‘Who cares about bloody management?’ asked the late Felix Dennis in exasperation. Many if not most people would doubtless nod in heartfelt agreement.

Yet there are powerful reasons why bloody management matters – and why you should care about it a lot more than you think.

First, we have to agree that management is necessary, a technology that makes possible things that we couldn’t do or want to do without – hospitals, transport, the World Cup, for example. In reality we don’t live in the atomised market economy beloved of the economists but an organisational economy in which large companies are the prime movers. Pace Adam Smith, our dinner arrives on the table not courtesy of the individual butcher, brewer and baker but of Tesco, Sainsbury and other management-intensive large firms, the marshalling yards of the economy, in Sumantra Ghoshal’s felicitous phrase. As the social technology of collective human achievement, management, as Peter Drucker put it, is society’s unseen central resource, and a modern developed economy is unthinkable without it. As he also remarked, it is what made the 20th century possible.

Purely physical technologies are neutral. A hammer, a wheel or a semiconductor isn’t good or bad in itself. It can be used for ends that are productive or non-productive, bad or good. In terms of use, management is similar, in that it can be employed alike for criminal or murderous intent – as in the Mafia or concentration camps – for blameless, life-enhancing ones such as charity or medicine.

But in another crucial sense management isn’t neutral at all. Management can be bad or good, in both senses of those words. Many technologies don’t come with a choice – a wheel is round, a hammer has a weight at one end, a semiconductor is the product of the physical properties of its materials. But the means management uses aren’t fixed. Unlike a wheel, management depends on its founding assumptions, and these can evolve. So can management styles. Today’s management isn’t god-given or inevitable, and nor is tomorrow’s. We can change it, and how we choose to do that matters profoundly. It will decide if management is a force for good or a force for bad.

As I suggested in my last article, management is the difference between an NHS (and other public services) that works and one that doesn’t. The financial crash of 2008 wasn’t caused by impersonal financial flows but by faulty management decisions made in boardrooms and offices on Wall Street and in the City of London. Ongoing scandals like Libor that still rumble around the international finance system like distant thunder were man- (or management) made in the same places. The way line managers manage is overwhelmingly responsible for the dismally low levels of employee engagement everywhere. According to the latest Gallup State of the Global Workforce survey, just 13 per cent of employees come to work each day emotionally invested in the organisation and focused on doing a good job, about half the proportion that is negative and potentially hostile. That leads the Drucker Society’s Richard Straub to suggest that what the world economy needs now is not more economic stimulus but a ‘Great Transformation’ of management that would not only add percentage points to world GDP but also reorient that growth towards sustainability. We could manage our way to prosperity.

Within Dennis’ expostulation, though, lies a powerful insight: it’s bad management that is bloody. Management only matters in use, as a means to an end. Management for management’s sake is meaningless. So the less of it the better. Good management is simple. Dennis mostly got it right, so he didn’t need to fret about it. In his influential Good to Great, Jim Collins found that companies on the way up paid ‘scant attention to managing change, motivating people or creating alignment’. They didn’t even worry much about pay. They didn’t need to, because their people were focused on doing a good job. This could be called management by getting out of the way – the opposite of the situation lamented by Drucker, where ‘so much of management consists of making it difficult for people to work’. Conversely management burgeons as managers struggle to do the wrong thing righter. For example, targets proliferate to get people to focus on parts of the job that other targets made them ignore. As Collins noted, ‘the purpose of bureaucracy is to compensate for incompetence and lack of discipline – a problem that goes away if you have the right people in the first place.’

In that sense, the crushing burden of today’s management is faithful testimony to its wrongness. But incompetence is not the worst danger that ‘bad’ management represents. Today’s management is ideological, not scientific, and running through it like the lettering in a stick of rock is a reductive, self-interested view of human nature in which people need to be bribed, whipped and constantly supervised to do their jobs. The danger is that these assumptions are self-fulfilling. People treated as untrustworthy do their best to escape supervision, thus justifying (in the negative view) more and tighter surveillance. Chief executives taught that they require incentives to perform are only too happy to believe it (greed is good!) and demand them in ever greater quantity. To put it brutally, today’s management moulds human nature after its own shrivelled, grasping image – a caricature of human potential.

The reverse is also true. Trust tends to breed trustworthy behaviour as well as greater engagement, and high-trust, high-engagement organisations by definition need fewer rules and regulations and less machinery of compliance – less management, in fact. That also means less cost. So ‘good’ management pays off twice: the first time by being more productive, and the second by reaffirming the positive, affirmative side of human nature. It is literally a force for good.

