Ideas
Steve Denning

Has Capitalism Reached A Turning Point?

Burgess COMMENTARY

Peter Burgess

Has Capitalism Reached A Turning Point?

In the early 16th Century, the movement objecting to the flagrant greed and corruption in the Roman Catholic Church, now known as the Protestant Reformation, got under way in earnest. In 1517 in Germany, Martin Luther posted his “Ninety-Five Theses.” At about the same time in Switzerland, Huldrych Zwingli launched a reform movement with a remarkably similar set of “Sixty-Seven Conclusions.” The recently-introduced printing press helped spread these ideas rapidly from place to place, but unresolved differences kept the reform movements separate. At the time, the prospects of reform looked remote, as the Church, most governments, the ruling classes and civil society supported the continuance of the status quo. In 1529, the German Prince Philip of Hesse saw potential in creating an alliance between Luther and Zwingli, realizing the strength of a united Protestant front to fight the entrenched elite. He convened a meeting, now known as the infamous Colloquy of Marburg. At the gathering, Luther and Zwingli agreed on everything except one doctrinal issue: was Jesus Christ spiritually present at a mass? Zwingli asserted no, while Luther insisted yes. In the debate, Luther became so angry that he carved his rejection into a table in the meeting room. (Some critics suggest that egos also played a role: if the strong-minded protagonists had been able to resolve their differences about the spiritual presence of Christ, another issue would have emerged to preclude agreement.) Coloured woodcut of the Marburg Colloquy, anon... Coloured woodcut of the Marburg Colloquy, anonymous, 1557 (Photo credit: Wikipedia) So the Colloquy of Marburg broke down and the Reformation proceeded in a fragmented fashion for another hundred years. Doctrinal differences that in retrospect seem minuscule in comparison to the extensive common ground prevented a united Protestant front. With the wisdom of hindsight, we can see that if these leaders had been able to set aside their doctrinal differences and explicitly recognize the issues on which they did agree, the Reformation could have moved much faster. As so often happens, the best had become the enemy of the good. A Reformation of capitalism? These events are worth remembering in the context of the emerging movements to reform the management of big corporations today, as thought leaders allude to the possibility of a Reformation in management, and indeed of the entire system of capitalism in which managers operate. Thus in June 2014, Clayton Christensen and Derek van Bever wrote in the June 2014 issue of Harvard Business Review (HBR). “The orthodoxies governing finance are so entrenched that we almost need a modern-day Martin Luther to articulate the need for change.” Christensen and van Bever are not alone in calling for some kind of Reformation. At the conclusion of this article, I list a number of the articles that have appeared over the past few months in leading pro-business journals such as Harvard Business Review, The Economist, Financial Times, The New York Times, the Wall Street Journal, the Washington Post and Forbes.com, all denouncing key management practices and calling for major change. So are we reaching a turning point in management, and indeed in capitalism as a whole, analogous to the religious Reformation five centuries ago? Many of the world’s thought leaders will converge on Vienna Austria on November 13-14, 2014 to discuss this very question at the Global Peter Drucker Forum 2014. The speakers include Clayton Christensen, Gary Hamel and Roger Martin, among many others. “We have arrived at a turning point,” says the Forum’s abstract. “Either the world will embark on a route towards long-term growth and prosperity, or we will manage our way to economic decline.” The question is whether the Drucker Forum in November will be able to reach agreement on the way forward and generate an united front for reform, or whether it will, as at the Colloquy of Marburg in 1529, splinter into different factions, as thought leaders emphasize their own particular slant on the issues, with the obvious common ground among them being lost in the din of heated debate on tiny doctrinal issues. Why the current calls for reform are significant A number of aspects are significant for assessing the current calls for reform. First, these calls come, not from an ill-informed rabble camping in a park. They come from the most distinguished pro-business voices in the world—the heavy artillery of capitalism itself. Second, it isn’t just one or two voices. The critiques and the calls for change are many and simultaneous. Big-gun broadsides are coming all at once. Third, these thought leaders are not speaking in euphemisms or hedging their bets. These are flat-out denunciations of, not just one firm, but the whole management culture that prevails in big business. Phrases like “stock price manipulation” (HBR), “corporate cocaine” (The Economist) and “zombie managers in the grip of management ideas that refuse to die” (Financial Times) are typical. Fourth, we now see incumbent members of the C-suite speaking out, such as Tim Cook at Apple [AAPL], Paul Polman at Unilever [UN], Xavier Huillard at the Vinci Group and John Mackey at Whole Foods [WFM]. These corporate leaders are speaking out while they are still in office, as compared to Jack Welch, who called shareholder primacy “the dumbest idea in the world,” long after he had retired. An