THE BANKRUPTCY of General Motors was a defining moment – in effect a symbolic final line under the management century that began with the invention of mass production and was brought to an end by the series of explosions that blew up the financial sector.

The latter, ironically, was supposed to be the future, a weightless economic and employment successor to limping manufacturing. Only it wasn’t. Meet the new economy, same as the old one except on steroids, which just intensify rather than dampen down the destructive effects.

GM’s demise comes after the longest death scene in history. Its heyday was the postwar period up to the 1970s, when, to a degree unmatched before or since, this one company was management. Peter Drucker, the discipline’s first and most respected chronicler, wrote the seminal Concept of the Corporation after observing the company for two years in the 1950s, and its pioneering multidivisional structure – with a separate division corresponding to each market segment, from Chevrolet to Cadillac – had a huge influence on the shape of other large firms.

In contrast to the maverick entrepreneur Henry Ford, who had little time (or need) for management, GM was the embodiment of what the great historian Alfred Chandler dubbed ‘the visible hand’ – the revolution that substituted rational administrative co-ordination for market forces to drive productivity up and costs down systematically. In the 1950s, GM was the biggest and most successful company in the world.

But its days were numbered as the car industry became global and world supply started to outstrip demand. GM’s formula took Ford’s mass production to new heights. It built so many cars so cheaply that even if they weren’t what buyers really wanted, it could shift them by cutting prices and advertising heavily. But just as GM had undercut Ford’s management model, GM’s was destroyed. Japanese companies figured out how to make cars in small quantities equally cheaply and of higher quality and, being much more attuned to what customers wanted, they rarely had to discount to get rid of surplus inventory. Economies of flow and market pull replaced economies of scale and marketing push.

Since the decline really set in during the 1980s, GM has staggered from one crisis to another. Automation, changes at the top, new brands – nothing has turned the tide some of its brands now have negative value. But this is not surprising: GM’s management model is as obsolete as fins, chrome and whitewall tyres. It has been kept on the road only because, like the banks, it was too big to be allowed to run off it.

All companies are collections of subsystems within a bigger one, which in turn operates within the ecology of the market as a whole. At its height in the 1950s and 1960s, GM’s parts all worked in harmony with the market. Since then, the market has radically altered, and the set of accountabilities that worked in the past has driven them ever further in the wrong direction. Neither the parts nor the whole are now functional, and a small GM is a contradiction in terms barring a miracle, the only future for the surviving marques (probably Cadillac and Chevrolet) will, like Opel and Vauxhall, be in the bosom of an acquirer.

It would be nice to think that with its chief protagonist humbled, the GM management model could be buried, the page turned and a new one started. Unfortunately, it has developed a potent half-life in the services sector. With the development of computers and the internet, financial services and communications companies have been sold a vision of services mass-produced like consumer products, with a virtual supply chain linking low-cost suppliers around the globe.

Alas, the template is usually pure GM. The emphasis on economies of scale and low transaction costs achieved through specialisation and standardisation exactly parallels the obsessions of the bankrupt US carmaker. The result is white-collar factories like HM Revenue and Customs, the Department for Work and Pensions and the Probation Service, which are as inflexible, error-prone and customer-unfriendly as any car assembly plant.

But the mass-production analogy is false. Services can and should be systematised , not industrialised. The idea of mass production leads up a blind alley back to the past. The wide variety of service demand means that the standardise-specialise-automate formula can’t work. Services can be produced economically, but they need well-organised humans, not computers, to do it.

Services are the most likely place to develop a post-industrial management model, one that is more sensitive to customers than mass production, more responsible than the financial services industry, and less wasteful than either. To do that, though, the first imperative is to dismantle the legacy of GM. RIP

As Larry Elliott noted in The Guardian recently, since the 1960s the liberal state has been stood on its head. Whereas 40 years ago markets were framed by strong checks and balances, while within the law individuals could, and did, tell officials to mind their own business, the reverse is now true.

Individual behaviour is regulated by armies of surveillants enforcing guidelines on drinking, smoking, parenting, loitering, dog-pooping, refuse disposal, even school catchment areas, to make the world safe for unregulated markets, particularly financial ones.