So sorry, Felix, this time you’re wrong. Everyone needs to care about bloody management. The future of the planet may depend on it.

How about a good news story about the NHS?

In 2008, the acute stroke unit at Plymouth’s Derriford Hospital was under as much pressure as its patients. It was bottom of the regional mortality table, the experience for both patients and relatives was poor, and every patient it treated was costing £2,000 more than it got back in payments. That added up to a deficit of more than £1m a year.

Yet while stroke was under scrutiny, there was no prospect of extra money for more beds. Counterintuitively, that was the best thing that could have happened. If money had been on the table, Plymouth neurologist and stroke specialist Steve Allder, the only person who believed that improvement was possible without spending any, would never have had the chance to put his ideas to the test.

Less than 12 months later, Allder was proved right and everyone else wrong. Plymouth now sat near the top of the mortality table. The patient experience was dramatically better. Quality was up. Yet far from increasing, the number of acute and rehab beds had fallen from 56 to 39. And instead of making a loss, the unit was now in surplus as the cost of (much superior) treatment was halved.

This transformation so flatly contradicts the universally accepted NHS narrative that less money equals worse service that it is hard to believe. Where could such a result have come from? The answer is simple: a different way of thinking.

This is the starkest illustration I know of something that politicians, and most other people, criminally ignore – the extraordinary leverage of management, for both good and ill. Viewed through the lens of conventional management, the NHS, and public services generally, are doomed to penny-pinching mediocrity as ever-increasing demand hits finite or diminishing resources. But under another lens a very different reality comes to light. Underlying demand is not going up – indeed, it is both predictable and stable. And while there is indeed a resource crisis, it is about the way resources are deployed, not the amount. There is scope for improvement; there is hope!

When Allder studied Plymouth stroke patterns, he found that Derriford predictably and regularly admitted 1.5 stroke sufferers a day. Much more variable was patient length of stay, which when analysed revealed that by far the greatest resource – 75 per cent of bed days – was absorbed by a small number of already frail people, suffering from massive strokes from which they were unlikely to recover. They (and their relatives) were also least well served by the existing system, often kept tenuously alive only to prolong agony and distress. The answer was to redesign the pathway for this group to accord with their and their families’ wishes, and to be more proactive with other groups – systematically ensuring that those who could benefit from rehab got it, for example. The result: the blockages caused by the long-stay group were resorbed, more patients could be seen in timely fashion, and the perceived need for extra beds went away.

Looking at the rest of the hospital, Allder found exactly the same patterns for other conditions: stroke was a microcosm of the whole. The consultancy Vanguard, which has been working in the NHS for the last three years, would go further and say that the same things are true of the NHS as a whole. That is, overall demand over the system is stable, a disproportionate amount of resource is absorbed by a small proportion of intensive users, and understanding the pattern of demand is the key to the Rubik’s cube of reconfiguring resources for permanently better and cheaper results.

Why is this evident in one optic yet invisible in the other? Back to Allder. He explains that the current stroke regime has more than 120 quality measures; when problems arise, they are addressed successively, in isolation. ‘After you’ve done six, there’s no money left, everyone’s exhausted and nothing has changed.’ At a more abstract level, conventional managers view a hospital as an asset to be sweated like any other kind of plant. They aim for efficiency through economies of scale, leading them to develop functional designs that use cheaper resources for simpler activities which they then run for high utilisation and low unit costs.

Unfortunately, as W. Edwards Deming taught many years ago, you can’t optimise the whole by optimising the parts. The first complication, notes Vanguard’s health lead Andy Brogan, is that fragmenting the world and running it for productivity makes for complicated governance and accounting across functional jurisdictions as each seeks to optimise and defend its own domain.

Second, it assumes that lower unit costs (making an appointment, seeing a nurse, doing an assessment) equates to lower overall costs. This is a fundamental error. It blinds managers to the fact that not all demand is equal. Much of it consists of what Vanguard terms ‘failure demand’, that is knock-on demand created by the failure to do something or do something right the first time – repeated appointments, referrals and assessments, people shuttling between A&E and GP surgeries to get their problems fixed. Failure demand accounts for all the apparent demand increase in health and many other public services, and often an enormous proportion of the total – up to 80 per cent in the NHS, Vanguard estimates.

Failure demand explains why lower unit costs don’t result in lower overall costs. Standardised services can’t meet the variety of need, and however cheap are a false economy – they end up increasing cost. Failure demands explains why organisations can be simultaneously frantically busy and highly ineffective. As Brogan puts it: ‘We can solve the wrong problems until we’re blue in the face, or we can get under the skin of what demand is, how we can create value for people, and what expertise we need to do it’.

