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

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

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

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

This is true for every one of its stakeholders.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

JP: Correct.

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

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

SC: And this is dangerous?

JP: Yes, of course.

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

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

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

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

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

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

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

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

Read my article for The Systems Thinking Review here

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

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

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

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

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

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

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

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

If capitalism is North America’s secular religion, shareholder value is its creed, as fervently believed and proclaimed as any evangelical sermon. So it takes courage as well as independence of spirit for any North American, even a Canadian, not only to tackle shareholder value head on, but to finger it as the bane of capitalism rather than its unchallengeable foundation stone. All the more so as Roger Martin, whose important new book Fixing the Game does all this, is also dean of a business school (Toronto’s Rotman School of Management), an institution which collectively has played a primordial role in legitimising the concept and now has a huge research and theorising investment sunk in it.

It’s precisely the strength of the book, the most authoritative statement of what’s wrong with our current model that I’ve seen, that it engages directly with underlying theory as the heart of the current problem. All the official reactions to the current crisis start from the assumption that we’re playing the right game: we just need to tighten up the rules and play it better. By contrast, Martin correctly identifies that it was the fundamental assumptions that got us into trouble in the first place, so that basing their remedies on them politicians and regulators are simply doing the wrong thing righter, which ratchets up the wrongness. So while such fixes by definition won’t prevent further crises, they will focus energy and resource in the worng place just when we need them most.

Using the example of the highly regulated and shiningly successful US National Football League as a counterpoint, Martin demonstrates how unintended consequences have turned shareholder value into a grotesque self-parody. The catalyst was a famous 1976 article by academics Michael Jensen and William Meckling which crystallised growing concerns that fat and complacent managers were paying more attention to their own interests than those of shareholders. The authors termed it an ‘agency problem’: a missing alignment between shareholder-owners (principals) and managers (agents). To make managers think like owners, what better solution than to load them with stock options that would reward them when the company did well and punish them when performance fell off?

Jensen and Meckling’s much-cited article invented agency theory, anointed shareholder-value maximisation as the sole purpose of the corporation, and set a framework for corporate governance that has been used ever since. (It is faithfully reflected in the City codes, for instance.) Yet the strength of its influence is matched only by its malignity.

As Martin demonstrates, stock options were chips that turned executives into gamblers whose compensation was conditional on performance not in the real world but in the ‘expectations market’ of the stock exchange. Like any gambler with large stakes, managers did everything to change the odds in their favour – manipulating earnings to match expectations, massaging expectations to match earnings, until ‘many companies focus more on their stock analysts than their customers.’

There’s more. In a striking chapter on managerial ‘inauthenticity’, Martin shows how acting more and more in the abstract world of expectations, executives all too often lose contact with both the real world and their moral bearings. The result: on the one hand, customers, employees and relationships become instrumental and disposable means to the sole end of winning a zero-sum game; on the other an unprecedented wave of corporate fraud as managers cross the line into immoral and illegal behaviour, culminating in the scandals of 2008. (In the week I’m writing this, JP Morgan has agreed to pay $154m to settle a civil fraud case and along with RBS is now being sued for $800m by the US credit union regulator for mis-selling of mortgage-backed securities.)

As the final straw, volatility created by the artificially stimulated expectations market has attracted a new kind of market player, the hedge funds, that exist solely to exploit and even create that volatility. Hedge funds, as Martin sharply points out, generate no net value for society; indeed with their egregious ‘2&20’ fee structure, they lumber it with a heavy parasitic cost burden.

Have shareholders actually benefited from this slavish attention to their interests? Well, no. Crunching the numbers, Martin shows that in the period of shareholder ascendancy since the Jensen and Meckling article, shareholders have actually experienced poorer returns than in the four decades previously when managers were supposedly ripping them off – 6.5 per cent a year compared to 7.5 per cent.

Laid bare, the unclothed emperor is not a pretty sight. Shareholder-value maximisation and stock-based compensation have had the reverse effect to the ones intended, destroying shareholder value and aligning executives not with shareholders but with their own pocket-books. Executive pay per dollar of profit made has rocketed. The theories have driven damaging short-termism, fostered a- and immoral executive behaviour, and benignly favoured the mushrooming growth of parasitic players in the expectations market to whose tune real-market actors are increasingly made to jump. The expectations tail is wagging the real dog. In short, warns Martin, these theories ‘have the ability to destroy our economy and rot out the core of American capitalism… The expectation game is beginning to destroy the real game, slowly from within’.

