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Good cop, bad cop

The police are the ultimate frontline service. Forever patrolling the hypersensitive interface between individual and state, responsible to both, the cops are a litmus test of both public-sector reform and social health. As the riots cruelly exposed, on both counts they now are up in front of the beak. What went wrong?

In brief, the police reflect in microcosm everything that has gone awry with UK public services, operationally and philosophically, and their current behaviour has to be understood in this light. Seduced and browbeaten by consultants and governments into dependence on technology and scale, fatally distanced from their ‘customers’, they have unwittingly contributed to the unravelling of the social fabric of which the rule of law is the last symbolic fraying thread.

Like the NHS the police are an ex-national treasure whose once-clear outlines are now hopelessly blurred. Ironically, there’s nothing wrong with the idea of an unarmed, civilian, consent-based local force – far from it. The problem is that it no longer corresponds to what the police do or in many cases think of themselves. It’s not that they are behind the times: it’s that they’ve forgotten, or been made to forget, their history and purpose, making their attempts at modernisation either directionless or geared to muscular reinforcement of an authority of which, as with the Cheshire cat, only the image remains.

Constitutionally, unlike in many other countries, the UK police are not an arm of the state. There is no national police force: the cops are partly paid for by and accountable to us, the citizens, and pace Theresa May, who wanted the new Commissioner of the Metropolitan Police to be ‘a single-minded crime-fighter’, their remit is much wider: to prevent crime, reassure the community and keep the Queen’s Peace. The Cheshire Constabulary, for example, aims to ‘make people safe and feel safe’.

As the riots showed only too clearly, reassurance and preventing crime require the police to be an integral part of their society, as much part of the street scene as the pub, church, school or London taxi. Unfortunately, over recent years the bobby has gone virtual. Writing in the FT recently, Jonathan Foreman noted that while US forces, including New York, had successfully gone back to an updated version of Sir Robert Peel’s local beat policing, the Met (and many regional forces) were heading in the opposite direction. Instead of being upfront and ‘out there’, they have retreated into a reactive, passive policing model based on technology in the shape of CCTV and computers as the tool of choice for enforcing the law.

Complete with call centres at the front and expensive CRM databases at the back, this is, of course, our old friend the industrial model of service that has fractured and driven up the costs of every other public service. For the police, as events of recent weeks have made explosively clear, it has been even more damaging. As Foreman pointed out, monitoring trouble on screen and screeching to the scene with sirens wailing may seem more dashing than pavement-bashing, but one of its effect is to leave ‘a vacuum of authority’ in the public space which is quickly filled by streetwise kids who are much quicker to suspend their disbelief than their elders. Unfortunately, as the cops have discovered, nicking offenders caught on camera after the event does nothing to make people feel safe – a vital part of the job. Security cameras don’t interpret body language or tell youths to buzz off home – in short, deter. Only flesh-and-blood officers do that, and on most streets it’s an event to see one. No wonder that it was the police who looked dazed in their own spotlights when when the looters struck.

Overreliance on technology does more harm. It puts a screen between police and citizens, turning the latter into ‘customers’ whose only, increasingly truculent, stake in local policing is querying whether they are getting value for money, and interaction into transaction. As with the banks, it’s almost impossible to contact the police informally, and getting into a police station these days is more Assault on Precinct 13 than a visit to Dock Green. When an award-winning beat copper was asked on the radio a couple of years ago how he kept his neighbourhood so peaceful he replied cheerfully: ‘Answering the phone.’ The better he became at sorting out local disturbances, the more calls he got, the better his intelligence and the quieter the streets. The equipment needed for this miracle of public order? A mobile and a bike. Operated, of course, by a brain.

In this context it’s welcome news, reinforced at a conference on 13 September by police minister Nick Herbert, that the coalition is committed to encourage local innovation and ‘sweep away’ the central police targets that have done so much to handcuff policing progress. He lauded the initiative of the Cheshire force, which a year ago took the radical step of rethinking the way it worked to respond to a simple, fundamental question: to keep people safe, who do we need where?

The result is ‘the biggest change to policing in my lifetime’, according to the deputy chief constable. When it queried the Orwellian mantra of scale and technology, Cheshire found, as in the example above, that really local policing not only met the purpose better: it was also far cheaper. Cheshire now gets more officers to incidents faster, has almost no backlogs and much less bureaucracy. As confidence rises and costs drop away, police chiefs think they can make cashable savings of £20m over the next four years and boost public confidence at the same time.

Not shown in the figures is one other huge plus: surging morale as officers stop acting as crime clerks and start being real coppers again, using common sense rather than a rule book to sort problems on the spot. ‘Careful, boss, you’re in danger of improving the morale of the constabulary,’ one officer quipped to Cheshire top brass. Obvious when you say it, public and police confidence can only grow together – illustrating, incidentally, another counterintuitive public-sector truth: civil engagement (aka the Big Society) is the result of functioning public service, not a substitute for it.

Like other public services, the police have contributed to the decay of public engagement – the erosion, as historian Tony Judt describes it in Ill Fares the Land, of the ‘thick mesh of social interaction and public goods’ through privatisation, outsourcing and the incursion of the market until there’s nothing left to bind the citizen to the state except the thinnest membrane of authority and obedience. We’ve all seen what happens when that membrane breaks. Repairing it through relationships that are local, personal and ‘out there’ is now as urgent a police task as responding to any external threat.

Rotting from the core

In Fixing the Game (2010), engaging with both theory and practice, Rotman Management School’s Roger Martin has written the sharpest, most authoritative account of what’s wrong with shareholder value as the organising principle for management and corporations. Instead of aligning executives’ interests with those of shareholders, he explains, it aligns them with their own pocket books and incentivises them to game the system rather than do the hard work of pleasing customers and nurturing employees.

Simon Caulkin: What do you see as the dangers to US capitalism, and what will happen if we don’t do something about it?

