This article was published on Systems Thinking Review on 21 December 2010. To read it, click through here

This article appeared in FT Business Education magazine, 6 December 2010. To read it, click here

Of course there’s such thing as an ethical business. There are plenty of organisations that have at their heart the idea that business is not just a vehicle for making profits but a force for the broader good: John Lewis and the coops, social enterprises, Fairtrade firms; even in the US there are companies like Whole Foods Markets, 7th Generation and others that as well as believing wholeheartedly in capitalism believe in doing the right thing too.

Lots of these companies are extremely successful too (although that’s not and shouldn’t be the rationale for being ethical. Remember the saying of Archbishop Whateley: ‘Honesty is the best policy. But he who says so is not an honest man’). And why shouldn’t they be successful? The truth, I’ve come to believe, is that it’s not what you know (or think you know) about business that’s crucial to business success: it’s knowing what you believe in and what you want to do strongly enough to make your own rules – and that includes being ethical or indeed being non-ethical.

So how come the myth has grown up that business can’t be ethical? Put crudely, in the 1970s-1980s there was an ideological hijack of the business orthodoxy by an unlikely and opportunistic alliance of corporate raiders and business schools. Each had their own reasons for formulating a kind of free-market fundamentalism to which the returns have steadily declined and now turned negative, as witness the series of scandals that culminated in 2008 in the banking crisis – which, let me remind you, was the result not of impersonal economic forces but mistaken, venal, greed-motivated decisions by human beings, managers, at the top of large financial firms.

Of course, there has always been a tension between what you might call a light side and a dark side of business: Quakers on one hand, robber barons on the other. But it is only in the last 30 years that a single dogmatic orthodoxy has hogged all the speaking roles, drowned out the counter-examples that I’ve mentioned above and turned business officially and explicity into a morals-free zone. That orthodoxy is the doctrine that the purpose of business is maximising returns to shareholders. After some initial resistance, the original gang of two promoters was quickly joined by top managers who instantly saw that far from being a threat managing for shareholder value could be very much in their interests too. Articulated by three powerful interest groups, the mantra ‘no ethics please, we’re businessmen’ was locked in place by corporate governance codes for which by the way there is no empirical evidence that I know of that they make business more successful and some that they make it worse.

As we have experienced, morals-free business is a disaster – but it’s also based on an egregious legal fallacy. It turns out – I’m quoting here – ‘[after a systematic analysis of a century’s worth of legal theory and precedent] that the law [is] surprisingly clear […]. Shareholders do not own the corporation, which is an autonomous legal person. What’s more, even when directors go against shareholder wishes […] courts side with directors the vast majority of the time…

‘And yet, in a 2007 article in the Journal of Business Ethics, 31/34 directors surveyed… said they’d cut down a mature forest or release a dangerous, unregulated toxin into the environment in order to increase profits. Whatever they could legally do to maximise shareholder wealth, they believed it was their duty to do so.’

This, says the article I’m quoting from, is plain wrong. Directors are being taught the wrong things, with the result that they simply don’t know what their legal duties are. Hence the tragic irony of innovative, proudly ethical Quaker companies like Cadbury, which campaigned against slavery and alcoholism and food adulteration, and Friends’ Provident and Barclays – did you know Barclays was orginally Quaker? – setting aside their ethical principles in the mistaken belief that they have to privilege stockholders above all the rest, and suffering the terrible consequences that we’ve seen.

Now a test: where do you think the text that I quoted comes from? No, not Marxism Today or New Left Review, or even the Observer. It appeared in that revolutionary organ Harvard Business Review – and while that sinks in, consider something else that I read in HBR a couple of months later: shareholders have not done better under shareholder capitalism, in fact they have done worse, than they did in the previous three decades from the end of the war to the late 1970s when managers and directors commonly believed they owed something to employees and society as a whole, not just the stockholders.

There are plenty of reasons for that, and I won’t elaborate on them here. But the point is that there’s no argument even in shareholder capitalism’s own terms for not behaving ethically; and very many arguments for, the biggest one being that if capitalism isn’t underpinned by an internal commitment to bettering society rather than just oneself then no amount of external regulation will prevent more and worse crashes in the future, and this one’s quite bad enough, thank you. Let me end with a quote from Peter Drucker, as relevant now as when he wrote it in 1954: ‘Free enterprise cannot be justified as being good for business. It can be justified only as being good for society’.