To reiterate, these bankrupt theories are the ones that form the starting point for the fixes proposed for the post-crunch banks. No wonder they are so feeble – they are business as usual in the most literal sense.

Martin argues that much more radical moves are necessary: destroying the expectations market by recasting theory to put customers rather than shareholders first, eliminating stock-based compensation to bring executives back into the real world, rethinking board governance, reining in the hedge funds (for which Martin reserves particularly sharp criticism), and aligning corporations with rather than against the public interest by placing positive purpose at their centre.

While all these are obviously right and necessary, Martin’s diagnosis of the ills is understandably stronger than his prescriptions for treatment. Even he doesn’t tackle a number of other outstanding and difficult issues. The most glaring is ownership, one of the most fervently-upheld components of the shareholder-value creed. Yet when high-speed traders own shares for nanoseconds and hedge funds borrow shares only to vote them for their own short-term ends, what does and should ‘ownership’ mean? Besides, notwithstanding the myth, legal researchers agree that shareholders simply don’t own companies, which are legal persons in their own right.

His analysis also has important unvoiced implications for conventional models of strategy (prop. Michael Porter). By implicitly pitching the interests of companies and their managers against those of society, these models have contributed powerfully to the managerial inauthenticity and alienation that Martin rightly identifies as a part of capitalism’s problem.

All these hint at the enormous inertia of vested interest that will need to be overcome if capitalism is to be saved from itself. Martin describes himself as ‘a long-term optimist but short-term pessimist’ (more sacrilege to capitalist fundamentalists). Without changes along the lines he specifies, the short-term prospects for the Western economies that are still in thrall to shareholder value are indeed grim. For the longer term we can only repeat (and believe) after him the famous quote from Margaret Mead which heads the final chapter of this angry and urgent book: ‘Never doubt that a small group of thoughtful, committed citizens can change the world. Indeed it is the only thing that ever has.’ She’d better be right.

It’s a weird paradox. Having triumphed over socialism, capitalism’s worst – perhaps only – enemy is capitalists. Conversely, because capitalists are so hopeless at analysing capitalism, it is always down to those it conceives as its enemies – critics and governments – to rescue it from its own excesses.

The genius of capitalism (if that is what it is) is its Protean capacity for self-renewal. But almost wilfully ignoring this, capitalists of the current dominant tendency have frozen it into a number of unchallengeable assumptions, more akin to religious dogma than the result of empirical investigation, that permit no deviance or evolution.

Consider some of their mainstream articles of faith.

• Companies are independent of the societies in which they are embedded. (This is the ‘business of business is business’ argument, smoothly paraphrased by the CBI’s new president Sir Robert Carr, that I wrote about last week.)
• Markets are the best way of organising resources; companies are a second-best option, and should be made to resemble markets as closely as possible. By the same token, the private sector is inherently better than the public sector.
• Companies are the property of shareholders, and the maximisation of shareholder value is the sole and sufficient purpose of the corporation.
• Individuals are exclusively self-interested, and people need to be motivated by incentives and bonuses to do a proper job (although curiously this appears only to apply to the top corporate echelons), and disciplined by hierarchies.

All these are just wrong.

Companies are unquestionably important to economic advance, but it defies common sense to think they can flourish independently of their context. Companies can only thrive as part of, and not at the expense of, the wider society. As Amory Lovins and Paul Hawken put it, in the final analysis ‘the economy is a wholly-owned subsidiary of the environment’.

Organisations, whether in the public or private sector, are different from markets – that’s why they exist! They obey different logics and do different things. Companies innovate, markets compete to distribute the value created by that innovation through the economy at large.

Companies are legal persons in their own right and are not owned by shareholders (see HBR), who have done worse during the shareholder-value-maximising era than they did before (see HBR again). Shareholder value is a by-product, not a prime cause.