Roger Martin: A couple of things. One is the ‘rotting-out-the moral-core’ danger. I’m not saying we’re completely there, but we’re heading in that direction. Executives have to lead an inauthentic life in which they’re supposed to do the undoable [keep the stock-price constantly rising], so they do something that’s doable instead – which is managing for the short term, worrying about stock-market expectations, cashing in their executive compensation and then often doing it again someplace else.

What that does is turn customers and employees into pawns that can be sacrificed to the cause of the greater good of increased executive compensation. So there’s this game playing. Rather than pLaying something that’s serious and meaningful and gets everyone together towards a goal, employees having a meaningful goal to their lives and feeling that if they go on serving customers great, they will go on enhancing their lives, their jobs, and the size of company – instead of that they’re playing a game which has no good outcome, in fact they may find half their jobs cut because the CEO hasn’t met the numbers the market wanted. So there’s the rotting out of the core of meaning.

Then there’s the inequality problem, with CEOs and hedge fund managers making such absolutely gigantic amounts of money and the rest of middle America flat. I don’t buy the disappearance of the middle class, there’s no evidence of that, but there is this rising inequality. The situation is very clear. There are two kinds of inequality: the differential between 95th percentile and the 50th, ie the top and the middle, and between the 50th and the 5th or 10th, the middle and the bottom. People always think of the latter when they think of inequaility. But the gap between the lower and middle is incredibly stable: it’s the gap between the middle and the top that has increased dramatically, and that’s not good.

It’s the combination of the two things that’s the danger to US capitalism. The second precipitates disbelief in democratic capitalism as a way to operate, and former damages the functioning of American democratic capitalism – it functions badly.

SC: What you’re saying is that the current situation is unsustainable?

RM: Yes. We’re not in equilibrium, bobbing along nicely. The game is being gamed ever more seriously, the core is rotting and people are becoming more and more dissatisfied, yes.

SC: Do you see hope in other models of capitalism, like say the European or Japanese? Is part of your worry that US capitalism is subsuming all others?

RM: That’s right. Other liberal democracies, all of them to me are like American capitalism only less bod. In essence the democratic capitalist business world is led by the US and others follow its lead. The UK is a perfect example. Stock-based compensation is now pretty common in FTSE100 companies, less prevalent in the German Dax. It goes: US, Canada, Australia, the UK, New Zealand and then it cascades outwards in terms of how much they mirror the US.

SC: One of strengths of your book, I think, is that you delve into the theory, agency theory and so on, to explain how the shareholder-value and stock-compensation obsession came about, and its results. To me it’s a powerful message. But how do people in the corporate world react to it? Is it a hard sell?

RM: To be honest, it is, although not an impossible one. It almost requires a retail rather than wholesale approach. Earlier this year I did a keynote presentation on Fixing the Game to the International Centre for Pension Fund Management, a global organisation for big pension funds. When I was contradicted by a compensation consultant on the same panel, the representative of a big UK pension fund, who shall remain nameless, got up and said, ‘I get that you disagree, but what Mr Martin does is lay out the facts and you’re just blustering’. There were a lot of people asking the ‘yes, but’ questions, because they don’t want to believe it, but at the end I was getting comments like, ‘wow, we really do have to rethink things’.

But it’s going to be a long haul because the existing theory and model are so entrenched, so heavily entrenched – it’s like as night follows day that stock-based compensation is better for everyone involved, and you come along and say no it’s not? It’s so worldshaking to them that they don’t want to believe it, they want to say, no, that just can’t be.

SC: Does the idea of ‘shared value’, as advanced by Michael Porter in his HBR piece, answer the problem?

RM: I’m not buying shared value.

Here’s what I think: there are plenty of folk who share with me that we’re pro-business, in that we believe that business is an agent for good in the world, if not the major source for improvement of people’s lives – but they struggle to say that if business is force for good and it’s not doing as nearly as much good as we’d like, what has to happen, why is that the case?

To me, Michael Porter with shared value is imploring CEOs to be different than they are currently without having a diagnosis in behind it as to why it’s absolutely sensible and utterly unsurprising to see businessmen doing what they’re doing, ie the things that Porter doesn’t want them to do.

For me, it’s like telling frat boys to stop chasing sorority girls. I don’t think you can implore CEOs to pursue shared value when the fundamental system under which they’re operating essentially and powerfully encourages them to do just about the opposite. So I’m trying to go for the fundamental drivers. In all my research I try to ask why things are this way and not some other way and not come up with the answer that the people involved are stupid or evil. If you ask why CEOs do they jerk the share price around, why are they spending much more time with analysts than customers or employees, why is their tenure getting shorter, why is volatility going up and returns coming down – I’ve got to come up with a better answer than that all CEOs are evil. That never works for me as a compelling argument.

SC: Talk me through your notion of authenticity. It’s a factor that is usually left out of economic-based critiques.

RM: That makes my heart sing because it’s the chapter I’m happiest with and I do think it’s a different take on the problem. I started from options backdating, and for a real reason. It’s almost insane to have such totally, totally illegal (and illegal in so many ways) stuff going on and have it be so widespread. So are the vast majority of CEOs evil? No, but it’s a bad case of loss of moral compass, and it comes from living in inauthentic world. Not unlike the Crips and the Bloods, where as an initiation ceremony you have to go out and take a life – take a life. I mean it’s completely crazy, but that’s what you do, everyone does it, that’s what we do here. Once you’ve lost your moral compass, in the middle of the wood it’s hard to figure out a good direction. So in the case of options backdating, people said, ‘Well, this helps retention and shareholder value maximisation’ – because they’re in this very surreal world of manipulating everyone else’s expectations and taking advantage, of making everyone else a mark. In this world it’s easy for a CEO to ignore that it’s about real people, real employees, real customers – all this stuff is a background to a game that they know they actually can’t win, so all they can do in the short term is exploit people who aren’t as well informed as they are.

SC: So the tail of short-term expectations ends up wagging the real-world dog?