Much the same has happened in management. In the 1960s there was less management, and although it was more paternalistic, it was (mostly) reined in by convention as well as stronger trade unions and collective bargaining (there’s a blast from the past). But managers grumbling about the ‘right to manage’ and leader writers fulminating about workers’ demands now seem from another world. In the ‘flexible’ economies, there are now, by design, very few constraints on management action. And, boy, have they used their freedom.

In the wholesale outsourcing of risk from the organisation to the individual, first to go was responsibility for careers. Next overboard was pensions, with companies seemingly competing nearly as hard to shore up their finances by closing schemes as by winning new customers. At the same time, financially trained managers increasingly looked to employees as their first resort for costs to cut. And a tightly yoked performance-management regime of targets and inspection (aka appraisal) made it clear that at work, as at home, people were not to be trusted, needing sharp sanctions and incentives to get them to perform.

In both cases, the cure was worse than the illness. After a couple of practice runs, free financial markets duly obliterated pension pots and savings that individuals had put aside after being booted out of company schemes, with governments utterly impotent to intervene except in the futile role of Humpty-Dumpty. Meanwhile, expecting the corporate officer class to look after the interests of the ranks proved as vain as the unions always said it would be.

Globally, the share of income going to capital has steadily risen at the expense of labour. At a human level, what this means at the coalface was revealed in a rich and fascinating report from the TUC last week. Life in the Middle (www.tuc.org.uk/touchstone/lifeinthemiddle.pdf) shows that the real middle Britain – the stratum of clerical and administrative workers, supervisors, lower-tier man agers, small entrepreneurs and skilled manual workers – has lost out sharply over the last 30 years compared with almost everyone else.

Thus the pay of median earners (pounds 377 a week) has gone up far less than the average – 60% versus 78% – and the gap has widened where 30 years ago the UK was one of Europe’s most equal societies, it is now among the most unequal. Middle-income Britons are less likely to have a university degree, a final-salary pension, or shares and savings, and more likely to have been unemployed than those just above them on the income scale. Four out of 10 think they are in a lower-status job than their fathers.

How all this has happened is not just economics. In their bold, original and agreeably opinionated The Puritan Gift , brothers Will and Kenneth Hopper argue that up to the 1970s, US management (which the British gamely follows at one remove) was living on the strength of its Puritan inheritance, part of which (with idealism, mechanical aptitudes and unparalleled ability to galvanise energy behind a single aim) was a belief that the coherence of the collective was more important than any individual.

But the obverse of US willingness to live in the present is the ease with which it forgets its past. Managers abandoned true north in favour of ‘neo-Taylorism’ – quantitative techniques, ‘the cult of the expert’, of which the temples were business schools, and heroic CEOs. Raging self-interest and the malign influence of shareholder value did the rest as it did in the UK, where, lacking their own tradition and burdened by inferiority complex, UK managers were all too easy to drag in the same direction.

The Hoppers end on a note of qualified optimism. Just as the French had to go to the US to reintroduce resistant vines after their own had been wiped out by phylloxera, so the most thoughtful Anglo-US firms are relearning what they once knew from Japan, inheritor of the human-centred US tradition via Deming and others after the war.

The crunch reinforces the urgency of renewal, as does the scandal of MPs’ expenses, both egregious management failures that focus the plight and the fury of the TUC’s ‘sinking’ middle. A new tax and mobility agenda is the TUC’s remedy; returning management to its virtuous roots would do more.

The Observer, 31 May 2009

IN BB KING’s song Recession Blues, the singer is about to (guess what) lose his baby because he can no longer afford to give her what she wants. Won’t someone go to Washington, he pleads in the last verse, to ‘get me out of this misery’.

Powerlessness corrupts. As recession brutally reveals, helplessness is what a century of wage work and increasingly abstract, remote management has left increasing numbers of people with – and, it is now clear, not just the working classes. Hence the unprecedented wave of outrage at City bankers, financiers who casually offshore themselves to avoid paying for the wreckage they have brought down on others, and MPs with their tragically revealing expenses.

