actions are taken, there will be another. And another. Till the changes are made.
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Company Law, Corporate Governance, Economic History, Economics, Management Theory, Political Decision, Regulation

Democratic Capitalism

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Among all the debate about the vices and virtues of capitalism there is rarely any serious attempt to define its key characteristics. Whatever they are, they appear to work better than the best known alternative that has so far been tried: centrally planned totalitarian communism. Whether good capitalism or bad, compassionate, predatory or even ‘conscious’, all capitalisms appear to depend on the ownership and control of the established legal entity known in the United States as the corporation, or the public limited company elsewhere. That is the corporate form Chandler described as ‘the most powerful institution in the economy’ on which the affluence and growth of the past century and a half has been based.

The corporation was the legal form which was enabled to issue shares to many dispersed individuals and so accrue sufficient funds to make large scale capital projects possible. Initially its legal creation required a royal charter, then an act of parliament and finally, after 1844, a company could be legally established by a relatively simple process of registration. Limited liability followed a decade later. This was the precious means by which industrialisation was enabled.
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Banking, Competition, Economics, Globalisation, Management Theory

Lessons for Advanced Economies from 2012

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Advanced economies everywhere seem to be led by politicians who are media competent but practically inexperienced. They seem not to have learned anything from the experiences of the past year, only yearning for a return to business as usual. But there are vital lessons and changes need to be made.

Recession: The much talked of double-dip morphed into talk of triple-dip and the lost decade, and, eventually in 2012, to the previously unthinkable notion that GDP growth might be a thing of the past for advanced economies. Systems thinkers warned of the classic systems life cycle characteristics which accompany permanent change from one phase (eg maturity) to the next (eg decline): for the first several time periods, the idea of permanent change is never accepted – ‘it’s a blip’, ‘a double dip’ – until the permanency of change is absolutely undeniable. By which time most opportunities for improvement have been lost. This scenario seems ever more probable, given the increasingly apparent limitations on earth’s capacities and the ever increasing demands placed upon it.
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Banking, Corporate Governance, Corporate Ownership, Economics, Management Practice, Management Theory, Merger & Acquisition

What good are Stock Markets?

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An article in the current issue of Harvard Business Review notes that there has been a ‘multi-trillion dollar transfer of cash from US corporations to their shareholders over the past 10 years’ [‘What good are shareholders?’, Fox & Lorsch]. The City of London achieved similar disinvestment. But that’s not what stock markets are supposed to be for. The money was supposed to flow the other way, from myriads of investors into new industrial, technological and business developments.

But public companies clearly no longer need to issue shares for sale on the stock market. Their funding is largely through retained profit and more and more of them are actually being taken private where disclosure and transparency requirements are less invasive. At the same time, the fast growing small and medium sized innovators on which a sustainable future depends, and which do need to acquire additional funds for future investment, don’t find stock markets a satisfactory means of raising the necessary. The fund managers and traders who control investment in stocks and shares want fast, low risk returns. But returns from SME innovators, even though they may be exciting and sustainable, are unacceptably long term.
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Agency theory, Company Law, Corporate Governance, Corporate Ownership, Economics, Free Market Capitalism, Management Practice, Management Theory, Regulation

A New and Legal Orthodox Wisdom

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Unilever’s Paul Polman must be a Chief Executive in a million. Or more. In his interview with Guardian Sustainable Business, Polman calls on business leaders, politicians and NGOs to recognise they cannot deal with the world’s environmental and social challenges by pursuit of Milton Friedman’s target of maximising shareholder wealth. Polman names a few other companies who are moving in that same direction, and suggests their numbers are growing. But it is a drop in the ocean.

“Why,” he asks, “would you invest in a company which is out of synch with the needs of society, that does not take its social compliance in its supply chain seriously, that does not think about the costs of externalities, or of its negative impacts on society?”

Sadly, the answer is simple and obvious: to make a quick buck. Friedman said that corporate officials had no other social responsibility than to make as much money as possible for shareholders, and that is what the business schools and university departments have been teaching ever since. So that is how the world now works. The world – business leaders, politicians, academics, and even the people in the street – have come to believe that it is the legal duty of those who run businesses to maximise the wealth of shareholders, and to hell with everything else. But it is simply not the case. We should not need heroic figures like Paul Polman to change the world. It should simply be a matter of compliance with the law.
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Co-operation, Corporate Governance, Economics, Management Practice, Management Theory, Political Decision, Shareholder Value

God Complex ‘Drivers’ to Extinction

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Keynes referred to them as the ‘madmen in authority’, referring to the policy makers and top financial and business executives, who rule our world. Maybe ‘madmen’ doesn’t quite capture their essential characteristics today. After all, mainstream economists would argue they are not mad, but wholly rational in their unwavering pursuit of self-interest without regard to any broader, more enlightened consideration. In a talk to TED’s global conference (TED – Technology Entertainment Design – bills itself as a nonprofit devoted to Ideas Worth Spreading), economist Tim Harford identified a ‘terrible affliction’, one that the ‘madmen’ might be suffering from. It was both ‘debilitating to individuals and corrosive to society’. He referred to as ‘the God complex’, the symptoms of which could be simply described as: ‘no matter how complicated a problem, you have an absolutely overwhelming belief that you are infallibly right in your solutions.’