Pause to consider the implications here. The measures that managers use to run critical environments like hospitals not only do not tell them the things that really matter, like quality and value to the patient, they actively mislead. So they don’t see that the effect of the focus on efficiency and productivity is to create more failure demand faster. In other words, not only are they not improving things, across the health system they are making them worse. Here is the explanation of the damning finding that with all the money spent on it NHS productivity, like that of the public sector in general, is actually going down. We have designed organisations that not only don’t know how bad they are, they don’t know that they don’t know it.

So what is the lens that makes this dynamic visible and in so doing opens up the organisation to change? In this case it is an approach to service organisation developed and honed by Vanguard over the last over 30 years that treats the organisation not as a collection of parts but as a whole system.

For practical purposes it starts with a definition of purpose from the point of view of the citizen or user – for stroke victims, timely and accurate diagnosis and treatment, safe recovery and earliest return home. It then asks how well the system meets the purpose (usually, as with the stroke unit, no one knows, because the measures in use have no relation to purpose). Then, having deconstructed the work to see what contributes to purpose and what doesn’t (usually a lot), it reconfigures resources predictably and reliably to meet the demand. As the organisation gets more closely aligned with purpose, costs drop out of the system in the form of less wasted effort and above all reduced failure demand – although crucially how much is impossible to specify in advance because cost-reduction is a side-effect of doing something better, not an end in itself.

While none of this is hard to comprehend, the challenge is putting it into practice. Although redesigning a medical pathway is in itself non-trivial, the issues are not primarily technical. One factor is the cross-functional governance issue described by Brogan. More challenging yet, the cheerful landscape projected through the new lens is so unfamiliar and disconcerting that ironically people are frequently more sceptical of it than of the familiar topography of failure.

Precisely because the approach is conceptually simple, it’s easy for senior managers used to dealing in top-down abstractions not to ‘get’ its full import. Understanding that there is a dynamic between purpose, measures and demand is one thing; realising that accepting it means rejecting all previous management certainties (economies of scale, standardisation, targets, conventional performance management, outsourcing…) is quite another. As Brogan notes, a niche for it can’t be found in the existing management worldview – it replaces it with a different one. Allder acknowledges: ‘At the start I thought I was doing a bit of improvement. As it went on I realised that it was an entirely different strategy.’

This is not a fad. In effect, a new management paradigm is struggling to be born. The infant is undeniably vulnerable to changing circumstances and personnel – Allder recounts that after the last election, promising initiatives at Plymouth were cut short when money became available for easier management options, while managers appointed to ‘get a grip’ often do so literally, reverting to default postures of top-down control and short-term cost-cutting that are incompatible with the new approach.

On the other hand the personal ratchet goes one way: for those who get it, there is no going back. This is why eventually a tipping point will come. The old ways are no longer affordable and, if painfully slowly, confidence that there is a better alternative is growing. ‘It’s a call to action,’ says Allder. ‘The potential for improvement using these methods is fantastic. Across conditions 40 per cent of our cash goes on long-stay emergency in-patients. I have no doubt that adopting a similar study for each condition we could do it 50 per cent better and cheaper.’

Read my article ‘Well done – you’re fired’ for the Foundation here

‘Prison governors have been ordered to cut the cost of holding inmates in England’s bulging jails by £149m a year, as part of a radical programme designed to slash the costs of incarceration by £2,200 a year per prison place’, reported The Guardian recently. The ‘savings’ were to be found through economies of scale (closing smaller prisons and building bigger ones), replacing prison staff with CTV cameras, and an enforced ‘benchmarking exercise’ designed to drive prisoner costs in higher-cost jails down to the level of the lowest. Meanwhile, the justice secretary has responded to two cases of high-profile prisoners absconding from open jails by tightening the licensing and temporary release rules.

Taken together, these are among the most depressing pieces of news in the last six months. They are a veritable compendium of stock management responses and assumptions (size, cost, technology, control), all of which are misleading, counterproductive or wrong. They’re back to front, stating the answers before the question. It’s management on auto-pilot, without thinking or learning, a continuation of the policies that have seen the prison population double to 85,000 since the 1990s, thus causing the cost explosion that the current initiative is supposed to mitigate, only on steroids.