After anger, frustration and the realisation that the only people anyone is going to Washington to bail out is themselves, what then? Time to get on your bike and take your destiny in your own hands. Lynda Gratton’s new book, Glow: How You Can Radiate Energy, Innovation and Success , was written before the crunch, but many will find its subject – self-help in a globalised and corporate world – perfectly suited for the times, and the positive message of individual agency at least a pinprick of light in the surrounding gloom. Why do some people radiate energy and optimism and attract other people to their projects? Can such qualities be created? And how do you deal with a situation that suppresses rather than encourages them, as many companies unfortunately do?

These seem simple ideas, and some people have been put off by the heavy emphasis with they are presented ( Glow always capitalised and in italics, for example). But don’t be misled. Gratton is no frothy new ager. You don’t get to be a director of a major consultancy at the age of 30 by being soft-minded, nor to be a professor at London Business School, where she has for some years been grappling with difficult issues of management practice (which is what she is professor of), rather than theory.

Glow is in this lineage. Whereas her earlier book, The Democratic Enterprise , as its name suggests, explored the implications of freeing up the company as a whole, and 2007’s Hot Spots dealt with firing the energy and creativity of groups, Glow turns the spotlight on the ultimate unit of management, the individual.

Gratton concedes there are many self-help books – but most of them leave out the context. She thinks people need to be ‘much more adult’ about the employment relationship. ‘Many of us are going to have to work till we’re 70,’ she says. ‘Work is it. So you’d better find somewhere where it’s fun and interesting.’ If the context doesn’t allow the individual to flourish, cut your losses and move. Project work, enabled by technology, makes this more feasible, she suggests.

But it’s also about taking responsibility. In far too many organisations, management absorbs energy, sucking the life out of groups and work. Gratton argues that by co-operating with others, ‘jumping across worlds’ (really networking to multiply the number of options and sources of inspiration), and setting audacious goals, backed up by supporting activities, such as sharing information, conversation, and asking questions, it can be consciously generated. ‘ Glow is the small actions people can take that add up to something larger,’ she says. The collective result is what in her earlier book she termed ‘hot spots’, those teams or groups that mysteriously flare up, radiate heat and light – and all too often die away again.

Do ‘quiet’ ideas such as co-operation and networking stand a chance against the stereotypes of competition and get ahead at any cost (as in the hideous caricature of business that is The Apprentice ), particularly in today’s hard times? Isolated individuals face a perilous future in global competition, responds Gratton. The corporation on the other hand is all about combination – collaborating to do things jointly that are beyond the scope of individuals on their own.

As to how her approach works in practice, though this was not part of her research, a number of companies seem to embody the ‘glow’ principles almost exactly. One is WL Gore, maker of the hi-tech fabric in the new folding roof over Wimbledon’s Centre Court. There are no titles or conventional lines of command at Gore, where the only way of becoming a leader is to attract followers. If a project can’t attract people to work on it, then it doesn’t get done. The Brazilian company Semco runs on similar self-organising lines. Both are highly successful both are besieged by job applicants.

Of course, this is only anecdotal evidence. But, pace BB King, they and other co-operative companies suggest that fatalism is not the only response to a difficult world. If you accept you have a part in shaping an organisation you would like to work in – and would want your children to join – then behaving in at least some of the ways described in Glow would be a start.

WILL ROYAL MAIL be New Labour’s political and managerial watershed? There could hardly be a clearer test case of what, if anything, 12 years of bruising encounters with public-sector reform have taught it.

No one doubts that the Mail badly needs an overhaul. In the 16 years since the then Post Office described itself to The Guardian as ‘the best in the world’ (I remember: I wrote the story), it has gone steadily backwards. Shorn of a vision, denied the commercial freedom of rivals and in the view of many ill-served by the regulator, RM has long been lost in strategic limbo.

Some abuse was self-inflicted: remember the beyond-caricature Consignia episode? Or the Orwellian ‘Negative External Financing Limit’ that saw the Treasury cream off pounds 2.4bn of its profits, or the government-imposed 13-year pension holiday that has landed it with a pounds 6.8bn pension deficit that has become a rod to beat it with. Not surprisingly, industrial relations, always challenging, are testy.

But RM is far from a basket case. Postal performance is relatively good and costs relatively low. Even after a 40% shrink age, it has a network of 12,000 outlets under the universal delivery obligation, it is a link to every address in Britain.

