In a provocative article in Times Higher Education (THE), Douglas Board compares business schools with the motor industry in the light of the VW emissions fraud. He notes that while both sectors are the same age, global in reach and have profound whole-system effects on the rest of the world, only one is tarnished by scandal caused by its behaviour or its secondary consequences: we’re up in arms about vehicle recalls, emissions and damage to the environment, but ‘society has barely registered the existence, let alone the scale, of business schools’ harms’.

It’s an important and useful thought. Thus, in automotive terms, you’d describe the Great Financial Crisis as a head-on global pile-up caused by MBA-licensed drivers all driving by the rear-view mirror in vehicles whose engine management system, also conventionally approved, was based on superstition rather than science. While the drivers were unscathed thanks to massive cockpit protection, there were no airbags for other passengers or society. As Board points out, VW-style ethics-lite are themselves the product of the results-above-all doctrine sanctioned by business schools over the last 40 years.

There are many management products freely on sale that would be outlawed as unsafe or bogus if they came out of any other industry. As Sumantra Ghoshal wrote in 2005, ‘business school faculty need to own up to our own role in creating Enrons. It is our theories and ideas that have done much to strengthen the management practices that we are all so loudly condemning’. He singled out governance based on agency theory, conventional versions of strategy, and hierarchical performance management. That’s fairly comprehensive. ‘Management is out of date…’, acknowledged Gary Hamel in 2007, ‘a technology that has stopped evolving, and that’s not good.’

We don’t on the whole buy cars that don’t work, so why do we continue to take management at its own valuation? One reason is precisely that we don’t consider it as the product of an industry, as we do aspirin or a car. We treat it more like a religion, a faith-system derived by top-down deduction from immutable principles that allows movement only at the margins, rather than induction upwards from what works empirically. Like religion management has little predictive value, and most estimates are that firm performance has more (or much more) to do with factors external to the firm than to management. Stanford’s Jeff Pfeffer has likened much leadership advice to lay-preaching, and Rakesh Khurana at Harvard notes a belief in the powers of ‘charismatic’ leaders that is ‘quasi-religious’. In one view leadership functions like myth, as a way of simplifiying complex reality into a narrative that allows it too be reassuringly understood in human terms.

Yet management’s current normative effect is something most churches (not to mention industries) might look on with envy. In Hamel’s description, management is a paradigm in the proper Kuhnian sense – more than a way of thinking, ‘it’s a worldview, a broadly and deeply held belief about what types of problems are worth solving, or are even solvable’, one now so profoundly taken for granted that for most people it is invisible and its wrongness therefore not even discussable.

But the problem is not just that so much of it is wrong – it’s that if enough people believe it it becomes right. While cars don’t act on changing beliefs, humans do. Is it coincidence that business students (the dominant subject group at masters level in both the US and UK, note, and in the UK at undergraduate level too) come to take a more instrumental view of others, be more likely to cheat, free-ride and generally behave like the ‘economic man’ of the textbooks than students in other subjects? Probably not. ’There is a growing body of evidence that self-interested behaviour is learned behaviour, and it is learned by studying business and economics,’ conclude Pfeffer and others in a paper self-explanatorily entitled ‘Economics Language and Assumptions: How Theories Can Become Self-Fulfilling’.

The self-reinforcing tendencies that turn people at work into shirkers, mercenaries and control freaks (‘arseholes’, in Board’s terminology) have hollowed companies too of their human purpose. As Jerry Davis has demonstrated, firms no longer look like the socially and geographically anchored entities of the past, but instead increasingly resemble the affectless ‘bundles of contracts’ (markets by another name) hypothesized by 1970s and 1980s economists and business-school theorists. And the paradigmatic circle is completed by the infection of their parent universities by the market thinking that in the absence of higher professional aims governs the management education industry. Anyone with doubts about the degree to which this ethos now dominates higher education should look at this winter’s Green Paper on the future of the higher education sector, ‘Fulfilling our Potential’, which describes universities as ‘providers’, talks of market exit and entry, the importance of employer needs and value for money for customers – everything, as a response from Cambridge University notes, except the university’s fundamental purpose of pursuing knowledge for the benefit of society as a whole, and ‘[helping] students grow into thoughtful and critical citizens, not just earners and consumers.’

