Category: Uncategorized

Why ‘doing things better’ makes them much, much worse

Meet 90-year-old Tom. Like many who get that far, Tom is beginning to show his age. He doesn’t see or hear too well, and he’s not very dextrous, which makes dressing difficult. But he’s vigorous, independent, full of spirit, and lives for his daily visits to his wife of 70 years, Iris, who went into a home last year with advanced dementia.

One day Tom is admitted to hospital with a suspected stroke. Actually it wasn’t a stroke (but better be on the safe side…). In hospital, Tom is distressed and confused. He can’t see Iris. He’s moved several times, is seen by many different people and can’t make out what busy doctors are telling him. He has difficulty with his clothes. He’s not sure where the loo is but is not very good with the bedpan, spilling some urine and slipping on it and falling. He’s quickly labelled ‘vulnerable’. ‘at risk’ and ‘unsafe for discharge’.

Eventually he does get home. But a few weeks later he is readmitted after a fall because an out-of-hours doctor sees the reference to stroke (better be on the safe side… ).

In most circumstances, Tom’s independence would have ended there. The ‘problem’ (the system’s, not his) would have been resolved with a move into residential care. There, living the life the system prescribed for him, not his own, he would indeed have been depressed and confused. Thus do people become the label the system pins on them.

Fortunately, however, Tom lives in Somerset, where a small integrated team has been piloting a very different approach to the commoditised world of care. Tom is one of the team’s service users, and his carers knew that he wasn’t, at all, a lonely and confused old man who couldn’t cope – he just looked like that because he was out of his normal context.

Having taken the time to understand Tom’s context, the care team discovered that putting his life back in balance, under his own control, was astonishingly simple.

He didn’t need a local authority ‘package of care’ for dressing or meals, still less a place in a care home. What he did need was clothes that fastened with velcro rather than the buttons he fumbled with. Yes, he had fallen, but that was due to poor lighting and inability to locate his glasses rather than failing balance. Solution: automatic lighting switches. As for eating, Tom’s issues – he had alarmed carers on their first visit by trying to prise bread from a toaster with a breadknife – were met by modest changes to his shopping habits: like buying rectangular bread.

Analysing what happened to other care users, the Somerset team found that Tom’s case set a depressingly standard pattern (minus the happy ending). Like Tom, most people presented with non-medical isses but, once through the NHS gateway, were rapidly medicalised. They became patients. To find a package of care they could be fitted to, they were assessed and passed on to different agencies, departments and teams literally dozens of times – in one case 35 times in 18 months.

Paradoxically, things were being made worse by each agency’s attempts to meet financial pressures by ‘trying to do things better’. In practice, this meant increasingly standardised processes and packages, spending less time in interviews, and rationing the time of experts.

Unfortunately, you can’t improve the system as a whole by optimising the individual parts. As Deming patiently explained, ‘If the various components of an organisation are all optimised, the organisation will not be. If the whole is optimised, the components will not be’.

In care, the cost of optimising the components was to make the system more fragmented, more impersonal and more prone to error – which is exactly how users experience it. ‘We’re great at assessment,’ notes Fiona Catcher of the Somerset care team. ‘But understanding… ’

In services as in manufacturing, the counterpart of increasing speed and standardisation is overspecification (better be on the safe side…). It’s a false economy. In care, repeated too-heavy solutions (hospitalisation, ‘at risk’ labels) further unbalance lives so that people rarely regain their previous independence. Horribly, it’s the reverse: once in the system they are on a ‘clear glide-path into residential care’. Adds Catcher ruefully: ‘It’s really perverse, isn’t it, that when the system swings into action to help, it gives you a leg up into greater dependency, greater need and of course at much greater cost to the public purse.’

Instead of operating on the old ‘assess-treat-refer’ process, Somerset now offers an ‘understanding and rebalancing’ service. Its mantra is ‘light touch, right touch’ and its aim to help people solve their own problems, maintain them in their own context, and manage their own lives. The most important qualification for this work, it has found, is an ability to listen. ‘Listening and understanding isn’t a profession,’ notes Catcher. To carry out the new value work, ‘what we really need is staff who can give people a right good listening-to.’