There is one other intangible but crucial factor. The Royal Mail is a national treasure. Like the NHS, it exerts a hold on public affection that is, objectively, only partly justified. But whatever the ‘reality’ – as Gordon Brown knows from his duffing up by Joanna Lumley – national treasure status raises the underlying stakes tenfold. No disrespect to Lumley, but RM is higher-profile than the Ghurkas. New Labour simply must get it right.

This is the intriguing backdrop to today’s clash of two opposing models of management modernisation. The official one, part-privatisation, is directly in the there-is-no-alternative, market-based line that has been the default setting since Labour came to power. The assumptions are entirely economic: to use management writer Alistair Mant’s phrase, the ‘business worldview’ has been so thoroughly ingested by ministers and civil servants that no other is entertained. Business is the frame of reference ergo, the private sector must do it better.

Meanwhile, the left-leaning think-tank Compass has put forward a proposal for a not-for-profit RM, borrowing from the likes of Network Rail and Welsh Water, with the aim of renewing and strengthening public-sector values. It wants a ‘dynamic and innovative pub lic service’ that enlists both workforce, including managers and trade unions, and public in the renewal effort. The measure is the maximisation of public benefit, rather than profit.

Wishful thinking? Not a bit, says Hilary Wainwright, who uses that formulation in another Compass publication, Public sector reform… but not as we know it!. It recounts an example of how it has been done. The template is not exact, since the case Wainwright reports is the modernisation (or ‘transformation’, as it prefers to call it) of Newcastle council’s IT services with 650 staff and a budget of pounds 25m, not a national enterprise. Nevertheless, the issues faced – basically the need to rejuvenate an underinvested, traditionally run, not very engaged public service – were fundamentally the same, right down to the initial assumption that there was no alternative to privatisation.

There are many interesting things about the Newcastle experience. One is the critical role of the union (Unison) in articulating the determination of staff to keep their own destiny in their own hands. It also maintained the ‘democratic infrastructure’ which ensured that, once arrived at, tough decisions would stick and is now a strong champion of spreading the model elsewhere.

And why would it not be? Because perhaps the most striking finding is that while the privatisation model has no language to address the public-service concerns of the Compass proposals – it talks past them, as if they didn’t exist – the publicly generated reform did that and more. In Newcastle’s case, the self-funding deal has saved a net pounds 28.5m after investment of pounds 20m, a result that if reproduced at other councils could save pounds 3.5bn nationally, as well as improving public services by leaps and bounds.

Translating all this to RM will not be easy, but, as in Newcastle, everyone, including the postal workers’ union, is aware it’s crunch time the only question is what kind of crunch. That applies to ministers too, for whom the choice could not be sharper. Do they continue to treat public service as an economic burden to be minimised by privatisation and outsourcing – the last gasp of the exhausted old policies – or switch to a less reductive management accounting that has a chance of mining some real national treasure? Forward, or back?

SIGH. Another grand efficiency wheeze that should have been strangled at birth. At first sight, getting worked up about Lord Darzi’s NHS suggestion scheme – under which pounds 20m in prize money is on offer to staff coming up with the best ideas for saving money over the next four years – might seem over the top. The cash sum is trivial: the NHS needs to cut costs by pounds 2.3bn in the next year alone. And if someone does walk off with pounds 5m for an idea that saves many times that, isn’t that a reasonable deal?

Well, no. Spoilsport though it is to point it out, the calculable costs of the awards will add much more to the headline pounds 20m the unquantifiable costs will be many times the original total and whatever the verdict of the subsequent report, the likelihood of the scheme delivering otherwise undreamed-of improvements to offset those costs is nil. Indeed, it could make matters worse.

The most depressing thing is the ignorance it betrays about how systems work – the management equivalent of a doctor expecting cancer patients to respond to treatment by black magic. ‘The more you look at it, the more frightening the whole thing becomes,’ mutters Jane Seddon of Process Management International, a consultancy whose work is based on looking at systems as a whole.

Start with the cost of the scheme itself. Even before the formal launch, there is the cost of developing, planning and specifying the scheme. Now add the costs of communicating and marketing it to the NHS’s two million employees. There’ll need to be a database of submissions with staff to run it, and trained assessors to rank suggestions. If consultants aren’t involved already, they will be now. Finally, there is the bureaucracy of judging and making the awards, including a review mechanism for appeals.