RM: Exactly right. I guess I’m least charitable about the hedge funds. They need the real game to work for them to make all their money, and they take absolutely no responsibility whatsoever for protecting the functioning of the real world. It’s just there to be exploited in whatever way possible – if we destroy it, so be it. If their trading patterns around subprime mortgages caused major institutions to fail – more than 12 institutions failed and had to be bailed out – the hedge funds just go, ‘Ladida, yes, I guess there is a bit of a problem, but it’s not mine – we just wrote a cheque for $2bn in personal compensation, so how bad can it be if the US economy goes under and goes into massive depression? I’ve got $10bn in the bank, I’ve got mansions everywhere, I can move out of the US and buy an island… The defence that we don’t care that we’re exploiting something that has to be here in order to be exploited is a twisted amoral world. And the worst of it is that it’s pension-fund money in the supply line, funding this kind of lunacy.

SC: So how do we get out of it?

RM: It’s not easy. It has to be a combination of things. Boards have to wake up and say that stock-based compensation is not a good thing. Repeal the Securities Act 1995 that allows earnings guidance to be given and make it dangerous for CEOs to talk to the Street. Chop the upply lines by disallowing pension funds from investing in things under ‘2 and 20’ payment structures… And this is a more fuzzy one, but we have to redefine the role of boards and get back to a world where directors are responsible for the corporation.

The Delaware courts have done just a dreadful job of moving us toward a world in which it is interpreted that the duty of boards is to equity stockholders. It’s not supposed to be like that, but slowly but surely it has migrated that way. Canadian commercial law is going that way too. Reverting to a very clear legal framework where boards are responsible for the corporation – these are all things that are necessary.

There’s no single silver bullet, and some of it has to come from behaviour. I wouldn’t want to legislate everything. But one thing would be getting rid of the 1995 Securities Act, which wouldn’t add anything, just take away an incredibly stupid law. The other is the pension fund thing. We do have fiduciary provisions. I learned this from a finance professor, that when mutual funds invest money on a performance basis, it has to be on what’s called a ‘fulcrum fee’, where the downside for the fund manager has to be as much as the upside. That is, the whole management fee down to zero and below is clawed back if there’s significantly bad performance. Why does this apply to mutual and not pension funds? If it’s good enough for mutual funds, to protect the small shareholder, why not pensioners?

SC: Since you wrote your book, we’ve seen the Arab spring, with people taking matters in their own hands. With rising dissatisfaction here, do you foresee a corporate equivalent – violence on the streets?

RM: I’m hesitant to bring too much of a parallel, because there’s a vastly different level of oppression: massively oppressed people struggling to gain a measure of democracy is a much bigger deal than reining in grasping hedge funds and CEOs. But that having been said, I don’t think it’s a completely illegitimate analogy: all systems require a sense of legitimacy to prosper, and if this legitimacy is undermined you’ll get more and more widespread activities that subvert it. This is why I like the example of the NFL, because they stamp out illegitimising forces with a steel-toed boot, so they don’t get subverting activity. If hedge funds can make ginormously supernormal profits by wrecking, absolutely wrecking, something on which they depend to make moneym with a cavalier attitude, do we think that’s legitimate? Lots of people would say not – big time.

SC: Running through the book is the comparison of the highly regulated NFL, where competition works much better in favour of the customer, with the unregulated baseball league, where competition works much worse. What are your feelings about business regulation?

RM: The whole regulation argument to me is just so shallow. Could someone remind me of a time or place in history where we had ‘no regulation’ – or show me a US industry that’s prosperous and creating jobs that hasn’t benefited from government investment and intervention? Pharma? Whoops, there’s gigantic government funding of research universities and schools of medicine. The internet? Whoops, invented by Darpa. In computer hardware and software, aerospace, it’s exactly the same thing. There is absolutely no such thing as a completely free market economy. There are just better or worse rules of the game, better or worse contexts set up by people getting together in a democracy and saying there are some rules that it’s useful to have. I have zero patience with the question do we want regulation or not. The only question is whether it is good or bad.

Similarly with the issue of high versus low tax. Let’s get it straight. There will be tax. The question is whether it’s smart or stupid. Sweden has high, smart tax, US taxes are low and stupid. In the US taxes are heaviest on things that are stupidest to tax, such as corporate income – it has some of the highest corporate taxes in the world. France is stupid and high: the stupidest tax system in the world and huge – really, really high on savings and investment, corporate investment that Sweden taxes superlow. Other things are taxed high in Sweden, but it’s smart tax.

So for me the question is how cleverly are we setting the rules of the game to cause it to be played in most productive way? The NFL has done a brilliant job of that and baseball a crappy one. And I think the analogy holds for business as a whole.

SC: Overall, are you an optimist?

RM: Yes. I can’t help myself! I think that sensible people making sensible arguments can get to where we want to be even if it seems revolutionary. I like the story of the treatment of peptic ulcers. Up to the 1990s the theory was that peptic ulcers were caused by excess stomach acid and the universal treatment was a bland diet and antacids. In the early 1980s, two whacky Australians called Marshal and Warren said, you know what, we don’t think so, we think the cause is bacteria, and we can treat it with antibiotics. They wrote scientific papers that were all rejected until Marshall said, screw this, I’ll grow an ulcer and cure it with antibiotics. So that’s what he did, he ingested horrible stuff that cause an ulcer and then he cured it. So they started getting their papers published, until about 10 years later people started saying, you know what, all this treatment, including tens of thousands of cases of ulcer surgery a year, is completely useless. And in 2005 Marshall Warren won the Nobel prize for medicine. It was the dominant theory that every doctor in the world subscribed to and it took two decades, but in the end it was changed. So there is hope. Yes, I’m an optimist.

Putting ownership to rights

From Understanding Organisations and The Gods of Management, both written in the late 1970s, to Myself and Other More Important Matters (2006), Charles Handy has been the shrewdest and most prescient of writers (and teachers) about business and society. Unless the contradications of corporate ownership are rethought, he argues, the tensions between capitalism and democracy can’t be reconciled.

Simon Caulkin: Is capitalism finished? How do you see its future?

Charles Handy: I believe that in its present form capitalism is incompatible with democracy. It throws up such intolerable inequalities that any democratic regime would eventually be forced to constrain it, put iron rings of regulation around it, so it will lose its force. And I think that’s what’s happening, so in that sense as a power for continued growth and expansion, it will be increasingly fettered. I don’t know if that means it’s finished or that it will be improved.