These are the same outdated industrial strategies, born in the mass-production factories of the mid-20th century, that continue to wreak havoc across the NHS and the rest of the public sector. The benefits of scale are always overestimated, partly because the wrong things are being measured, and the diseconomies ignored, for the same reason; managing cost always raises cost because it starts from the wrong end – lower costs are the earned consequence of redesigning the system to work better; technology is invariably used to do things that should be done by humans and vice versa; tighter controls focus on doing the wrong thing better at the expense of doing the right thing. It’s a locked-and-bolted certainty is that as with A&E units or local authority benefits offices, the remedy will make things worse and more expensive.

Starting with cost per prisoner year is a classic case of management being led astray by an irrelevant measure – one that calculates activity cost but gives no indication of how well the system is performing overall against its purpose. Only measures related to purpose are any use to anyone, whether politicians or managers, trying to figure out how to do things better.

Let’s assume for argument’s sake that the purpose of prison is to protect communities and enable the maximum number of people to live stable lives. In that case, even a cost per prisoner year of zero would be a false economy if achieving it means putting offenders in larger prisons which have higher reoffending, suicide and self-harm rates than smaller local establishments where the offender can stay in touch with their family, friends and local services and thus stands a better chance of reintegration into the community when they come out. Larger prisons, such as Oakwood, the G4S-run jail that sets the cost benchmark, are often drug-ridden, impersonal, violent and hard to control, making them perfect academies for criminals and breeding-grounds for addictions and dependencies that pass on massive costs to other public agencies.

Consider the prison population (‘demand’) as a three-tiered triangle of which the apex comprises a small minority of unreconstructed serial offenders who absorb the bulk of the prison resource. At the bottom (the biggest section) are those who are in prison through bad luck, temporary misfortune or because their lives have fallen into chaos. In the middle are prison’s ‘floating voters’, offenders who could go either way: either joining the ranks of the hard cases or with a bit of help getting their lives back on track so that they can rejoin society without endangering themselves or their communities.

Since between 50,000 and 70,000 offenders rejoin society every year (it’s self-evidently too expensive to keep them in for ever), the effects of being locked up really matter. In all three categories, the only conclusion is that traditional prison does a terrible job – not just wasting resources, actually exacerbating the problems it was meant to solve. Recidivism statistics suggest that prison creates more violence than it prevents. Hardened criminals get harder and more prolific (hello, Skullcracker). Prison is poor at deterring or rehabilitating – nearly half of those who leave are back behind bars within 12 months, more in the case of those on shorter sentences, and, shockingly, three-quarters in the case of young offenders. As for the lowest-level demand, much of it occurs because, as with A&E departments, prisons are a plughole of last resort, the recipient of all the miscellaneous problem demand which has nowhere else to go. Most offenders in this category suffer from problems that prisons aren’t designed or equipped to solve – very few don’t suffer from one of mental, learning or other disability, drug or alcohol dependency, homelessness or unemployment or a combination of the above. They shouldn’t be there at all.

From all this it’s fairly obvious that the current prison cost-cutting exercise is an irrelevant response to the wrong problem. Crime prevention and treatment cries aloud for the kind of holistic, locality-based approaches to social policy issues that are being tried out with promising results by councils such as Stoke, Bromsgrove and Camden, along with many other agencies in the public sector. In the US, in the rare places where such therapeutic initiatives have been applied, they predictably end up saving many times their cost, by reducing overall demand. The best rehabilitation programme? Prison degree courses, which have been ‘shown to be 100 per cent effective for years or decades at a time in preventing recidivism’. Gardening also shows promising results. As for prisons, it’s amazing that we tolerate the continued existence of institutions with such a grotesque and expensive failure rate – literally throwing good money after bad. As a US professor of psychiatry puts it, in time ‘prisons will come to be seen as a well-meaning experiment that failed, rather like the use of leeches in medicine.’ But no politician would dare to say that.

It’s simple. There is only one question that MPs needed to ask Pfizer’s Ian Read, or any other CEO pursuing a takeover of national size and scope: to what or to whom is your primary obligation as CEO?

Read would have probably said something like ‘building shareholder value by delivering innovative and life-improving therapies’. In its 2013 annual review, Pfizer states its mission as ‘to be the premier innovative biopharmaceutical company’, its four strategic imperatives being to ‘innovate and lead’, ‘maximise value,’ ‘earn greater respect’, and ‘own its own culture’.

The honest answer, however, is ‘maximising value for shareholders’. That is what most directors (including AZ’s) believe and governance codes suggest. And it’s certainly the story that Pfizer’s figures tell. In his letter to investors, Read boasts of handing them nearly $23bn in share buybacks and dividends in 2013, bringing their total cash returns over the last three years to $53bn. Not worth a mention is that that was more than double Pfizer’s R&D budget of $22.8bn and comfortably exceeded its entire net profit for the period – an omission that is as eloquent about the company’s priorities as the numbers.