However, the direct bureaucratic costs will be dwarfed by the unquantifiable ones. The prize money sets up competition among individuals and units that ought to be sharing knowledge, not hoarding it. What about people whose day job is process improvement? Will they hold good ideas back or ‘seed’ them with others to give themselves a chance of sharing the booty?

Many apparently sensible suggestions, says PMI’s Jan Gillett, will be unhelpful in practice, because in a system made up of many interacting parts like the NHS, changing one part will affect many others, some for the worse. As the venerable US systems thinker Russ Ackoff never tires of pointing out: ‘Problems in organisations are almost always the product of interactions of parts, never the action of a single part. Treating a single part destabilises the whole and demands more fruitless management intervention management becomes a consumer of energy, rather than a creator’.

Meanwhile, suggestions that really would make a difference – like getting rid of distorting targets and IT-driven bureaucracy, classic energy-gobblers – can’t even be admitted, let alone acted on. This is partly because, as a complex organisation, the NHS is not susceptible to quick fixes (to quote Ackoff again, the only problems that have simple solutions are simple ones). But in any case, says Gillett, the problems they want to remove have been deliberately created by NHS management and are therefore politically out of bounds. The costs of the cynicism and wasted time occasioned by such a fruitless exercise will never be calculated, but they certainly exist.

The Darzi scheme is perverse in two ways. First, the NHS is home to islands of extremely advanced and sophisticated systems thinking, which under pins radical improvement in cancer and stroke services, for example, and is being explored in a number of hospital trusts. Second, used systematically, suggestion schemes are very far from useless. But, says Gillett, they can only work as an integrated part of the whole system.

To see what an awesome instrument a simple suggestion can be in the right hands, consider this. Toyota’s Japanese plants generate an astonishing 600,000 improvement suggestions a year. Equally astonishing, almost all are implemented, and none is paid for. Improvement in this scheme of things isn’t separate from the job it is part of it. In this sense, honed by a constant stream of improvements, Toyota’s standard operating procedures stand as the embodiment of its organisational learning, accumulated over many years. Ability to harness the motivation of front-line employees is a large part of its competitive edge.

Compared with this simple structured approach, Darzi’s incentive-based scheme is almost embarrassingly crude. ‘You don’t need to bribe people to come up with ideas,’ says Seddon. ‘All you have to do is visit the workplace and listen.’ Money prizes won’t make the ideas worse or better, or help the distribution. So here’s a suggestion for Darzi: stop trying to motivate NHS workers with money and use the cash to link up the islands of excellence that exist already.

IN AESOP’S fable of the boy who cried wolf, the sting in the tail is that when the wolf actually appears, the young shepherd has lied so many times that no one comes to his aid even when the wolf is devouring the flock (and, in some versions, the boy himself). No one would actually want him – or the sheep – to suffer that fate, but if he does, we understand that he has brought it on himself.

Hearing the deafening cacophony of wolf warnings echoing around the Square Mile last week, it’s hard to resist the idea that the City of London is similarly preparing its own downfall. The roll call of businesses blindly asserting their right to go on doing the things that will eventually kill them is long: car companies resisting limits on CO 2 emissions, chemical firms contesting controls on toxic substances, energy firms fighting regulation every step of the way. The City’s insistence on its right to evade responsibilities that apply to everyone else is just the latest in this cautionary line, but taken to a new level.

In fact, given similar predictions of doom following the tax treatment of non-doms and foreign company earnings last year, anyone listening to the howls of protest that a 50% tax rate, regulation of hedge funds and curbs on bankers’ pay will trigger an exodus of ‘the brightest and best’ from London must be surprised that there is still anyone in that dubious category left to drive away.

The breathtaking sense of entitlement, and contemptuous dismissal of those who labour in the lower strata of the real world, can be gauged by the weirdness of the arguments attacking the measures. One is that the rich will take steps to avoid paying some of the tax (well, blow me). Another is that, by using cars, private medicine and schools, they are proportionally less reliant on public services. Or try this: cutting tax relief on pensions contributions from 40% to 20% will encourage outraged high earners to cut off their noses to spite their faces by closing down company pension schemes, as well as (of course) emigrating to more favourable legislations.

