Comparisons with May 1968 have been hard to resist in Paris this month as noisy students take to the streets to protest against capitalism and an unpopular government. Also unavoidable is the irony that while 48 years ago the protesters were in revolt against stifling corporatism and chanting ‘power to the imagination’, this generation would like nothing better than to inherit the safe jobs and secure pension rights at the same companies that their long-haired grandparents so despised.

That of course is one measure of the extent to which the world of work has changed in the interim. The focus of today’s protests is government labour legislation that, modestly by Anglo-Saxon standards, aims to make it easier for employers to dismiss people in times of economic stress and to inject more flexibility into the notorious 35-hour week. The protesters see both as further blows for insecurity against hard-won employment rights.

There is an important point here. A running debate at each annual meeting of the Global Peter Drucker Forum pitches faith in gung-ho Californian techno-optimism as potential purveyor of a new surge of prosperity and employment against European-style social measures to protect or at least prolong existing jobs.

Yet much as I sympathise with the European view in general, and with French youth’s identification of itself as ‘la génération précaire’ in particular, the debate is already out of date. President François Hollande’s political ambition to boost employment totals is equally understandable, and equally doomed. It’s a fight neither side can win, and those seriously concerned about jobs should save their energy for bigger and even tougher ones to come.

As ever, it’s important to be careful what you wish for. To begin with, the cost of French employment protection is appallingly high. This is only partly a matter of employment itself. While French youth joblessness at 24 per cent is obviously unacceptable, it’s not clear that alternative employment policies are much better. The ‘successful’ UK, for example, suffers from a toxic tradeoff of its own: while its nominal unemployment rate is half the French 10 per cent, UK pay rates are so low, and contracts so precarious, that employment à l’anglaise, and draconian welfare measures that drive it, are not so much a route out of poverty as a high road into it. So much for ‘flexibility’.

A less obvious part of the price for making it so hard to move people on is poisonous French workplace relations. Most new jobs in France aren’t permanent but short-term renewable contracts. But even the lot of those in permanent employment is less enviable than you might think. French employees are among the most stressed in the world, according to a recent report. One powerful reason is a feeling of being trapped, unable to leave permanent jobs people don’t like or have grown out of for fear of never getting another. Another is that French workplace relations increasingly resemble a zero-sum game which both sides treat as warfare. One tactic used by some employers, even large state-owned ones, is to make life so unpleasant for unwanted individuals that they eventually leave of their own accord. HR departments have become departments of dirty tricks. Favoured methods of dismissal by 1000 cuts include bundling off managers to work in a different department or unit, call centres being a destination of choice, transferring workers to a distant part of the country or simply cutting off communications. There’s even a name for this limbo – ‘le placard’, the closet. A spate of workplace suicides made headlines made headlines a year or two ago.

There is of course no defence for such behaviour. But even if it could be stopped at source (it is already illegal); and even if company law were reformed (as it should be) to weaken shareholder value as the corporation’s motive force in favour of greater duty of care for other stakeholders, there are good reasons to believe that the era of large companies as mass employers is over. In his fascinating book The Vanishing Corporation (of which more on another occasion), Jerry Davis notes that the industrial-age connection between corporate growth and employment has broken down. Thanks to technology, a company can now be simultaneously ‘radically tiny’ in employment and globally dominant in its sector. Unlike industrial plants, websites and platforms such as Uber and Arbnb don’t need human bodies to scale. One bold London start-up believes it would need no more than 30 employees to turn itself into a global brand used by billions.

And even that isn’t all. A final disrupter of the old employment patterns is the steady upward march of life expectancy. As Lynda Gratton and Andrew Scott eloquently outline in their self-explanatorily entitled The 100-Year Life: Living and Working in an Age of Longevity, even if all the other factors undermining today’s employment practice could be nullified, life itself will have the last word. When half of those born today will live a century or more, each part of today’s linear three-stage life – education, work, retirement – will have to be rethought. Each becomes more personal, more fragmented, more a matter of personal choice. Individuals will have to take more responsibility for their working life, and organisations, for which anyway talent and career planning will become fiendishly complicated, correspondingly less. The inevitable temptation will be for more companies to opt for the ‘plug-and-play’ model of HR pioneered in the so-called sharing or gig economy.

