WILL ROYAL MAIL be New Labour’s political and managerial watershed? There could hardly be a clearer test case of what, if anything, 12 years of bruising encounters with public-sector reform have taught it.

No one doubts that the Mail badly needs an overhaul. In the 16 years since the then Post Office described itself to The Guardian as ‘the best in the world’ (I remember: I wrote the story), it has gone steadily backwards. Shorn of a vision, denied the commercial freedom of rivals and in the view of many ill-served by the regulator, RM has long been lost in strategic limbo.

Some abuse was self-inflicted: remember the beyond-caricature Consignia episode? Or the Orwellian ‘Negative External Financing Limit’ that saw the Treasury cream off pounds 2.4bn of its profits, or the government-imposed 13-year pension holiday that has landed it with a pounds 6.8bn pension deficit that has become a rod to beat it with. Not surprisingly, industrial relations, always challenging, are testy.

But RM is far from a basket case. Postal performance is relatively good and costs relatively low. Even after a 40% shrink age, it has a network of 12,000 outlets under the universal delivery obligation, it is a link to every address in Britain.

There is one other intangible but crucial factor. The Royal Mail is a national treasure. Like the NHS, it exerts a hold on public affection that is, objectively, only partly justified. But whatever the ‘reality’ – as Gordon Brown knows from his duffing up by Joanna Lumley – national treasure status raises the underlying stakes tenfold. No disrespect to Lumley, but RM is higher-profile than the Ghurkas. New Labour simply must get it right.

This is the intriguing backdrop to today’s clash of two opposing models of management modernisation. The official one, part-privatisation, is directly in the there-is-no-alternative, market-based line that has been the default setting since Labour came to power. The assumptions are entirely economic: to use management writer Alistair Mant’s phrase, the ‘business worldview’ has been so thoroughly ingested by ministers and civil servants that no other is entertained. Business is the frame of reference ergo, the private sector must do it better.

Meanwhile, the left-leaning think-tank Compass has put forward a proposal for a not-for-profit RM, borrowing from the likes of Network Rail and Welsh Water, with the aim of renewing and strengthening public-sector values. It wants a ‘dynamic and innovative pub lic service’ that enlists both workforce, including managers and trade unions, and public in the renewal effort. The measure is the maximisation of public benefit, rather than profit.

Wishful thinking? Not a bit, says Hilary Wainwright, who uses that formulation in another Compass publication, Public sector reform… but not as we know it!. It recounts an example of how it has been done. The template is not exact, since the case Wainwright reports is the modernisation (or ‘transformation’, as it prefers to call it) of Newcastle council’s IT services with 650 staff and a budget of pounds 25m, not a national enterprise. Nevertheless, the issues faced – basically the need to rejuvenate an underinvested, traditionally run, not very engaged public service – were fundamentally the same, right down to the initial assumption that there was no alternative to privatisation.

There are many interesting things about the Newcastle experience. One is the critical role of the union (Unison) in articulating the determination of staff to keep their own destiny in their own hands. It also maintained the ‘democratic infrastructure’ which ensured that, once arrived at, tough decisions would stick and is now a strong champion of spreading the model elsewhere.

And why would it not be? Because perhaps the most striking finding is that while the privatisation model has no language to address the public-service concerns of the Compass proposals – it talks past them, as if they didn’t exist – the publicly generated reform did that and more. In Newcastle’s case, the self-funding deal has saved a net pounds 28.5m after investment of pounds 20m, a result that if reproduced at other councils could save pounds 3.5bn nationally, as well as improving public services by leaps and bounds.

Translating all this to RM will not be easy, but, as in Newcastle, everyone, including the postal workers’ union, is aware it’s crunch time the only question is what kind of crunch. That applies to ministers too, for whom the choice could not be sharper. Do they continue to treat public service as an economic burden to be minimised by privatisation and outsourcing – the last gasp of the exhausted old policies – or switch to a less reductive management accounting that has a chance of mining some real national treasure? Forward, or back?

SIGH. Another grand efficiency wheeze that should have been strangled at birth. At first sight, getting worked up about Lord Darzi’s NHS suggestion scheme – under which pounds 20m in prize money is on offer to staff coming up with the best ideas for saving money over the next four years – might seem over the top. The cash sum is trivial: the NHS needs to cut costs by pounds 2.3bn in the next year alone. And if someone does walk off with pounds 5m for an idea that saves many times that, isn’t that a reasonable deal?

Well, no. Spoilsport though it is to point it out, the calculable costs of the awards will add much more to the headline pounds 20m the unquantifiable costs will be many times the original total and whatever the verdict of the subsequent report, the likelihood of the scheme delivering otherwise undreamed-of improvements to offset those costs is nil. Indeed, it could make matters worse.

