Is there an Olympic legacy beyond the buildings? Read my piece for The Foundation here

Just how far the British economy has been pulled out of shape by the last 30 years of rampant financialisation is only now becoming clear. But while rebalancing the economy is vital, let no one think that achieving it will be easy.

The extent of the challenge was one of the themes emerging from the TUC’s important ‘After Austerity’ conference on 26 June. Rebalancing is not just (or maybe even at all) a question of putting in place an industrial policy. So baleful and far-reaching have been the effects of the City on the rest of the economy that there are now massive regional, age, human capital and public-private imbalances as well as those we are familiar with in wealth and finance.

The starting point is that the overdevelopment of finance and the underdevelopment, or rather de-development, of industry are two sides of the same coin. Manufacturing is weak because finance is powerful. At the conference, Cambridge economist Ha-Joon Chang pointed out that the UK, the sixth largest economy in the world, ranked 20th in manufacturing output per head, behind Luxemburg and Iceland. Meanwhile, finance is five times larger than three decades ago. ‘Is it even three times better?’ asks US economist Dean Baker. ‘I don’t think so.’

Can manufacturing be revived? Recent history suggests we shouldn’t bank on it. Sterling has lost 30 per cent of its value in the last three years, points out Chang. But that has not triggered the expected export boom, leaving the UK with a whopping £100bn trade deficit – and also acutely vulnerable to international market sentiment in the medium term.

One reason is that during the years of City triumphalism, many complete supply chains have disappeared, so that while for instance Nissan’s Sunderland plant is touted as a manufacturing success, 80 per cent of the components used in its cars are imported. The UK’s largest manufacturing industry is now food processing.

‘Has manufacturing lost critical mass?’ muses Chang. ‘It will take a very big push to get it back’. For sure, it won’t happen when finance attracts the most ambitious with higher salaries and even with the current devaluation keeps sterling higher than it would otherwise be; creams off resources that it previously channelled to industry through bonuses and profits when there were any and subsidies when there weren’t; when it destabilises the real economy through excessive leverage and the derivatives that escape the regulators’ (and its own) power to control.

But there’s still more to it than that. As Mariana Mazzucato told the conference, finance has consistently rewarded activities focused on value extraction rather than value creation, destroying value and misdirecting investment in the process. For instance, instead of favouring ‘good’ risk embodied in high R&D spending (most innovations fail) it instead rewards share buybacks and dividend distribution, which are inversely related to R&D and human capital formation, and speculation. Perversely, it is the most innovative UK companies that have been penalised by punitive lending rates since the financial crisis. Reforming finance so that it rewards Schumpeterian ‘creative destruction’ rather than ‘destructive creation’ is an essential part of the rebalancing process.

This leads on to another important skew that needs to be righted: gross undervaluing, and rewarding, of the innovation role played by the public sector. It’s true that the state isn’t particularly good at ‘picking winners’ – but as Mazzucato points out, it’s no worse than the private sector, where the part played by venture capital is vastly exaggerated. Up till recently the US government contributed 60 per cent of the country’s R&D effort, especially the fundamental research that private finance won’t touch. The internet, most of the technologies that Apple has combined so artfully in the iPhone, Google’s algorithms and revolutionary new drug classes all come out of publicly funded research. Cutting back on this effort is a fundamental error. What does need rectifying, however, is the balance between companies, many of which compound the injury by paying minimal rates of tax, and the public sector. Once again, profits are privatised while the costs accrue to the state.

One pernicious effect of the financialisation process has been to detach senior corporate managers from their own firms and align them with the City institutions: in effect they are now part of finance rather than the real world. This has set their pay free to soar (as in finance) and encouraged them to bear down down on suppliers and their own workers, whose pay has barely moved in real terms (and whose pensions are now being sacrificed too). This has caused what Lord Skidelsky terms a ‘crisis of inequality’ and consequently – quite apart from moral considerations – ‘severe underconsumption in relation to the size of the economy’. In turn, since investment is far more sensitive to demand than to interest rates, companies have gone on an investment strike, instead piling up cash reserves of £700bn. So a higher minimum wage and a strengthening of workers’ bargaining rights are economically indispensable for any meaningful rebalancing too.