To anyone but the hardest-line economist, it is evident that human beings are motivated by a variety of things, including both self-interest and altruism. Many studies show that intrinsic rewards (doing a good job) are far better motivators than extrinsic ones (money), not to mention much cheaper.

If singly these beliefs are nonsense, together they form a toxic system which that is bringing us nearer and nearer to financial and physical meltdown. The increasing incidence and severity of financial crashes, the apparently unstoppable rise of corporate wrongdoing, the unsustainable dislocation between the economy’s winners and losers, the plunging moral authority of business, and the growing urgency of climate change are all well enough documented to need no more elaboration here. ‘American capitalism’, sums up Roger Martin in his recent book Fixing the Game, ‘is in danger’, slowly but surely destroying itself from within.

In the past, critics and practical reformers – anti-slavery campaigners, Quaker industrialists, New Dealers, trade unionists, corporate raiders – have always managed to shake up the fixed assumptions of the existing fundamentalists, changing the balance of forces and generating fresh forms and solutions to the problems of the day. Limited liability, pension funds, business education, tapping into workforce skills and knowledge, shareholder activism, and many others have all inflected the course of capitalist development, adding diversity and fresh thinking from many different sources to the mix.

Technically, the same ought to be true now. There is no shortage of new ideas wanting to be heard. I don’t mean social media and Web 2.0. I mean, taking a leaf from radical capitalist thinkers like Umair Haque, institutional innovation such as thick, thin or shared value, social enterprise and a social enterprise stock exchange, green measures of economic growth, human capital, stewardship… the human brain is as inventive as ever it was.

What may be different this time, though, is that capitalism’s self-correcting feedback loops have stopped working. Why, even after the financial earthquakes of 2008, has nothing changed? Perhaps because the underlying assumptions have become self-reinforcing. In a 2005 Academy of Management Review paper, academics Jeff Pfeffer, Bob Sutton and Fabrizio Ferraro cited research finding that business students were consistently less empathetic, less concerned with others and more prone to cheating and wrongdoing than those of other disciplines. They concluded: ‘A growing body of evidence suggests that self-interested behaviour is learned behaviour, and it is learned by studying economics and business’. In other words, even if (again as common sense dictates) self-interest is neither universal nor inevitable, self-fulfilling prophecy is gradually making it so.

The nightmare, then, is that business in its largest sense has already made itself too big, dominant and centralising to fail. It has eaten the regulators, and now it seems to be consuming the political process itself – witness the extraordinary difficulty of bringing ‘proud finance’ to heel, and the profoundly illiberal, anti-labour legislation being introduced in several states in the US and threatened in the UK. And it is not just about size that escapes control. Increasingly, the accountancy of business, unscientific, fault-ridden and prone to spontaneous self-combustion as it is, is the measuring rod used to validate all other areas of life. Education, health, the arts all have to justify themselves in business terms. Instead of capitalism being made safe for the world, the world is being made safe for shareholder capitalism.

My main point here is not just or even primarily about ‘rightness’ – it is about maintaining sufficient diversity for capitalism to do what capitalists boast it does best: evolve, innovate, self-correct, self-renew. Because of the dominance of one hard-line theoretical view, supported by giant institutions that perceive their self-interest as keeping it so, capitalism is becoming a monoculture that ensures it can no longer evolve in this way. Capitalism is indeed too important to be left to capitalists – but this time round, are there any enemies left to save it from its friends?

As the care scandals rumble on, indignant commentators are loudly calling for more resources to be thrown behind inspection and regulation.

This is understandable but wrong-headed. Just like the banks, the care homes saga does indeed throw into dramatic relief the shortcomings of regulation. But the problems can’t be solved by intensifying the arms race between regulators and regulated. Sarbanes-Oxley has made a fortune for lawyers and consultants, and corporations run rings round it as effortlessly as Spanish forwards ghosting through an English back four. Regulation and inspection put in place after Victoria Climbié were powerless to prevent the tragedy of Baby Peter.

It’s time to face up to the fact that the regulatory state that was supposed to manage the interface between the public and private sectors is not only bloated and ineffective: it is now itself part of the problem.

Don’t get me wrong. Regulation is essential, but not at the level that people think. Both banks and care homes make that case, it seems to me unanswerably: external regulation of profit-maximising organisations managed by people who believe that self interest is king is about as useful as appointing chickens to control wolves. It’s a lost cause from the start.