The most depressing thing is the ignorance it betrays about how systems work – the management equivalent of a doctor expecting cancer patients to respond to treatment by black magic. ‘The more you look at it, the more frightening the whole thing becomes,’ mutters Jane Seddon of Process Management International, a consultancy whose work is based on looking at systems as a whole.

Start with the cost of the scheme itself. Even before the formal launch, there is the cost of developing, planning and specifying the scheme. Now add the costs of communicating and marketing it to the NHS’s two million employees. There’ll need to be a database of submissions with staff to run it, and trained assessors to rank suggestions. If consultants aren’t involved already, they will be now. Finally, there is the bureaucracy of judging and making the awards, including a review mechanism for appeals.

However, the direct bureaucratic costs will be dwarfed by the unquantifiable ones. The prize money sets up competition among individuals and units that ought to be sharing knowledge, not hoarding it. What about people whose day job is process improvement? Will they hold good ideas back or ‘seed’ them with others to give themselves a chance of sharing the booty?

Many apparently sensible suggestions, says PMI’s Jan Gillett, will be unhelpful in practice, because in a system made up of many interacting parts like the NHS, changing one part will affect many others, some for the worse. As the venerable US systems thinker Russ Ackoff never tires of pointing out: ‘Problems in organisations are almost always the product of interactions of parts, never the action of a single part. Treating a single part destabilises the whole and demands more fruitless management intervention management becomes a consumer of energy, rather than a creator’.

Meanwhile, suggestions that really would make a difference – like getting rid of distorting targets and IT-driven bureaucracy, classic energy-gobblers – can’t even be admitted, let alone acted on. This is partly because, as a complex organisation, the NHS is not susceptible to quick fixes (to quote Ackoff again, the only problems that have simple solutions are simple ones). But in any case, says Gillett, the problems they want to remove have been deliberately created by NHS management and are therefore politically out of bounds. The costs of the cynicism and wasted time occasioned by such a fruitless exercise will never be calculated, but they certainly exist.

The Darzi scheme is perverse in two ways. First, the NHS is home to islands of extremely advanced and sophisticated systems thinking, which under pins radical improvement in cancer and stroke services, for example, and is being explored in a number of hospital trusts. Second, used systematically, suggestion schemes are very far from useless. But, says Gillett, they can only work as an integrated part of the whole system.

To see what an awesome instrument a simple suggestion can be in the right hands, consider this. Toyota’s Japanese plants generate an astonishing 600,000 improvement suggestions a year. Equally astonishing, almost all are implemented, and none is paid for. Improvement in this scheme of things isn’t separate from the job it is part of it. In this sense, honed by a constant stream of improvements, Toyota’s standard operating procedures stand as the embodiment of its organisational learning, accumulated over many years. Ability to harness the motivation of front-line employees is a large part of its competitive edge.

Compared with this simple structured approach, Darzi’s incentive-based scheme is almost embarrassingly crude. ‘You don’t need to bribe people to come up with ideas,’ says Seddon. ‘All you have to do is visit the workplace and listen.’ Money prizes won’t make the ideas worse or better, or help the distribution. So here’s a suggestion for Darzi: stop trying to motivate NHS workers with money and use the cash to link up the islands of excellence that exist already.

IN AESOP’S fable of the boy who cried wolf, the sting in the tail is that when the wolf actually appears, the young shepherd has lied so many times that no one comes to his aid even when the wolf is devouring the flock (and, in some versions, the boy himself). No one would actually want him – or the sheep – to suffer that fate, but if he does, we understand that he has brought it on himself.

Hearing the deafening cacophony of wolf warnings echoing around the Square Mile last week, it’s hard to resist the idea that the City of London is similarly preparing its own downfall. The roll call of businesses blindly asserting their right to go on doing the things that will eventually kill them is long: car companies resisting limits on CO 2 emissions, chemical firms contesting controls on toxic substances, energy firms fighting regulation every step of the way. The City’s insistence on its right to evade responsibilities that apply to everyone else is just the latest in this cautionary line, but taken to a new level.

In fact, given similar predictions of doom following the tax treatment of non-doms and foreign company earnings last year, anyone listening to the howls of protest that a 50% tax rate, regulation of hedge funds and curbs on bankers’ pay will trigger an exodus of ‘the brightest and best’ from London must be surprised that there is still anyone in that dubious category left to drive away.

The breathtaking sense of entitlement, and contemptuous dismissal of those who labour in the lower strata of the real world, can be gauged by the weirdness of the arguments attacking the measures. One is that the rich will take steps to avoid paying some of the tax (well, blow me). Another is that, by using cars, private medicine and schools, they are proportionally less reliant on public services. Or try this: cutting tax relief on pensions contributions from 40% to 20% will encourage outraged high earners to cut off their noses to spite their faces by closing down company pension schemes, as well as (of course) emigrating to more favourable legislations.