As Davis points out, the shifts now afoot could lead to a ‘new dark age’ for labour – or the opposite, the liberation from corporate paternalism that the May 1968 protesters demanded. In the same way, a 100-year life could be a burden or a gift. At this stage the options are open – each requires choices. But to reach the sunlit uplands we need to start thinking through the implications now. This is what Paris students should be debating at their nightly ‘Nuit debout’ (‘Up all night’) meetings at the Place de la République, not a Pyrrhic last-ditch defence of a system whose day has gone. In another 50 years, their own grandchildren would have cause to say ‘merci’.

My write-up of the most recent Foundation forum is here.

I’m conscious of a long delay since my last piece, the result of damage to my hand and doctor’s orders to rest it. My apologies for this – normal service to be resumed as soon as I can.

So much of what these days is done in the name of management is idiotic (almost anything foisted on the public sector), unpleasant (‘this is strictly a business decision’) or just plain gross (Bob Dudley and his bonus – partly for meeting safety standards, for God’s sake) that sometimes it’s really hard work being a business optimist. So when a good news story turns up, it’s a cautious pleasure. Two, and it’s cause for celebration.

So here are two companies – ‘positive deviants’, we might call them – that have succeeded by doing the exact opposite of most of their mainstream rivals: really putting their customers first, and trusting their staff to do the right thing. Each flourishes in a sector famous for high cost and deep unpopularity, thus proving that despite the excuses of apologists there is nothing inevitable about these two things: it’s just that those suffering from them are probably (as above) dumb, self-serving or maybe just horrible.

The organisation you may not have heard of is Buurtzorg (which, explaining itself, is Dutch for ‘neighbourhood care’). Buurtzorg is the brainchild of Jos de Blok, a community nurse and subsequently health administrator who in 2006 was so disillusioned with what healthcare ‘reform’ in the Netherlands was doing to the quality, not to mention cost, of patient care (sounds familiar?), that he and a three others decided to set up a social enterprise to do the job properly. Ten years on, so successful is the vision that Buurtzorg now serves half the country’s home-care patients. Nurses have flocked to an organisation that reconnects them with their vocation. The original four have become 10,000, working in 850 teams that are entirely self-managing. From 2008, Buurtzorg was setting up 10 or more teams a month, a rate made possible, according to Blok, by the fact that the teams ran themselves without need for outside help, and were bureaucracy free.

Nothing has changed since, apart from size. Buurtzorg doesn’t do budgets and has no HR function. There are just 40 people, three or four dealing with finance, at head office, whose function is not to direct but act as service centre to the teams. Blok, CEO, is the only person with a management title. There is a corps of 20 peripatetic coaches available to dispense advice, primarily about teamwork, but they have no management authority or responsibility for results. In fact there is almost no ‘management’ separate from the front line: since teams run themselves, there is nothing much for central management to do.

On whatever level, the results of this lo-management model are startling. Buurtzorg has the highest patient satisfaction ratings and the lowest costs in the Netherlands, and has been the country’s ‘best employer’ for five years on the trot. Those three things are linked. Buurtzorg employs highly trained nurses and requires them to do what they are good at, which is helping people to live the lives that they want. In consequence (duh), its patients get better faster, consuming 40 per cent fewer care hours and much less medication, than others. In other words, Buurtzorg – and the country as a whole – are reaping the enormous ignored benefits of cutting off demand before it happens. The paradoxical and unanticipated outcome is that Buurtzorg has become a remarkably profitable non-profit. With better trained and paid nurses the unit cost of care is high – but because of the prophylactic effect on demand, the overall cost is far lower. Ernst & Young estimates that extending the Buurtzorg model to the the country as a whole could save €2bn a year, not counting the incalculable benefits to patients and nurses in terms of quality of life and work (motivation is all intrinsic; the company doesn’t offer incentives). Not surprisingly, political parties are eager for this to happen. Hello, anyone paying attention in the UK?