Regulation that works can only come from inside. That means a different conception of what companies are for, and changing the governance rules to match.

The standard line, unsurprisingly, is put forward by Sir Robert Carr, the new president of the CBI (and the man who sold Cadbury to Kraft because ‘it was the board’s duty to get maximum value for shareholders’ ). ‘We’ve got to show in a much better way that business is a force for good; demonstrate that companies invest in research, that they pay fair taxes and are good for society’, he told Maggie Pagano in the Independent on Sunday. In other words, as long as companies pay tax and do R&D, they’ve discharged their obligation to society. This is Chicago high priest Milton Friedman in more emollient terms: the business of business is business, and companies have no other responsibility than making profits.

Well, no. There was a time when demonstrating minimal compliance à la Carr might have passed muster. But no longer. To borrow Umair Haque’s sharp metaphor, when you live on the prairie, hunting/gathering is an acceptable, even logical way of managing. After you have eaten all the wildlife, burned the trees and filled up the cave with bones, you move on to the next valley and nature regenerates behind you.

But if you live on a heavily-loaded ark, with limited space and tightly constrained resources, the previous management model becomes a liability. The ‘bads’ it produces – pollution, overconsumption, resource exhaustion,gross inequalities, global and financial warming – outweigh the ‘goods’. And that’s the point that we’ve reached today. We can’t afford to have sociopathic profit-maximisers – who don’t recognise any other rights than their own – in charge of any organisations, let alone care homes and banks, because on an ark they endanger us all.

It’s not just that trying to regulate sociopaths, like taming wolves, is pointless. They will always find a way round or under the tightest fence, because that’s what they have evolved to do. It is that regulation of this kind threatens to make already difficult problems insoluble.

Consider: for free-market champions, the whole point of the market is that it does away with the need for all except minimal regulation. The case for privatisation was precisely that competition itself would be the impartial, unappealable regulator on behalf of the consumer.

But oh boy, it hasn’t turned out like that. The side-effects of putting profit-maximisers in charge of banks and care homes has proved unmanageable, their extreme and utterly unironic self interest bringing the entire edifice crashing down on all our heads. So light-touch regulation quickly becomes heavy touch. Unfortunately, the bolting of the regulatory stable door only takes place after the sociopaths have made off with the loot; but it does make it much harder for normal people to do the thing that is needed above all, which is real innovation.

There’s a similar logjam in the public sector. The effect of the crude targets regime of the last decade and a half was to ensure that nothing except the targeted priorities got measured or managed, bringing about the Kafkaesque nightmare of care homes without care and a health service without compassion. As night follows day, the resulting scandals begat tighter inspection and regulation, eventually leading to organisations entirely specified by the centre, as rigid and incompetent as anything produced in the Soviet Union. The inhuman, computer-driven (and failed) childcare management system is a good example.

To sum up: in the apt words of the Open University’s Ray Ison, problem-determined regulation has now become a huge regulation-determined problem. The delicate evolving ecology of companies, markets and state has congealed into a giant mess, an anti-ecology that gives us the worst of every element: an out-of-control private sector alongside a rigid, uninventive public sector, topped with ever-thickening layers of ineffective but incredibly expensive regulation squashing the legitimate life out of both.

Regulation for the ark differs from regulation for the prairie. But to work at all it requires a new settlement between its inhabitants – and the starting point is locking up the sociopaths and wolves.

Behind the desire to enlist private firms in public service delivery lies the assumption that thereby efficiency will be improved. The sense of frustration – perhaps panic is a better word – is palpable. No one would disagree that innovation is needed. Although measurement is hard, particularly where quality is involved, the best guess of the Office of National Statistics is that public-sector productivity has fallen in the last decade. As a recent report from the Work Foundation points out, services facing a triple whammy of shrinking public spending, expanding service demands and a broad reform agenda are now expected to produce nothing short of a ‘productivity miracle’.

But hang on. Is the private sector really the place to find it? After all, over the decade of lost productivity the public sector has been subjected to a relentless barrage of incentives, targets, outsourcing and performance management imported directly from the private sector. If 10 years of this haven’t made things any better, do we really need more of it?