Indignation at proposals to get companies to publish gender pay comparisons, or the ratio of senior to average pay, similarly seems to come from another world. Good firms aiming to attract the best (as opposed to the most mercenary) talent would want to show they have a fair – that is, equal – pay policy anyway. And firms arguing that what they pay their chief executives is irrelevant to the rest of the company are simply demonstrating that they still don’t get it.

These fractures and disconnections – of the City from the rest of the economy, of the astronomically wealthy from the lower orders, of the boss from the humble employee – are both part symptom, part cause of the bubble that has blown up in our faces over the last year. Top and bottom, finance and factory, are interconnected parts of the same system, whether the unit is a company, an economy or, as we are now learning, the planet as a whole. As we also now know, while the wealth of the rich has shrunk dramatically, the millions who have lost jobs and homes are paying a much heavier relative price than those who are down to their last couple of million.

Which is why the recent, hesitant measures are important. We can regret that in relation to both pensions and tax they are tardy and ill-thought-through – indeed, they give every impression of being narrowly political rather than strategically motivated. But they are still welcome to the extent that they begin to call the City’s preposterous bluff.

For a start, we can begin to query the facile identification of ‘top talent’ with ‘top pay’. In many professions – in fact even in the pre-Big Bang City – the idea that the best were automatically the most attracted to money would cause outrage. Since in any case we shall need fewer, as well as less well-paid, bankers as the financial sector shrinks back to sustainable size, we don’t need to cave in to hollow blackmail. Every other country is in the same boat where exactly would they go? We can stop the regulatory and tax race to the bottom and think more clearly about what we do want – and the incentives that might encourage it.

The irony is that we need a functioning, creative City playing its important original role of serving the rest of the economy: helping companies to raise money, trade, insure themselves and invest wisely. As for the other City, the ‘big end of town’, as it came to be known in New Labour circles, it has cried wolf too many times for the warnings of disaster to be believed. It lied about its ability to manage risk, the necessity for light-touch regulation and the need to be free to pay its practitioners any money they asked for. It will, accordingly, get the regulation it deserves. If City professionals decide in consequence to depart for Hong Kong or the Channel Islands, it won’t be because someone else has driven them out. They’ll have done it to themselves.

JOHN LOCKE defined a madman as someone ‘reasoning correctly from erroneous premises’. For Einstein, madness was repeatedly doing the same thing and hoping for a different result. The worst of modern management – and alas, that often seems most of it – manages to combine the two so well that it doesn’t just exclude incremental learning: it takes knowledge backward.

Consider the operational efficiency programme accompanying the budget last week. It identified a further pounds 15bn of public-sector savings on top of pounds 26.5bn already claimed, pounds 7bn to be made through obliging public-sector bodies to share back-office services such as finance and HR and buying better IT.

It’s not that there aren’t savings to be made – of course there are. Done properly, they would boost public-sector capacity beyond the wildest imaginings of the five expert advisers to the Treasury who wrote the report. The insanity is that savings can’t be got at by the cost-cutting methods they put forward, which on the contrary are guaranteed to drive overall costs higher. Not only that: by specifying the methods to be used, the government locks in far greater sys temic inefficiencies at the same time as it places the assumptions behind them off-limits to examination.

Part of the self-referencing madness is seeking assurance from experts who are so attached to current assumptions that they can’t see beyond them. As with recruiting Lord Laming, whose recommendations shaped the dysfunctional childcare system, to report on Baby P, getting the former chief executive of an IT services firm to advise on office efficiency is like asking McDonald’s to devise an obesity policy. Guess what, the answer is fast food! More standardised procedures, more streamlining of back offices, more shared services… in sum, more work for IT services companies.

The paradox of efficiency is that it can’t be addressed head on. It is a by-product that can only be defined in terms of its purpose. Without purpose, efficiency is meaningless. Cutting costs (the government’s purpose) only raises them for the citizen – but because the assumptions are out of bounds, the government can’t see it.

Look at the ‘cost savings’ made at the Department for Work and Pensions and HM Revenue & Customs. Both these flagships of public-sector reform have been subject to top-down makeovers along approved factory lines. Dumbed-down ‘front offices’ sort and feed incoming cases to specialised processing sections in the ‘back office’ in the belief that these mass-production techniques will cut the unit cost of transactions and harvest economies of scale.

Even in manufacturing, economies of scale lost their grail-like allure when the Japanese discovered how to make small quantities of different, high-quality goods cheaply. In services the case is at best unproven (banks, anyone?), and so far the successes in shared services are few and far between. But even if they do make transactions cheaper, that’s irrelevant if from the citizen’s point of view the service is worse, requiring more transactions to put right. And it takes no account of the disbenefits of the efficiency measures elsewhere in the system.