Indignation at proposals to get companies to publish gender pay comparisons, or the ratio of senior to average pay, similarly seems to come from another world. Good firms aiming to attract the best (as opposed to the most mercenary) talent would want to show they have a fair – that is, equal – pay policy anyway. And firms arguing that what they pay their chief executives is irrelevant to the rest of the company are simply demonstrating that they still don’t get it.

These fractures and disconnections – of the City from the rest of the economy, of the astronomically wealthy from the lower orders, of the boss from the humble employee – are both part symptom, part cause of the bubble that has blown up in our faces over the last year. Top and bottom, finance and factory, are interconnected parts of the same system, whether the unit is a company, an economy or, as we are now learning, the planet as a whole. As we also now know, while the wealth of the rich has shrunk dramatically, the millions who have lost jobs and homes are paying a much heavier relative price than those who are down to their last couple of million.

Which is why the recent, hesitant measures are important. We can regret that in relation to both pensions and tax they are tardy and ill-thought-through – indeed, they give every impression of being narrowly political rather than strategically motivated. But they are still welcome to the extent that they begin to call the City’s preposterous bluff.

For a start, we can begin to query the facile identification of ‘top talent’ with ‘top pay’. In many professions – in fact even in the pre-Big Bang City – the idea that the best were automatically the most attracted to money would cause outrage. Since in any case we shall need fewer, as well as less well-paid, bankers as the financial sector shrinks back to sustainable size, we don’t need to cave in to hollow blackmail. Every other country is in the same boat where exactly would they go? We can stop the regulatory and tax race to the bottom and think more clearly about what we do want – and the incentives that might encourage it.

The irony is that we need a functioning, creative City playing its important original role of serving the rest of the economy: helping companies to raise money, trade, insure themselves and invest wisely. As for the other City, the ‘big end of town’, as it came to be known in New Labour circles, it has cried wolf too many times for the warnings of disaster to be believed. It lied about its ability to manage risk, the necessity for light-touch regulation and the need to be free to pay its practitioners any money they asked for. It will, accordingly, get the regulation it deserves. If City professionals decide in consequence to depart for Hong Kong or the Channel Islands, it won’t be because someone else has driven them out. They’ll have done it to themselves.

JOHN LOCKE defined a madman as someone ‘reasoning correctly from erroneous premises’. For Einstein, madness was repeatedly doing the same thing and hoping for a different result. The worst of modern management – and alas, that often seems most of it – manages to combine the two so well that it doesn’t just exclude incremental learning: it takes knowledge backward.

Consider the operational efficiency programme accompanying the budget last week. It identified a further pounds 15bn of public-sector savings on top of pounds 26.5bn already claimed, pounds 7bn to be made through obliging public-sector bodies to share back-office services such as finance and HR and buying better IT.

It’s not that there aren’t savings to be made – of course there are. Done properly, they would boost public-sector capacity beyond the wildest imaginings of the five expert advisers to the Treasury who wrote the report. The insanity is that savings can’t be got at by the cost-cutting methods they put forward, which on the contrary are guaranteed to drive overall costs higher. Not only that: by specifying the methods to be used, the government locks in far greater sys temic inefficiencies at the same time as it places the assumptions behind them off-limits to examination.

Part of the self-referencing madness is seeking assurance from experts who are so attached to current assumptions that they can’t see beyond them. As with recruiting Lord Laming, whose recommendations shaped the dysfunctional childcare system, to report on Baby P, getting the former chief executive of an IT services firm to advise on office efficiency is like asking McDonald’s to devise an obesity policy. Guess what, the answer is fast food! More standardised procedures, more streamlining of back offices, more shared services… in sum, more work for IT services companies.

The paradox of efficiency is that it can’t be addressed head on. It is a by-product that can only be defined in terms of its purpose. Without purpose, efficiency is meaningless. Cutting costs (the government’s purpose) only raises them for the citizen – but because the assumptions are out of bounds, the government can’t see it.

Look at the ‘cost savings’ made at the Department for Work and Pensions and HM Revenue & Customs. Both these flagships of public-sector reform have been subject to top-down makeovers along approved factory lines. Dumbed-down ‘front offices’ sort and feed incoming cases to specialised processing sections in the ‘back office’ in the belief that these mass-production techniques will cut the unit cost of transactions and harvest economies of scale.