The truth is that this kind of ‘efficiency’ is a false economy that exacts a very high price. What the private sector is good at (although that’s hardly the right word) is service industrialisation: mass-producing centrally designed service ‘packages’ (as they are tellingly termed) at apparently low cost. Unfortunately the low cost is a delusion. Because they are not-very-good-to-awful, the real cost is actually very high – it’s just that it’s ‘saved’ from citizens who don’t get what they need and have to come back or go somewhere else to get the problems solved that weren’t met first time round.

Albeit fashionably souped up by IT, this is industrial-age service, as producer-centred as anything in the traditional public sector. It is deliberately impersonal, designed to turn customers of banks, retailers and telcos into standardised transactions that can be monetized and turned into corporate profits. Customers are a means to an end, and that end, as taught by today’s governance norms, is to capture as much value as possible from the other stakeholders, including customers, and transfer it it to shareholders’ pockets with minimum fuss and maximum speed.

That is worth spelling out, because it helps explain the appalling scandal of the UK’s care-homes. Care homes used largely to be run by local authorities until a wave of private-equity buy-outs took them private in the noughties. Seventy per cent of homes are now privately run. In a sub-bubble of its own, banks fell over themselves to lend to investors who knew nothing about care but were attracted by property, the prospect of long-term government contracts and increasing demand as the population aged.

Before the bubble burst in 2008 care homes were changing hands at stratospheric valuations. Companies that had taken on mountains of debt now found themselves facing falling property prices and contracts that were less valuable as local authorities explored ways of keeping healthier elderly in their own homes longer. Austerity added to the pressures, with councils refusing to raise, and in many cases cutting, the fees they were willing to pay.

The sector is now in ruins, with banks and other lenders controlling companies caring for thousands of people in residential care. Southern Cross, the UK’s largest UK care-home operator with 30,000 elderly residents, is struggling not to join them. As privately-owned homes thresh around to stay afloat, they have cut standards and costs; a survey by the FT found that in the private sector care is often worse, wages lower and turnover higher than in the public.The cost in human terms can hardly be exaggerated. One manager told the newspaper: ‘It’s all purely to do with making money and not looking after people.’ And this before the cuts really begin to bite.

Industrialised service designed to satisfy shareholders rather than customers – a classic example of Umair Haque’s thin or fake value – is obsolete and unfit for purpose anywhere, kept alive by an unholy alliance of management consultants and IT vendors; in personal service it is a disastrous oxymoron.

As even The Economist recognises (although supporting more private-sector involvement in public services), ‘the industrialisation of patient care often depersonalises the process of treatment’, causing people to lose faith in it and thus – since healing is the ultimate participatory venture between physician and patient – reducing its effectiveness.

Let me spell it out: this kind of ‘efficiency’ makes matters worse. Sure enough, patients who now get an average of just eight minutes with their GP are beginning to complain: just 45 per cent would recommend their local GP surgery compared with 60 per cent a couple of years ago.

Of course, it doesn’t have to be like this. At heart service is a matter of design, not ideology, although as we have seen the shareholder-first dogma militates against it. Some enlightened private-sector companies offer excellent service – Aviva is learning fast, for example – just as a number of public-sector organisations do, using exactly the same principles of finding out exactly what demand is, then designing a system that delivers it.

We need a thousand flowers to bloom in the public services, for sure. But the real obstacles to that are fundamentalist free-market ideology and ignorant central planners, not public-sector intransigence. The straightjacket is central specification of method – shared services, customer-service call centres, massive computer databases – rather than exclusion of the private sector. If the private sector finds itself unwelcome, it is because it has disqualified itself.

Never mind what happens in the superinjunctions saga – you can’t buy that kind of publicity – It’s been a great few weeks for Twitter. Not only does it break news – you heard the death of Osama Bin Laden and the arrest of ex-IMF head DSK there first – it increasingly makes and indeed shapes it. Witness its role in first the Arab uprisings and the Uncut movements, and now the evolving superinfunctions story, in which it may turn out to be a lever to change the law. (Having like everyone else found the names of the ‘celebs’ after a 30-second search, I was disappointed to find I’d never heard of half of them. But there you go.)