Thus the HMRC and DWP cost savings recorded in official figures reappear, with interest, in the workloads of harassed local councils, housing associations, police, courts and advice agencies. They have to pick up the pieces left by the failure of HMRC and DWP’s demoralised staff and fragmented processes to provide an acceptable (rather than cheap) tax and benefit service.

Much of the work of the UK’s voluntary advice organisations now consists of dealing with mistakes affecting the most vulnerable in society perpetrated by New Labour’s efficiency flagships. There is an opportunity here. By identifying problem areas and working with tax and benefit offices to remove them, these unsung pillars of civic society could be a powerful agent for improving service and reducing costs.

Except that the government has stamped on any such possibility. First, it has disallowed anything except immediately ‘cashable’ benefits to count as efficiency gains – so investment now to prevent costs in the future doesn’t qualify. And second, diabolically combining type 1 and type 2 madness in the same move, it is subjecting the voluntary sector to the same misguided ‘reforms’ as the service providers – putting large advice ‘contracts’ out to tender, forcing agencies to combine or wither, and paying them per transaction, thus removing any incentive to improve the system as a whole.

’In times of transformation, not only do new problems arise, old ways of looking at things become problems themselves.’ That’s the infinite regression the cost-saving programme being rammed through Whitehall locks us into. It is, perhaps, a third form of madness.

AS THE DUST clears after the collapse of the old financial order, mixed with fear and loathing is a palpable sense of release. Of course there will continue to be discomfort, sometimes extreme, as whole industries are sucked into the maelstrom of the imploding debt bubble. Yet now that market ‘solutions’ are no longer self-justifying, new options for the shape of companies and economies come into view. If society comes before markets, as Philip Blond recently suggested in the FT , a different management vista begins to open up.

The nightmare that is finally ending is the 30-year neoliberal project to make humanity safe for markets. On this economic Island of Dr Moreau, individuals and institutions have been bent to fit an abstract framework of theory and ideology rather than the other way around. Pragmatism and a sense of the importance of social relations have been sacrificed to notions of efficiency that now turn out to be wholly misguided.

As George Packer noted in a recent New Yorker , modern conservatism (whether practised by Republicans or Democrats, New Labour or Thatcherite Tories) has turned its back on its origins of respect for tradition and the need for checks and balances and become its rabid opposite – ‘abstract, hard-edged and indifferent to experience and existing conditions’.

Ever in thrall to economics, today’s management has faithfully reflected this deluded rationality. Managers have grown – and been taught – to eschew messy reality in favour of managing by computer model and target.

Indeed, increasingly they don’t know how to manage forward from reality rather than backward from the numbers. Thus the besetting sin of mistaking the map for the territory, the scorecard for the game, the representation for reality; in any collision between humans and the numbers, it is humans who are the casualty of first resort.

Another consequence of this fundamentalist faith has been the growth of colossal concentrations of market power: not just banks, but also oil companies and even supermarkets have become too big to fail. ‘Efficient’ in a very limited sense, and that only at the cost of squelching the life out of our high streets, they offer a deformed, depersonalised style of competition designed to please regulators rather than customers – witness record low levels of trust in big business that are now prevalent in the US and UK.

Indeed, a regulatory regime operating entirely on abstract criteria favouring economies of scale and high-level targets is essential to these oligarchies, spreading the same dehumanised principles from the private to every corner of the public sector. And the accompanying cynicism, its goals being so remote from the concerns of individuals that there is no sense of wellbeing even when targets are met, remains the same.

The twin monuments to this pitiless, mechanical version of modernity are the banks that grew too big to die and the NHS computer system that grew too big to complete. Both institutionalise the impersonal and abstract and fetishise size, speed and scale.

The paradox, of course, is that ‘efficiency’ of this kind turns out to be catastrophically inefficient even in its own terms, let alone social and environmental ones. In retrospect, the vaunted decade of growth was just another management abstraction, a loan from the future that has been called in with interest.

Establishing a new equilibrium between individuals and broad economic forces so that markets can be made to serve social ends must be the first priority. The City no longer having a de facto veto, the stakeholding ideas, so abjectly abandoned by New Labour in the face of its disapproval, can be resurrected. That would be a huge step, breaking the stranglehold of shareholder value, reopening today’s pernicious governance model and helping to put finance back where it belongs – on tap, not on top.

There is little evidence that economies of scale are useful in banking (or any other services), and plenty that anything too big to fail is too dangerous to live. So banks should be broken up and bankers encouraged to get a life inventing goods and services for customers rather than concentrating on making their bonuses. If that makes banking less creative, good: nothing life-critical, preferably nothing at all, should be run by anyone subject to incentives that make them focus on the money rather than the job.

Economic life, as Nassim Nicholas Taleb puts it, should be ‘definancialised’. It should be re-tethered to real things – customers, products and services. The aim is to bring it ‘closer to our biological environment: smaller companies, richer ecology, no leverage. A world in which entrepreneurs, not bankers, take the risks, and companies are born and die every day without making the news.’ This week’s budget would be a good place to start.