So government too is in thrall to business-school values. One industry’s currency has imposed itself as the value by which all others are judged. That makes management far more important than most people imagine, with more potential for both good and ill than any other technology, since it is the one that decides how the others are applied. Ironically, industries, and even sports, that are physically dangerous are subject to regulation or strict safety rules; medicine has its Hippocratic Oath. Management, on the other hand, is responsible only to the market. It’s long past time we should reconsider.

Every day brings fresh evidence that the most dangerous word in the management lexicon is ‘incentives’. Incentives are a star instance of management’s besetting sin, its urge to impose simple solutions on complex issues. It’s hard to overestimate the consequences of their resulting abuse. To quote Mihir Desai in that well-known radical organ HBR, today’s incentives and rewards have ‘contributed significantly to the twin crises of modern American capitalism: repeated governance failures… and rising income inequality’. Others would add at least some blame for the current lack of global growth and companies’ dismal record of job creation to the charge sheet.

Oversimplification in incentives is endemic and fractal, distorting outomes at every level.

The flaw inherent in all outcomes-based management is that history runs forward, not back. While it seems attractive to manage back from incentives attached to desired outcomes, it can only be done by sleight of hand and optical illusion, as in the alluring but impossible constructions of M.C. Escher. In the real world results are always context-dependent and often hard to measure (over what time frame? At what cost to other parts of the organisation – eg VW?). What’s more, since they are the emergent product of a complex system with lots of moving parts, it’s also near impossible to establish a linear chain of cause and effect. Hence a kind of social science uncertainty principle: the more we know about the outcome the more complex it becomes and the less we are able to attribute it to a particular cause or person. In this situation incentives simply make no sense.

In such a context, the problem is not that incentives don’t work. It’s that they do – just in a way that was entirely foreseen. As systems guru Russ Ackoff never tired of pointing out, organisations being systems, their problems ‘are almost always the product of interactions of parts, never the action of a single part. Treating a single part destabilises the whole and demands more fruitless management intervention; management becomes a consumer of energy, rather than a creator.’ Incentives are a classic example of treating a part as a whole. Then, like league tables and targets, incentives further step down multidimensional performance into a few simplistic targets. Unfortuately, ‘focusing on a small number of these dimensions as targets directs attention on these at the expense of others of equal importance,’ notes John Kay, ‘The effect of the target is to focus attention on the target rather than its purposes. The target is met; the underlying objective remains elusive.’

But even if incentives didn’t fail conceptually, they don’t work on so many practical, empirical scores that it would be comical if the consequences weren’t so dangerous.

Innumerable studies show that money doesn’t motivate. Incentives based on them doubly don’t motivate, except to make people demand incentives. Their effect is only temporary, so even if they did work they would have to be increased at a prohibitively accelerating rate (which is exactly what has happened to CEO pay) to be any use.

Financial incentives can’t make people cleverer nor (by definition) more ethical. Not only do they not result in better or more work except in the very simplest piecework situations – the relationship is often negative. One powerful reason is hubris: the higher the pay and the incentive, the greater the reinforcement of narcissist and overconfident tendencies, leading to overinvestment particularly in value-destroying mergers and acquisitions (think RBS in the run-up to the Great Financial Crash). As Berkshire Hathaway’s Charlie Munger once put it, ‘II’ve been in the top five per cent of my age cohort all my life in understanding the power of incentives, and all my life I’ve underestimated it. And never a year passes but I get some surprise that pushes my limit a little farther.’ That’s a good reason, says Nicholas Nassim Taleb, author of The Black Swan, for not offering incentives ‘to those who manage risky establishments such as nuclear plants and banks… Society gives its greatest risk-management task to the military, but soldiers don’t get bonuses’.

Despite all the refuting evidence the incentive sledgehammer is still routinely used to bash almost any performance management issue, nut or not. This is partly for self-serving and psychological reasons, but also because incentives are obstinately seen as a technical issue that can be ‘solved’ if only they are done better, whereas in fact the problems are intrinsic to the thing itself. In other words, incentives are the problem, which can therefore only be resolved at a different level.