Almost everyone outside the City agrees that these kinds of reform, while difficult, are urgently necessary. But at this point we run up against the most glaring imbalance of all: power. Right on cue, a recent study by Democratic Audit warns that democracy in the UK is in ‘long-term terminal decline’ as the power of corporations keeps growing, politicians become less representative of their constituencies, and disillusioned citizens stop voting or even discussing current affairs. Put another way, as the BBC’s Robert Peston did on air last October, what are the chances of rebalancing taking place if it means weakening a sector that supplies not just 10 per cent of tax revenues and 3 per cent of GDP, but also – as was revealed the same day – 51 per cent of Tory party funds? Not much, you might think. And yet… In the space of a year, the phone-hacking scandal has destroyed the thrall in which Rupert Murdoch held politicians of all parties, and the Libor affair may just mark a similar moment for the banks. With the press and the banks both involtarily busy cutting themselves down to size, there may never be a better opportunity to kick-start the process.

Let’s be clear. It’s not just Barclays, it’s not just the UK, and it’s not just banks. The limited liability public company, the central institution of capitalism, is rotten at its very core (or corp). We don’t need an inquiry into Libor rate-fixing, we just have to break the banks up – even the FT now thinks so – and some criminal prosecutions. What we do need is a root-and-branch enquiry into the putrefying corporate governance that is at the heart of this and every other recent scandal, including the mother of meltdowns in 2008.

It’s not just Barclays (what would its Quaker founders be thinking now?). You can’t fix rates by yourself: it takes two to tango, or up to 20 dancers in this case. In the UK RBS, which we own, and HSBC are also in the line of fire. What’s more, the Libor affair has been known about for ages. As Tony Hilton pointed out in characteristically blunt fashion in the Evening Standard the FT’s Gillian Tett was writing about it five years ago, which makes the boss’s expressions of shock-horror ring more than a little hollow.

It’s not just the UK. As the ripples spread wider, the US too is waking up to the possibility of ‘a rip-off of almost cosmic proportions – trillions of dollars that average people would otherwise have received or saved that have been going to the bankers instead’, according to Robert Reich, a previous US Labor Secretary. Citigroup, JPMorgan Chase and Bank of America, along with UBS, and Deutsche Bank are under suspicion. But even as they struggle to avoid this whammy, they are already reeling under another. Only a few days ago Rolling Stone’s redoubtable Matt Taibbi chronicled a decade-long US municipal bond-rigging scam that was uncannily similar to Libor, down to the verbal high fives and semi-sexual flirting of the perpetrators, employees of ‘virtually every major bank and finance company on Wall Street’, according to the author.

It’s not just the banks. While the banks have hogged the headlines, consider this. Also last week the London-listed pharmaceuticals giant GlaxoSmithKline agreed to cough up $3bn and has pleaded guilty to criminal conduct to settle charges of misselling drugs, including to adolescents. As the FT observes, ‘people caught doing that in nightclubs go to jail. People caught doing it to generate extra sales get a telling-off from the US Attorney’s office’. This is billed as the biggest healthcare fraud ever in the US. In the four years since 2012, GSK has set aside no less than £5bn to settle legal claims for sales and marketing malpractice and product liability.

Nothing could surprise us any more about the banks. But the astonishing things about the GSK affair, apart from its size, are first that no one has batted an eyelid, and second – and this should really set the alarm bells ringing – pharmaceuticals are heavily regulated. Indeed, light-touch banking regulation is often unfavourably compared with with the much heavier drugs variety. If dangerous substances like drugs are strictly controlled and regulated, shouldn’t dangerous financial ones be, too?