The second cause for cheer is harder to ignore, not least because it is a bank that has opened 180 branches in the UK over the last 10 years – more than one a month in a period that no one in the financial sector would call exuberant. Like Buurtzorg, the Swedish banking group Svenska Handelsbanken expands not by head-office say so but from the bottom up, when there is customer demand on the ground and bankers in existing branches who are eager personally to meet it. Handelsbanken aims to be more profitable relatively than the average of its peers, through serving its customers better at lower overall cost. Largely self-sufficient branches measure themselves on their cost/income ratio (a metric that High Street banks appear to have forgotten about, to their enduring competitive disadvantage), and customer satisfaction. When the group reaches its financial aim, a profit share comes into play, with the proceeds spread, equally, among all staff. The profit share has been paid every year since 1972. Like Buurtzorg, Handelsbanken is a budget-free and largely forecast-free zone. Apart from financial robustness, Handelsbanken also shares with Buurtzorg exceptionally high customer-satisfaction ratings (top in Sweden since 1989, top in the UK for the last seven years), decentralisation (‘the branch is the bank’), and an emphasis on individual decision-making and initiative in building long-term relationships with customers.

It’s a simple and potent combination. Note that the fact that both companies have radically simplified – or rather abolished – financial and planning controls (a bank that doesn’t do budgets!) is not a coincidence. Both are star exhibits in the database of the pioneering Beyond Budgeting Institute, which supports a network of advanced organisations developing more responsive and economical management models. Beyond Budgeting’s key insight is that ‘the budget’ is not only the major generator of corporate bureaucracy, it is also the scaffolding that holds the edifice (or straitjacket) of command-and-control management in place. So while getting rid of the budget removes a swathe of management overhead at a stroke, even more importantly it allows a completely different, low-maintenance management model to emerge. Centred on the business’s real needs rather than those of the accounting cycle.or the bloodsucking capital markets, this promises to be more resistant to disruption, uberisation or just decrepit old age than the rotten and conflicted present version, and thus gives the traditional corporation, composed of people and relationships rather than algorithms and one-night stands, a sporting chance of lasting until the second half of the 21st century. For that, let’s give them a loud cheer.

In the Looking Glass world of management and economics, words come come adrift from their normal meanings. Sometimes they end up as their opposite, as the impoverished new meaning corrupts or subsumes the old one: consultation, flexibility, accountability, transparency, enhancement come to mind. Or ‘choice’. Competition authorities and economists rule that we have choice in financial services and groceries because there are four or five supermarket or banking chains. Never mind that all our High Streets look identical, supply chains are corrupted (horsemeat), small suppliers and retailers put out of business and every store or agency sells exactly the same things – there’s competition, so we have choice. Yes, I know the only colour is black – but, look, you can buy it from half a dozen suppliers, what more do you want?

The same specialised logic is applied to public services, where it is even less appropriate, and the consequences correspondingly more damaging. Public services are a necessity. Their job is to solve problems, not provide lifestyle choice. If there’s a fire, you want the fire service to put it out, if you’re ill you want to be cured, if there’s a hole in the road you want it filled. If they’re not, you’re pissed off. As Vanguard’s Richard Davis puts it, ‘In Frederick Herzberg’s terms, they are hygiene factors – things that are necessary rather than desirable… What matters to me is that the service works when I need it, no more, no less. I want a good school nearby, a good hospital nearby, an effective police force ready to help me in my neighbourhood’.

When David Boyle wrote a ‘Barriers to Choice Review’ for the government in 2013, he found that there wasn’t even a glancing relationship between what people thought choice meant and what it meant in practice. Providers and recuoebts just talk past each other, leading to indifference and cynicism at best, despair at worst. ‘The difficulty is that the kind of flexibility in the services that people want, and are increasingly demanding, is also a prerequisite for many people to exercise any choice at all,’ noted Boyle.

What people mean by choice is having a service that starts from where they are rather than where ‘theorists think they should be’. Real choice is to have a carer’s visit when you want it, velcro to fasten your clothes rather than buttons or help to meet your mates for lunch every week, not a choice of medicalised universalist packages which keep you in dependency and none of which fit what you really need. In other words, the choice that people want is exactly what the current systems can’t give them: a public service that works for them, not some commissioner or government minister.

In manufacturing Fordism – scale, standardisation, deskilled labour at the service mass production and consumption – died decades ago, killed off by Toyota when it discovered how to overcome the trade-offs between volume and variety, quality and cost. ‘There is no longer any reason to rule out localisation of economic activity on the grounds of scale economies,’ wrote accountancy professor Tom Johnson. ‘Scale economy, beyond very small volumes, is a concept that should be discarded.’