Text of a talk given at The Foundation on 29 November 2010

Oh, how I wanted to hate this book.* That grating note of injured victimhood: the very title sets your teeth on edge. Yet another attack on the baby boomers. As if it was their fault they were born in the explosion of fertility that followed the most horrific war in history – in which many of them lost family and almost everyone someone or something precious. As for the optimistic aspirations of the 1960s – at least they had some. And guilt at having (eventually) bought houses and signed up (the lucky ones) for pensions? Grow up, get a life, get a job!

By the time I finished Ed Howker and Shiv Malik’s book, I was still boiling – but not at them. I still think the baby boomer angle is sensationalist and unhelpful: generations are too slippery to be useful units of analysis, let alone blame (as one cross friend said to me on his 46th birthday: ‘What about us? Our parents are going to live to 100, and our kids are still at home because they can’t get jobs or houses!’).

Above all aiming at their grandparents deflects attention from the real culprit – which the thrust of their case makes abundantly clear. What they eloquently trace is the consequences of a breathtakingly foolhardy 30-year (not 60-year) experiment in dismantling the state and individualising responsibility that has led straight to the debt crisis we face today.

As the authors note, this was a deliberate political project. Dazzled by the hard-edged arguments of Chicago monetarists, Margaret Thatcher (who hated the baby boomers) and co-ideologues in subsequent governments acted out the belief that the state wasn’t just inefficient: it was hostile to the individual. In this view, public service was an oxymoron, public employees of all kinds pursuing their own interests at the expense of those of citizens (think Yes, Minister). Since the latter could be relied on to know what they wanted, the argument ran, let’s get rid of the former and allow the marketplace – an instant information processor, in contrast to the hopelessly clumsy proceses of democracy – to coordinate needs and provision without bureaucratic interference. Even better: since markets are efficient and tastes constant, there was little need to plan for the future at all!

In a wealth of charts and tables, Howker and Malik lay out the price of this institutionalised short-termism for three things that matter most to young adults: jobs, housing and inheritance. These chapters are urgent, surprising and enraging. They show how at every turn human beings pirouette around rigid economic theory as effortlessly as foreign footballers past dim English defenders. In housing, they demonstrate how the great council-house sell-off and deregulation have bequeathed us a housing stock and tenancy regime (respectively poky, expensive and insecure) that meet the needs of buy-to-let investors but not those of young adults wanting a home. In jobs, the dropping of full employment as a political goal has been just as counterproductive. Far from being a consequence of Labour welfarism, the ‘benefits explosion’ that George Osborne is now trying to rein in is the direct result of Thatcherite deregulation – the counterpart to rising unemployment and, even more striking, a race to the bottom in employment in which more and jobs, particularly for young people, are so badly paid that they have to be supplemented by handouts from the state. Subsidising skinflint employers now accounts for a large part of the £90bn benefits budget.

As the book shows, abandoning collective responsibility for the future had other dire consequences, notably the crumbling of the apprenticeship system and the casual shrugging off, still proceeding, of pension obligations (let alone career). Free university education went the same way. Paradoxically, Conservative and New Labour governments that lectured the 1960s generation so sternly about living within today’s means were being as profligate with tomorrow’s as a flash City trader on his third bottle of Bolly. Unlike Norway, which quaintly funnelled North Sea oil revenue into a sovereign wealth fund for collective benefit, we blew it. Likewise the £60 bn proceeds of privatisation. And no, as our authors point out, the unleashed private sector proved no better at investment than the public, chief executives quickly twigging that the simplest way to win City kudos (and lavish bonuses) was to slash investment, research and jobs. Meanwhile, like a desperate gambler, governments have thrown around off-balance-sheet IOUs like confetti. Through the PFI, capital projects worth £56bn will end up costing £267bn.

Labour Treasury chief secretary Liam Byrne’s cheeky note to his coalition successor that the cupboard was bare was no joke. There’s nothing left to sell or pawn. Howker and Malik are right to dig through that flippancy to expose how successive governments have bet (and lost) the farm on a barren economic formula. This month’s savage cuts are payback not just for bankers, but for three decades of voodoo economics. We should applaud their forensic skill in exposing the rarely discussed assumptions than have led us where we are, and in setting out the consequences in concrete terms. Perhaps not surprisingly, they are less convincing in putting forward remedies, however. It will certainly take more than the mild doses of social enterprise and employee ownership that the authors suggest.