If shareholders rule, by definition commitments managers give to anyone else aren’t worth a packet of aspirin. But this is just one of the toxic consequences of shareholder primacy that the Pfizer episode points up. Shareholder primacy combined with a fierce market for corporate control, another essential element in Anglo-US governance, results in ‘institutionalised short-termism’, as John Plender put it in the FT, which favours buying and selling over the harder work of boosting shareholder returns through organic growth. ‘Big pharma is no longer in the innovation business, using its own resources to fund the high-risk ideas,’ says Sussex University’s Mariana Mazzucato. It prefers to concentrate on near-term development and rely on small biotech labs and publicly-funded academic research to do the front-edge work. Cutting research overheads and taking advantage of the UK’s lenient tax rates to benefit shareholders (executives prominent among them) is transparently what the AstraZeneca deal was about. This is tantamount to socialising risk and privatising reward, Mazzucato argues – nor much different from the banks.

There are three mighty ironies here. In the aggregate, investors in whose name executives claim to act do not benefit from a shareholder-first regime. Former dean of Toronto’s Rotman School of Management Roger Martin has calculated that shareholder returns from 1977, the beginning of the shareholder value era, to 2010 were lower than in the period from 1933 to 1976 when managers were supposedly empire-building to feather their own nests. The only ones who do consistently gain are short-term opportunistic shareholders like hedge funds – and top executives. Here again, Pfizer is an exemplar.

Its current market capitalisation of $185bn is considerably less than the $240bn it has spent in the last 15 years on three large acquisitions. So it has destroyed shareholder value. But it’s not executives who pay the bill. In 2013 the six top managers listed in Pfizer’s proxy statement to the SEC took home $52m between them, more than half in stock. Their average salary of $8.6m is 112 times the Pfizer average and 309 times that of the company’s lowest-paid workers. This is another consequence of shareholder first: the perverse management incentives it generates are the engine of inequality, the wedge pushing top salaries ever up and wages at the bottom ever down. Here is a perfect illustration of the rise of the Thomas Piketty’s corporate ‘super-managers’, at the direct expense of their underlings’ pay and pensions.

The second irony in shareholder primacy is that as well as not working very well it is factually wrong: a fraud based on a myth. ‘Corporate law does not, and never has, required directors of public corporations to maximise shareholder value,’ writes Lynn Stout, distinguished professor of corporate law at Cornell University, in her critique, The Myth of Shareholder Value. ‘Second, closer inspection of the economic structure of public corporations reveals that shareholders are neither owners, nor principals, nor residual claimants. Third, the empirical evidence does not provide clear support for the proposition that shareholder primacy rules produce superior results. Indeed, once we shift our focus from the performance of individual firms to the performance of the corporate sector as a whole, it suggests the opposite’.

In explanation, Stout notes that the theory came out of business schools and economics departments in the 1970s which had little regard for legal niceties; she attributes its enthusiastic uptake to its undoubted appeal to the two powerful interest groups that have monopolised the benefits, corporate managers and short-term shareholders, as well as to free-market ideologues. It has now congealed into an article of faith as impervious to questioning or doubt as any tenet of fundamentalist religion.

The third irony, of course, is that AZ uses exactly the same unreconstructed shareholder discourse as Pfizer, which is why it was vulnerable in the first place.

The implications for any such monstrous tie-up should be clear. A shareholder-value-driven entity of this size of Pfizer and AZ is too big and powerful not to have huge public-interest implications – and the public interest would be to ban it on those grounds alone. It would be too big to fail, and have every incentive to exploit that moral hazard for its shareholders. As the FT’s Martin Wolf decisively noted, the fate of such mergers should not be decided by shareholders, many of whom (as in the Cadbury-Kraft case) have no long-term interest in the company, but by the board in the interests of the company as a whole. Never trust a manager who is driven by shareholder value.

Read my 19 May 2014 Guardian Comment is Free piece on mis-selling here

Read my article in FT Business Education 12 May 2014 here

Thomas Piketty’s magnum opus Capital in the 21st Century, with its charge that inequality in much of the Western world is reaching Victorian levels, has rightly pushed the subject to the top of the political agenda. Coincidentally with the publication of a discussion note by the IMF showing that reducing inequality not only doesn’t harm economic growth but indirectly encourages it, it puts a premium on urgently finding means of shrinking the gap.

Piketty proposes draconian taxes, including a wealth tax, a remedy that, as even the author concedes, tests to the limit the bounds of political feasibility. But an alternative to redistribution would be to start at the other end: by modifying the way the market generates inequality in the first place. That would have to pass by way of modernising corporate governance.