THE CREDIT crunch confronts the corporate social responsibility (CSR) movement with its biggest crisis. Over two decades, the idea that companies should voluntarily ‘put something back’ has acquired impressive support from the great and the good.

No less than 85% of the FTSE 100 refer to CSR in their annual reports, according to one study. ‘It’s never been more important,’ runs a headline prominent on the Business in the Community website over a section on ‘Corporate Responsibility in recession’, with links to how-to articles and an awards scheme. The government also approves, appointing the world’s first minister for CSR in 2000 and asserting in a recent report that by behaving responsibly ‘businesses can make a significant contribution to boosting wealth creation and employment, fostering social justice and protecting the environment’.

Yet the financial meltdown brings a two-pronged challenge to responsibility champions. The first is simply whether sustainability and wider CSR issues will remain on the boardroom agenda. Non-government organisations and a number of other CSR observers see signs of com panies reverting to the default position that, in today’s conditions, anything other than business as business is a luxury that they can’t afford.

In truth, the ‘market for virtue’, as David Vogel put it a couple of years back in a book of that name, is in any case small and weak, particularly in capital markets, which give no sign of rewarding companies that do good with higher share prices or punishing those that behave badly with lower ones. Accordingly, while for a few companies CSR makes business sense as part of their brand and customer strategy, and others use it defensively for risk management purposes, most do it only in so far as it suits them and they can afford it. When it doesn’t suit them there’s nothing to prevent them dropping it, or perhaps cherry-picking the areas to apply it.

It may be no accident that most CSR centres on environmental issues. Doing more with less – ie, resource efficiency – and eliminating pollution before it occurs often directly benefit the bottom line (which means it isn’t really CSR, it’s just sound business). Meanwhile, green credentials may deflect attention from less visible or savoury practices. For example a number of large retailers – Debenhams, B&Q, Boots Alliance and Selfridges among others – have over the past year reportedly extended their payment period to suppliers, sometimes up to 96 days, while the Federation of Small Businesses says that 14 companies, mostly retailers, have taken to charging a 2.5% ‘settlement fee’ when they pay their bills.

While such a power play, like MPs’ lodging arrangements, may not offend literal definitions, it breaches the spirit, potentially putting many credit-starved small suppliers in danger of collapse. It also lays companies open to the charge that CSR is attractive to them because they can gloss what they do in the most favourable light, while not having to do anything they don’t want to.

But more glaring are the contradictions in the financial sector. Much like Enron, financial services have combined being a pillar of CSR with corporate irresponsibility on a grand scale. The immediate cause of today’s crisis was cynical mis-selling of sub-prime mortgages to self-certifying customers whose hope of maintaining payments in a serious downturn was minimal. Scarcely believably, the process was then repeated higher up the food chain, investment bankers re-mis-selling poisonous packages of debt to investors and other bankers, egged on by massive one-way bonus incentives.

Yet, as Ian Christie, an independent environmental consultant, notes, the CSR industry has had nothing to say about the pay and incentives issue, a crucial part of any post-crunch reform, at least in public, and if it has been conducting advocacy on it in private, it was to singularly little effect. A similar outbreak of mutism has greeted the failure of financial self-regulation – indeed, arguing against regulation is a key point on the City agenda. Christie asks: ‘Has any member of any CSR club been ejected or suspended for breach of the spirit of CSR or for flagrant irresponsibility? I think the answer is no.’

How little influence CSR is able to wield within companies was charted in a recent article in Ethical Corporation noting the imperviousness of sales teams to ethical concerns. Sometimes scornfully labelled the ‘sales prevention team’, CSR professionals were ‘completely excluded’ from debates about how to treat customers. Given the ritual obeisance to customers and the central role played by their abuse in the current crisis, this is an extraordinary revelation, kicking away any pretension CSR might have to pose as a saviour in today’s troubles. Rather the reverse: the reputational issues faced by the banks are only matched by those facing CSR itself.

READING THE opinion and letters pages of the Financial Times these days gives a curious sensation of seeing cogs and gears that have not moved for 30 years creaking into motion. The past couple of weeks have seen an article putting forward happiness as a better goal for economic activity than growth a proposal from the Aylesbury Socialist Party to contain banking exuberance by socialist planning and, scarcely less heretical, a declaration by Jack Welch, formerly head of GE and the foremost management icon of the age, that shareholder value is ‘the dumbest idea in the world… a result, not a strategy… Your main constituencies are your employees, customers and products.’

Welch’s comments mark a psychological turning point. While he didn’t invent shareholder primacy, which emerged from seminal US academic work in the 1970s, GE under Welch became a past master at managing it, making a fetish of delivering quarterly earnings and dividend rises – using judicious disposals as necessary to make the numbers. With the crunch, that possibility is no more, along with GE’s treasured ‘AAA’ credit rating. Hence, perhaps, the recantation.