Yet it defies belief that that a nation with Britain’s resources should be going backwards in terms of simple basics that matter most to most people. To change that, it’s not the fringe manifestations of capitalism that have to shift, but the brutal and unrealistic economic credo at its heart. Putting forward a political programme that does that is the real challenge for the jilted generation – and one that the baby boomers, forgiving the brickbats, will support all the way.

* Jilted Generation: How Britain has Bankrupted its Youth, Ed Howker and Shiv Mali, Icon Books: London 2010

This article was published in Financial Times Business Education magazine, 25 October 2010. To read the article on ft.com, click here

This article was published in Financial Times Business Education, 20 September 2010. To access the article on ft.com, click here

THOSE OF a timorous disposition may want to avoid Enron: The Smartest Guys in the Room. Most Hollywood horror is ultimately comforting, since you can tell yourself it never happened. Not so the events recounted in this blood-curdling, neatly constructed documentary on the rise and fall of the notorious Houston energy giant, culminating in the world’s biggest bankruptcy.

As the film progressively reveals, principally through the mouths of the protagonists, they really were as bad as they seemed. We see the hubris (one of the shell companies set up to shelter the firm’s mounting losses was called M. Yass – OK, move the full stop to the right), the self-serving and the rampaging greed. In retrospect, though, what should send shivers up every spine is that if Enron and Arthur Andersen were business’s Twin Towers (40,000 jobs and $100bn of capital were lost between them), the fundamentalism that brought them crashing down was not some external malevolence: the enemy was, and is, within.

At one level, Enron was a microcosm of the dotcom extravaganza, a one-company bubble of its own. All the ingredients were present: within the firm, leaders who believed they could outsmart anyone or anything, and products that became increasingly disembodied from reality (from energy to futures and markets: at one stage it planned to sell weather) outside the firm, political support and willing believers – ‘useful idiots’ in both academic and financial worlds who took at face value everything the firm told them and eagerly talked it up.

Once the bandwagon started to roll, Enron became a model of self-sustaining momentum. Everyone was dazzled by the honeypot. Investors scrambled over each other to pile in. The top US investment banks, Wall Street’s creme de la creme, enthusiastically subscribed to the loss-hiding schemes, no questions asked. Laxer accounting rules? Regulators, perhaps mindful of chairman ‘Kenny Boy’ Lay’s political connections, were happy to oblige. Lawyers and auditors – the latter well enough aware of what was happening to shred the offending documents in panic when the balloon burst – were far too dependent on the gravy train to even attempt to apply the brakes.

Enron was a bubble in another sense. Disconnected from reality by both its conviction of invincibility and its fantasy accounting, and unchecked by guidance from the top, Enron employees behaved as if they were in a world of their own. Just how perverse this world had become is shown in one of the film’s most disquieting sequences where Enron traders are overheard laughing and boasting about their efforts to disrupt California’s energy supplies in 2000. The famous blackouts that year were not caused by shortage of capacity or poor regulation – they were caused by Enron, which drove prices (and profits) up by as much as nine times by shutting down power stations and creating artificial shortages. Caught on tape, one trader exults at the forest fires sweeping over the state, crowing ‘Burn, baby, burn!’

It may be significant that it took two women to make the first small punctures in this testosterone-inflated balloon – Fortune reporter Bethany McLean (one up for journalism here), who mildly asked if the company’s stock was overpriced, and Sherron Watkins, the Enron employee who undertook the dangerous job of informing the company emperors that they weren’t wearing any clothes.

Although Enron bosses used considerable ingenuity in their attempts to disguise the true state of the figures, in retrospect the most striking thing about their drive to auto-destruction is its utter pumped-up, fanatical single-mindedness: business as extreme sport.