One of the differences between today and other periods of great inequality, such as the late 19th century, is the striking preponderance (60 to 70 per cent of the total) of corporate executives, or ‘supermanagers’, as Piketty calls them, among the new 1 per cent. This is a new phenomenon. Only since the late 1970s, when the staggering surge in executive pay levels began, has it been possible to get seriously rich by managing large established corporations. US CEO pay is now 331 times as much as the average American’s $35,000 a year and 774 times as much as the minimum wage.

Driving this rise is partly what Piketty dubs ‘meritocratic extremism’, a competition for wealth and status in which executives see themselves as hard done by (yes, you read that right) in comparison with those who inherit. Why should real wealth would be the sole preserve of the already capital-rich, they argue. Rewarding talent and energy rather than birth, stratospheric pay is in their view an aid to rather than an offence against social justice.

Piketty is right to retort that current pay levels have little to do with managerial merit (most large companies grow at roughly the same rate as the economy) and are a product of a tacit collusion between executives and boards, and boards and shareholders.

But we can go further. It is no coincidence that pay escalation began in the 1970s. In fact, we can date it even more precisely than that. As no less than McKinsey’s global managing director, Dominic Barton, told a US journalist recently, the moment Western capitalism started veering off the rails was 1970, when Milton Friedman famously declared that ‘the business of business is business’ and the only duty of the chief executive was to maximise value for shareholders.

That subsequently triggered the ‘revolution in management pay’ that Andrew Smithers describes in his recent book The Road to Recovery (more here). It consisted in devising schemes that incentivised managers to focus on shareholder value by paying them in shares and options, which now make up 83 per cent of total US top management pay. Friedman’s programme, as later developed by Harvard’s Michael Jensen and James Meckling and Chicago’s finest, has since then wormed its way into every interstice of the management edifice, including formal governance codes, to the point where it, and the assumptions that it is based on, are not only unchallenged but have become completely invisible.

Yet, as speakers unanimously agreed at a Brussels conference of legal and management heavyweights in February, all the taken-for-granted assumptions that underpin the cult of shareholder primacy and rewards for managers based on it are false. In law shareholders don’t own companies, which are separate ‘legal persons’; shareholders aren’t principals, and executors and directors are not their agents; directors’ duty being to the company itself, there is no fiduciary obligation to maximise shareholder returns; most shareholders are secondary investors (or just punters) and don’t provide capital for firms, and in any case in recent years the function of stock markets has been to extract capital via share buybacks rather than raise it. Finally, evidence is stacking up that shareholders have done worse under the shareholder primacy regime than they did in the postwar period when managers were less well paid and considered their job to be to satisfy the claims of all their stakeholders. Because of managers’ ever shorter time-frames (CEO tenure in the US is now down to four years), the attempt to align their interests with those of shareholders has had the opposite effect to the one intended, driving a wedge between them and investors who are in it for the long term.

The cost of un-mooring executives from the fortunes of their co-workers and those of society as a whole and attaching them instead to those of remote shareholders is incalculable, and we are still paying the price. The link with shareholder value is the hidden ratchet that continues to polarise incomes by pulling executive pay upward while forcing the pay of other ranks down. This is what it is designed to do, and Vince Cable’s pleas for restraint are so much whistling in the wind so long as it is left in place. Conversely, though, snapping the link at a stroke pulls the rug from under any need to maintain such discrepancies. There is no intellectual or empirical justification for paying a chief executive 331 times more than the average, nor is it an inevitable outcome of economic determinism: it is a declaration of ideology, pure and simple.

The question of great inherited wealth, sometimes amassed by dubious means (as Balzac, one of capitalism’s sharpest observers and much quoted by Piketty, unequivocally wrote, ‘The secret of great wealth with no obvious cause is a forgotten crime’), is another matter, in which redistribution no doubt will have a role to play. But regrounding executives in their own companies to cut pay differentials would be a huge and relatively painless first step towards a more equal society. As the Brussels conference heard, that wouldn’t even need a law change (it’s today’s received wisdom that has got it diametrically wrong), although it would require a rewrite of the governance codes. But at a time when at least some of those who have gained most from it are beginning to query the shareholder value doctrine (‘Shareholder value is the dumbest thing in the world,’ famously declared GE’s own arch-supermanager Jack Welch a year or two ago), along with McKinsey’s Barton and many of the most thoughtful business school gurus, politicians should should not hesitate to push at a door that is already cautiously ajar. Reducing income inequality at source would make capitalism work better by marrying market dynamism ‘to a sense of shared purpose and achievement’, to quote the FT‘s Martin Wolf, promote social cohesion and at the same time nip in the bud the growing danger of a politics in total thrall to corporate wealth and power. There are simply no arguments against it.