Understanding takes time upfront. But this is a small price to pay for a move from ‘doing things better’ to ‘doing better things’ that takes service and its cost into a dimension that is incomprensible to those stuck in the old model. As in Tom’s case, the material costs of rebalancing are laughably small, while the savings elsewhere in the system are uncountable. For 93 people discharged from the Somerset service, there were 12 prevented hospital admissions, 25 reduced stays, six prevented admissions to long-term care homes and 29 reduced packages of care, let alone numberless assessments, appointments and other transactions that didn’t need to happen. And how do you compute the positive benefit? ‘Think of the effect on Tom’s life,’ reflects Catcher. ‘And think also of the effect on the social care budget’.

Somerset began by thinking it was redesigning an adult re-enabling and rehab service. Now it believes it’s doing something much bigger, recasting the entire interface between communities and services, with implications that at this stage can only be guessed at.

‘What we’ve done in administration in the public sector over the last 15-20 years is turn public agencies into deliverers of transactionalised services,’ reflects Richard Davis of Vanguard, the consultancy that helped Somerset’s care team. ‘When we do that the issues that come to the fore are standardisation and efficiency, and the more we standardise the less we understand what matters to people and the more we miss the plot. One of the things that’s beginning to interest us is a move from looking at services as commodities, as they’ve become, to relationships, which is what they used to be. In many services, certainly the police and health, a lot of things go wrong because we don’t know people and have no relationship with them. It sounds terribly expensive until you understand the harm that’s being done because we don’t understand and the cost that’s being incurred as a result of doing the wrong things’.

Power games

Power, money and the self-fulfilling prophecy: Stanford’s Professor Jeff Pfeffer on how corporate leaders have amassed more power than world leaders.

Simon Caulkin: To pick up where we left off last time, you said to me that a good political analysis of power would start by looking at at who benefits from today’s supposedly dysfunctional capitalist system?

Jeff Pfeffer: It’s not a question of functional or dysfunctional, it’s the way things work. If you’re going to make things better you have to begin by understanding why things are the way they are, and the forces that made them so. I think that a lot of traditional leadership literature and stuff that’s taught in business school doesn’t distinguish very well between what they’d like the world to be and what it is. Hence my description of it as lay preaching rather than social science. You need to understand forces working with you and against you.

SC: At any rate, the way the system currently works benefits those in pole position?

JP: Yes. There’s an article in the Journal of Economic Behaviour in Organisations that asks, do ethical people do better in their career? And the answer is, ethical men do worse while with ethical women it makes no difference. Another article, in the Academy of Management Journal, shows that less nice people do better. There are a bunch of studies starting with Teresa Amabile, quoted in my book, saying that competence and warmth are often seen to be negatively correlated. Yet another piece talks about how people who break the rules or are rude, are perceived as powerful. There’s this heuristic association, so if you scream at someone and get away with it you must have power over them, if you violate the rules the assumption is you must have power. Because of this heuristic association between power and being not nice, people who aren’t nice are assumed to have more power and accorded more status as a consequence. And there’s something else in the book about anger, which shows that expressing anger gets you more status than being remorseful. God knows why – evolutionary psychology, perhaps – but people respond much more positively to anything that signals strength, including brute strength, than they think they do. Because of this heuristic association between power and the ability to engage in certain behaviours, to the extent that you engage in that behaviour, people assume you have power.

SC: So the pursuit of power is the sort of invisible hand behind everything, covertly shaping everything that happens in business?

JP: Yes, absolutely. I’ve been doing some pieces for a Wall Street Journal special section on HR. I’m working with some talented coaches, and also Bill Gentry of the Centre for Creative Leadership, on a bunch of things. For one, career derailment. Career derailment is amazingly common – it happens between 33 and 75 per cent of the time. It’s very costly for both the individual and the organisation. But it doesn’t happen because of technical failure (people who aren’t very good technically don’t last long… ) but mostly over issues of organisational dynamics, ie politics – they can’t handle relationships laterally or with the boss. Organisations and even individuals are very reluctant to acknowledge this, so firms don’t train for it and people are oftentimes at a loss to understand what’s going wrong with their career patterns. They’re convinced there’s something wrong with their boss. But the reality is that your boss is your boss. You need to build a good relationship with him, because if you don’t you’re going to have career problems.