But, zombie-like, Fordism and its attendant scale still rule in public services, where their deathly grips squeezes the life out of service quality, and with it engagement, community and local agency, all in the name of competition and choice. Scale is a double dead end in services, where by defeating quality it remorselessly raises, not lowers, overall costs. The greater the attempt to lower unit costs, the worse the outcome. This is why what we end up with is the shame of 15-minute care packages delivered by people with time only to fill in the paperwork before rushing on to the next job – an insult to both giver and recipient – and the desperate budget cost-cutting that makes public services another example of reversification: an exercise in rationing that leaves no stone unturned in raising thresholds, minimising service and making the rules so forbidding and baffling that they are almost impossible to comply with.

With this reductio ad absurdum we have reached the very final version of the old Fordist service operating system which, with a non-unionised workforce paid the minimum wage and on zero-hours contracts, simply has nowhere left to go. There are no more negatives or minima to retreat into. Behind it is a profoundly pessimistic, deficit-based view of public services that stigmatises those who receive them as too old, feeble in body or mind or devious to bother with: the choice of which unsatisfactory service to receive is all they deserve.

What we need, of course, is a leap to a new positive post-Fordist operating system for public services based on the idea of choice that people actually do recognise: the choice of help to put a chaotic or temporarily disturbed life together again and take the individual or family out ot the ambit of public services altogether, where the cost to the public purse is zero. This is a strength-based approach focused on self-help and control of one’s own life that aims to reduce demand by building agency, resilience and engagement.

Building this kind of self-rsustaining momentum is what David Cameron and George Osborne should be concentrating on rather than the use of crude extrinsic sticks and carrots – not so much nudge as a blow to the head with a blunt instrument. Not least, it would deliver the language of choice from the grip of Humpty Dumpty: ‘When I use a word,’ Humpty Dumpty said, in rather a scornful tone, ‘it means just what I choose it to mean–neither more nor less.’ ‘The question is,” said Alice, ‘whether you can make words mean so many different things.’ ‘The question is,’ said Humpty Dumpty, ‘which is to be master–that’s all.’

Read my write-up of the latest Foundation Forum, Going local: can corpororate giants ever make a positive local impact, here

In a provocative article in Times Higher Education (THE), Douglas Board compares business schools with the motor industry in the light of the VW emissions fraud. He notes that while both sectors are the same age, global in reach and have profound whole-system effects on the rest of the world, only one is tarnished by scandal caused by its behaviour or its secondary consequences: we’re up in arms about vehicle recalls, emissions and damage to the environment, but ‘society has barely registered the existence, let alone the scale, of business schools’ harms’.

It’s an important and useful thought. Thus, in automotive terms, you’d describe the Great Financial Crisis as a head-on global pile-up caused by MBA-licensed drivers all driving by the rear-view mirror in vehicles whose engine management system, also conventionally approved, was based on superstition rather than science. While the drivers were unscathed thanks to massive cockpit protection, there were no airbags for other passengers or society. As Board points out, VW-style ethics-lite are themselves the product of the results-above-all doctrine sanctioned by business schools over the last 40 years.

There are many management products freely on sale that would be outlawed as unsafe or bogus if they came out of any other industry. As Sumantra Ghoshal wrote in 2005, ‘business school faculty need to own up to our own role in creating Enrons. It is our theories and ideas that have done much to strengthen the management practices that we are all so loudly condemning’. He singled out governance based on agency theory, conventional versions of strategy, and hierarchical performance management. That’s fairly comprehensive. ‘Management is out of date…’, acknowledged Gary Hamel in 2007, ‘a technology that has stopped evolving, and that’s not good.’

We don’t on the whole buy cars that don’t work, so why do we continue to take management at its own valuation? One reason is precisely that we don’t consider it as the product of an industry, as we do aspirin or a car. We treat it more like a religion, a faith-system derived by top-down deduction from immutable principles that allows movement only at the margins, rather than induction upwards from what works empirically. Like religion management has little predictive value, and most estimates are that firm performance has more (or much more) to do with factors external to the firm than to management. Stanford’s Jeff Pfeffer has likened much leadership advice to lay-preaching, and Rakesh Khurana at Harvard notes a belief in the powers of ‘charismatic’ leaders that is ‘quasi-religious’. In one view leadership functions like myth, as a way of simplifiying complex reality into a narrative that allows it too be reassuringly understood in human terms.