To which the answer is yes, of course they should. But, as the Glaxo case demonstrates, don’t expect regulation to prevent bad behaviour if the entire culture is toxic; if bad behaviour is the norm.

I don’t know how many different ways there are to say this. Barclays, the other banks and GSK aren’t the exception, a few rotten apples in a barrel of healthy ones. It’s the healthy ones that are the exceptions. Business is an ethics-free, amoral wilderness because that’s what it’s been designed to be. Self-interest, not responsibility or duty of any kind, is the organising principle around which Anglo-US governance codes revolve. The only social responsibility of business, Milton Friedman helpfully reminded us, was to maximise profits within the law, to give back to shareholders. In these circumstances, legislators and commentators throwing up their hands in horror at the Libor scandal are latter-day versions of Casblanca’s Captain Renault, declaring himself ‘shocked, shocked to find gambling going on’ in Rick’s cafe as he calmly trousers his winnings.

The banks are an extreme case because the leverage they have built up in the headlong pursuit of individual profit threatened, and still threatens, the entire edifice of world finance. But it’s only quantitively different from Glaxo, Murdoch and any number of ‘ordinary’ companies which have learned from business schools, governance codes, consultants and their peers that governance is all about the alignment of self-interest for the benefit of shareholders and has nothing, zero, zilch to do with morality or wider duties in any shape or form. As the much-missed Sumantra Ghoshal, himself a business-school professor, noted in 2004, ‘By propagating ideologically-inspired amoral theories, business schools [and all those underpinned by their theories] have actively freed their students from any sense of moral responsibility’. As is becoming clearer every day, the practical consequences of this ethics-free experiment have been momentous, altering the shape not only of companies and the economy, but of society itself.

Tinkering with the banks and fiddling with votes on pay is like treating cancer patients with herbal tea. As Gary Hamel has pointed out, limited liability status is an extraordinary privilege that has been granted to companies and investors not as of right but because it fostered vigorous enterprise and thriving markets that in turn led to economic growth and all the societal benefits that stemmed from the latter. If it no longer delivers those benefits, and if companies systematically abuse it to socialise losses and privatise profits, the privilege should be removed. We should go much further than breaking up the banks.

I’m with Ngaire Woods, Oxford Professor of Global Economic Governance, who recently suggested that the investment or casino banks should be re-incorporated with unlimited liability – which, as partnerships, they effectively were until the 1990s. Similar sanctions should be imposed on other gross or habitual defenders like GSK. The high and mighty who run them should be forcibly reminded that they have no god-given rights; their privileges are granted under licence. Free enterprise, as Peter Drucker put it in 1954’s The Practice of Management, one of management’s foundation texts, ‘cannot be justified as being good for business. It can be justified only as being good for society’.

Vince Cable’s proposal to give shareholders a binding vote on CEO pay will do nothing to alter the short-termism of which it is both symptom and cause.

It’s true that short-termism is now ‘system-wide, with contributions from and interdependency among corporate managers, boards, investment advisers, providers of capital, and government,’ as an Aspen Institute report put it in 2009 (one of the signatories being Warren Buffett, who should know). But investors should remember who triggered the inexorable rise of CEO pay in the 1980s by complaining that bosses weren’t being short-termist enough: they did.

Their solution was to make managers act like shareholders by loading them up with stock-options and equity-based incentive plans.

Unfortunately, since then shareholder attitudes have become more, not less, short-termist. Long-term UK investors such as pension funds hold perhaps 40 per cent of shares on the London Stock Exchange. The average holding period for a share is now seven months, down from seven years in the 1970s and 10 in the 1940s. High-speed traders buy and sell within the space of fractions of seconds. Expecting fund managers, themselves subject to the same pay incentives as corporate executives, acting for short-termist shareholders, possibly in a minority, to promote long-term stewardship on chief executives is fanciful in the extreme.