‘Management’, economist Andrew Smithers told the FT’s Martin Wolf over lunch recently, ‘is not an intellectually satisfying occupation. It consists of telling people things that you’re not sure about and they don’t want to hear. So I’ve been much, much happier since I ran my own business and so can do what I want intellectually.’

Smithers runs an eponymous boutique advisory firm in the City, and his agreeable scepticism about management at the personal level carries over into his professional analysis of its role in the economy as a whole.

To be blunt, Smithers believes that most economists, in love with mathematically modellable theory, have got the real economy dramatically wrong. There is no mystery about the snail-like recovery from recession, puzzlingly lagging company investment and productivity, and higher than predicted inflation, he says. The recession is structural, not cyclical, and it is caused by changed management behaviour brought about by bonuses and incentives.

The argument is straightforward and compelling, and as outlined at a recent seminar at the High Pay Centre (more fully developed in a book entitled The Road to Recovery) goes like this.

Over the last 20 years there has been a revolution in management pay in the US and UK. As we know, total pay has soared. It has also shifted from being mainly salaries to being mainly bonuses (83 per cent of the total in the US), the aim being to align the interests of managers with those of shareholders.

As intended, the incentives have sharply changed managers’ behaviour. Unfortunately, their effect has been to align the interests of managers not with those of long-term investors but predatory and ultra short-term shareholders such as hedge funds and private equity.

‘These incentives came out of business schools, whose understanding of options theory evidently wasn’t very good,’ notes Smithers briskly. ‘Options depend on volatility. So they don’t do what they were designed to do and are damaging for the economy as a whole.’

Under the changed pay dispensation, the key risk for managers is not getting huge bonuses in the short period (currently around four years) of their tenure. The easiest way to combat this risk is to engineer sharp rises in return on equity (RoE) and earnings per share (EPS), or shareholder value for short, by jacking up short-term profit margins and buying back shares. That of course risks undermining their companies by making them uncompetitive compared with rivals which do continue to invest for the longer term. Significantly, private companies, where the incentives are weaker, are investing at twice the rate of quoted ones, according to research.

As Smithers shows with a huge assemblage of charts and graphs (be warned: his book although fascinating is not an easy read), this is exactly what is happening. In the US and UK companies are awash with cash and business investment has collapsed. At the same time, companies on both sides of the Atlantic are now buying back their own shares at the ‘astonishingly high’ rate of 2-3 per cent of GDP.

Viewed through the Smithers’ lens, conundrums that currently stump orthodox economists – the tardiness and timidity of the recovery, the failure of quantitative easing to spur investment, and declining labour productivity – suddenly come into sharp focus.

Although the cost of capital is currently negligible, with near-zero interest rates and sky-high equity prices, ‘if management’s perception of the cost of capital is the cost of not buying back their own shares, then, of course, there is a large wedge between the perceived cost of capital to management and the real cost of capital to companies’. So QE has no effect on investment.

Meanwhile, the changed management behaviour also makes the disappointing productivity performance suddenly ‘highly explicable’. Because managers don’t want to invest in plant and equipment, which would drag down RoE and EPS in the short term, to meet any increase in demand they choose to employ more people. But without more capital, diminishing returns to scale push down productivity. QED.

Smithers is of course not the first to point out the problems the bonus culture poses for the economy. His findings chime with similar narratives from one or two other sceptical observers such as Bill Lazonick, who has found that in recent years many large US corporates have been spending more than their total profits on dividends and buybacks, a strategy which he dubs ‘downsize and distribute’ to contrast with the ‘retain and reinvest’ policies that drove allocation before the advent of the shareholder value ideology in the 1980s. Many others, not least the High Pay Centre, have done much to underline the harm that pay inequalities do to society and the fabric of the individual firm

But Smithers’ is the most detailed and thorough assault on the effects of incentives on the economy as a whole. Because orthodox economics ignores these effects, he charges, official forecasts are wronger than they would otherwise be, and economic policies are not only ineffective, they make the achievement of non-inflationary deficit reduction, and hence sustainable growth, much more difficult. Smithers is the first mainstream economist to say it straight out: dismantling the bonus culture that governs managers’ investment decisions is the single most important task facing economic as well as social policymakers in the world today.