Yet management’s current normative effect is something most churches (not to mention industries) might look on with envy. In Hamel’s description, management is a paradigm in the proper Kuhnian sense – more than a way of thinking, ‘it’s a worldview, a broadly and deeply held belief about what types of problems are worth solving, or are even solvable’, one now so profoundly taken for granted that for most people it is invisible and its wrongness therefore not even discussable.

But the problem is not just that so much of it is wrong – it’s that if enough people believe it it becomes right. While cars don’t act on changing beliefs, humans do. Is it coincidence that business students (the dominant subject group at masters level in both the US and UK, note, and in the UK at undergraduate level too) come to take a more instrumental view of others, be more likely to cheat, free-ride and generally behave like the ‘economic man’ of the textbooks than students in other subjects? Probably not. ’There is a growing body of evidence that self-interested behaviour is learned behaviour, and it is learned by studying business and economics,’ conclude Pfeffer and others in a paper self-explanatorily entitled ‘Economics Language and Assumptions: How Theories Can Become Self-Fulfilling’.

The self-reinforcing tendencies that turn people at work into shirkers, mercenaries and control freaks (‘arseholes’, in Board’s terminology) have hollowed companies too of their human purpose. As Jerry Davis has demonstrated, firms no longer look like the socially and geographically anchored entities of the past, but instead increasingly resemble the affectless ‘bundles of contracts’ (markets by another name) hypothesized by 1970s and 1980s economists and business-school theorists. And the paradigmatic circle is completed by the infection of their parent universities by the market thinking that in the absence of higher professional aims governs the management education industry. Anyone with doubts about the degree to which this ethos now dominates higher education should look at this winter’s Green Paper on the future of the higher education sector, ‘Fulfilling our Potential’, which describes universities as ‘providers’, talks of market exit and entry, the importance of employer needs and value for money for customers – everything, as a response from Cambridge University notes, except the university’s fundamental purpose of pursuing knowledge for the benefit of society as a whole, and ‘[helping] students grow into thoughtful and critical citizens, not just earners and consumers.’

So government too is in thrall to business-school values. One industry’s currency has imposed itself as the value by which all others are judged. That makes management far more important than most people imagine, with more potential for both good and ill than any other technology, since it is the one that decides how the others are applied. Ironically, industries, and even sports, that are physically dangerous are subject to regulation or strict safety rules; medicine has its Hippocratic Oath. Management, on the other hand, is responsible only to the market. It’s long past time we should reconsider.

Every day brings fresh evidence that the most dangerous word in the management lexicon is ‘incentives’. Incentives are a star instance of management’s besetting sin, its urge to impose simple solutions on complex issues. It’s hard to overestimate the consequences of their resulting abuse. To quote Mihir Desai in that well-known radical organ HBR, today’s incentives and rewards have ‘contributed significantly to the twin crises of modern American capitalism: repeated governance failures… and rising income inequality’. Others would add at least some blame for the current lack of global growth and companies’ dismal record of job creation to the charge sheet.

Oversimplification in incentives is endemic and fractal, distorting outomes at every level.

The flaw inherent in all outcomes-based management is that history runs forward, not back. While it seems attractive to manage back from incentives attached to desired outcomes, it can only be done by sleight of hand and optical illusion, as in the alluring but impossible constructions of M.C. Escher. In the real world results are always context-dependent and often hard to measure (over what time frame? At what cost to other parts of the organisation – eg VW?). What’s more, since they are the emergent product of a complex system with lots of moving parts, it’s also near impossible to establish a linear chain of cause and effect. Hence a kind of social science uncertainty principle: the more we know about the outcome the more complex it becomes and the less we are able to attribute it to a particular cause or person. In this situation incentives simply make no sense.

In such a context, the problem is not that incentives don’t work. It’s that they do – just in a way that was entirely foreseen. As systems guru Russ Ackoff never tired of pointing out, organisations being systems, their problems ‘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.’ Incentives are a classic example of treating a part as a whole. Then, like league tables and targets, incentives further step down multidimensional performance into a few simplistic targets. Unfortuately, ‘focusing on a small number of these dimensions as targets directs attention on these at the expense of others of equal importance,’ notes John Kay, ‘The effect of the target is to focus attention on the target rather than its purposes. The target is met; the underlying objective remains elusive.’