And so it has proved. Fast forward two decades. From 1998 to 2011, reports John Chapman in the FT, ‘rewards of FTSE 100 chief executives grew at 12 per cent a year… as they sought to deliver on short-term performance targets’. But there was a casualty of this single-minded focus on shareholders: everyone else. The labour share of output has tumbled, and although profit levels on both sides of the Atlantic are touching record highs, investment in the US and UK, the champions of shareholder primacy, has fallen further and faster than other developed countries.

Now we have reached the point where, as the Bank of England’s Andy Haldane put it: ‘A publicly listed UK company may well view dividends as the target and investment as the residual’ instead of the other way round, as in the past. The difficulty with that is that calibrating performance in terms of equity is deeply problematic. Either the measures are as likely to reflect general movements of the stock market as firm performance or they are easy to game in ways that unfailingly undermine the company in the long term – whether by share buybacks (which by shrinking the number of shares in circulation improve return on equity without the inconvenience of having to devise better products or services), increasing leverage and bumping up dividends on one hand, or slashing R&D, investment, advertising and now pensions on the other. Hence the well-known paradox that a company is never as profitable as when it is about to go bust. Look no further than the banks for a good example.

In the real world, of course, companies aren’t financial abstractions. They are complex human organisations which succeed not through short-term financial engineering but the hard work of organisation-building that fosters contribution from all the resources necessary to make and improve products and services that customers wish to buy. Shareholder value is the by-product of the efforts of employees and customers – as überguru Gary Hamel puts it, shareholders ought to want CEOs to be aligned with them, not outsiders who may have the same relationship with hundreds of other companies and no real knowledge about how the company actually works.

The fact is that governance based on shareholder primacy when shareholders can’t or won’t exercise stewardship responsibilities and don’t in any real sense own companies anyway, is an exercise in the manifestly absurd. As Sir David Walker remarked in his review of bank governance, ‘as a matter of public interest, a situation in which the influence of major shareholders in their companies is principally executed through market transactions in the stock market [ie selling their shares rather engaging with companies they invest in] cannot be regarded as a satisfactory ownership model…’ In the absence of engaged shareholders to police the contracts, the agency model is a runaway train, guaranteed to produce increasing short-term returns to chief executives and short-changing everyone else.

One of the most pernicious creations of the fundamentalist ideologues on whose theoretical musings the shareholder value creed is based is the Efficient Market Hypothesis. Taken literally it implies that to maximise shareholder value executives don’t need to worry about the long term, since all available information about future prospects is incorporated in today’s share price. That investors with hindsight are regretting the effects of such arrant nonsense is perhaps not surprising. Alas, they should have been more careful what they wished for.

You’ve seen it a hundred times – that mildly frustrating moment when a confused tourist, with poor English, gets on a London bus, tries to buy a ticket from the driver and after several minutes of miscomprehension and mounting irritation from other passengers, is ejected from the bus and has to start all over again.

Only this time the ending was different, because a Londoner in a front seat intervened. ‘Come on, love’, he said, producing his Oyster card and signing the tourist in. Then, blow me, the same thing happened again a few stops later. This time the would-be passenger was a harassed young father with a small child in a bulky pushchair, who had clearly mislaid his travelcard. Again, another passenger, this time a middle-aged woman, good-humouredly volunteered to pay the fare.

This set me thinking. The self-propelled steamroller of self-interest, the subject of last week’s piece, is indeed large, heavy and relentless, moving forward with all the accumulated momentum of 30 years. But effective as it is, as those gratuitous trivial acts of neighbourliness demonstrate, it hasn’t succeeded in crushing altruistic, other-regarding behaviour out of our lives altogether.

As it happens, on the same day, without looking for them, I came across two other examples of what we might call self-interest denial. One, picked up from a tweet, was the case of a young woman athlete at a local meeting in the US who made headlines when, instead of overtaking a staggering rival in a distance event, she stopped to help her over the line. Neither was going to win, but still.

