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

Big Ben is the emblem of London, and by extension of the UK too, in both sound and sight as representative of Britishness and British history as the Eiffel Tower of France or the Empire State Building of of the US. Yet this national icon is now in such disrepair that according to a parliamentary report repairs worth £40m are urgently needed to prevent the clock’s hands dropping off, the bearings seizing up and the pendulum slowing to a stop. As it is, London will be without its visual and aural signature for four months while repairs are carried out, or 12 if the clock gives up the ghost first.

It’s tempting to see in the state of the emblematic clock tower a metaphor for the UK economy as a whole – the stately exterior concealing the engine of a clapped-out 1960s Mini. Perhaps only in the UK is such vicious short-termism, a lethal blend of ignorance and expediency, conceivable.

It is not just Big Ben and the Houses of Parliament (which together, note, face a repair bill of no less than £7bn to stop them crumbling around MPs as they speak). The same effortless ability to fudge the inevitable and then be astonished at the outcome – a 156-year-old clock needs maintenance! whoever knew? – is visible everywhere. There’s the competitive boasting of politicians about their ‘business friendliness’ while the Bank of England warns that a financial sector geared to serving (and remunerating) itself rather than the wider economy needs to be reshaped to suit the needs of those outside rather than inside the charmed circle. The orgy of self-congratulation greeting the success of the James Bond franchise at the global box office glosses over the fact that the car marque inseparable from the brand, Aston Martin, is another British icon with bits falling off, swerving from crisis to crisis under the ownership of a foreign hedge fund.

Or take the steel industry. The fact is that UK steel has been in crisis since the 1980s, by which time it was already crystal clear that there could be no long-term future for steel firms in isolation making commodity products in competition with emerging low-wage economies such as (then) Korea or efficient high-tech ones like Japan and Germany. In 2014 Japan was still the second largest steel producer in the world and Germany the seventh, turning out respectively nearly 10 and four times as much as the UK, which has meanwhile tumbled from fourth world producer in the late 1960s to 18 today, its output having halved.

It’s also been crystal clear that the long boom in commodities, including steel, that has been fuelled by outsize Chinese growth rates would one day come to an end – and that day would be far too late for politicians to consider setting up task forces and other futile talking shops. The cat was let out of the bag by a steel industry insider on the Today programme who explained that the reason blast furnaces were firing full tilt in Japan and Germany while ours were going dark and cold is that in less short-termist and neo-liberal economies with more thoughtful management strategies, steel plants exist as part of vertically-integrated supply chains whose participants are tied together by long-term contracts which give them a powerful incentive to look after the interests of the supply chain as a whole as carefully as they do their own, the two being effectively the same. In other words, while competition is important, so is cooperation; an adversarial supply chain, in which each participant tries to cheat and bully its suppliers and customers, is a recipe for bankruptcy, and, and… now what else is that a recipe for?

Ah yes – horsemeat! Here’s part of what Manchester University’s Centre for Research on Socio-Cultural Change (CRESC) said about the horsemeat scandal two years ago: ‘There are better ways to organise the supply chain through vertical integration to ensure participants take responsibility for the overall health of the supply chain… The better way, which delivers on broader economic and social objectives, is represented by the integrated national models of the Danish and Dutch pig industry or the directly-owned processing of Morrisons… which aligns the interests of firm, supply chain and society’ – and kept the retailer immune from the contamination that affected other supermarket chains.

It’s perfectly true that British steel plants suffer from higher energy costs than many of their rivals. But that too is the result of similarly myopic, unsystemic thinking about power generation. Only the UK, an island nation floating on oil, surrounded by wind and waves pounding its 7,000 miles of coastline 365 days a year, could find itself in its present position of commissioning back-up power plants using diesel generators and buying vastly expensive nuclear expertise from nationalised energy industries in France and China to keep the lights from going out.

To complete the joke, all this is happening in a country where (hat tip to Douglas Board for this), more undergraduates and higher-degree students study business and administration than any other subject, and by some margin; and one of whose more successful industries consists of advisory and professional-services firms that make money from telling others to do as they say, not as we do – in other words, to use the technical term, from bullshit. Now, could one of these madrassas of capitalism kindly furnish us with someone who knows how to wind a clock?

Volkswagen is not alone or even the worst. Wittingly or not, almost all companies are built on lies and and self-deception, from top to bottom. Cheating is endemic.

Whether by financial or (in the VW case) physical engineering, executives routinely manipulate or ‘smoothe’ corporate results to meet stock-market earning expectations and trigger their own cash or stock-option bonuses. Recent research suggests that selection panels recruit top accountants who are willing to do just that over those who aren’t.