The UK coalition government has more than its fair share of sufferers: Andrew Lansley at Health, Michael Gove at Education, and, of course, Prime Minister Cameron, self-confessed expert in how to manage hospital wards, deal with binge drinking, solve racism in football and make child adoption processes fairer and faster, to name but a few recent self-confessions. These are individuals convinced of their infallibility, despite the complexity of the issues they confront, and not prepared, unless forced, to consider the possibility they might be wrong and other solutions might be better.
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Corporate Governance, Corporate Ownership, Economics, Management Practice, Management Theory, Shareholder Value, Society, Stakeholder theory

Bad Theory and Management Renewal

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Management scholar, Sumantra Ghoshal, accused mainstream business schools and university departments of teaching ‘bad management theories’ that were ‘destroying good management practices’. His arguments were persuasive, both as to how bad the theories were and how effective they had been in destroying good management practice. The bad theory was that management had no other social responsibility than the legal duty to maximise shareholder wealth. The good practices this bad theory destroyed were related to concern for employees, customers, the local community, the environment and (therefore) the long term, all of which were exploited and impoverished, or at the very least neglected, on the altar of short term shareholder interests.

Ghoshal argued that destroying the bad theory would be an essential first step to renewing good management practice. If the bad theory remained intact, the greed enabling culture it supported would remain as the dominant set of beliefs. Under that circumstance, initiatives promoting sustainability, transparency, fairness and integrity, as characteristic of the role of business in society, would be doomed to fail. At the end of the day, no matter how worthy an action would be, if it meant reducing shareholder return, it would not be sustained. And if an action were to harm employees, customers, the community or environment, but would enrich shareholders, it would be justified. For this to be reversed, the bad theory must be totally overturned.
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Co-operation, Corporate Governance, Economics, Management Practice, Management Theory, Shareholder Value, Social values

What Really Matters Now

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Professor Gary Hamel’s new book is available: ‘What Matters Now: how to win in a world of relentless change, ferocious competition, and unstoppable innovation’. Hamel is a breathless optimist. He sees the world changing and he encourages and motivates managers to achieve near impossible ends. He believes in the potential greatness and goodness of industry and teaches bright young people how to raise their game so as to take us forward to the promised land. He is today’s Peter Drucker, with slightly less gravitas, but rather more academic shape and a whole lot more bounce. We need Gary Hamel. Big business under the Hamel code would be honest and trustworthy, exciting and innovatory, giving people real opportunity to develop to their full potential and encouraging them to participate in decision making at all levels. He puts five issues at the centre of whether a business will ‘thrive or dive’ in the years ahead: values, innovation, adaptability, passion and ideology. They’re all people based factors which together ratchet up corporate performance to winning. But there’s a problem with Hamel’s brave new world. It’s not going to work.

Management practitioners today, at least the vast majority, believe in something quite different. They are taught to be, and have become, dedicated followers of the Friedman line: their bounden duty, they believe, is to maximise the wealth of shareholders, having no other social responsibility than that. To hell with everything else! Oblivious of the fact that maximising any one thing necessarily results in the neglect and impoverishment of everything else, they are taught that the relentless pursuit of shareholder value will end with the best result in the best of all possible worlds. But that, as Sir Mike Darrington of the Pro-Business Anti-Greed campaign would put it, is all ‘total bollocks’.
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Economic History, Economics, Globalisation, Management History, Management Practice, Management Theory, Regulation

Anglo-American Post-Industrial Waste

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The idea of the life cycle is widely applicable, from products and industries to something as simple as a lighted candle, or even something as complex as a whole economy. It depicts four distinct stages: start up, growth, maturity and decline. The early stages are slow with typically many false starts, but once a particular approach is established, growth takes off. For example, the factory system in 18th century England. During this growth phase innovation dominates, with new technologies applied to produce genuinely new products with more features and better performance. In due course, generally accepted standards of performance emerge as growth slows into maturity. During this critical transition to maturity there will be a radical reassessment of growth projections and fierce competition will force the weakest to withdraw.

During the ensuing, relatively stable mature phase, the emphasis of innovation tends to move from product to process, where innovations are largely aimed at reducing costs and improving efficiency. That phase comes to an end when either a completely new technology takes over or some other structural change eliminates the existing; maybe something like globalisation. Again the reduction in future expectations will cause intensified competition and force out marginal units.
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