Even more striking was an incident in a women’s baseball match, with a place in the next round of the competition at stake. In her last inning in her final competitive match, one player hit a first-ever home run, but in her exultation twisted her ankle so badly that she was unable even to get to first base. Consulted, the umpire confirmed that if her teammates helped her round the circuit, they would forfeit the match. Whereupon, to general astonishment, an opponent suggested that they should carry her. Which they did, touching the injured player’s foot on each base as they went. The benefactors ended by losing the match. But no one will remember that. What remained was the glow of the spontaneous act of generosity. Game, set and match to humanity.

I quote these small acts of kindness because in the market society we have become, they take on a symbolic value that is out of all proportion to their monetary, media or any other kind of importance. And they suggest an antidote to the pervasive pessimism of the self-interested view.

The power of the self-fulfilling prophecy invests every one of these actions with the quality of resistance. It’s all too easy to convince yourself that individual beliefs don’t matter. But they do – in fact, in the world we inhabit today what we choose to believe about human nature may be the most important choice we ever make. Writ larger, the values that a company acts out in its relations with employees and customers may be ultimately more significant for the rest of us than what it chooses to make (although its products and services can of course reinforce the values by embodying them).

In a world in which ideas triumph not by explaining the world but by changing it in their own image via their influence on others, every company that subscribes to a positive ‘Theory Y’ view of the workplace is striking a blow that may help it come true. Just as every manager who looks at the world through the lens of control and compliance will find reasons to confirm his belief, and by applying them bring that world nearer, the one who takes the employees’-eye view is not only taking the first step on the long road to the high-engagement, high-trust workplace that is not approachable along any other route, they are also making it more likely that others will take the same step too. ‘One good apple can infect all the rest,’ one cynical businessman warns another in Joseph Heller’s satire Catch-22.

There are many influential converts out there, ranging from Happy Computers, Henry Stewart’s IT training company, all the way up to John Lewis, and in one important sense the resounding failure of the current reductive business model should increase their attractiveness. The danger, of course, is that harassed, under-pressure managers will simply revert to the default behaviour that they know best and that is sanctioned by management’s authorised version.

To prevent this happening we need a concerted attempt to recentre our practices in a more realistic, less exclusively negative model of human nature. Only a minority of us are in a position to change the policies of a whole organisation in that direction. But all of us are aware of the power of expectation in our own upbringing, and now is the time to bring it to bear in our turn. Expecting the best of people and acting on it is not a soft and fluffy option, but the reverse. It’s becoming a matter of life and death – even if it’s just helping a tourist on a bus.

In his widely reviewed new book, Harvard political philosopher Michael Sandel notes that ‘Over the past three decades, markets – and market values – have come to govern our lives as never before’. Almost anything can be, and, if the price is right, is, bought and sold: places in queues for Congressional hearings, the right to queue-jump, the right to use car-pool lanes, sterilisation, green cards, the insurance policies of those with AIDS, and body parts, to name a few. Bastions of the public sector such as health and university education are increasingly part of the market sphere. Says Sandel: ‘We have drifted from having a market economy, to being a market society’.

Have no doubt that this is a critical point. Once we are a market society, is there a way back? Behavioural economics supports Sandel’s observation that marketisation tends to be a one-way ratchet. For example, when an Israeli playschool decided to fine parents who were late picking up their children after school, against expectation the number of offenders increased. By paying, parents were relieved of guilt. They were no longer putting others to inconvenience: they were paying a fee for childminding. But when the school stopped levying the fines, lateness did not fall back again. It was stuck on the plateau. Paying had dissolved the sense of obligation to others.

Why should that be? One reason might be that it is a self-fulfilling prophecy. The SFP is well known to social scientists. Sociologist Robert Merton first wrote about it in the 1940s. Unlike the behaviour of physical objects, which is unaffected by human beliefs, what we think about human nature helps to shape it. ‘The self-fulfilling prophecy is, in the beginning, a false definition of the situation evoking a new behaviour which makes the originally false conception come true,’ wrote Merton. Theory alters practice, which then confirms the theory. Neat.