‘If you aren’t lying you aren’t trying!’ exhorted a Barclays manager quoted in the LIBOR-fixing enquiry. Lower down the organisation, people equally routinely cheat in small or large ways to make sales or other targets and keep managers off their backs. But small-scale cheating can all too easily morph into institutional self-deception and eventual scandal (the banks, Mid-Staffs, VW) in which, regular as clockwork, leaders protest their innocence and blame ‘a few bad apples’ for the misdeeds. At the extreme, as I’ve noted before, self-deception and denial can turn whole organisations into reversed-out versions of themselves: banks that make people poor, hospitals that make them medically dependent, shareholder-value-maximising companies that destroy value.

In view of the dire effects, why are lying and self-deception so prevalent? It’s not that companies are full of wicked people. It’s the system, stupid – as the telling phrase ‘gaming the system’ clearly announces. And the culprit? In a word, measures and the counterproductive ways in which managers use them.

Measuring is one of the most important things managers do. Without appropriate measures, management can’t be even methodical, let alone scientific. Yet given the lip-service paid them (how many times have you heard the expression, ‘What gets measured gets managed?), astonishing quantities of the measures that companies compile are useless or worse. While good measures promote learning, improvement and innovation, bad measures are often worse than no measures at all: not only do they drive actions that alienate customers and their own employees (yes, you do get what you measure), they keep managers in the dark about their effects.

The reason is simple and profound – but not obvious. As John Seddon has put it, whether organisations realise it or not, ‘there is a systemic relationship between purpose (what we are here to do), measures (how we know how we are doing) and method (how we do it)’. Measures should be a means to an end (learning, improving). When purpose is put first – doing what matters to the customer through products or service – and measures are related to it, managers and employees can see directly how well they are achieving that purpose. Their job is then, guided by the measures, to identify methods to do it more effectively. That is, the purpose-measures-method trio form a learning system. The job of measures is to connect actions with consequences.

Now look what happens when the purpose is not related to customers, or there is no explicit purpose at all. To fill the vacuum, the measure becomes the de facto purpose – the means turns into the end. But putting the measure first (as in sales or other targets, standards and specifications mandated by governments and regulators) has terrible consequences, because methods are now geared to achieving the measure rather than the real purpose (often at the expense of the real purpose). They are not about learning but making people accountable. And as all such targets are arbitrary, with no necessary relation to the system’s capability to meet them, there are high incentives for people to cheat. As W.E. Deming succinctly put it half a century ago: ‘People with targets and jobs dependent upon meeting them will probably meet the targets – even if they have to destroy the enterprise to do it’.

Cue Volkswagen, seemingly a classic case of capture by its own closed, self-referencing metrics. Fifty per cent owned by the Porsche family and 20 per cent by the state of Saxony, VW, as the company at the centre the company town of Wolfsburg, was focused entirely on volume and jobs, to which environmental protection and even the customer came a distant third. Everyone seems to have bought into those goals, including the supervisory board, the unions and shareholders who were doing very well from the formula. But volume meant selling in the US, which has much stricter diesel emission rules than Europe. With feeding the machine the priority, and detached from customers, it’s easy to see how self-confident, production-minded managers could convince themselves that cutting a few testing corners wasn’t a serious matter – after all, fudged emission tests don’t make them poor cars, just not quite what the ads said they were (ads also lie, as consumers well know; witness the soaring use of online adblockers). Little lies become bigger ones, until it is very hard to go back.

As set out in Goodhart’s Law – ‘Any statistical regularity will tend to collapse once pressure is placed upon it for control purposes’; or in plain words, a measure that becomes a target is no longer reliable as a measure – all data collected to meet incentives is worthless because liable to manipulation. The mother of all numerical targets, of course, is shareholder value, which is useless as a guide to action in the real world of customers and service, because it is unrelated to what matters to customers, is used as a carrot or stick rather than an aid to learning, and does not connect actions to consequences. It is owned by the boardroom, not those doing the work. Incidentally, it may well be true that departed CEO Martin Winterkorn did not have direct knowledge of the testing scam: in a delicious variant on Catch-22, in an organisation that uses measures to make people accountable rather than to learn, no one is ever accountable because they always meet their targets. Winterkorn’s deeper responsibility, of course, is for the system that drove such perverse behaviours in the first place.

As VW’s subsequent struggles show, the distorting effects of turning measures into ends are catastrophic. The company has set aside $6n to provide for vehicle recalls and rectifications, while liabilities for fines and possible lawsuits could dwarf that. Some executives may face criminal charges. If, back in the real world, car-buyers give up on the brand, things could get even worse. Spending is already being reined back. All of which shows that actions do eventually have consequences, even if the failure of official measures to make the link apparent means that they turn up many years later as an unexpected and very nasty surprise. Rarely have the wings of chickens flapping home to roost cast a longer or deeper shadow.