Enron was the most extreme corporate monument to shareholder value ever erected. The entire system was geared to keeping the share price up. On the carrot side, the incentives for doing so were vast: even in the last months executives were collecting bonuses of tens of millions and cashing options for hundreds, even as they exhorted lowlier employees to invest their retirement savings in company stock (which was later pillaged in a desperate attempt to buy time). On the stick side, the system was ‘rank and yank’: every year all employees were graded one to five, and all the fives were fired. Fifteen per cent had to be fives.

In a culture formed by the sack on one side and a pot of gold on the other, it’s scarcely surprising that employees stopped at nothing, including shutting down California (which is now suing for $6bn compensation), to keep the quarterly numbers moving up. After all, their own greed could be, and was, justified because it was all for the shareholders.

But we should know that. In systems where incentives are sharp enough and the moral compass deliberately disabled – what’s good for shareholders is good for the company is good for me – that’s what happens. In that sense, to get where Enron ended up didn’t require management to be deliberately evil; it just required it to take what most MBAs learn at business school and pursue it to its logical conclusion.

The Observer, 7 Ma7 2006

BEHIND THE fiasco of last year’s vanishing Revenue and Customs disk lies an everyday story of outsourcing folk. You can imagine how it went. Senior HMRC manager to junior manager, on telephone: ‘Hello? Sir Humphrey here. The National Audit Office wants some numbers on families receiving child benefit. They don’t want sensitive stuff – names, addresses, bank accounts – just the basic figures. Can you get it off to them?… Oh. Why not?… You mean we don’t have anyone here who can remove the personal details?… Yes, I know we outsource data management to EDS, but surely – well, never mind, get EDS to do it then… What do you mean, it’s beyond the scope of the contract?… How much?… Good God! OK, just send the complete disk, then. Let the NAO desensitise it.’

Behind this story is another. The reason the extra charge was so high – reportedly thousands of pounds – was only partly that the outsourcer had its customer over a barrel. More fundamentally, many customers drive such hard bargains upfront that outsourcers can only make money through extras and small print that makes contracts heavily back-end-loaded. ‘If it’s not a fair price, something has to give – either quality or cost,’ says Geraldine Fox, of Compass Management Consulting.

HMRC ought to be a star exhibit in the inquiry currently being conducted by economist DeAnne Julius into the pounds 44bn-a-year market in outsourced government services, ranging from IT and payroll services to prisons, and how it can be made to function better.

Of course, ‘make or buy’ decisions have to be made in any business, and apply to services as much as manufacturing. But it’s hard to resist the feeling that Julius is addressing the wrong question. Her remit assumes that outsourcing is the right thing to do, and the route to efficiency is doing it better. Yet the real issue is how to make public services work better as a whole, rather than the outsourced part of it. In this larger issue, as we should know by now, outsourcing is often an irrelevance and a distraction, the wrong answer to the wrong question.

HMRC handily epitomises some of the most obvious pitfalls. For starters, when a service is outsourced, the accompanying know-how usually goes with it – even for such simple things as removing information from a database, or how to keep a hospital ward clean and infection-free. Since it’s impossible to specify all eventualities in a contract, such indirect costs are never counted, and costs of non-standard items always exceed predictions (and budget). In many cases, exasperated users end up creating internal specialist groups to fill in the outsourcing gaps, thus negating the reason for doing it in the first place.

Another casualty of the outsourcing decision is the ability to manage the function. IT and cleaning still have to be managed. Rather than tough bargaining at the procurement stage, ‘to get value from outsourcing you need a top-notch governance group – and they are as rare as hen’s teeth. It takes smart customers to get good deals,’ says Fox.

Alas, in most cases the emphasis is reversed. In their determination not to be ripped off, and meet fierce individual cost targets, buyers rely heavily on aggressive, legal-led purchasing teams focusing on short-term contract prices rather than the long-term needs of the business – an approach almost guaranteed to be self-defeating. What looked an attractive deal in year one, already looks a good deal less so by year three. ‘To get deep starting discounts, organisations are signing seven-, eight- and even 10-year deals,’ says Fox. ‘That’s consistently bad practice – the economy will change, the business will change, and you’ll be locked in. Some organisations will be paying 40 per cent over the market rate by the end of the contract, and for antiquated processes. That’s not a good place to negotiate from.’

It’s disappointing, she says, that after three generations of IT outsourcing, organisations still make the same mistakes – believing they can get rid of problems by outsourcing them, underestimating the management overhead needed to make contracts work, and overestimating cost savings. Indeed, with companies panickingly squeezing suppliers as recession bites, this round of mistakes may be bigger than ever.

