There’s just one problem. Could it be the wrong kind of governance? The day the FT carried the story, Incomes Data Services was reporting that FTSE100 directors took home a median 10 per cent pay increase last year, continuing a soaraway trend that has continued year-in, year-out over the same period. And would this be the same governance, that has given us the RBS meltdown, LIBOR and PPI mis-selling to the tune of £18bn, the biggest rip-off in financial history? That failed to stop phone-hacking or BP taking dangerous short cuts? And that has sanctioned the wholesale offloading of risk on to everyone else, whether individuals (pensions, careers) or collective (global and financial warming), at the same time rejecting any responsibility of its own except to shareholders?
So lop-sided and jerry-built is the corporate economy erected on the scaffolding of the current governance codes that it can’t even deliver the material progress by which it justifies its many privileges: even with a return to growth, living standards for lower or middle earners may be no higher in 2020 than in 2000, according to the Resolution Foundation.
The truth is that much vaunted UK corporate governance has neither headed off major scandal nor nurtured good long-term management. In fact it has done the opposite.
The irony is that by now we know pretty well what makes companies prosper in the long term. Organisations are whole systems and have to be managed as such – you can’t optimise whole systems by optimising the individual parts. Pace Beecroft and Osborne, good people management pays dividends: fear makes people stupid and cussed, not clever and entrepreneurial.
We know that incentives and targets are dangerous (and sometimes lethal) things, all too often taking people’s eye off the real job and focusing it instead on the incentives themselves, damaging intrinsic motivation and undermining performance. Companies work better when pay differentials are less wide (ie, when we really are in this together). Lasting success comes from the hard work of organisation-building and devising products and services that please customers, not from doing deals, which mostly destroy value.
Lastly, it’s obvious except to themselves that in the long term companies can’t thrive unless they have society’s interests at heart as well as their own.
So why do so many boards and managers, sicced on by politicians, systematically do the opposite – run companies as top-down dictatorships, opt for mergers and financial engineering over pleasing customers, destroy teamwork with runaway incentives, attack employment rights and conditions, outsource customer service, treat their stakeholders as resources to be exploited, and refuse wider responsibilities to society?
The answer is that management in the 1980s was hijacked by an opportunistic alliance of impatient shareholders, corporate raiders and ambitious business school academics. The formula that they came up with cast management as a sub-branch of Chicago economics, based on an ideologically inspired view of human nature (homo economicus) needing to be bribed, whipped or both to do their exclusive job of maximising returns to shareholders. It is these assumptions, untested and hidden from view, that are at the heart of the governance codes and have taken on the aura of unchallenged truths ever since.
The consequences of the hijack have been momentuous, over time remodelling society as well as business. The first consequence was to align managers’ interests not with their own organisations but with financial outsiders – shareholders. This triggered the explosion of senior managers’ pay that continues to this day.
At the same time, focusing outside rather than in made them less sensitive to the real-world needs and capabilities of their organisation and encouraged them instead to turn to deals as the preferred short cut to growth (and their bonus targets). This signalled the second major consequence, the switch from the previous policy of retaining and reinvesting profits for the benefit of all stakeholders, to ‘downsize and distribute’, contracting out as much as possible and cranking up dividends and share buybacks to shareholders.
The crowning irony is that this stealth revolution progressively undermined the foundations of the shareholder value under whose flag the activists had ridden into battle. Along with corporate welfare and customer service, one of the prominent victims of downsize and distribute was R&D. Innovation has stalled since the 1980s, prompting some economists to query whether the era of growth itself is over.
But it’s not economics, it’s management, stupid. Unsurprisingly, downtrodden and outsourced workers, mis-sold-to customers, exploited suppliers and underpowered innovation do not make for rising shareholder value despite ever more ingenious financial engineering.
When the Canadian academic Roger Martin crunched the numbers, he found that shareholders had done less well in the the shareholder value era since 1980 than in previous decades when lazy managers were supposedly feathering their own nest. The crash of 2007-8 stripped away any remaining doubt: the economic performance of the last 30 years was a sham. Overall, there were no profits – as Nassim Nicholas Taleb wrote in The Black Swan, they were ‘were simply borrowed against destiny with some random payment time.’
To sum up: what the City was congratulating itself on last week is a wonderful example of the wrong thing done righter. The ‘success’ of the governance codes is a triumph of bureaucratic process over substance. Never mind that we have a financial system that has lost both purpose and moral compass, an economy that is failing most of the population and an increasingly unequal society, look how well we tick the governance boxes! The truth is that governance has recreated management as a new imperium in which managers and shareholders rule, and the real world dances to finance’s tune. A worthier anniversary to celebrate is the death seven years ago this month of Peter Drucker, one of the architects of pre-code management. Austrian by birth, Drucker was a cultured humanist one of whose distinctions was having his books burned by the Nazis. In The Practice of Management in 1954 he wrote: ‘Free enterprise cannot be justified as being good for business. It can be justified only as being good for society’.