But in my book The Hungry Spirit [1998] I argued that there was another way, even though though it wasn’t easy to see how it would happen. The idea that companies are owned by shareholders is, excuse me, balls. It is the cause of all kinds of problems. The only right that shareholders really have is to elect the board of directors. Of course that means directors have to pay attention to them, because otherwise they’ll lose their seats. But that’s a draconian measure which doesn’t give you any day-to-day power, really. Somehow the myth has grown up that shareholders are owners; whereas the law says that the corporation is an individual and therefore has the same legal and moral obligations as a person. Even more than that, a company is a community, a group of companions, which means that it can’t be owned by anybody else in any real sense. You can own the assets, but not the inhabitants in it – we used to call that slavery.

So it’s very strange that over the past century that view has become respectable – due, of course, to those two great social inventions of limited liability and shareholder capitalism, so that people could ‘own’ a company without ever going near it, and didn’t have to invest all their assets in it. And the two together created huge economic expansion.

But –a big but – with unintended consequences of irresponsibility. If all assets aren’t at risk, you can take much greater risks, and if you can own shares without ever going near the place, irresponsibility was built into the system from the start because of those two great social inventions.

So what you’re then thrown back in my scheme is the obligation of directors to act as responsible persons. What does that mean? It means loving your neighbour as yourself, respect for community and people, and the purpose of the company, as Bill Hewlett and Dave Packard stressed long ago, is in some sense to change the world through your goods and products. Steve Jobs said the same thing to his people at Apple, ‘We’re going to change the world’, which to a degree they’ve done.

SC: And in the process you make a lot of money.

CH. And in the process you make a lot of money.

One of the projects Liz [photographer Liz Handy] and I are working on at the moment is a book about a man who set up a unique company called Camellia. He was a Canadian chartered accountant Buddhist who fell in love with tea gardens, and starting with a small shareholding in a little Indian tea company in Darjeeling, he built up the largest tea company in the world. It now has 76,000 employees. He’s a Buddhist, takes life very seriously, and early on he put 54 per cent of the shares into a foundation whose principal purpose was to maintain the ownership of the company in terms of the shareholding, so that it couldn’t be sold unless the foundation so agreed. To maintain the company in existence in perpetuity. And secondly, to invest the dividends from the shareholding in social things in the countries where it grows its tea – hospitals and schools and so on. So it’s a very goody-goody company. But it’s a very well managed company with all the right values, and I have to tell you that in the process the share price has trebled. And there are many other example of companies that set themselves up to improve the world by, in effect, putting customers first, employees second, the community third and shareholders – well, shareholders have rights.

So I ended up saying that the language of ownership is all wrong. I think we should change to a language of rights. So shareholders have rights, chiefly to elect directors, but also to a due return on their risk capital. But it’s not an overwhelming right. Workers have rights too, which are increasingly encoded in law, and so do customers, which are gradually being encoded in law too. But you could argue you should go further – long-term employees might get voting rights, they don’t have to have shares, but they have voting rights, for example. In due course even customers might get more legal rights than they have at the moment.

Rather than fettering capitalism with endless regulations, which companies will undoubtedly get round – like John Kay and others I simply don’t believe ring-fencing will work – thinking in terms of rights is a more plausible way of preserving the dynamism of capitalism.

Ownership doesn’t work conceptually, legally, theoretically or practically. Shareholders are like punters at the racecourse – because they place bets, it doesn’t mean they own the horse. We might not bet on it again next year. I just don’t think it’s very productive. We need a new conceptual framework..

SC: But you’re not against a market economy.

CH: Without a market economy, we’ll stagnate. I desperately want to preserve capitalism, although maybe under another name, because this one is in such bad odour… Capitalism provides creativity and vigour – because of course people are made up of a mixture of altruism and selfishness; to think that people are totally altruistic and will work for nothing in the public sector is crazy. But self-interest unbounded swamps altruism.

SC: Along with shareholders owning companies, there is another harmful myth, that companies can exist independently of the society that they are part of. How did that come about?

CH: Responsibility to society got lost when ownership was dispersed. The mill owner was well aware of his responsibility to society, but then ownership floated off, became virtual. It’s absurd: if you think of the company as community, which is how the word is derived, then it has to exist within a larger community.

I’m also a convert to what one of my ex-students called the the ‘bonsai’ view of companies: there’s an appropriate size for each, and it’s different depending on whether you’re in aerospace or a coffee shops. This abiding myth of corporate managers that they can grow for ever, it’s absurd. If you ask the London Symphony Orchestra if they want to grow, they don’t want to double the number of violinists – but they do want to expand the repertoire, or just get better. So we need to redefine growth, which should increase profits, but not necessarily by buying up other companies.

SC: To summarise: do you consider yourself an optimist or a pessimist?

CH: I’m a long-term optimist and a short-term pessimist. In other words, I think human beings are incredibly creative and always seem to come up with answers when disaster is pending. But in the short term I’m really not impressed by our business and financial leaders today – they seem to me to be overwhelmingly trimmers, tweakers, and adjusters – bereft of long-term vision.

Saving capitalism from itself

Read my article in Management Today here

It’s management, stupid

The outspoken Henry Mintzberg, Cleghorn Professor of Management Studies at Montreal’s McGill University, is a long-time critic of the direction management, both pracrical and academic, has been taking. Now he believes that democracy itself is in danger.

Simon Caulkin: Are you optimistic about the future of capitalism?

Henry Mintzberg: No.

It’s not about business or free enterprise, it’s about capitalism being so far off the rails in at least two respects that relate to each other.

First of all, the predominant form of financing large business, the stock exchange, has turned out to be completely dysfunctional, in the sense that it breeds a mentality that doesn’t sustain enterprise. It breeds a kind of ‘cash in and get out’ mentality … The phrase I use is ‘the unholy alliance’ of economic dogma with corporate entitlement which refers to the same thing: it creates a very short-term mentality and a very anti-community and anti-social mentaility within organisations, so that everything is economic, everything is short term. A CEO fires people at will if the company doesn’t meet the numbers on Wall Street, suddenly 5,000 ‘human resources’ become magically redundant because he didn’t make his numbers, and it destroys the whole fabric of the enterprise.