How? It has been known for aeons that while pay doesn’t motivate, it most reliably demotivates – the most powerful emotions relating to money being anger and anxiety, according to psychologist Adrian Furnham. So the best thing to do is as far as possible to take money off the table, allowing workers to focus on the job rather than the reward and managers to spend their time and energy improving the system rather pacifying the discontented (see Ackoff above). Fire remuneration consultants (another saving) and devise a scheme based on pay ratios, say 50 from top to bottom, that will satisfy the strong human desire for fairness, not to mention the empirical finding that less widely dispersed pay is associated with better performance, and connect the measures they use to purpose – in other words, give them a good job to do. James Treybig, the founder of Tandem Computers in the US, carefully recruited people by attitude with the promise only of a ‘competitive’ reward package on selection. If they insisted on knowing the exact salary they didn’t get the job. If they came for money, reasoned Treybig, they’d leave for it, too.

In a list of warning maxims for management, incentives perfectly illustrate the top two: ‘be careful what you wish for’, and ‘you can’t solve a problem by doing better the thing that was at the root of the problem in the first place’. As Peter Drucker earily used to say, ‘There is nothing so useless as doing efficiently that which should not be done at all.’

I’ve been wrong before – but is management at last moving up the political agenda? The route is roundabout, but it’s slowly dawning on governments and ministers that many of the social and economic problems they are grappling with are micro-economic rather than macro-economic at root – that is, even if the results (inequality, lagging productivity, slow growth) manifest themselves as problems at the national level, those results are the sum of what goes on inside companies. The only levers that can be pulled to affect them are the beliefs, practices and incentives that operate in the workplace. So what happens in the boardroom and on the shop floor, how the company is governed and managed, have direct political ramifications.

A few voices have been have been trying to make such views heard for years. City economist Andrew Smithers, for instance, has made the seemingly obvious point that the motivations of those making resource-allocation decisions within companies have an important bearing on indirect outcomes such as productivity, jobs and income distribution. In The Road to Recovery he argues that there won’t be one unless the incentives to short-termism of CEOs loaded with stock-options are brought under control.

In a powerful presentation on ‘Reinventing the Corporation’ at the British Academy last year, Colin Mayer, formerly dean of Oxford’s Saïd Business School, noted that ‘it is to the corporation that we should turn for both the source of our prosperity and our impoverishment’, adding: ‘With the emergence of the mindful corporation we could be on the edge of the most remarkable prosperity and creativity in the history of the world. On the other hand we could equally well be at the mercy of corporations that are the seeds of our destruction through growing inequality, poverty and environmental degradation that give rise to social disorder, national conflicts and environmental collapse on scales that are almost impossible to conceive of today. We are therefore on the border between creation and cataclysm, and the corporation is in large part the determinant of which way we will go.’

We might sense a returning echo from that warning in the whiff of fear in the air as today’s elites see the certainties underpinning their comfortable existence of the last few decades crumbling in front of their eyes. ‘As the US has developed a Latin American-style income distribution, its politics have grown infested with Latin American-style populists, of both the left and the right’, Martin Wolf summed up recently in the FT. There is no guarantee that these new populists, not only in the US but also in France, Spain, the UK, Greece and others, will be as compliantly ‘business-friendly’ as their predecessors; hence the need to head them off becomes a priority.

All of which brings the company squarely into the political firing line. Of seven steps Wolf listed for bringing elites back in touch with the masses they have left behind, no less than four involve the company, how it works and is regulated. First, curbs on the financial sector, whose vast expansion has not brought commensurate improvements in the rest of the economy (rather the reverse: the financial sector’s gain has been the rest of the economy’s loss); ‘ruthless’ competition policy to deal with ‘too big to fail’ and corporate rent-seeking; nailing corporate tax, which also means addressing issues of wider corporate responsibility and legitimacy; and finally, challenging the doctrine of shareholder primacy – ‘shareholders enjoy the great privilege of limited liability. With their risks capped, their control rights should be practically curbed in favour of those more exposed to the risks in the company, such as long-serving employees’.

Taken together with the wave of reform initiatives (in its broadest sense) that have sprung up around the world – the Purpose of the Corporation Project, Coalition for Inclusive Capitalism, Conscious Capitalism, benefit and b-corporations, the Management Innovation eXchange, the Global Peter Drucker Forum – Wolf’s list signals something important. All are a belated stirring of human agency – we are not drones in a technocratic economic machine with immutable laws and but have choices, including over the purpose and governance of companies that we work in, that we want to exercise. They reflect perhaps a greater appetite for change now than at any time for the last 40 years.