But also troubling. There is plenty of evidence that this is what is happening in economics and management. This matters much more than you might think, given the reductive, one-dimensional version of human nature that they are both based on. ‘The first principle of economics is that agents are actuated only by self-interest,’ according to the great economist Amartya Sen – not casually and sometimes, but relentlessly and always. Self-interest in this extreme form is illustrated by Sen thus: ‘’Can you direct me to the railway station?’ asks the stranger. ‘Of course,’ says the local, pointing in the opposite direction, towards the railway station, ‘and would you post this letter for me on the way?’ ‘Certainly,’ says the stranger, resolving to open it to see if it contains anything worth stealing.’

Almost no one, including economists, believes than humans really act this way. But only by such simplification can they distill their theories into axioms and mathematical equations that work. Meanwhile, exactly obeying Merton’s description, the side-effect of telling people so often over the last three decades of marketisation that they are uniquely driven by self-interest is to make them believe it.

The most obvious instance of the belief in action is executive pay. Since the 1980s – ie just the period that Sandel writes about – appeal to self-interest has been expressly designed into Anglo-US corporate governance. CEOs are supposed to be greedy. In a caricature of Adam Smith’s invisible hand, under option and equity based pay schemes by enriching themselves they enrich the body of shareholders too. Greedy is what they have predictably become – witness Sir Martin Sorrell’s aggressive justification of his planned pay hike at WPP, using just this defence. As Alfie Kohn, a well-known writer on pay and motivation, puts it: ‘Do rewards motivate? Absolutely. They motivate people to demand rewards.’

But it is not just among CEOs that the SFP carries out its stealthy work. ‘A growing body of evidence suggests that self-interested behaviour is learned behaviour, and people learn in by studying economics and business,’ a group of respected Stanford academics concluded in 2005.

In what one of them, Jeff Pfeffer, termed an ‘incredibly depressing series of studies’, business and economics students were found to be more prone to cheat, free-ride and violate codes than counterparts in other disciplines. They are less cooperative and generous in business simulations. One study found that as they went through their courses, MBA students became more focused on shareholders and less on customers and employees. Anther identified business-school students as least concerned with knowledge and understanding, economic and social justice, and developing a meaningful philosophy of life. Yet another found that the tendency of larger firms to violate safety and health regulations was linked to the growing proportion of MBAs in top management. In short, business and economics students come more and more to resemble Sen’s caricature of economic man, the starting assumption of their discipline. ‘Economics,’ says Pfeffer flatly, ‘is toxic.’

The widening and deepening market logic described by Sandel follows the same dynamic, spreading the infection from business and economics into other spheres. Thus, researchers consistently find that while most people do not consider themselves self-interested, they think others are – a testament to the normative power of such beliefs. It doesn’t matter if people believe them themselves. They don’t even have to be aware of them. They just have to act on them to make them come true.

This then is the nightmare scenario. The battle of economic ideas is decided not by which ones best explain the world but which most affect it and thereby become true as a result of their own influence. Of course, there are positive economic ideas out there which could operate in the same manner. But the progression from market economy to market society that Sandel notes leaves little doubt as to which side is winning the battle of ideas. It is the result of a self-fulfilling prophecy in which the more market values are acted on, the more they are internalised, like a computer virus wiping our their own tracks in the process. As with the playschool parents, the market is well on the way to remaking human nature in the form of economic man and companies as prisons or boot camps to contain their rampant self-interest. Economics has long been referred to as the dismal science. Now we can see what that really means.

Management books don’t usually set the pulse racing. From the title, you might predict that ‘Delivering Public Services That Work Volume 2’ would do little to disprove that rule. But reading these case histories I confess I was moved to laughter, tears (well, almost), anger and deep reflection, sometimes all in the space of one chapter.

Disclosure is in order here. I have done, and still do, editing work for Vanguard, the consultancy whose thinking the eight cases reflect. I knew several of them, or thought I did, but reading them in this context reminded me all over again why I am both excited and proud to do it.