SC: So the crisis we’re seeing…

HM: I don’t see the current cris as an economic crisis, I see it as a management crisis – so many companies in the US have been so badly mismanaged that the whole economy is faltering. And it’s not going to be fixed by Obama’s economists because they don’t understand, they don’t have a clue about the functioning of enterprise. They’re trying to fix it economically – but the problem is managerial, it’s not economic. There are too many enterprises that have been trashed, and no one seems to get that message. Either I’ve got it wrong, or nobody wants to hear it. The message doesn’t get through.

There’s another point, which I don’t think anyone else has made. Entrepreneurs today are much more interested in cashing out their companies through a profitable IPO than in building a sustainable enterprise. This is new. Entrepreneurs never built companies before that they could sell real quick, they built enterprises for a legacy. The heart and soul of the economy is small and growing enterprises, and even those are being managed for the short term.

SC: You said you had two major concerns about what’s happening.

HM: Yes. The first part is short-termism and the second is the wholesale destruction of the sense of community, which is what sustains an enterprise and builds it for the future. If you do everything for the short term you end up with very superficial companies that everyone hates working for. And that’s undermining whole social fabric of the society.

Picking up on something Jim March used to write about, the distinction between ‘exploiters’ and ‘explorers’, there are so many exploiters now who are trying to manipulate their market position, largely through lobbying, that they’re destroying democracy. US democracy is under huge threat right now from the role of money, the US Supreme Court ruling that corporations have the right to donate [to election campaigns], and the sense of corporate entitlement. I say that free enterprises are replacing free people in the US democratic system.

So it’s not capitalism itself that’s the issue, it’s the fact that it’s running rampant. For me a balanced society balances the three sectors, it balances the private sector, the public sector and the plural or social sector. What’s happening is that in 1989 people misinterpreted the reason for the fall of communism and assumed that capitalism triumphed: it was balance that triumphed. The Eastern European countries were utterly out of balance, and we were much more in balance then than we are now. They were then out of balance on the side of the public sector, and now we’re going out of balance on the side of the private sector. And so it’s not capitalism that’s the problem: it’s the assumption that capitalism is the be-all and end-all of human existence instead of a way to create and fund enterprises.

SC: Do you think it’s the shareholder-value mantra that’s to blame?

HM: Yes, absolutely. It’s this simple-minded idea that the enterprise exists only for the owners. Greed is good, markets are supreme, and governments are suspect – the whole mantra – and therefore corporations exist only for shareholders. Who by the way contribute least. The workers contribute their daily lives. There’s interesting evidence from a few years ago, and supported since then, that the amount of additional money that shareholders actually put in the company, as opposed to just trading back and forth, is trivial, very small indeed. So are they really entitled to all those economic rents and the workers none of them? Not only that, but the salaries of those who do the work have been stagnating for years. It’s amazing how docile the Americans have been, having been kicked around so much.

SC: Do you see any positive signs? Social enterprise, for example? Any indications that we are coming back into balance?

HM: No, not coming back into balance. Of course I think that social enterprise is wonderful, but I wish there was much, much more. One of the things I wrote lately was that a green Walmart won’t make up for a greedy Exxon. If you think of the impact on the environment of the greening of Walmart compared with Exxon’s impact on the environment, it’s so weighted towards the negative. It’s the same thing with social enterprise. I think what there is of it is wonderful – we need it and we need much more of it. But it’s a pittance compared with what’s going on in the private sector.

Not that the private sector is bad. The private sector is great. I don’t want to go to a state-run restaurant or buy my car from an NGO. When a businessman says to me, ‘I want to be socially responsible’, my response is: ‘Good, now get out of my government’.

To clarify, it’s not him or her – they have as much right to make their views known as anyone else – it’s getting the company out of government. Individuals have as much right as anyone else to express themselves – but not more.

SC: What about the business schools? What do you think of their role, in both creating the monster and putting things right?

HM: They have certainly played a role in creating this monster. But anyone who thinks that taking an oath to be good is going to get anywhere or running more courses on ethics is going to get anywhere – I’m sure Jeff Skilling would have signed that oath in flash when he was at Harvard Business School – is silly. Well, not silly because that’s fine as far as it goes, but it’s not very far. I’m in a business school, but I’m not sure many other people in business schools are saying these things – well, you tell me.

I think we’re facing a dreadful crisis, and it’s accelerating by the hour. I think the ante is getting upped all the time as to what corporate entitlement expects, and the latest thing I’ve been reading about is corporations suing people to shut them up because they can’t afford the legal fees. These are cases which are frivolous and have no basis in law, but you can’t afford to fight it [‘A strategic lawsuit against public participation (SLAPP) is a lawsuit that is intended to censor, intimidate and silence critics by burdening them with the cost of a legal defense until they abandon their criticism or opposition’ – Wikipedia]. And it’s getting more common.

SC: Is there anything you can be positive about?

HM: There are always companies that we admire. Apple has done amazing things. There are the explorers rather than exploiters, and they’re the companies we admire. You mentioned social entrepreneurship, social movements like what happened in Egypt, where people are beginning to get together and kind of see things in their own light. All this is good, but it’s just being overwhelmed at the moment.

Read more by Henry at The Economist and Huffington Post

Trust in organisations: who stole it, how can we get it back?

On 26 May, The Foundation hosted a forum on trust in organisations with three lively speakers: Ed Smith, Anthony Hilton and John O’Farrell. Get my summary and reflections here

Recovery: you can’t get there from here

Economists arguing about the UK and US (non)growth rates are like mediaeval scholastics disputing the number of angels that can dance on a pinhead. The reason there is no recovery, or at least no meaningful one, is that this isn’t an economic crisis but an organisational one: the final collapse of a worm-eaten corporate order that is entirely unfit for the purpose of dragging us out of the crisis that it has created.