That doesn’t mean we’ll get it – it doesn’t help that politicians are dismally, diametrically wrong about management, micro-managing and laying down the law where they have no business to (method), and treating the big issues of purpose and governance, their proper domain, as givens that are undiscussable. The stakes couldn’t be much higher, with economists warning of a combustible conjunction of global economic slowdown, rapid population growth, climate change and resource shortages, and not least a wave of geo-political instability such that ‘the world has never been a more dangerous place’, in the view of one US military high-up. Two things at least are clear. The first is that, echoing Mayer, the corporation is a key determinant of whether the future is ‘creation or cataclysm’. The second, following from the first, is that for management too this is a defining moment.

My new piece on ‘the purpose of purpose’ for FT Business Education is online here

With nice irony, the release at the end of the month of The Big Short, the movie version of the 2010 book of the same name by Michael Lewis (still the best piece of sustained financial journalism that I have read) coincides with the news that the Financial Conduct Authority is shelving the enquiry into banking culture which was a substantial plank of its planned work.

The film is smart, quirky and acted with acerbic humour by the actors playing the handful of geeks and oddballs who almost incredulously, and with much uncertainty, in the run up to the crash found themselves alone betting against the whole of Wall Street (before, too late, the latter changed its mind), and indeed the entire US economy, in the financial play of the title. The film, like the book, leaves no doubt that the cause of the financial nightmare of 2008 – entailing an estimated $12tr in financial losses, together with 8m jobs and 6m homes in the US alone – was not abstract economic forces, but decisions informed by the banking culture that is even now being eased off the hook: a systemic culture so corrupt and multiply conflicted that the actors embedded in it ended up by comprehensively deceiving themselves (as Lewis noted of Howie Hubler, a Morgan Stanley bond trader who ran up losses of $9bn, the single largest loss in Wall Street history, ‘he was smart enough to be cynical about his market, but not smart enough to realise how cynical he needed to be’).

The story has lost none of its ability to amaze and appal in the intervening years. It builds from the inkling of a handful of investment contrarians that there’s something not right about the US housing boom of the early 2000s. If that is the case, then not only they shouldn’t be investing in anything to do with it, they should be betting against it. What they discover, piece by piece, with mounting disbelief, is a system in which a grotesquely deformed housing tail has ended up wagging the entire Wall Street dog, now blindly lashed to what is destined to be its own Doomsday machine. As Citigroup’s Chuck Prince’s memorably told the FT in 2007, ‘As long as the music is playing, you’ve got to get up and dance. We’re still dancing.’ The bricks and mortar of US dwellings, the outsiders begin to see, are the tiny fulcrum on which is erected a towering superstructure of ‘mortgage-backed’ derivative investment vehicles: first mortgage bonds and then increasingly abstruse collateralised debt obligations, or CDOs, which aggregate tranches of many individual bonds into a new derivative investment vehicle, and so on almost to infinity.

What they uncover is in effect a giant Ponzi scheme driven by wishful thinking based on one critical assumption, which falsifies everything else. With every addition to the gleaming edifice, the towers of debt become more unstable, but the consequences are so remote from the original action that no one connects the dots. The critical assumption, glaringly obvious in retrospect but long unquestioned by anyone in the chain, is that the instruments that compose the debt towers are creditworthy. Staggeringly, no one vets the quality of the mortgages at the bottom of the pile. On the basis that mortgage bonds are diversified assets (in all history it had never happened that mortgages had gone bad in all parts of the country at the same time), the rating agencies, Standard and Poor’s and Moody’s, classify them as investment grade. On the same grounds, CDOs backed by the mortgage bonds are rated triple-A or double-A, even though they are composed of sub-prime loans to people who will never repay them. Confronted in the film on this blatant credit laundering, a rating-agency official replies simply: ‘We’re competing with the other guys. If we don’t give the originator their double-A rating, they’ll just go up the road.’

