Ideas
Simon Caulkin

Era of management-led growth held hostage by old ideas that refuse to die

Burgess COMMENTARY

Peter Burgess

Era of management-led growth held hostage by old ideas that refuse to die

Where governments have failed to restore previous world growth levels, could a management renaissance do the trick? Noting in a Harvard Business Review blog that a mere 13 per cent of employees worldwide are engaged in their work, with twice as many disengaged or hostile, Richard Straub and Julia Kirby call for a “Great Transformation” that would set the world on a new path to sustainable growth.

Can we manage our way to prosperity? Some would turn it around and say it is not an option – it is management’s fault that the economy is so limp in the first place. And it is less a case of sulky employees than of zombie managers in the grip of management ideas that refuse to die. Leave aside for the moment the poor management decisions that caused the crisis whose legacy still besets us. Clayton Christensen, holder of the unofficial title of the world’s most influential management thinker, blames managers’ short-termism for companies’ preference for innovation that cuts costs (usually jobs).

Another academic, William Lazonick, has shown how in recent years many large US corporates have been spending more than their total profits on dividends and share buybacks, leaving precious little for investment or employees. And in The Road to Recovery, City economist Andrew Smithers, hardly a rabid lefty, argues that the recession is not cyclical but structural, and it is caused by the misallocation of investment resources brought about by bonuses and incentives. For Smithers, dismantling the bonus culture that misdirects managers’ investment decisions is the single most important task for economic and social policy today.

If this is the case then, the management innovation that is needed will not come from hot new communication and co-ordinating technologies (such as big data, the internet of things or social media). In fact, the reverse. In today’s financialised world, these are more likely to be used to accentuate the job-stripping, winner-takes-all trend already seen with previous techniques like outsourcing and offshoring.

As Straub writes: “Instead of liberating the creative and innovative energy of employees [ ... ] blind processes and rigid hierarchies still hold them down. In effect, the emergence of a Taylorism of a sort in non-manufacturing business operations has been enabled by digital technology.”

Managers are the constitutive organ of society and its very survival is dependent on the performance, competence, earnestness and values of their managers. - Peter Drucker (1993)

As the reference to Frederick Winslow Taylor’s “scientific management” project suggests, managers are still building mass-production organisations fit for the early 20th century, based on hierarchy, standardisation and compliance, rather than flexible, human-centred outfits in which technology is not a threat but a partner of both employees and customers.

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. 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.

So if this is old news, what is holding things up? What has to change to break the management logjam? Enter the zombies. As Smithers demonstrates, 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 maximise returns to shareholders.

Technology is not a threat but a partner of employees as well as customers

This idea is embedded deep in official governance codes and it is hard to believe it is both recent – gaining traction only in the 1970s and 1980s – as well as based on a myth. In law, as the redoubtable legal scholar Lynn Stout, among others, has pointed out, shareholders own shares, not companies, which are separate legal persons, and directors’ only fiduciary responsibility is to the company. Shareholders are not principals and managers are not their agents.

The fact that this is a zombie idea does nothing to weaken its hold on the corporate psyche, particularly in the US. As the late London Business School scholar Sumantra Ghoshal explained, the problem is not that we fail to recognise good management practice – it is that bad management theory anaesthetises 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.

Copyright The Financial Times Limited 2014.