The 2008 crunch was the moment the corporate express hit the buffers – but in retrospect it was the end of the line for a runaway train that had been careering out of control for years. As the smoke clears, we are facing the second part of this double-dip crisis: slow realisation that since it was business as usual that caused the crisis, expecting it to be the engine that pulls us out again is an ecapsulation of Einstein’s definition of insanity: doing the same thing over and over and anticipating different results. Hence the unreality of the debate.

Let’s be clear: the destination that the runaway corporate express has been thundering towards for the last 20 years is the bottom.

This is true for every one of its stakeholders.

First, employees. On the day I wrote this, there were two business headlines. HSBC announced first-half profits 36 per cent up on a year ago – and that it was cutting 30,000 jobs, or 10 per cent of the total, to prune costs. And the Workplace Retirement Income Commission said that one-third of UK adults faced ‘a bleak retirement’ future because of inadequate and hopelessly inefficient pension provision.

As the first indicates, with honourable exceptions the private sector no longer sees an obligation to provide real jobs. Job cuts are a measure of first resort, not last. Those it does provide increasingly take the form of McJobs, with low pay, no prospects and the expectation of constant churn. Meanwhile, working conditions are getting worse – and it’s a one-way trip. ‘Recession work practices are “here to stay”’, a self-explanatorily entitled FT news story told us last year. ‘The harsh reality,’ sums up LBS’ Prof Julian Birkinshaw, ‘is that today’s large business organisations are … miserable places to spend our working lives (1).’

Companies have also surrendered their role as the engine of middle-class prosperity. Since the 1970s, pay for those on middle incomes have barely moved in the US and UK, a fact only disguised by huge increases in middle-class debt. Only those at the very top have benefited. As for pensions, the abjection of companies’ flight from proper provision is doubled by their determination to drag the public sector down to their own miserable level. In a list of broken employee commitments over recent years, another business school professor, Stanford’s Jeff Pfeffer, includes pension plans terminated or changed, health insurance abandoned (sometimes using bankruptcy to shed obligations), work outsourced or routinely ‘restructured’ not for reasons of financial stress but to increase profits or copy rivals, the psychological contract simply torn up. ‘In ways big and small, both implicitly and explicitly, employers have told their employees that they themselves are responsible for their own careers and, in many instances, their own healthcare and retirement,’ Pfeffer writes (2).

Customers have done scarcely better. Quite apart from the thousand minor ways they are daily short-changed and misled, two recent episodes stand out. Persistent mis–selling reached its apogee, or nadir, when Goldman Sachs’ CEO Lloyd Blankfein appeared before Congress to tell senators it was OK for the bank to screw its own customers because they were sophisticated investors. The phone-hacking by the News of the World is just as bad. And hacking is just the tip of the iceberg. The tabloids – and indeed the press in general – are a perfect microcosm of the generalised race to the bottom pursued by many consumer industries justified by ‘we’re just giving the market what it wants’.

But whether in the media, finance or any other industry, pandering to the lowest common denominator has a cost, in the shape of declining trust, thinning value and a loss of legitimacy which eventually becomes catastrophic (think of the fate of News of the World and Enron’s auditor, Arthur Andersen, both going concerns wiped out overnight by the evaporation of trust). And, sorry, but these companies have have given up ther right to survive. As Umair Haque, author of The New Capitalist Manifesto, points out, their products haven’t made people healthier, smarter and better able to make informed decisions, but the reverse. (‘We All Work at Enron Now‘, he wrote in one striking blog.) More generally, the loss of moral compass that News Corp and Goldman embody in extreme form simply disqualify the corporate sector in its current shape from giving anyone else lessons about financial discipline, or accountability, or the means needed to get out of the crisis.

The crowning irony is that shareholders, the first-class passengers on the doomed express in whose name all the baggage of employee and customer commitment has been so ruthlessly jettisoned, are actually worse off than in the era when corporate managers were supposedly ripping them off. When Roger Martin did the sums for his excellent demolition of the myths of shareholder capitalism, Fixing the Game, he discovered that in the three postwar decades to the end of the 1970s, shareholders in the S&P 500 enjoyed compound returns of 7.5 per cent a year. In the period from the 1980s to the 2000s, however, that dropped to 6.5 per cent. In other words, even in terms of its own chosen performance indicator the corporation has failed. Not surprisingly, companies that fail all these tests, fail that of the general economy too. No wonder there’s no recovery.

Let’s recap. Not all companies are corrupt and broken. But the ones that obey the dominant theories are. With deep irony, companies that believe they have an obligation to employees, suppliers and society as a whole are currently treated as exceptions that prove the rule of the economists’ ‘bleak realism’ of greed and fear. And it is to the latter than politicians are looking not only for economic revival, but to reform the public sector too. We’ll spell it out. There can be no lasting recovery without reform of the instruments of that recovery, that does not turn today’s corporate exceptions into the rule, and that fails to reassert another example of what is bleeding obvious to everyone except economists: in the long term no company can thrive in isolation from the society of which it is a part.

1. Reventing Management, Julian Birkinshaw, Jossey-Bass (San Francisco), 2010, p 8-9

2. Power – Why Some People Have It – And Others Don’t, Jeffrey Pfeffer, Harper Collins (New York), 2010, p 217

Police intelligence

Read my article for The Systems Thinking Review here

The rules of power

Stanford’s Professor Jeffrey Pfeffer has been studying and teaching power for three decades, and for many his conclusions on the subject make uncomfortable reading: the world is unjust, the leadership literature is a hopeless guide, and the biggest obstacle to achieving power is your own scruples. In conversation, he reflects on Murdoch, the failure of society to rein in imperial CEO power, and self help.

Simon Caulkin: How do you view the Murdoch drama from the power angle? You’ve said that power protects and perpetuates itself, but only up to a point…?