For the bloody-minded loners sitting on the knowledge of this gross mispricing of risk, the frustration is that they have no direct way to profit from it. Then one has the bright idea of persuading a Wall Street bank to sell him another derivative – a credit default swap, or CDS – which is in effect an insurance policy against a CDO, paying out if that instrument fails. No one on Wall Street believes that’s possible (‘they’re triple-A, aren’t they?’), so CDSs are sold with gusto; and then combined into so-called ‘synthetic’ vehicles so opaque that it’s near impossible to work out which side of the bargain holders are… Some investment banks are later found to have been selling investments that they know to be junk to gullible clients (‘dumb Germans’ or ‘Korean farmers’) with the sole intention of using these arcane instruments to bet against against them.

In the end, it turns out that all the quants and super-managers on the Street are ‘far less capable of grasping basic truths in the heart of the US financial system than the film’s oddball heroes, one of them ‘a one-eyed money manager with Asperger’s’, and two or three other equally obstinate and persistent outsiders. (One of the sobering lessons of the episode is just how much obstinacy and persistence it takes to stand out against such powerfully self-reinforcing groupthink.) But when in 2008, as the short four predict, the sub-prime loans go bad and the CDOs fail, they take first Bear Stearns and then Lehman Brothers donw with them. Many others would have followed, including the giant insurer AIG which was the counterparty to many of the CDSs in play, but for the bailouts which transferred trillions of dollars of liability to taxpayers on both sides of the Atlantic.

Here perhaps lies the truly chilling explanation of the failure of the authorities to allow the the banks to reap the just rewards of their own venal stupidity and go bust under the weight of their colossal debts and ‘troubled assets’: what terrified them was not the direct costs of institutional failure but the prospect that the collapse would trigger a tsunami of payouts on the unquantifiable trillions-worth of CDSs that had been taken out against them. It wasn’t the size of the banks themselves that made them too big to fail, but the number and magnitude of the side bets laid on them. The casino managers didn’t even know the odds on the vast wagers they were taking.

Seven years on from the crisis, the film warns, the banking culture that produced it is still intact. A short-term, hire-and-fire culture in which the only motivator is money. ‘When you can be out of the door in five minutes, your horizon becomes five minutes,’ one City worker told a journalist. Where the traders who earned millions, sometimes hundreds of millions, screwing their customers have kept their gains. Where those who caused the disaster are now advising governments to get off their backs, and regulators such as the FCA are accordingly scaling back their attempts diminish the chances of the same thing happening again.

Meanwhile, the unreformed ratings agencies are still being paid by those whose products they rate.

CDOs are being marketed again.

Happy New Year.

The outsourcing of public services is massive business, worth £100bn or more to the private sector at the beginning of this decade. And the impetus shows no sign of slackening as, following the lead of the centre, more and more cash-strapped local authorities struggle to cut costs and ‘increase efficiencies’.

But, as a slim new book from the team at Manchester’s Centre for Research on Socio-Cultural Change (CRESC) makes clear, outsourcing is much more than a large business pockmarked by fiascos and scandals (Atos’ work capability assessments, tagging of fantom prisoners by Serco and G4S, Capita’s inability to fulfill its contract to supply court interpreters, ditto for G4S and Olympic security in 2012). No longer something applied just to support activities like IT or payroll, outsourcing has now penetrated into the key historic functions of the state (criminal justice, welfare, for example). Economically, the UK operates a kind of ‘franchise state’ in which outsourcing is the default option, with profound implications for local and central democracy, not to mention the quality of services to citizens.

In practice, at the heart of outsourcing is an exquisitely lethal form of Catch-22. One of the first findings to emerge from the original outsourcing contracts in areas such as IT was that not knowing how to do it yourself (the initial sales justification) was the worst possible basis for contracting something out. On the contrary, the only way you can manage an outsourcing contract is to know how to do it yourself – in which case you might just as well do so. Conversely, the minute you can no longer do it yourself, the less able you are to manage the outsourcing relationship and the more dependent on the outsourcer – a crippling double whammy that locks the ‘partners’ into a position of uneasy co-dependence, an unholy alliance of state convenience and corporate opportunism in which the customer/citizen interest comes last.

As the authors explain, the bargain rests on the assumption that it is possible (and better) to separate out policy and strategy from delivery and implementation, with the idea that competition for contracts will lead to increased efficiency and a transfer of risk to the private sector. In reality, the assumption is deeply mistaken for the reason outlined above, and it results in a total absence of the accountability that features so large in the justificatory rhetoric. Thus for governments the split provides a convenient opportunity to shift blame for toxic or ineffective policies on to those who execute it (as with work assessments), while outsourcing firms point an accusing finger at the ineffectiveness of local and central authorities (much criticised by parliamentary select committees and the National Audit Office) to write and manage contracts.