But even if incentives didn’t fail conceptually, they don’t work on so many practical, empirical scores that it would be comical if the consequences weren’t so dangerous.

Innumerable studies show that money doesn’t motivate. Incentives based on them doubly don’t motivate, except to make people demand incentives. Their effect is only temporary, so even if they did work they would have to be increased at a prohibitively accelerating rate (which is exactly what has happened to CEO pay) to be any use.

Financial incentives can’t make people cleverer nor (by definition) more ethical. Not only do they not result in better or more work except in the very simplest piecework situations – the relationship is often negative. One powerful reason is hubris: the higher the pay and the incentive, the greater the reinforcement of narcissist and overconfident tendencies, leading to overinvestment particularly in value-destroying mergers and acquisitions (think RBS in the run-up to the Great Financial Crash). As Berkshire Hathaway’s Charlie Munger once put it, ‘II’ve been in the top five per cent of my age cohort all my life in understanding the power of incentives, and all my life I’ve underestimated it. And never a year passes but I get some surprise that pushes my limit a little farther.’ That’s a good reason, says Nicholas Nassim Taleb, author of The Black Swan, for not offering incentives ‘to those who manage risky establishments such as nuclear plants and banks… Society gives its greatest risk-management task to the military, but soldiers don’t get bonuses’.

Despite all the refuting evidence the incentive sledgehammer is still routinely used to bash almost any performance management issue, nut or not. This is partly for self-serving and psychological reasons, but also because incentives are obstinately seen as a technical issue that can be ‘solved’ if only they are done better, whereas in fact the problems are intrinsic to the thing itself. In other words, incentives are the problem, which can therefore only be resolved at a different level.

How? It has been known for aeons that while pay doesn’t motivate, it most reliably demotivates – the most powerful emotions relating to money being anger and anxiety, according to psychologist Adrian Furnham. So the best thing to do is as far as possible to take money off the table, allowing workers to focus on the job rather than the reward and managers to spend their time and energy improving the system rather pacifying the discontented (see Ackoff above). Fire remuneration consultants (another saving) and devise a scheme based on pay ratios, say 50 from top to bottom, that will satisfy the strong human desire for fairness, not to mention the empirical finding that less widely dispersed pay is associated with better performance, and connect the measures they use to purpose – in other words, give them a good job to do. James Treybig, the founder of Tandem Computers in the US, carefully recruited people by attitude with the promise only of a ‘competitive’ reward package on selection. If they insisted on knowing the exact salary they didn’t get the job. If they came for money, reasoned Treybig, they’d leave for it, too.

In a list of warning maxims for management, incentives perfectly illustrate the top two: ‘be careful what you wish for’, and ‘you can’t solve a problem by doing better the thing that was at the root of the problem in the first place’. As Peter Drucker earily used to say, ‘There is nothing so useless as doing efficiently that which should not be done at all.’

I’ve been wrong before – but is management at last moving up the political agenda? The route is roundabout, but it’s slowly dawning on governments and ministers that many of the social and economic problems they are grappling with are micro-economic rather than macro-economic at root – that is, even if the results (inequality, lagging productivity, slow growth) manifest themselves as problems at the national level, those results are the sum of what goes on inside companies. The only levers that can be pulled to affect them are the beliefs, practices and incentives that operate in the workplace. So what happens in the boardroom and on the shop floor, how the company is governed and managed, have direct political ramifications.

A few voices have been have been trying to make such views heard for years. City economist Andrew Smithers, for instance, has made the seemingly obvious point that the motivations of those making resource-allocation decisions within companies have an important bearing on indirect outcomes such as productivity, jobs and income distribution. In The Road to Recovery he argues that there won’t be one unless the incentives to short-termism of CEOs loaded with stock-options are brought under control.

In a powerful presentation on ‘Reinventing the Corporation’ at the British Academy last year, Colin Mayer, formerly dean of Oxford’s Saïd Business School, noted that ‘it is to the corporation that we should turn for both the source of our prosperity and our impoverishment’, adding: ‘With the emergence of the mindful corporation we could be on the edge of the most remarkable prosperity and creativity in the history of the world. On the other hand we could equally well be at the mercy of corporations that are the seeds of our destruction through growing inequality, poverty and environmental degradation that give rise to social disorder, national conflicts and environmental collapse on scales that are almost impossible to conceive of today. We are therefore on the border between creation and cataclysm, and the corporation is in large part the determinant of which way we will go.’