These are the opposite of the bloodless Janet and John stories most management books use to illustrate their theories. Here are real managers – real policemen, care workers, fire and rescue staff, food safety inspectors, care workers, town planners – wrestling with real issues in their daily work, issues that lead them to pose, and struggle to answer, the most important questions in management: What is our purpose? What are we here to do? How well are we doing it? How can we do it better, in ways that make people’s lives easier?

Although they all reference the ‘Vanguard Method’, this being real life each case is quite different from all the others. Each journey starts from scratch and entails real choices. There are no single right answers and plenty of compromises. Not one is easy or the result of applying an off-the-peg formula. Unexpected constraints – not only government targets and specifications, though these often loom large – obtrude and frustrate; people brought up on different management assumptions misinterpret or find it hard to adapt to new ones; there are false starts and setbacks.

Yet what they share at the end is the learning that improving service brings real benefits: halved costs of stroke care in Plymouth, dented crime figures in a tough sector of Wolverhampton, better development at lower cost in Rugby planning office, improved food safety in Great Yarmouth, slashed red tape and wasted effort at Staffordshire Fire and Rescue, halved advice costs in Nottingham, lives of vulnerable and elderly in Somerset radically improved and the number of missing persons reports in Cheshire reduced by 75 per cent.

Although improvement was obviously anticipated, none of these outcomes could have been predicted in advance. It is the result of intellectual curiosity, as rewarding to read (and write) about, let alone to do, as to solve a detective story. This is how real change happens – emergent, full of unexpected twists and turns, the fruit of the hard yards of repeated experiment and learning. It can’t be planned – it emerges from the learning. By opposition, the stories here demonstrate with blinding clarity the arrogance of planned top-down change like that currently being visited on the NHS. How can you plan a new destination if you don’t know what direction and how fast you’re currently travelling? Every case in this book demonstrates how little managers commonly know about their organsations. They have no idea how poor their service is from the customer’s point of view. Like referred pain, the presenting problem often disguises a quite different one underneath. Having lost sight of their purpose, they have little understanding of their costs.

One criticism of systems thinking is that its acknowledgement of complexity makes it hard to know where to start unpicking it. But what these cases – and indeed all Vanguard interventions – have in common is that they begin with an analysis of demand. In a thought-provoking chapter in part two of the book, Vanguard’s Richard Davis explains why this has to be so. For most managers demand is unproblematic – it’s what comes in through the door or, more likely, call centre. But as Davis shows, when demand is assessed against purpose – ‘what we are here to do’ – a very different picture emerges. Half or more of the ‘demand’ is likely to be ‘preventable’ – the result of not doing something or not doing it in a way that solves the problem in the first place. If you can get rid of this ‘failure demand’, there’s an immediate uplift in capacity, a hallmark of all the cases in the book.

Establishing ‘the problem that we want to solve’ is the critical first step from which everything else follows. But it is not always obvious. For example, when one council looked closely at its apparently insatiable demand for social housing, it found that in 70 per cent of applications, the problem was one that going on the housing list wouldn’t solve (‘The garden’s too big and I need help’, ‘it’s an insurance policy for when I’m old and alone’, ‘my kids are grown up and I want them out – give them a house’, ‘I’m homeless’). Writes Davis: ‘As a nation, we think we have a shortage of social housing. It’s possible that we do, but we currently don’t know.’

The book concludes with two more general chapters: a complementary piece by John Seddon on why the opposite, mass-production approach to services favoured by the conventional wisdom ineluctably makes them worse and drives cost up, and a final summing up by Charlotte Pell that pulls together the two most important messages of the book, both of them counterintuitive to those brought up on traditional management thinking: it’s cheaper to do it properly, and the only way to do it properly is to put people using professional judgment back in charge. As becomes crystal clear from these cases, when you understand the organisation as a system, improving service starts with a leap of fact, not faith.