Even in manufacturing, economies of scale lost their grail-like allure when the Japanese discovered how to make small quantities of different, high-quality goods cheaply. In services the case is at best unproven (banks, anyone?), and so far the successes in shared services are few and far between. But even if they do make transactions cheaper, that’s irrelevant if from the citizen’s point of view the service is worse, requiring more transactions to put right. And it takes no account of the disbenefits of the efficiency measures elsewhere in the system.

Thus the HMRC and DWP cost savings recorded in official figures reappear, with interest, in the workloads of harassed local councils, housing associations, police, courts and advice agencies. They have to pick up the pieces left by the failure of HMRC and DWP’s demoralised staff and fragmented processes to provide an acceptable (rather than cheap) tax and benefit service.

Much of the work of the UK’s voluntary advice organisations now consists of dealing with mistakes affecting the most vulnerable in society perpetrated by New Labour’s efficiency flagships. There is an opportunity here. By identifying problem areas and working with tax and benefit offices to remove them, these unsung pillars of civic society could be a powerful agent for improving service and reducing costs.

Except that the government has stamped on any such possibility. First, it has disallowed anything except immediately ‘cashable’ benefits to count as efficiency gains – so investment now to prevent costs in the future doesn’t qualify. And second, diabolically combining type 1 and type 2 madness in the same move, it is subjecting the voluntary sector to the same misguided ‘reforms’ as the service providers – putting large advice ‘contracts’ out to tender, forcing agencies to combine or wither, and paying them per transaction, thus removing any incentive to improve the system as a whole.

’In times of transformation, not only do new problems arise, old ways of looking at things become problems themselves.’ That’s the infinite regression the cost-saving programme being rammed through Whitehall locks us into. It is, perhaps, a third form of madness.

AS THE DUST clears after the collapse of the old financial order, mixed with fear and loathing is a palpable sense of release. Of course there will continue to be discomfort, sometimes extreme, as whole industries are sucked into the maelstrom of the imploding debt bubble. Yet now that market ‘solutions’ are no longer self-justifying, new options for the shape of companies and economies come into view. If society comes before markets, as Philip Blond recently suggested in the FT , a different management vista begins to open up.

The nightmare that is finally ending is the 30-year neoliberal project to make humanity safe for markets. On this economic Island of Dr Moreau, individuals and institutions have been bent to fit an abstract framework of theory and ideology rather than the other way around. Pragmatism and a sense of the importance of social relations have been sacrificed to notions of efficiency that now turn out to be wholly misguided.

As George Packer noted in a recent New Yorker , modern conservatism (whether practised by Republicans or Democrats, New Labour or Thatcherite Tories) has turned its back on its origins of respect for tradition and the need for checks and balances and become its rabid opposite – ‘abstract, hard-edged and indifferent to experience and existing conditions’.

Ever in thrall to economics, today’s management has faithfully reflected this deluded rationality. Managers have grown – and been taught – to eschew messy reality in favour of managing by computer model and target.

Indeed, increasingly they don’t know how to manage forward from reality rather than backward from the numbers. Thus the besetting sin of mistaking the map for the territory, the scorecard for the game, the representation for reality; in any collision between humans and the numbers, it is humans who are the casualty of first resort.

Another consequence of this fundamentalist faith has been the growth of colossal concentrations of market power: not just banks, but also oil companies and even supermarkets have become too big to fail. ‘Efficient’ in a very limited sense, and that only at the cost of squelching the life out of our high streets, they offer a deformed, depersonalised style of competition designed to please regulators rather than customers – witness record low levels of trust in big business that are now prevalent in the US and UK.

Indeed, a regulatory regime operating entirely on abstract criteria favouring economies of scale and high-level targets is essential to these oligarchies, spreading the same dehumanised principles from the private to every corner of the public sector. And the accompanying cynicism, its goals being so remote from the concerns of individuals that there is no sense of wellbeing even when targets are met, remains the same.

The twin monuments to this pitiless, mechanical version of modernity are the banks that grew too big to die and the NHS computer system that grew too big to complete. Both institutionalise the impersonal and abstract and fetishise size, speed and scale.