Every new medium becomes fuel for existing media, and here again Twitter is no exception. Take the entertaining twitterspats between, for example, Lily Allen and Piers Morgan or – more seriously, as recounted recently in The Guardian– Ian Birrell and Paul Kagame. The journalist tweeted a disparaging comment on a press interview with the Rwandan president and was amazed to receive an immediate indignant response from Kagame himself, with Rwandan foreign minister pitching in for good measure. Writes Birrell: ‘In this new world, I was able to draw attention to Kagame’s original statement, he was able to respond and we could debate in real time watched by thousands of people worldwide, scores joining in with links, opinions and comments.’

One-hundred and forty characters is short, it’s true. But the terseness and immediacy that the medium demands is powerful compensation. Twitter can do profound (moving tributes on Remembrance Day) and serious (philosophical and political debate) just as well as trivial and pointless. Pomp and circumstance, whether the Royal Wedding, international economic gatherings or the Eurovision Song Contest, now positively demand an accompanying twitterfeed to deflate, praise and add instant commentary, and it rarely disappoints. Birrell is not alone in seeing Twitter ‘fast becoming the most important journalistic tool around’.

Actually, it may be more than that. Even to a (by instinct and training) print journalist and junkie like me, it’s frighteningly obvious how easily Twitter could supplant the daily fix of newsprint.

News already breaks first on the 24/7 Twitter stream – see above, or if you prefer it in more structured form you can follow BBC News or plenty of other breaking news feeds. As for comment, even if your favoured columnists don’t tweet, other tweeps are unerringly good at pointing to feature and op-ed pieces all around the world, online as well as in print, giving a much wider agenda and more international sweep than the national newspaper you’re used to. And who needs editorials when you have thousands of diverse voices offering praise, critique and comment from all angles in real time? Combining all those, Twitter is the nearest thing so far to a Daily Me.

Then, too, for the increasing number of people who work from home, Twitter functions as a kind of surrogate office. While nothing can replace the adrenalin of a newsroom as the deadline approaches, Twitter does a pretty good job of replacing the myriad conversations going on at any one time in a buzzy open office – whether scurrilous, inconsequential, irrelevant-but-interesting, or bull’s-eyeing slap bang in the centre of your area of interest. As in an office, the streams feed and breed off each other, so that an item that’s meaningless or trivial on its own takes on a diffferent slant when set in the context of another conversation. (Also as in an office, you have to have the strength of mind to shut the conversations out when you really need to work…)

The real ‘secret’ and significance of Twitter, though, is none of these things, although it informs them all. Never mentioned in discussions of its value (but instantly identified by Vanguard’s John Seddon), it is that Twitter is part of the emerging economy that substitutes engaging ‘pull’ for hectoring industrial-age ‘push’. That is to say, as with iTunes only more so, you choose how and in what combination you want to take and use the Twitter conversation. It doesn’t matter that 99 per cent of tweets are crap – of course they are. Ninety-nine per cent of everything is crap, but in this case it’s you who get to decide what is and isn’t. You choose whom you trust. Rather than submitting to the producers’ take-it-or-leave-it CD- (or newspaper-) shaped packages, it’s up to you to mix and match.

Does this matter? Yes: for both users and the entrepreneurs who created the company, ‘pull’ has enormous implications. Because ‘push’ doesn’t work on Twitter (Twitter is opt-in, and let’s face it, who’s going to opt in for ads and the hard sell?), it is a pretty useless medium for corporate sales and marketing (alas, I can’t find the stats that showed this – on Twitter, naturally).

That may seem to be a headache for Twitter’s founders, who have yet to figure out how to monetise its 200 million users. (See this piece in Fortune for a less than flattering portrait.) But perhaps they are looking in the wrong place. For the rest of us its absolute transparency is of course Twitter’s critical asset. Authentic shines through; so does fake, which is why the latter doesn’t work, and that’s exactly how and why we like it. Unlike, say, Linked-In, whose stock soared on flotation to unimaginable heights, Twitter is what we make it. If that includes making life richer, funnier, more convivial and exciting than it would be otherwise, I’d be happy to pay for it – and I don’t think I’m the only one.