SC: This is what’s happened at Yahoo! and HP?

JP: Absolutely, or at least at HP. I agree with the New York Times that the HP board is one of the worst in the US, but but beyond that I think for example that Meg Whitman [the new CEO] will keep her job at HP because as she demonstrated at eBay she knows how to manage her board very effectively. Leo Apotheker [the previous CEO] was brought in to make strategic changes and she’s following the same line. His problem was was that he didn’t know how to look and present himself as a CEO. It’s mostly about image and perception. Carol Bartz at Yahoo! was another story, but I like the way she left. She wasn’t going to be pushed without telling her story, and good for her. It’s all politics.

SC: You said to me that power wasn’t a homeostatic or self-correcting process, but that it amplified variance. Can you elaborate?

JP: Yes. The powerful become more powerful. Let’s say your name is Simon Murdoch. To the extent that I believe you have control over vast resources and dominate the media field and I have any talent, I’m likely to want to work with you. That perception helps you attract best the talent and become more successful. That’s just one social process. To the extent that I believe you hold lots of power, I’m unlikely to take you on, so you face less opposition. So for a variety of self-fulfilling reasons, power reinforces itself. Better people want to work for you, you have less opposition, reputation grows and because of the self-reinforcing aspect, everyone looks at what you do from the perspective that you’re a powerful genius rather than a deranged madman.

SC: So power is a case of self-fulfilling prophecy?

JP: Absolutely. There are thousands of manifestations of social processes that are self-fulfilling. If you think you’re going to interact with someone intelligent you’ll interact in a way that allows them to demonstrate their intelligence. If you think they’re stupid, even unconsciously you’ll act in ways that make it difficult for them to show they’re intelligent.

So yes, the self-fulfilling nature of human interaction is a very powerful force. It’s particularly so with power and reputation. Once you become known as powerful and competent, the reputation is almost impossible to destroy. Leo Apotheker was fired from two jobs in two years – what do you bet that in another two he’ll be back in Europe as head of another big firm?

SC. What you’re suggesting is that power structures are pretty hard to shift. So nothing much will change.

JP: I think in general in economic systems the best forecast or the safest prediction is no change, or no change from the trendline. I recall in business school 1000 years ago I took a macroeconomics course where we looked at all these fancy forecasting models. Our professor said, don’t look at whether they’re up or down compared with last year but whether they can predict turning points. They did horribly, worse than chance. Because of the self-fulfilling properties of most economic systems and power, the safest most likely bet is that they’ll continue. If they’re going up, because of the self-fulfilling properties they’ll go on going up, if they’re going down because of the self-fulfilling properties they’ll continue to go down. And we’re reading a lot of that lately: governments have too much debt so they’re cutting spending, and when you cut spending you cut jobs, which cuts tax revenues, which makes debt problems worse. So that in general it’s true in most social phenomena that whatever is going on will continue. It’s not 100 per cent – but the Arab spring is the exception. And even there – look at Yemen, Syria, even Gadaffi has hung in there. It requires a lot of energy and force to change trajectories. It’s like Newton’s law of motion applied to social systems: a body at rest remains at rest or a body in motion remains in motion at the same speed and trajectory unless something slows it down. I think the same is true for social systems as well.

SC: Is it part of the same thing that we now have oligopolistic industries and huge concentrations of power in fewer and fewer hands?

JP: Everyone talks about how important markets are, but governments have done nothing to make them work. The first requirement for a market is that there will be lots of buyers and lots of sellers. But look at the oil industry. Look at what BP has been allowed to buy, or Exxon-Mobil, Phillips-Conoco. Or financial services. Many people have commented that banks that were too big to fail in 2008 are now even bigger, in Europe too. In airlines there’s BA-Iberia, Lufthansa-BMI-Austrian, Delta-Northwest, United-Continental, etc. Or the phone companies, where basically the AT&T monopoly has been reassembled. When I look at the world, in industry after industry I see increasing concentration of power and resources. There are plenty lots of SMEs, of course, but big companies are getting bigger, and no one is stopping it happening.

SC: Why don’t people want to talk about power?