At the heart of outsourcing is the Fordist faith in mass-production: specialisation, division of labour and economies of scale. But while the formula worked for Adam Smith’s pin factory, the diseconomies of scale – in the shape of massive demoralisation and labour turnover – were already becoming apparent by the time of Ford’s Model-T.

HMRC, and the vast shared-service factories being imposed on local authorities and other public service providers, are today’s equivalent of Ford’s River Rouge plant. Behind the automated document handling and batteries of computers sits a rusting, outdated hulk of a management model – and no amount of outsourcing can change that.

The Observer, 30 March 2008

’THIS IS a solution?’ marvelled Stanley Bing incredulously on business website TheStreet.com at the prospect of a new wave of bank consolidations.

’Didn’t we see what happened to Citigroup and Bank of America? Aren’t both now being deconstructed due to unsuccessful, if not heedless, acquisitions? Haven’t empires from Rome to ITT fallen into rubble as a result of getting too big, too fast?’

He has a point. Most people assume that sorting out the banks is a technical and financial matter – deleveraging, rebuilding reserves and writing down toxic liabilities. But that’s just the half of it. What has been grossly neglected is that, even when that’s done, many banks face the mother of all challenges on the management front – making business sense of vast, sometimes shotgun, acquisitions carried out in the most hostile economic conditions of our lifetimes.

Consider: at the best of times, mergers are worse business, and harder to do, than managers think. A third fail, and 80% fail to live up to expectations. The financial brainboxes are no better at it than the plodders: a recent City poll on the worst banking mergers of all time identified such turkeys as Citibank-Travellers, Credit Suisse-DLJ, Wachovia-Golden West and Commerzbank-Dresdner Bank – then put RBS-ABN Amro and Bank of America-Merrill Lynch, whose consequences are still ramifying, on top of the list.

’Value destruction in financial services isn’t new – we just can’t afford it any more,’ says Dustin Seale, managing director of the Europe arm of Senn-Delaney Leadership, a consultancy specialising in corporate culture.

The risk, he fears, is that the perceived remedy makes ultimate success harder to achieve. Thus, while banking is moving towards being smaller, more focused, and more conservative, the entities being cobbled together are bigger and more complex than ever. Banks were once too big to fail are today’s mergers creating organisations that are too big to save?

Bank mergers are not just ordinarily difficult. The credit crunch capsized all the assumptions on which they were based. RBS’s Sir Fred Goodwin had a good record of making acquisitions work, even expensive ones, but ‘Fred the Shred’ is toast, and his merger rationale and style volatised with him.

His bank’s strategy of globalisation no longer makes much sense, believes Andrew Campbell, director of the Ashridge Strategic Management Centre and co-author of a book called Smarter Acquisitions. Lloyds-HBOS, now relabelled Lloyds Banking Group, is a more coherent unit focusing on the UK retail market, but even here the merger will not be plain sailing integrating the workforce and senior managers of a fierce rival, part of whose identity is bound up with the rivalry itself, never is.

The very success criteria on which the mergers were predicated, and on which the current leaders rose to the top, have reversed overnight. The macho City culture of individual achievement and self-promotion has become the problem but moving to a culture where words such as engagement, trust and self-determination can be heard without provoking gales of laughter is a monumental management task – made more monumental, points out Ian Johnston, a Senn-Delaney partner, by the fact that the colossal bonuses that were used to paper over other cultural discontents are no longer available.

The sense that the world revolves around the banks has to yield to a humbler recognition of the need to serve customers and build relationships. Some banks will make wholesale changes in what they actually do (leadership, recruitment, reward) as well as what they say. Others will find it harder to get beyond spin. Yet, as Seale points out, those that do can contemplate an opportunity as enormous as the challenge.

Without exception, the big banks have been lamentable at dealing with retail customers. This is partly because their minds have been on sexier types of business, but much more because they have remained obstinately wedded to the cost-driven mass-production methods that render them brainless – and, incidentally, have taken General Motors and Chrysler to the brink of extinction.