Jeff Pfeffer: What I would say is that there’s all this screaming and shouting and hollering, but you look six months from now and ask, where’s Rebekah Brooks or Rupert Murdoch, where’s David Cameron, where’s Andy Coulson… People get caught up in the theatrics and what they don’t ask is whether at the end of the day will Rupert Murdoch have lost very much, will Rebekah Brooks end up working at some other Murdoch property doing essentially the same job? There’s lots of wailing and gnashing of teeth, but will anything have changed very much?

And also, at some point in the electoral cycle politicians need money and press coverage, and Rupert Murdoch has a lot of both. He’s the non-political version of Berlusconi. Here’s the interesting thing: despite screaming and gnashing of teeth and apparently consorting with underage girls and charges of corruption, Berlusconi has been prime minister of Italy, one of the largest economies in the world, for a decade. And the basis of this is his media empire. And wealth. And, you know, wealth and power mostly win.

If you or I did what he does, we’d probably be in jail. It’s the same thing for Murdoch – the question is not whether he’ll suffer, which he will, a bit, and a few people will probably go to jail. The question is, will their power and wealth and influence – this is a counterfactual, so it’s a little hard to figure out – but will all this have immunised them in ways that it wouldn’t have for you and me? And part of this is, as with our ex-governor [Arnold Schwarzenegger], how they conduct themselves. People want to be associated with the winning side, so if he exhibits strength and persistence and resilience and confidence that this is a little tempest in a teacup but at the end of the day we’re the News Corp which is a powerful and successful global enterprise…he’ll survive. I’m not worried about Rupert Murdoch. (Chuckles) I’m not worried about him at all.

SC: So for you power has no ethical component at all – it’s as it were an ethics-free zone?

JP: Yes. This is something that often upsets my students and readers too. For me, power is a tool, like a knife, and you can use a knife to do surgery and cure people, or you can use it to kill people. How you use it is up to you.

One of the things that irritates me, I have lots of colleagues who write leadership books, which firstly are mostly works of fiction, but secondly in them they became kind of lay preachers. A lot of the leadership books are lay preaching. What I say to my colleagues, and friends, is that I know what your training is in social science and how to run experiments and read the literature, but I don’t understand what training you have to be a moral philosopher. I think it’s very important for people to know what they know and what they don’t know, and I’m not going to portray myself as an expert in ethics and moral philosophy – there’s an academic discipline and literature and knowledge required for all that. What I do know is a lot of social science and a lot about power. So I’m going to tell you how the world works and it’s up to you to decide what you will do with that power.

SC: So the idea is that you’re flattening the playing field – saying ‘this is what you need to think about whatever your moral purpose’?

JP: Correct.

SC: Gary Hamel talks of living in an age when power has become extraordinarily concentrated and centralised in the hands of imperial CEOs, of whom Murdoch might be one. Do you see a dynamic in that? Does power want more power, for ever and ever?

JP: Of course. Of course. I completely agree. I would add to that that it’s been permitted by society. If I want to eat everything on the buffet table, and you know that, it becomes your job to stop me. Under the clucking of tongues, there’s a bunch of countries, including the US, that have abandoned any sense of trust enforcement, the idea that for markets to work there has to be competition. So, BA buys Iberia, Lufthansa buys Swiss, Austria and a bunch of others, Air France and KLM are part of the same organisation, United buys Continental, BP acquires Arco and I don’t know how many others… The financial institutions which at the time of 2008 were a problem because they were too big to fail are now for the most part bigger, in fact without exception bigger… and all this stuff has been permitted to occur. There are all these competition and anti-trust laws premised on the idea that economies work well, and markets work well, when there’s competition. Which is certainly true. And people have allowed this to happen – in oil, in financial services, in insurance, in autos, in media, there’s been this enormous consolidation of power. So yes, there’s this inexorable growth of companies and therefore the power of those who sit at the top of those organisations and control vast sums of resources. Gary’s absolutely right.

SC: And this is dangerous?

JP: Yes, of course.

SC: Is the drive to power part of human nature? Where does it come from?

JP: Well, the world is a hierarchical place. As I discuss in the book, there’s lots of evidence that people prefer hierarchy, particularly in tasks or task groups. Hierarchy is part of the natural order of things, whether people or fish or goats or human beings, so if there’s going to be a status hierarchy, and that hierarchy is associated with the distribution of rewards and goodies and benefits, as of course it is, then it’s only natural that people should prefer to be at top rather than bottom.

So if you look at this as a game – although I think it cheapens it a little – if you think of this as US football, or tennis, or soccer, you’d never say to players, you can play this game without rules or constraints. Every sport has rules and a referee to enforce them to ensure the game is played in a fair fashion. What differs in business is that referees have gone to sleep or left the field. So I don’t actually blame the players. If you’re watching American football and the referees leave the field and say, ‘guys, do whatever you want’, you can’t blame the players for trying to win however they can. It’s up to the people who make the rules and enforce them to not go to sleep. So for me, the problem in the UK is not Rupert Murdoch, it’s the government, for Christ’s sakes.

SC: So power needs rules to work like anything else. This makes it even more important than I’ve been thinking. So are you proposing new rules?

JP: No. Not at all. We need to be explicit. The book is written for people who need to understand what the game is, how it’s played and what they need to do to be successful. I have a chapter towards the end of book [‘Power Dynamics: Good for Organisations, Good for You?’] in which I say look, people say to me, and ask in classes, how does this affect organisations and organisational performance? And I say to my class on day one, companies aren’t worried about you, so you shouldn’t worry about them. You need to take care of yourself, and by the way, when you open up your eyes, then you do. So therefore this is not about making organisations more effective. My title for the book would have been something like ‘power, an organisational survival guide’. This about how to survive in the world we’re talking about, not a macro perspective on how rules should be changed. It’s about this is how the world works, this is what you need to understand it, here are some things that social science and interesting case studies illustrate work better rather than worse, and you need to figure this out.