even larger number of corporate leaders at firms like Gore, Google [GOOG], Amazon [AMZN], Linux, and Morning Star and many small organizations are actually practicing a more creative brand of management, even if they don’t always go around making speeches about capitalism. Fifth, although there are different terms in use and different emphases, the common ground among the voices for change is more striking than the differences. Finally, these thought leaders make a powerful case that the economic and social costs of current management practices are so grievous that in any event they are not sustainable. As Roger Martin argues in his article in the October issue of HBR on “The Rise and (Likely) Fall of the Talent Economy,” change will happen, one way or another. The only question is whether the transition is going to be quick and intelligent and elegant, or slow and ugly and even violent—like the religious Reformation— and take more than a century. Obstacles to a Reformation of capitalism Nevertheless, the obstacles to be overcome if the Drucker Forum is to contribute to the move towards a turning point are formidable. First, calls for reform have been going on for a long time. “A-list management voices as well as a cohort of younger thinkers and doers, have been calling for the reinvention of management along these lines for years,” writes Simon Caulkin in the Financial Times. “But nothing much has changed, at least among large established companies—just look at the unreconstructed financial sector. If anything, managers report that short-term pressures are getting worse.” As Andrew Hill also writes in the Financial Times, “US chief executives hoard good news for stock sales” with dubious practices that resemble “cookie jar accounting.” Second, overwhelming incentives are in place for the continuance of the status quo. In the period 2004-2013, Bill Lazonick’s research shows that share buybacks shifted some $3.4 trillion from organizations to their shareholders and managers away from employees, investment and innovation. This diversion of resources is macro-economic in scale. As the C-suite is becoming not just rich but legacy-rich, why should they change? Third, the entrenched interests are mutually reinforcing, as society as a whole has come to accept the practices and ideology of 20th Century management as inevitable. The C-suite is offered extraordinary compensation by their boards for implementing the practices. Business schools teach their students how do it. Institutional shareholders are complicit. Regulators pursue individual wrong-doing rather than addressing systemic failure. Rating agencies reward malfeasance. Analysts applaud short-term gains and mostly ignore long-term rot. Politicians, lavished with campaign contributions, stand by and watch. In such a context, it isn’t easy for any individual business leader to take a stand and say: this is simply not right. It’s the entire society that needs to change. Thus we are dealing with a systemic issue. This isn’t about individual corporate managers acting badly in isolation but about a number of key systemic elements—managers, their boards, investors, particularly institutional investors, regulators like the SEC, the central banks like the FED, financial institutions, hedge funds, business schools, rating agencies, the media—all acting in concert. The case can be made that corporate leaders find themselves operating in a society that has, as a whole, lost its way. Fourth, a previous effort to reach common ground on the reform of management provided no clear path forward. Thus Gary Hamel in 2008 assembled a gathering of thirty-five of the world’s top management thinkers. Hamel wrote up the outcome in his famous article, “Moonshots For Management” in HBR in 2009. There was strong agreement that the current management model was broken, but no consensus among the strong-minded participants as to how to reform it. Fifth, even if shareholder primacy is set aside, corporate leaders will have to master fundamentally different management practices, with a different kind of leadership that involves different ways of thinking, speaking and acting in the workplace. Old habits will die hard, even if their abandonment is rational and necessary. In the New York Times, Peter Thiel, the co-founder of PayPal, questions whether many of the “the conformist, risk-averse politicians who already control most American mega-corporations” are even capable of making the needed change. Settling on a common cause The question on the agenda of the Drucker Forum is whether we have reached a turning point in management, and indeed in capitalism itself. If Peter Drucker himself were still with us, he might suggest that we begin by agreeing on a common set of questions, and then see whether we can even get close to some answers. The outcome will depend on whether the Forum can agree on the broad direction of change, or whether it will, as in the meeting of Luther and Zwingli back in 1529, allow obscure doctrinal differences to prevent any agreement. In effect, will pursuit of the best once again become the enemy of the good? As Caulkin notes in the Financial Times, “the invisible link between sluggish innovation, cost-cutting, share buybacks, the jobs and pay squeeze, and neo-Taylorism, is management incentives. What locks them all together in a tight, self-reinforcing paradigm is shareholder value–the assertion that the sole purpose of the company is to maximize returns to shareholders.” If this is correct, the principal question for the