The real leadership crisis
If quantity of ink were the criterion, we’d know everything there was to know about leadership and more. The last time I looked there were 64,000 titles on the subject listed at Amazon (UK) – with another 2,000 added to the groaning shelves each year.
Yet it’s one of those topics that the more you read and talk about, the smaller the area of certainty becomes (‘I’m still confused, but at a higher level’, as Goethe said after reading Hegel). What’s more, the higher the pile get, the more confused thinking and practice become, triggering yet more effusions on the subject. No wonder there’s a ‘leadership crisis’, even though it’s not the one that most people think it is.
It was hard not to reach this conclusion at a fascinating recent symposium on the subject at Gresham College, London. It was illuminated by two dazzling lectures by Liz Mellon, executive director of Duke Corporate Education, and ex-headhunter Douglas Board, npw visiting fellow at Cass University, talking respectively of the way leaders think and the way they are appointed.
Reverse-engineering leaders, says Mellon, author of Inside The Leader’s Mind: Five Ways to Think Like a Leader, by breaking leadership into its component competencies and then finding (or forcing) candidates to fit the template, is doomed to failure. You might as well try to create a butterfly by pulling one to bits and using the parts as a blueprint for a new one. It’s only slightly less crude than the Frankenstein myth. What’s missing – what gives leadership life – is the way leaders think, and without it what you get is robots and clones: the exact opposite of what is needed for a world of ambiguity, few precedents, and incomplete information.
This error is made worse by the extraordinarily lackadaisical way senior leaders are chosen, according Board, whose book Choosing Leaders and Choosing to Lead: Science, Politics and Intuition in Executive Selection, came out in the summer. Despite spending enormous amounts on headhunters – a search for a US CEO can easily cost upwards of $1m – candidates for top jobs almost never get the grilling they deserve (and that more junior executive would undergo) from either board or search officers. The role of politics and intuition is rarely taken into account. As a result, those who get appointed to the top jobs are those who are firmly convinced by search’s rituals of deference that unlike other mere mortals they are already equipped for and deserve them. Hence, perhaps, the hubris, sense of entitlement and narcissistic display that is in evidence in boardrooms almost every day.
But what if leadership, like happiness and even profits, is best looked at as an epiphenomenon – a by-product of doing something else? Here’s a quote on captaincy by Martin Corry, a former captain of the England rugby team: ‘It’s a simple matter of making sure everyone knows what he’s supposed to be doing, and then letting them do it. After that, it’s about maintaining your own standards, which is the most effective way of winning the confidence of those around you. It’s obvious to me that you can’t have a captain the majority of the dressing-room think is a tosser. How can you stand up and say your piece in a team meeting if you’re playing like a fairy every weekend? Your performance carries the weight of everything. That’s all you need to remember, basically.’
‘Your current performance carries the weight of everything’. Given the arid competency approach, it’s not surprising, as Mellon notes, that the hottest leadership courses du jour are on ‘authenticity’ – ‘being yourself’ – in other words, another fruitless attempt to pin down an abstraction that doesn’t exist in isolation from the behaviour itself. But how can anyone be ‘authentic’ when they are simultaneously being expected to conform to the same competency framework as everyone else? You can convincingly have one or the other, but not except in the very rarest cases both.
So perhaps we should stop searching for a mythical particle called ‘leadership’ and instead start looking at character and values as a predictor of behaviour under pressure. ‘Leaders must be true to themselves, but they also have a role to deliver that demands that they should rather bring the best of themselves to every situation’, says Mellon. ‘I believe we should ask leaders to get straight how they think about their role – and then trust that the right behaviour, across a broad spectrum, will follow’.
The proviso here, though, is that our current management model demands that leaders march their troops in the wrong direction. Take corporate governance arrangements, at the heart of which is financial alignment of top management with shareholders’ interests. Yet as überguru Gary Hamel has noted, while managers boast of their alignment with shareholders, ‘My guess is that… shareholders would have been better serviced if their chairman could have bragged about being aligned with employees and customers. It seems to me that a CEO’s first accountability should be to those who have the greatest power to create or destroy shareholder value’. Would there be £18bn claims on the banks, the worst banking scandal in history, for PFI mis-selling if CEOs were aligned with customers and employees rather than shareholders?
So, to sum up: the ‘leadership crisis’ does not consist of a dearth of great leaders (or rather, the unrealistic desire for great leaders is the wrong solution to a problem that does not exist in the form most people think it does). It is that senior leaders are poorly chosen, against mis-specified qualifications, and given a job that is designed to make them do the wrong thing.
On second thoughts, perhaps we do need a few more books on leadership after all.