We might sense a returning echo from that warning in the whiff of fear in the air as today’s elites see the certainties underpinning their comfortable existence of the last few decades crumbling in front of their eyes. ‘As the US has developed a Latin American-style income distribution, its politics have grown infested with Latin American-style populists, of both the left and the right’, Martin Wolf summed up recently in the FT. There is no guarantee that these new populists, not only in the US but also in France, Spain, the UK, Greece and others, will be as compliantly ‘business-friendly’ as their predecessors; hence the need to head them off becomes a priority.

All of which brings the company squarely into the political firing line. Of seven steps Wolf listed for bringing elites back in touch with the masses they have left behind, no less than four involve the company, how it works and is regulated. First, curbs on the financial sector, whose vast expansion has not brought commensurate improvements in the rest of the economy (rather the reverse: the financial sector’s gain has been the rest of the economy’s loss); ‘ruthless’ competition policy to deal with ‘too big to fail’ and corporate rent-seeking; nailing corporate tax, which also means addressing issues of wider corporate responsibility and legitimacy; and finally, challenging the doctrine of shareholder primacy – ‘shareholders enjoy the great privilege of limited liability. With their risks capped, their control rights should be practically curbed in favour of those more exposed to the risks in the company, such as long-serving employees’.

Taken together with the wave of reform initiatives (in its broadest sense) that have sprung up around the world – the Purpose of the Corporation Project, Coalition for Inclusive Capitalism, Conscious Capitalism, benefit and b-corporations, the Management Innovation eXchange, the Global Peter Drucker Forum – Wolf’s list signals something important. All are a belated stirring of human agency – we are not drones in a technocratic economic machine with immutable laws and but have choices, including over the purpose and governance of companies that we work in, that we want to exercise. They reflect perhaps a greater appetite for change now than at any time for the last 40 years.

That doesn’t mean we’ll get it – it doesn’t help that politicians are dismally, diametrically wrong about management, micro-managing and laying down the law where they have no business to (method), and treating the big issues of purpose and governance, their proper domain, as givens that are undiscussable. The stakes couldn’t be much higher, with economists warning of a combustible conjunction of global economic slowdown, rapid population growth, climate change and resource shortages, and not least a wave of geo-political instability such that ‘the world has never been a more dangerous place’, in the view of one US military high-up. Two things at least are clear. The first is that, echoing Mayer, the corporation is a key determinant of whether the future is ‘creation or cataclysm’. The second, following from the first, is that for management too this is a defining moment.

My new piece on ‘the purpose of purpose’ for FT Business Education is online here

With nice irony, the release at the end of the month of The Big Short, the movie version of the 2010 book of the same name by Michael Lewis (still the best piece of sustained financial journalism that I have read) coincides with the news that the Financial Conduct Authority is shelving the enquiry into banking culture which was a substantial plank of its planned work.

The film is smart, quirky and acted with acerbic humour by the actors playing the handful of geeks and oddballs who almost incredulously, and with much uncertainty, in the run up to the crash found themselves alone betting against the whole of Wall Street (before, too late, the latter changed its mind), and indeed the entire US economy, in the financial play of the title. The film, like the book, leaves no doubt that the cause of the financial nightmare of 2008 – entailing an estimated $12tr in financial losses, together with 8m jobs and 6m homes in the US alone – was not abstract economic forces, but decisions informed by the banking culture that is even now being eased off the hook: a systemic culture so corrupt and multiply conflicted that the actors embedded in it ended up by comprehensively deceiving themselves (as Lewis noted of Howie Hubler, a Morgan Stanley bond trader who ran up losses of $9bn, the single largest loss in Wall Street history, ‘he was smart enough to be cynical about his market, but not smart enough to realise how cynical he needed to be’).