SC: Ie, power as realpolitik. For instance in the book you show that talent and performance don’t necessarily guarantee you anything. It’s not a just world. The other way round, you also say something like, ‘the only way to have the powerful be good is having more of the good become powerful…’

JP: As a friend pointed out, and this is right, I’m a child of the 1960s, and this is a kind of ‘power to the people’ book. This is what the rules really are, don’t believe the crap that people are telling you… I’m huge fan of Malcolm Gladwell’s 2009 New Yorker article in which he makes the point that the rules basically favour the people who are winning, because they make the rules! From war to basketball, David beats Goliath by not playing by Goliath’s rules.

*Power: Why Some People Have It – and Others Don’t, Harper Collins, New York (2010)

Suicide bomb at Wapping: family mansion in flames

The News of the World is ‘journalism’s Enron’, as a senior businessman told my colleague Stefan Stern. Like Enron, the story now compellingly unfolding is not just that of one global media concern; as with the banking crisis too, it is a parable of 21st century capitalism.

Not since Arthur Andersen, one of the world’s oldest and most respected accounting names, sank overnight in the undertow of Enron’s demise has a large going concern vaporised as quickly as the News of the World, a profitable paper with a 168-year-old history, a staff of 200 journalists and the UK’s largest Sunday circulation of 2.6 million. As a journalist from a family of journalists it pains me to say so, but Rupert Murdoch’s instinct to close the paper – as it usually has been in commercial press matters – was exactly right.

As we now know, you can get away with bugging customers, bribing policemen and suborning politicians for a surprisingly long time: but when the smell from the bodies under the Wapping floorboards reached the very selective noses of the big advertisers, the pirate ship NOTW was doomed as surely as the Titanic. As a newspaper editor, Roger Alton, now executive editor of The Times, commendably always stood up for his journalists, including me. But his attempt to blame Mumsnet for the pulling of the ads and thus the demise of the NOTW was both ludicrous and a measure of the remoteness of Planet Wapping executives from reality. It was The Guardian, of the group of which Alton had been a part, that broke the hacking story, remember, and it was only a story because hacking is a crime. Let’s reemphasize this: the News of the World has no one to blame for its demise but itself. (Question to ponder: as the Economist points out, the other UK tabloids have been uncharacteristically low-key about the phone hacking scandal – would, or could, the story have been exposed by a publicly-owned newspaper group, rather than the trust-owned Guardian?)

Journalists like to see themselves as cynical folk, and many defiantly wear the mistrust their readers hold them in as a badge of honour. With respect, they’re wrong. All businesses ultimately depend on the trust of their customers, but as the NOTW’s theatrical disappearance amply demonstrates, for newspapers it is their raison d’être. With their monopoly on news, gossip, rumour and entertainment long surrendered to racier and quicker-reacting online media, credibility and habit are the only assets they have left. Habit is a wasting asset. Credibility is the only thing that keeps them afloat; without it they’re as seaworthy as a holey lifejacket.

In truth, the air has been seeping out for decades. I haven’t yet pursued the correlation in detail, but I’d be surprised if falling newspaper print sales weren’t a pretty tight proxy for declining trust in journalism in general. In retrospect, the rot started with the advent of television. In a classic vicious circle of short-termism, faced with the loss of advertisers to the then new medium, newspapers could think of no other strategy than the slow suicide of cutting corners and going downmarket. They slashed editorial investment, shut down investigative teams and stopped following up the difficult stories. Gossip and celebrity, initially a sideline, gradually became the main focus. Not surprisingly, in this race to the bottom (led enthusiastically by Murdoch’s titles) trust, credibility and loyalty leaked away, and readership has only been propped up by ever more lurid headlines produced by – as we now know – corrupt and, let’s not mince words, criminal methods.

Many papers have become grotesque parodies of their original selves. Think of the gap between the News of the World’s proud title and the reality of what it latterly purveyed. They haven’t informed and enlightened: they have debased and trivialised. They have demeaned, exploited and cheated. Instead of measuring trust and loyalty (alas, I don’t know any UK newspaper that does), they have measured readership and paper profits, all justified by ‘we’re just giving the market what it wants’. The whole industry has been undermined by this self-induced public apathy and cynicism. The normally hard-hitting Murdoch-owned Wall Street Journal has so far barely mentioned the affair; in a recent poll 80 per cent of UK respondents said that after hackgate they no longer trusted the media to tell the truth. Journalism has sunk lower than estate agents in (as the hacks would say) the professional roll call of shame. Thanks a bunch, News of the World.

In this depressing cycle, the News of the World in particular, and newspapers in general, simply mirror the familiar death spiral of industrial-age capitalism. To boost short-term profitability (and thus their own rewards through option-based pay) executives skimp on long-term investment and and find ever sneakier ways to cheat their customers. In Umair Haque’s terminology, they pursue ‘dumb growth’, growth that doesn’t make people smarter, happier or better off, but the reverse. No growth has been dumber, and no value thinner, than that created by News Corp. Gordon Brown made this brutally clear in his BBC interview on 12 July: ‘I find it incredible that a supposedly reputable organisation made its money and produced its commercial results at the expense of ordinary people by using known criminals.’ The ‘value’ created at the NOTW was so vanishingly thin that eventually readers and advertisers saw straight through it to the noisome reality beneath. When they did, paper had no loyalty capital left to draw on. Which is why, even leaving aside the cynical political manoeuvring around BSkyB, Murdoch was right: the NOTW was only fit for wrapping chips.

The big question now is whether that also goes for parent News Corp as a whole – or whether, like the deranged Glenn Close at the end of Fatal Attraction, the apparent corpse will heave itself up for one final lunge at its attackers. For Murdoch the signs aren’t good. The Sunday Times and Sun are under suspicion, the key BSkyB deal has collapsed, at least temporarily, and a class action as well as further investigations are brewing in the US. One Wapping insider told me: ‘It’s like the politburo when Stalin died: no one knows what to do, and they’re all running around like headless chickens.’ Most important of all, the spell that Murdoch has exercised on all political parties through the supposed power of papers like the News of the World, and that he has steadily used to consolidate and extend the family media empire, must surely be broken once and for all. I never thought I’d write this sentence, but if that is the case, then for once the closure of an important, high-circulation newspaper will come to be viewed not as a blow against the wider cause of democracy, but for it.