The result, as I have pointed out elsewhere, is the worst of all worlds – arbitrary top-down specification of the service packages that the citizen in all manifestations will receive, largely dictated by cost, by a Soviet-style state, delivered by financialised corporate purchasers of local monopolies in a travesty of the free market. This is sham capitalism and sham localism, in which a small number of private firms benefit from ‘near unassailable competitive advantage from scale and win disproportionate amounts of business’ from a ‘co-dependent state which can only keep the show going by not pressing value for money or risk transfer’.

This is a system designed not to learn. With the main criterion cost and most outsourcing contracts specifying payment for volumes of activity, there is no incentive for innovation and improvement across the system that would drive down the volume of activity, the only sustainable way of reducing whole-system cost. Too often, current outsourcing does the reverse, imposing heavy social costs for private gain. Thus private-sector firms exploiting their ability to reduce pay levels drive a race to the bottom in which the pay of underpaid and overworked care workers (for example) has to be supplemented by payments by the state, while the appalling quality of care increases overall need (and expense) rather than reducing it: institutional stupidity of the highest order.

The CRESC authors, as ever, have done invaluable service in their structural analysis of large-scale outsourcing and its wider political implications. They note the eye-opening rewards generated at low risk and with little investment that have attracted private-equity and other financialised parents, the worst possible owners of providers of essential service. But beyond advocating limits on certain kinds of outsourcing, and prohibition of others, they have less to say on alternatives, or alleviating the problems that the process was meant to remedy in the first place.

The key here is surely to break the structure of inevitability that pervades current practices (‘there is no alternative’) and design a systems architecture that favours the linked imperatives of current public service, ie service improvement and innovation, both desperately needed. That, as John Seddon has outlined, would require politicians and regulators to abandon their current obsession with targets and specific methods like shared services and back offices and instead focus on their proper role, which is establishing and defending the purpose of public service from the citizen’s point of view.

The goal, the exact contrary of today’s practice, is to free up local managers to experiment (innovate) with measures and methods that can be tested against the purpose, establishing real as opposed to sham accountability. In that framework, outsourcing has a respectable part to play. Seddon notes that it is perfectly possible to devise ‘more constructive outsourcing approaches… that abandon strict contract rules and instead draw up agreements that treat the supplier as part of the same service system, working together for the same purpose’. Gains to the provider follow gains to the whole system, often in the shape of reduced failure demand, effectively turning outsourcing from a large part of the problem into a contributor to the solution. Of course, what role that would leave for the current cast of giant outsourcers, with their factory management methods and financially-engineered structures, is another matter. That will not be a cause for regret for those on the receiving end of their cursory, industrialised service packages, however.

Read my article on ‘the myth of leadership’ in FT Business Education, December 2015, here

Who owns companies? In a useful recent summing up in the FT, John Kay was unequivocal: as a matter of legal fact, in neither the US nor the UK, the most shareholder-oriented economies, do shareholders own the company, although almost everyone thinks they do. Of 11 characteristics of ownership listed by one legal scholar, shareholders satisfied just two, reported Kay, and those minor ones.

So who does own a PLC? No one does, says Kay, ‘any more than anyone owns the River Thames, the National Gallery, the streets of London or the air we breathe.’ Ownership as applied to companies is a myth, he concludes, that gets in the way of any progress on what to do about them.

He’s right. But we could say much more. The issue goes far beyond semantics or legal niceties. It is important – almost more important than anything else – because for the last 30 years the full force of corporate governance has been brought to bear on trying to make the myth work. And those trying hardest include those who make important resource allocation decisions in companies. As one governance authority put it: ‘Managers now largely think and act like shareholders’. Unfortunately the results have been a disaster for the company itself. The efforts to make the myth work have not only been fruitless: they have profoundly damaged the reality.

As well as a myth and a chimera, ownership is a giant, and increasingly toxic, red herring. The trail leads back to 1932 when Adolf Berle and Gardiner Means published their seminal work The Modern Corporation and Private Property, which declared the separation of corprate ownership and control under professional management a danger to shareholders and laid the foundations for agency theory.