The story has lost none of its ability to amaze and appal in the intervening years. It builds from the inkling of a handful of investment contrarians that there’s something not right about the US housing boom of the early 2000s. If that is the case, then not only they shouldn’t be investing in anything to do with it, they should be betting against it. What they discover, piece by piece, with mounting disbelief, is a system in which a grotesquely deformed housing tail has ended up wagging the entire Wall Street dog, now blindly lashed to what is destined to be its own Doomsday machine. As Citigroup’s Chuck Prince’s memorably told the FT in 2007, ‘As long as the music is playing, you’ve got to get up and dance. We’re still dancing.’ The bricks and mortar of US dwellings, the outsiders begin to see, are the tiny fulcrum on which is erected a towering superstructure of ‘mortgage-backed’ derivative investment vehicles: first mortgage bonds and then increasingly abstruse collateralised debt obligations, or CDOs, which aggregate tranches of many individual bonds into a new derivative investment vehicle, and so on almost to infinity.

What they uncover is in effect a giant Ponzi scheme driven by wishful thinking based on one critical assumption, which falsifies everything else. With every addition to the gleaming edifice, the towers of debt become more unstable, but the consequences are so remote from the original action that no one connects the dots. The critical assumption, glaringly obvious in retrospect but long unquestioned by anyone in the chain, is that the instruments that compose the debt towers are creditworthy. Staggeringly, no one vets the quality of the mortgages at the bottom of the pile. On the basis that mortgage bonds are diversified assets (in all history it had never happened that mortgages had gone bad in all parts of the country at the same time), the rating agencies, Standard and Poor’s and Moody’s, classify them as investment grade. On the same grounds, CDOs backed by the mortgage bonds are rated triple-A or double-A, even though they are composed of sub-prime loans to people who will never repay them. Confronted in the film on this blatant credit laundering, a rating-agency official replies simply: ‘We’re competing with the other guys. If we don’t give the originator their double-A rating, they’ll just go up the road.’

For the bloody-minded loners sitting on the knowledge of this gross mispricing of risk, the frustration is that they have no direct way to profit from it. Then one has the bright idea of persuading a Wall Street bank to sell him another derivative – a credit default swap, or CDS – which is in effect an insurance policy against a CDO, paying out if that instrument fails. No one on Wall Street believes that’s possible (‘they’re triple-A, aren’t they?’), so CDSs are sold with gusto; and then combined into so-called ‘synthetic’ vehicles so opaque that it’s near impossible to work out which side of the bargain holders are… Some investment banks are later found to have been selling investments that they know to be junk to gullible clients (‘dumb Germans’ or ‘Korean farmers’) with the sole intention of using these arcane instruments to bet against against them.

In the end, it turns out that all the quants and super-managers on the Street are ‘far less capable of grasping basic truths in the heart of the US financial system than the film’s oddball heroes, one of them ‘a one-eyed money manager with Asperger’s’, and two or three other equally obstinate and persistent outsiders. (One of the sobering lessons of the episode is just how much obstinacy and persistence it takes to stand out against such powerfully self-reinforcing groupthink.) But when in 2008, as the short four predict, the sub-prime loans go bad and the CDOs fail, they take first Bear Stearns and then Lehman Brothers donw with them. Many others would have followed, including the giant insurer AIG which was the counterparty to many of the CDSs in play, but for the bailouts which transferred trillions of dollars of liability to taxpayers on both sides of the Atlantic.

Here perhaps lies the truly chilling explanation of the failure of the authorities to allow the the banks to reap the just rewards of their own venal stupidity and go bust under the weight of their colossal debts and ‘troubled assets’: what terrified them was not the direct costs of institutional failure but the prospect that the collapse would trigger a tsunami of payouts on the unquantifiable trillions-worth of CDSs that had been taken out against them. It wasn’t the size of the banks themselves that made them too big to fail, but the number and magnitude of the side bets laid on them. The casino managers didn’t even know the odds on the vast wagers they were taking.

Seven years on from the crisis, the film warns, the banking culture that produced it is still intact. A short-term, hire-and-fire culture in which the only motivator is money. ‘When you can be out of the door in five minutes, your horizon becomes five minutes,’ one City worker told a journalist. Where the traders who earned millions, sometimes hundreds of millions, screwing their customers have kept their gains. Where those who caused the disaster are now advising governments to get off their backs, and regulators such as the FCA are accordingly scaling back their attempts diminish the chances of the same thing happening again.

Meanwhile, the unreformed ratings agencies are still being paid by those whose products they rate.

CDOs are being marketed again.

Happy New Year.