McGill University’s Henry Mintzberg has always been the most grounded, empirical and ‘political’ (in the sense of situating business and management within the larger context of society as a whole) of management thinkers. He has written about what managers actually do (react and fire-fight mostly), the nature of strategy (emergent) and the effect (harmful) of conventional MBA courses. He believes unshakably that management is a craft to be learned by doing and careful reflecting, inseparable from its context.

In recent years, Mintzberg has become steadily more disturbed by the direction that both management and business have been taking – the power and arrogance of business, and the greed and indifference to others of too many managers.

These concerns come to full flower, as it were, in his latest work, an ‘e-pamphlet’ entitled Rebalancing Society – radical renewal beyond left, right and center. As the title suggests, it is an urgent call for the Western economies, and particularly the Anglophone ones, to rethink the free-market fundamentalism that is leading them towards a bleak future, if not outright disaster. If the final stage of bondage, he notes, is when people no longer recognize they are slaves, then we are very close to it. We don’t realise how much we are imprisoned by the economic structures and institutions that we have allowed to close in on us over the last half century.

Mintzberg’s counterintuitive central thought, and it’s a persuasive one, is that we have been disastrously misled by the implosion of the Soviet Union and the supposed ‘triumph of capitalism’. What brought down the communist regimes, he argues, was not capitalism but their own massively unbalanced societies. Hopelessly skewed towards the monolithic state sector at the expense of the private and ‘plural’ or civic sectors, the Soviet bloc collapsed under its own dead weight. Unfortunately, tragically taking talk of the end of history (or the ‘end of thinking’, as Mintzberg prefers to call it) at face value, the West has made the reverse mistake of fetishizing the private sector at the expense of government and the plural sector. The result, paradoxically, is exactly the same. As the economist J K Galbraith put it, ‘Under capitalism, man exploits man. Under communism, it’s just the opposite’.

The current imbalance is most extreme in the US. As Mintzberg notes, rebelling against authoritarian rule from Britain, the founding fathers took care to keep their own government in check with an elaborate system of checks and balances. ‘But this had the effect of weakening government overall, in favor of non-state institutions and individuals, especially those with economic wealth. By curbing power in one place, the constitution overconcentrated it in another.’

The balance was then well and truly tipped by the rise of the business corporation. Mintzberg pinpoints the grant of legal ‘personhood’ to corporations in 1886 as the first step on the route to today’s crisis, culminating in the Citizens United ruling of 2010 allowing corporate spending on political advertising. ‘[Personhood] has made all the difference. From the liberties for individuals enshrined in the American constitution sprang [today’s] entitlements for corporations,’ Mintzberg writes. In his landmark study of American society, Democracy in America, Alexis de Toqueville had written that the genius of American society was ‘“self-interest rightly understood”. Now the country finds itself overwhelmed by self-interest fatefully misunderstood’.

Mintzberg has been thinking about all this for years, and it shows. The text is full of nuggets – the hypocrisy of business urging governments to stop meddling in business while it spends ever more energy and time bending government to its views, the paradox of liberty leading to individualism whose externalities, both personal and corporate, overwhelm society and the planet, humans consumed by consumption, the commercial commodification of everything (as corporations become people, people become resources, the withering of the state, irony of ironies, under capitalism rather than Marxism)… There is an adrenaline shot in a sobering list of the social consequences of the Great Imbalance in the US, suggesting that the country is now ‘depreciating socially, and politically, and perhaps economically as well. Yet globally, it still continues to promote successfully the very model that has caused its own troubles domestically.’ There is an excellent, copious bibliography.

Where to look for solutions? Mintzberg is clear that radical renewal will not happen without the eventual participation of government and business: ‘Governments will have to receive clear messages from their citizens, and businesses must reject the objectionable doctrine that they exist for the shareholders alone.’ But being a large part of the current problem, they are too compromised to provide leadership, so much of the initial impetus must come from the plural or civic sector that de Toqueville set so much store by in the 19th century – ie us. Mintzberg insists that the emphasis on social movements to trigger some immediate rebalancing is not a search for an illusory ‘third way’, nor is he anti-business. What is needed is balance and a proper distinction between the three main sectors, none better or worse than the others, each essential in its own place. In this he invites comparison with another important Canadian thinker, the great Jane Jacobs, whose 1992 book Systems of Survival argued similarly for need to understand and respect the moral foundations of politics on one side and commerce on the other, the real disaster, she maintained, being to mix them up.

Mintzberg begins and ends his pamphlet with a quote from Tom Paine’s 1776 pamphlet Common Sense: ‘We have it in our power to begin the world over again’. If that is to happen, Mintzberg is right: the most important word in that sentence is ‘we’.