However, while saluting Welch’s conversion, a subsequent FT editorial on ‘Shareholder value re-evaluated’ shows how little the wheels have actually turned. Surviving the ‘re-evaluation’ are all the structures of existing governance: companies as entities run for the benefit of shareholder-owners (even if, as Welch implies, the means are indirect, rather than direct, managing of the share price) alignment of directors and shareholders pay to reflect performance. In short, once the crisis is over, with a tweak or two here and there, it’s safely back to business as before.

This expectation is shared in the City. Entrusting a review of the Combined Code on corporate governance to the Financial Reporting Council – just like the preposterous appointment of Lord Laming to report on the working of his own reforms in child protection – simply guarantees a ‘steady as she goes’ response. How could it be otherwise?

But don’t these people realise the platform is blazing beneath them? This column has long maintained that, regardless of theory, a system that encourages the same organisation to pay one person 470 times what another gets will eventually blow up. This it has now done – in America, of all places, where the freewheeling social contract has broken down under pressure of the crisis. Confidence in business has hit rock bottom. In a recent poll, just 17% of US respondents said they would trust what a CEO told them a ratio of 3:1 wanted tougher regulation.

Does anyone seriously think that assurances about ‘better bonuses’ (as misguided as ‘better targets’, of which they are a close relative) will stem this tide of outrage? It isn’t a question of refining the incentives, chaps – it’s a question of reversing them. As Welch rightly notes, share prices are supported by the value created in product markets by the interrelationship of employees, customers and suppliers. So why should alignment run upwards from directors to shareholders?

’My guess,’ writes Gary Hamel in The Future of Management ‘is that… shareholders would have been better served if their chairman could have bragged about being aligned with employees and customers. It seems to me that a CEO’s first accountability should be to those who have the greatest power to create or destroy shareholder value.’

In any case, the entire notion of the shareholder has to be rethought. In an age when a listed company’s share register suffers 90% churn each year, the very concept of ‘the shareholder’ dissolves, corporate governance expert Professor Bob Garratt told a recent meeting of the Human Capital Forum. Calling for a ‘cultural and behavioural transformation’, Garratt declared that the first duty of directors was not to shareholders, but to the company itself. Organisations have to move from agency theory to stewardship theory, he believes – restoring the original concept of the board’s role from the 17th century.

Ironically, from that perspective it is today’s ‘business as usual’ that is the aberration. In a forthcoming book, The Rise and Fall of Management, Gordon Pearson shows how corporate law, including the 2006 Companies Act, takes a much more enlightened approach to governance than current practitioners want to admit. Contrary to common assumptions, shareholders do not own companies (how could they and benefit from limited liability at the same time?), and directors owing their duty to the company can’t be ‘agents’ of shareholders – indeed, they are charged with acting fairly as between all company members. It’s a measure of how much present governance has lost its way that resurrecting such ideas should now seem so radical – and so urgently necessary.

The Observer, 29 Mar 2009

MRSA, Baby P, now Stafford hospital. The Health Commission’s finding last week that pursuing targets to the detriment of patient care may have caused the deaths of 400 people at Stafford between 2005 and 2008 simply confirms what we already know. Put abstractly, targets distort judgment, disenfranchise professionals and wreck morale. Put concretely, in services where lives are at stake – as in the NHS or child protection – targets kill.

There is no need for an inquiry into the conduct of managers of Mid Staffordshire NHS Foundation Trust, as promised by Alan Johnson, the health secretary, because contrary to official pronouncements, it is exceptional only in the degree and gravity of its consequences. How much more evidence do we need?

Stafford may be an extreme case but even where targets don’t kill, they have similarly destructive effects right across the public sector. Targets make organisations stupid. Because they are a simplistic response to a complex issue, they have unintended and unwelcome consequences – often, as with MRSA or Stafford, that something essential but unspecified doesn’t get done. So every target generates others to counter the perverse results of the first one. But then the system becomes unmanageable. The day the Stafford story broke last week, the Daily Telegraph ran the headline: ‘Whitehall targets damaged us, says Met chief’, under which Sir Paul Stephenson complained that the targets regime produced a police culture in which everything was a priority.

Target-driven organisations are institutionally witless because they face the wrong way: towards ministers and target-setters, not customers or citizens. Accusing them of neglecting customers to focus on targets, as a report on Network Rail did just two weeks ago, is like berating cats for eating small birds. That’s what they do. Just as inevitable is the spawning of ballooning bureaucracies to track performance and report it to inspectorates that administer what feels to teachers, doctors and social workers increasingly like a reign of fear.