Berle and Means’ concerns remained largely academic during the postwar boom years, but since the 1980s the conviction has grown that the evident shortcomings of the PLC – manifest in increasingly frequent collapses and scandals, short-termism, out-of-control executive pay – are all down to deficient ownership. Thus, the company is a brilliant social invention, wrote Martin Wolf in the FT, but ‘it has inherent failings, the most important of which are that companies are not effectively owned’. ‘Better-owned firms are the key to responsible capitalism’, declared Will Hutton’s Ownership Commission, and at least in the US and UK codes and company law have been altered to strengthen shareholder democracy and give shareholders more powers (to vote on pay, for example), all with the intention of making shareholders act like owners – in other words, making ownership work better.

But you might as well try to make the world fit the rules for Wonderland laid out by Lewis Carroll. The attempts are doomed to failure in law, logic and practice. Shareholders do not have the ability to control management and are too diverse to offer consistent guidance, which was the reason for employing professional management in the first place. But in any case, for shareholders to pursue control and ownership claims is self-defeating. It is to turn the goose that lays the golden egg into a sterile hybrid. The beauty of the PLC, its overriding USP, is precisely that it isn’t owned; it is its status as an independent self-owned legal entity that allows it, uniquely, to pursue its own self interest by making commitments to the future that aren’t and shouldn’t be overridden or controlled by any one constituent stakeholder.

Explaining this in a quite remarkable (perhaps even beautiful) paper entitled The Corporation As Time Machine: Intergenerational Equity, Intergenerational Efficiency, and the Corporate Form, the influential law scholar Lynn Stout argues that that the publicly-traded corporation is an even more extraordinary invention than we thought. In effect, a company with perpetual life, whose assets are ‘locked in’ or put out of reach of today’s stakeholders, and whose shares are publicly traded, becomes a kind of commercial Tardis that can transfer wealth forward to future generations when current investments pay off – but also back from the future to the present in the shape of higher share prices in anticipation of the future rewards (Google’s research into driverless cars might be an example of the two-way process in action). Companies operating in this implicit intergenerational exchange in the past gave us long-term investments in Xerox, Bell, Dupont, Kodak and IBM research labs, among others, whose extraordinarily fruitful discoveries are still dispensing their benefits to the companies and consumers of today.

But this kind of forward transfer, Stout warns, is now imperilled: ‘The public business corporation with asset lock-in, perpetual life, and freely transferable shares… is a legal technology that can play, and historically has played, an important role in promoting both intergenerational equity and intergenerational efficiency. However, the recent rise of a “shareholder value”-focused approach to understanding and governing public corporations has begun to erode public companies’ abilities to lock in their assets. Logic and evidence both suggest this loss of asset lock-in is threatening the public corporation’s ability to serve as a mechanism for transferring wealth between time periods and generations’.

Without the locked-in assets, the PLC becomes ‘a delicate creature’, vulnerable to pressures from short-term shareholders, activists and managers themselves for jam today in the shape of share buybacks and dividends, commonly funded by layoffs and cuts to research and investment spending, or sell-offs and even auto-immolation. Not surprisingly, that not only prevents companies transferring wealth and benefits forward for future generations – it also renders them less resilient in the present. The signs of this self-harm are already too obvious to be ignored: the shrinking population of publicly-listed companies in the US and UK, their shortening life expectancy, and – irony of ironies – diminishing returns to shareholders. Shareholder value thinking, says Stout, now ‘appears toxic to many, and perhaps most, public corporations’.

The conventional wisdom is right that that the corporate form has ‘inherent failings’ that better corporate governance should be used to fix. It is also right that ownership is part of the problem – just not in the way it thinks it is. Putting Stout’s argument together with Kay’s, we might conclude that not only are shareholders wrong to think that they own companies, but that abandoning all claim to the title would be the best thing they could do in the wider interest – and in their own too.

Read my essay, ‘Ratios could align top bosses with workforce rather than shareholders’, in the High Pay Centre’s collection Thinking high and low: exploring pay disparities in society, here (see page 15)

Read my article, ‘Technology is is making real-time performance monitoring too easy’, in FT Business Education magazine, October 2015, here