JP: In 1979 Rosabeth Moss Kantor wrote in HBR that power was the ‘last dirty secret’. People like to believe in a just world where people get their just desserts and virtue triumphs. You can understand they want to fight it. Number one, people like to believe they live in a just world when if you do a good job everything takes care of itself. Number two, they really don’t want to believe the things we just talked about, that warmth and competence are negatively correlated, that nice guys finish last, these really aren’t very nice messages. Once in a while I go to Amazon and read the reviews of my book, and one recently said, ‘This is one of the most depressing books I’ve ever read. It makes me sad to think that world works this way’. It’s not a question of being sad or not – it’s about understanding what is. If you want to change these processes, you have to begin by taking a hard look at what the social science says about them and the logic behind it. People are lazy too – it’s much easier just to have a few aphorisms. As Jack Nicholson says to Tom Cruise in A Few Good Men, ‘You can’t handle the truth!’ True. Look at what happens to whistleblowers, people who uncover major corporate and government malfeasance. They are seldom seen as heroes. What that individual has done is throw a monkey wrench into the existing order of things, into the existing power structure, and even when they’re correct, they don’t get much thanks. They may get financial reward, but they’re not popular guys.

The really good CEO understands that the higher you go in an organisation, the more likely is is that people will automatically treat you as if you’re right. The upper echelons are often completely devoid of critical thought, so it becomes incumbent on senior-level leaders to get someone who will actually tell them the truth. There are not many leaders who do that – a few, but not many.

SC: Are companies more powerful than governments?

JP: Oh, for sure. Look at Cameron and Murdoch. One of the reasons they have power is that they also have what politicians need, which is campaign money. I was speaking to a senator recently, someone who’d read the book and actually liked it, a Republican no less, and he said one of the depressing things about being in government is that you spend all your time raising money. And you go to raise money where money can be raised, and after the Citizen’s United case in the US there’s almost unlimited ability… so yes, companies are at least as powerful as world leaders.

SC: John Kay wrote a good piece in the FT recently making the point that lobbyists eventually get their way because they that’s their job. They do it every day of the week, whereas supporters of a public interest cause have to go back to the day job, and public opinion moves on.

JP: Exactly right. Money talks. The old golden rule is that he who has the gold gets to make the rules – and companies now have enormous amounts of money. Isn’t it interesting that governments are massively indebted, with huge budgetary troubles, average households are in debt and in trouble, and companies in the US are sitting on $2 trillion in cash. The point being that the only entities in good financial shape are companies. Their profits and balance sheets have never been in better shape. The big issue for them is what to do with all the money they’re generating. It’s a perspective to keep in mind when thinking about all this.

Ed’s right: but how will he tame the predators?

Of course Ed Milliband is right: we are living in an era of predatory capitalism. But his diffidence and lack of precision about remedy suggests he doesn’t know how right he is, how scary the situation has become, nor how seismically difficult it will be to change.

Arguments over the ‘leftness’ of his propositions are of stunning irrelevance even by the standards of the British press. While the papers trade angels-on-pinhead pedantics, the biggest question of all remains undiscussed and largely undiscussable: not is change desirable, but is it remotely possible?

The polite term for the underlying issue is vested interests. The unvarnished one is power, which translates even more brutally into money and status.

Consider some items from last week’s news.

Instead of acting as a utility channelling savings into productive investment, LSE’s Paul Woolley told a Today audience on 1 October, financial services had become a bloated, unstable and short-termist industry that had hijacked the returns for itself, either as profits when there were any or as subsidies when there weren’t. As well as devouring most of the returns, he went on, the financial sector had destabilised the real economy, largely through the derivatives that Europe was now – rightly – trying to regulate.

Yes, said Robert Peston, referring to research showing that economies with overdeveloped financial sectors were much weaker in manufacturing, not least because finance attracted the most ambitious people and maintained a damagingly high exchange rate.

The tough call for the government, he concluded, was whether it could rebuild manufacturing and rebalance the economy, as everyone agrees is desirable, without damaging a finance sector that supplies not just 10 per cent of tax revenues and 3 per cent of GDP – but also, as revealed the same day, 51 per cent of Tory party funds (more than half coming from hedge funds, financiers and private equity).