If people experience services run on these lines as fragmented, bureaucratic and impersonal, that’s not surprising, since that’s what they are set up to be. Paul Hodgkin, the Sheffield GP who created NHS feedback website Patient Opinion (www.patientopinion.org.uk) notes that the health service has been engineered to deliver abstract meta-goals such as four-hour waiting times in A&E and halving MRSA – which it does, sort of – but not individual care, which is what people actually experience. Consequently, even when targets are met, citizens detect no improvement. Hence the desperate and depressing ministerial calls for, in effect, new targets to make NHS staff show compassion and teachers teach interesting lessons.

Hodgkin is right: the system is back to front. Instead of force-fitting services to arbitrary targets (how comforting is hitting the MRSA target to the 50% who will still get it?), the place to start is determining what people want and then redesigning the work to meet it.

Local councils, police units and housing associations that have had the courage to ignore official guidance and adopt such a course routinely produce results that make a mockery of official targets – benefits calculated and paid in a week rather than two months, planning decisions delivered in 28 days, all housing repairs done when people want them. Counterintuitively, improving services in this way makes them cheaper, since it removes many centrally imposed activities that people don’t want. Sadly, however, the potential benefits are rarely reaped in full because of the continuing need to tick bureaucratic boxes and in the current climate of fear, chief executives are loath to boast of success built on a philosophy running directly counter to Whitehall orthodoxy.

The current target-, computer- and inspection-dominated regime for public services is inflexible, wasteful and harmful. But don’t take my word for it: in the current issue of Academy of Management Perspectives , a heavyweight US journal, four professors charge that the benefits of goal-setting (ie targets) are greatly oversold and the side-effects equally underestimated. Goal-setting gone wild, say the professors, contributed both to Enron and the present sub-prime disasters. Instead of being dispensed over the counter, targets should be treated ‘as a prescription-strength medication that requires careful dosing, consideration of harmful side effects, and close supervision’.

They even propose a health warning: ‘Goals may cause systematic problems in organisations due to narrowed focus, increased risk-taking, unethical behaviour, inhibited learning, decreased co-operation, and decreased intrinsic motivation.’ As a glance at Stafford hospital would tell them, that’s not the half of it.

The Observer, 22 March 2009

HOW FAR have we got in rethinking the management of banking and financial services? Almost nowhere, was the verdict emerging from a recent workshop by the Centre for Research on Socio-Cultural Change (Cresc) in London. The session gathered a rich cross-section of politicians, bankers, academics and commentators who sharply challenged the official analysis of the crisis.

It may be, as The Guardian‘s Larry Elliott suggested, that we are still in the fourth, ‘panic’ stage of the crunch – following the bubble phase (’it’s different this time’), denial (’don’t worry, the fundamentals are sound’) and acceptance (’more serious than we thought, but well placed to recover’) yet underneath all the frenetic activity, the remarkable thing is not how much underlying assumptions have changed, but how little.

For make no mistake: the tectonic plates are shifting. On the one hand, as Professor Mick Moran of Manchester University made clear, the crisis has fatally holed the grand project of the past three decades to shrink democratic control of the economy and deposit it in the hands of the technocracy. The edifice built on an independent central bank, independent regulatory agencies and a business-friendly regime for the markets is tottering. With the technocrats in retreat, economic problems are pushing back into the political and democratic domain: ‘politics is flooding back’.

Yet it is unreflected in either institutional or technical reactions to the crisis. Institutions charged with managing the response, such as government investment managers UK Financial Investments and the Shareholder Executive, remain independent agencies run by the usual Treasury/City suspects. The banks may be effectively nationalised, but governance is still at arm’s length and has no other aim but orderly exit. Shareholder value is still the discourse.

In other words, business as usual. But as other presentations demonstrated, it was business as usual that got us into this mess in the first place. An investment banker acknowledged that three of the miscalculations that caused the meltdown – neglect of liquidity, staggering concentration of risk, and failure to allow for the business cycle – were management errors of the most glaring kind that he was at a loss to account for.

For a second academic speaker, Ismail Erturk, however, the explanation was plain: ‘The problem is shareholder value.’ He argued that this concept, much favoured by the business-friendly financial regulators of the grand project, had driven an ‘unsavoury revolution’ in the banks that damaged the interests of borrowers and depositors and showed itself to be ultimately incompatible with banking’s basic utility function.

In retail, the banks turned themselves into mass marketers selling fee-earning financial products that could promptly be removed from the books by securitisation, while the investment banks switched their focus from corporate services to proprietary trading on their own account. Both sidestepped none-too-onerous regulation to build up formidable levels of leverage. Each of these models has now unravelled.

Erturk’s conclusion is stark and far-reaching. As long as shareholder value prevails, some kind of defensive separation of trading from basic banking functions is essential. More positively, the Cresc researchers propose a remutualisation of retail banking: a gradual euthanasia of shareholders, and a substitution of bonds for equities, giving investors ‘predictability and security of returns on a class of paper whose quality could be second only to government bonds’.