Drucker Forum is whether we will be able to agree on severing this invisible link. Will the Forum accept that this is the critical link that needs to be broken? Obviously the Forum itself has no power to sever the link, but will it be able to show how it might be done and point the way forward? “The fact that this is a zombie idea does nothing to weaken its hold on the corporate psyche, particularly in the US,” writes Simon Caulkin. “As the late London Business School scholar Sumantra Ghoshal explained, the problem is not that we fail to recognize good management practice—it is that bad management theory anaesthetizes it.” “So, yes, an era of management-led growth is both feasible and urgently needed. But the renaissance will not flourish unless a stake is driven through the heart of the shareholder-primacy zombie first.” For reference: some leading voices for change 1. Harvard Business Review In June 2014, Clayton Christensen and Derek van Bever in Harvard Business Review (HBR) write: “The orthodoxies governing finance are so entrenched that we almost need a modern-day Martin Luther to articulate the need for change.” http://www.forbes.com/sites/stevedenning/2014/05/26/clayton-christensen-do-we-need-a-revolution-in-management/ Also in June 2014 HBR, Gautam Mukunda in “The Price of Wall Street Power” points out “excessive financialization” of the economy and the “unbalanced power” of the financial sector over management mindsets. Executives are “making choices they know are wrong.” http://www.forbes.com/sites/stevedenning/2014/06/03/why-financialization-has-run-amok/ In the September 2014 HBR, “Profits Without Prosperity,” by William Lazonick, professor of economics at the University of Massachusetts Lowell, pointed out the massive scale and impact of share buybacks. http://www.forbes.com/sites/stevedenning/2014/08/18/hbr-how-ceos-became-takers-not-makers/ http://hbr.org/2014/09/profits-without-prosperity/ar/1 In the October 2014 HBR, Roger Martin’s classic article, “The Rise and (Likely) Fall of the Talent Economy”, states: “The move from building value to trading value is bad for economic growth and performance. The increased stock market volatility is bad for retirement accounts and pension funds… talent is being channeled into unproductive activities and egregious behaviors.” http://www.forbes.com/sites/stevedenning/2014/08/20/from-ceo-takers-to-ceo-makers-the-great-transformation/ 2. Financial Times In August 2014, Martin Wolf, wrote in the Financial Times: “Almost nothing in economics is more important than thinking through how companies should be managed and for what ends. Unfortunately, we have made a mess of this. That mess has a name: it is ‘shareholder value maximization’.” http://www.forbes.com/sites/stevedenning/2014/09/02/the-financial-times-slams-the-worlds-dumbest-idea/ In September 2014, Simon Caulkin wrote about the “Era of management-led growth held hostage by old ideas that refuse to die.” In September 2014, Andrew Hill wrote in the Financial Times that “US chief executives hoard good news for stock sales” with dubious practices that resemble “cookie jar accounting.” In September 2014, Edward Luce wrote in the Financial Times about “The short-sighted US buyback boom” and argues that “Unless the roots of the problem are fixed, boardrooms will keep on draining their treasuries.” 3. The Economist In September 2014, The Economist published two important articles explaining how Blue Chip companies have become addicted to share buybacks, which have come to constitute ‘Corporate Cocaine.’ http://www.forbes.com/sites/stevedenning/2014/09/19/the-economist-blue-chips-are-addicted-to-corporate-cocaine/ 4. The New York Times On September 14, 2014, the New York Times featured a whole section with six separate articles on the issue of share buybacks, four of which denounced the practice. Bill Lazonick’s article called for “a national debate” as to why these practices are permitted and asked the S.E.C. “to rethink the role of the stock market in the economy so that it can distinguish rules that encourage value extraction from those that encourage value creation.” 5. Wall Street Journal In January 2014, the Wall Street Journal wrote that “There is a rare type of organism that eats itself alive. One of them is IBM IBM +0.56%.” The article goes on to show that the practice is widespread in capitalism today. In February 2014, Peggy Noonan wrote in the Wall Street Journal about “Our Decadent Elites.” She asks pointedly: “What happens to a nation whose elites laugh at its citizens? What happens to its elites?” 6. Washington Post In September 2014, Harold Meyerson concluded in the Washington Post that “wealth in the United States today comes chiefly from retarding businesses’ ability to invest in growth-engendering activity. The purpose of the modern U.S. corporation is to reward large investors and top executives with income that once was spent on expansion, research, training and employees.” 7. Aspen Institute In May 2014, Aspen Institute released its study on shareholder value reported that a majority of respondents strongly agreed that the primary purpose of the corporation is to serve customers’ interests as ultimately the best means to add value for shareholders. And read also: Capitalism’s Future Is Already Here Why the World’s Dumbest Idea Is Finally Dying From CEO Takers To CEO Makers: The Great Transformation Navigating the Phase Change To The Creative Economy The five surprises of radical management ______________ Follow Steve Denning on Twitter @stevedenning