The first major bank to use the opportunities of the merger round to renew itself by providing an honest, transparent and intelligent service to high-street customers will be greeted with tears of joy. OK, I exaggerate a bit, but renewing the link with customers is the best way for the banks both to make amends for the monstrous errors of the past few years and to proof themselves against foolishness in the future.

As they consider how to avoid a new wave of merger-driven value annihilation, bank leaders can at least comfort themselves with this unexpected thought: for once, as Seale points out, ‘no one wants them to fail’.

The Observer, 1 February 2009

THE BANKERS have claimed another victim – this column. Cost-cutting as a result of the worst media recession in a lifetime means that Observer Management will disappear next week.

I wish I could say the job was complete. When I joined the paper in 1993, the brief was to make visible and discussable something that was intangible, taken for granted, and, for better or worse, affected us all. That was the easy bit. The column instantly drew a rich and argumentative response that ensured a constant supply of issues to address that meshed directly with readers’ own.

But from this exchange emerged a second agenda item that soon overtook the first. Across both public and private sectors what readers experienced as ‘management’ was pervasively problematic. It just wasn’t what it said on the tin. Wherever they looked, readers found a glaring discrepancy between ‘official’ and ‘unofficial’ versions, between talk and walk.

The talk was empowerment, shared destiny, pulling together: the walk was increasing work intensity, tight performance management, risk offloaded on to the individual. The talk was flat organi sations: the reality, centralisation and a yawning divide between other ranks, required to minimise their demands for the greater good, and a remote officer class whose rewards had to soar to motivate them to do their job. Employees were the most valuable asset – until costs had to be cut. Repeated mis-selling and other scandals demonstrated it certainly wasn’t the customer who was king.

Somewhere along the line the edifice of management had been turned upside down – it was shareholders who had become monarch, their courtiers lavishly rewarded managers whose MBA courses had taught them to manage deals and numbers, not things or people. Management had suffered a reverse takeover. Finance annexed reality, cost ousted value, the means became the end.

This is the story that this column has reflected. Shamefully, it reached its explosive climax on the watch of a Labour government that, betraying its entire history, not only encouraged ethics-free market-led management principles in the private sector but imposed them wholesale on the public sector. The credit crunch is man(agement)-made – management, not market, failure. So is the Soviet-style targets and inspection regime, locked in place by lucrative IT contracts with private suppliers, that has made the public sector systemically less capable than it was 12 years ago, despite the billions spent. The emails of rage and despair from public-sector workers at what has been done to their profession have to be read to be believed. And still ministers don’t get it. The elevation of the grisly Alan Sugar to ‘enterprise tsar’ and the timorous, frozen-in-the-headlights approach to City reform in one sense are as risible as MPs’ expenses – but they are also a terrifying denial of reality.

Of course, institutional stupidity and failure to take responsibility are characteristic of all top-down organisations – in fact, they’re two sides of the same coin. Hence the reductio ad absurdum , also charted here, of gleaming hi-tech organisations too witless to stop themselves auto-destructing. What is there about the credit crunch and the environmental one hard on its heels that is not to understand? The management model that has run us for the past 30 years, like the discredited economic theories (rational expectations, efficient markets) to which it cringes, is bust, dead, finished – a mortal danger to us and the planet.

So where do we go from here? Optimism has been in short supply over the past few years. Yet this is not because of lack of alternatives (There Is Always An Alternative) so much as the arrogant certainties of the ruling doctrine that have pushed saner voices to the margin, at worst making unorthodoxy unpublishable. Perhaps the collapse of orthodoxy will make it easier to salute and cherish such exceptions: companies that refuse the dominant logic, such as John Lewis academics who risk their careers by engaging with big issues (would Darwin, Freud and Marx be employable in today’s universities?) courageous public-sector managers who find ways of circumventing the draconian targets regime to do what they know to be right.

As the 2009 Reith lecturer Michael Sandel noted last week, norms matter, because they so easily become self-fulfilling. It shouldn’t need saying in the middle of the biggest management meltdown in history, when the stakes are at their highest, that the debate about the norms that should govern a post-financial form of management must go on, even if not here. For my part, what I’ve learned from an amazingly rewarding 16 years will find its way into a book that, in honour of readers who are the joint creators, I had always thought of as The Observer‘s book of management – although regrettably, and not of my doing, now without the capital ‘O’.