Other workshop participants were quick to extend the diagnosis from the banks to publicly quoted companies in general. If – as it is now becoming permissible to suggest – shareholder value is indeed the problem, then, as Einstein said, ‘the significant problems that we face cannot be solved at the level of thinking we were at when we created them’. A wholesale recasting of today’s unfit-for-purpose corporate governance becomes another urgently necessary response. In short, we are a very long way from business as usual.

Of course some people argue that the situation is now so bad that preventing a future crisis takes a distant, second place to getting things moving again. One inhabitant of the real economy feared that the squeeze would suck so much life out of companies like his that we wouldn’t even care about the possibility of another bubble.

Assuming it doesn’t go that far, the dilemma is poignant. The softer the landing, the more the government will be tempted to shore up the crumbling orthodoxy, making another crisis certain. The worse the depression, the better the chances that Whitehall can be pressurised into a fundamental rethink. Neither prospect is a cheerful one. But as the Obama team keeps repeating: ‘Never waste a good crisis.’

The Observer, 15 Mar 2009

HAPPINESS HARDLY seems at the top of the management agenda when the financial world is falling apart. But, as participants at a seminar on ‘Recession: health and happiness’, organised by the Economic and Social Research Council, heard last week, it probably should be.

Hard times put a premium on real priorities. One of the founding assumptions (and justifications) of conventional economics is that money CAN buy me love, or at least wellbeing: and if wellbeing increases with wealth, GDP growth is obviously of cardinal importance. But in many countries over the past half century, soaring levels of crime, deprivation, depression and addiction to alcohol and drugs seem to have consumed much of the increases in happiness that ought to have accrued from steadily rising living standards.

The Easterlin paradox, as this is called – after American economist Richard Easterlin – has prompted economists such as Richard (Lord) Layard of the LSE and Warwick University’s Professor Andrew Oswald, both speakers at the event, to argue that the aim of public policy should switch from GDP growth to measures that more directly relate to human happiness. As BBC presenter Evan Davies, who chaired the session, pointed out, this is the first recession since the dismal science began taking happiness seriously: an appropriate time to consider the lessons and act on them.

Fear of recession makes everyone less happy. But one finding from the study of the economics of happiness stands out: the devastating effect of unemployment. Ironically, as panellist Melanie Bartlett, professor of Public Management at UCL, pointed out, unemployment was considered so uninteresting in the 1990s that people stopped studying it. Now it is back with a vengeance.

Indeed, so harmful are the consequences – up there with divorce and separation, with the added complication that they get worse the longer it continues – that Layard believes government must guarantee jobs for those still out of work after a year, with further state support conditional on acceptance. Wefare-to-work is justified, he argues, by ‘the huge jump in happiness that occurs when people go back to work’. Training takes a clear second place to getting people back into work. Young people will be particularly vulnerable as recession deepens, making guaranteed apprenticeships ‘one of the top five tasks for government’.

If the public sector is obliged to pick up the pieces, the private sector needs to stop creating the debris in the first place. In particular, the kneejerk reaction to get rid of what until yesterday were ‘our greatest assets’ makes no sense either economically or socially. Recall that up until the 1970s, most companies tacitly accepted that they had an obligation to employees for whom finding a new job was harder and more traumatic than for investors to buy and sell their shares. Sacking people was therefore the measure of last resort.

Over the past 30 years of shareholder dominance, however, redundancies have become the measure of first resort rather than last. However, while shareholders may be temporarily mollified, sackings frequently cast a pall over the survivors, with dire effects on engagement. Lower costs but higher disengagement is not likely to be a winning trade-off in an environment where attracting customers may be key to survival.

The alternative, employee-centric approach is still used by many Japanese countries, many of which go to extraordinary lengths to avoid lay-offs of permanent staff. Toyota has not laid off full-time workers since 1950 as late as last December, like camera and printer manufacturer Canon, it was committing itself to maintaining lifetime employment, although many agency workers have gone. In the UK, it is discussing with the union alternative approaches to facing the crisis, including work-sharing, shorter hours and pay cuts, as well as voluntary redundancy. Japanese companies often cut dividends first, followed by management bonuses (if any), then pay and working hours, and only then jobs.

There is of course more to this than fairness. Although no one is likely to be made happy in the short term by shorter working hours and lower pay, keeping the maximum number of people on is an obvious expression of confidence in the future. Research by the Engage group suggests that employees take the behaviour of companies under crisis as highly revealing of their real nature: the spirit of the decisions made under pressure will be remembered far into the future.

Paradoxically, the age of economic self-interest has turned out to be as destructive of human happiness as it has of the economy. Conversely, a more inclusive, egalitarian, humanitarian era may benefit not only happiness, but the economy too.

The Observer, 8 March 2009