Will it happen? Even though everyone except bankers believes it should, that depends not just, or mainly, on reason – but on the exercise of power and influence.

The essential point about power, says Stanford’s Professor Jeff Pfeffer, is that, like many social phenomena, it is self-reinforcing at every level. What that means in practice is that, however apparently strong the logic of change or the force of entreaty, existing trajectories are extremely hard to shift. ‘Given the self-reinforcing properties,’ says Pfeffer, ‘the safest bet is that whatever is happening will go on happening.’

Take soaraway CEO pay and mega-mergers. Neither of these can be objectively justified. There is no correlation between CEO remuneration and company performance, nor between performance and company size. Most mergers fail. Everyone from presidents and prime ministers down deplores mergers that destroy jobs and ‘out-of-control’ CEO pay. So why can’t we stop them?

When viewed through the lens of power, the answer is blindingly clear and the aberrations suddenly scarily comprehensible. The obvious explanation is the right one. Size may not pay off for consumers, employees or shareholders, but it certainly does for CEOs. For CEOs, big is better, and giant is best. As big companies become inexorably bigger, so do CEOs’ salaries and the resources they have at their disposal. Pay and mergers aren’t out of control at all – just the opposite.

Right on cue, ‘Amazon, the company that ate the world’, ran a headline in Bloomberg Businessweek last week. Amazon is one of a number of gigantic companies – Apple, Google, Facebook, IBM, Microsoft, Exxon among them – with resources that could easily stretch to buying small or even medium-sized countries. While the BW headline is hyperbole, as Woolley’s analysis shows the metaphor applies with appalling earnest to finance. Too big to fail in 2008, many financial institutions are even bigger and more powerful now – institutions, to repeat, whose first article of faith is that they bear absolutely no responsibility for the safe functioning and protection of the real world that they exploit to make their all-consuming returns.

It’s not of course just the course of business itself that these colossal concentrations of corporate resource are used to influence. In a recent FT column, John Kay noted that the reason so many proposals of general benefit (eg on banking reform) get stalled and so many of benefit to vested interests get though (eg patent prolongation) is the power of lobbying. Public opinion has many things to occupy it; citizens are underresourced and have lots of things to do. Lobbyists, on the other hand, ‘are overresourced and have nothing else to do. Wherever the proposal is rejected, its advocates revive it in another forum at another time. Eventually they get their way. The lobbyists never go away’.

Kay fears that UK banking reform, already deferred for eight years, will be so undermined in the meantime that it never takes place. Lobbying and influence likewise ensure the untroubled expansion of the big UK retail groups even though they already control more than 80 per cent of the grocery trade. It’s not a question of whether locals want a Tesco or Sainsbury: the groups’ tentacular power means that every town will get one anyway. Norwich reportedly has 17 Tescos, which to anyone but an economist, banker or CEO is plainly an abuse of both power and common sense.

‘Oh, for sure companies are more powerful than governments,’ says Pfeffer. After the US Supreme Court’s decision in the Citizens United case, which reverses a previous ban on direct corporate financial support for electioneering, that power is not going to dwindle any time soon.

So, yes, Ed. Capitalism is predatory, to the point of devouring us. But the point is surely not to interpret the world but to change it. Here’s what you’re up against, summed up in a final quote from last week’s news. ‘Actually, there’s been class warfare going on for the last 20 years’, Warren Buffett told CNN. ‘And my class [the rich class] has won.’

A winning hand

Read my piece in FT Business Education 19 September 2011 here

Good cop, bad cop

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

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

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

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

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

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

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

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

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

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

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

Rotting from the core

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

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

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

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

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

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

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

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

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

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

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

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

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

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

RM: I’m not buying shared value.

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

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

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

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

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

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

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

SC: So how do we get out of it?

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

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

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

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

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

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

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

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

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

SC: Overall, are you an optimist?

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

Putting ownership to rights

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Saving capitalism from itself

Read my article in Management Today here

It’s management, stupid

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

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

Henry Mintzberg: No.

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

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

SC: So the crisis we’re seeing…

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

SC: Is there anything you can be positive about?

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

Read more by Henry at The Economist and Huffington Post