Read my article on the myth of shareholder ownership (FT Business Education, 14 May 2012) here

Read my commentary on The Foundation’s forum on storytelling here

Pumped-up shareholders have enjoyed landing punches on plump corporate paunches in recent weeks, drawing blood at several companies where executives targeted by remuneration protest votes have resigned. The result: satisfied newspaper editorials on a ‘shareholder spring’, anticipating even sharper discipline when, as per Vince Cable’s proposals, remuneration votes become binding.

Don’t raise your hopes too high. As the BBC’s Robert Peston noted in a recent blog, the protests do not question high pay as such, just paying for failure. Better than nothing, you might think. But the difference is between tinkering and fundamental change is critical. Tinkering with present methods is a classic case of doing the wrong thing righter (and thereby becoming wronger). The effect will be to focus even more time, ingenuity and money, not less, on trying to make the unworkable work. Concocting new formulas for performance-related pay and bonuses is the wrong remedy for the wrong problem – the unfeasible in pursuit of the unjustifiable.

Can and should shareholders be expected to control executive pay in the first place? The answer to both questions is no. To start with, in an era of churn and high-speed trading when the average holding period for a UK equity is seven months (three for the banks), which shareholders? Those in it for the long term are outnumbered 30:70 by short-term gamblers and foreign owners with little interest in pay and governance. Although big UK shareholders have combined to strike a blow or two in recent AGMs, in its recent report Will Hutton’s Ownership Commission judged that they had made a poor fist of stewarding the UK’s assets generally, largely because of endemic short-termism and the intractable difficulty of speaking with one voice.

In practice, far from restraining managers, shareholders have often done the opposite. As the Bank of England’s Andy Haldane noted in the London Review of Books, ‘In the 19th century, managers monitored shareholders who monitored managers; in the 21st, managers egged on shareholders who egged on managers’. What’s more, the ‘shareholders’ who wield the telling votes aren’t the beneficial owners but institutional fund managers operating to the same short-term performance incentives as the managers they are supposed to be monitoring. Are they likely to risk calling attention to what they are paid for mostly matching the index by proposing fundamental change? Turkeys, Peston points out, rarely vote for Christmas.

By choosing fast exit, short-term shareholders effectively forfeit the right to voice. They are entitled to one but not both. They also demolish their own claim to primacy, resting as it does on the idea that bearing all the risk, shareholders are entitled to all the reward. That is an offence against common sense, not to mention elementary justice. The truth is that shareholders can, and do, far more easily sell their shares than workers can find another job. What’s more, it is employees who directly create value through their knowledge, skills, and entrepreneurship, not shareholders – buying shares on the secondary market doesn’t even contribute capital. Shareholders own own shares, not companies. There is simply no argument for shareholders, who have failed to do so in the past – and who helped devise the governance arrangements that legitimised the discredited reward mechanisms used today – alone deciding levels of executive pay.

Once that is admitted, the whole question of what to pay corporate high-ups is transformed. Long neglected issues of internal fairness, of critical importance for real as opposed to stock market performance, bring a stinging breath of fresh air as they rush in from the cold. Forget shareholder alignment: even überguru Gary Hamel, as red-blooded an advocate of capitalism as you can find, believes companies would be better off aligning CEOs’ interests with those of value-creating employees rather than distant shareholders. So of course employees should be on remuneration committees. Charles Handy would go further, giving long-serving workers, and possibly customers too, voting rights. Bonuses would shrink or preferably vanish, as would share buybacks. Paradoxically, cutting shareholders down to proper size as well as managers would in the long term benefit them too, as companies retained more cash to reinvest in building markets, better products and jobs. The insidious rise of income inequality would be reversed, so society would be the gainer too.

The current spat between boards and shareholders is a public settling of scores between the 1 per cent – entertaining but irrelevant to the rest of us. A proper shareholder spring would be about resetting the social contract, nothing less – a giant first step towards rebalancing the economy in the truest sense.