The paradox, of course, is that ‘efficiency’ of this kind turns out to be catastrophically inefficient even in its own terms, let alone social and environmental ones. In retrospect, the vaunted decade of growth was just another management abstraction, a loan from the future that has been called in with interest.

Establishing a new equilibrium between individuals and broad economic forces so that markets can be made to serve social ends must be the first priority. The City no longer having a de facto veto, the stakeholding ideas, so abjectly abandoned by New Labour in the face of its disapproval, can be resurrected. That would be a huge step, breaking the stranglehold of shareholder value, reopening today’s pernicious governance model and helping to put finance back where it belongs – on tap, not on top.

There is little evidence that economies of scale are useful in banking (or any other services), and plenty that anything too big to fail is too dangerous to live. So banks should be broken up and bankers encouraged to get a life inventing goods and services for customers rather than concentrating on making their bonuses. If that makes banking less creative, good: nothing life-critical, preferably nothing at all, should be run by anyone subject to incentives that make them focus on the money rather than the job.

Economic life, as Nassim Nicholas Taleb puts it, should be ‘definancialised’. It should be re-tethered to real things – customers, products and services. The aim is to bring it ‘closer to our biological environment: smaller companies, richer ecology, no leverage. A world in which entrepreneurs, not bankers, take the risks, and companies are born and die every day without making the news.’ This week’s budget would be a good place to start.

THE CREDIT crunch confronts the corporate social responsibility (CSR) movement with its biggest crisis. Over two decades, the idea that companies should voluntarily ‘put something back’ has acquired impressive support from the great and the good.

No less than 85% of the FTSE 100 refer to CSR in their annual reports, according to one study. ‘It’s never been more important,’ runs a headline prominent on the Business in the Community website over a section on ‘Corporate Responsibility in recession’, with links to how-to articles and an awards scheme. The government also approves, appointing the world’s first minister for CSR in 2000 and asserting in a recent report that by behaving responsibly ‘businesses can make a significant contribution to boosting wealth creation and employment, fostering social justice and protecting the environment’.

Yet the financial meltdown brings a two-pronged challenge to responsibility champions. The first is simply whether sustainability and wider CSR issues will remain on the boardroom agenda. Non-government organisations and a number of other CSR observers see signs of com panies reverting to the default position that, in today’s conditions, anything other than business as business is a luxury that they can’t afford.

In truth, the ‘market for virtue’, as David Vogel put it a couple of years back in a book of that name, is in any case small and weak, particularly in capital markets, which give no sign of rewarding companies that do good with higher share prices or punishing those that behave badly with lower ones. Accordingly, while for a few companies CSR makes business sense as part of their brand and customer strategy, and others use it defensively for risk management purposes, most do it only in so far as it suits them and they can afford it. When it doesn’t suit them there’s nothing to prevent them dropping it, or perhaps cherry-picking the areas to apply it.

It may be no accident that most CSR centres on environmental issues. Doing more with less – ie, resource efficiency – and eliminating pollution before it occurs often directly benefit the bottom line (which means it isn’t really CSR, it’s just sound business). Meanwhile, green credentials may deflect attention from less visible or savoury practices. For example a number of large retailers – Debenhams, B&Q, Boots Alliance and Selfridges among others – have over the past year reportedly extended their payment period to suppliers, sometimes up to 96 days, while the Federation of Small Businesses says that 14 companies, mostly retailers, have taken to charging a 2.5% ‘settlement fee’ when they pay their bills.

While such a power play, like MPs’ lodging arrangements, may not offend literal definitions, it breaches the spirit, potentially putting many credit-starved small suppliers in danger of collapse. It also lays companies open to the charge that CSR is attractive to them because they can gloss what they do in the most favourable light, while not having to do anything they don’t want to.

But more glaring are the contradictions in the financial sector. Much like Enron, financial services have combined being a pillar of CSR with corporate irresponsibility on a grand scale. The immediate cause of today’s crisis was cynical mis-selling of sub-prime mortgages to self-certifying customers whose hope of maintaining payments in a serious downturn was minimal. Scarcely believably, the process was then repeated higher up the food chain, investment bankers re-mis-selling poisonous packages of debt to investors and other bankers, egged on by massive one-way bonus incentives.

Yet, as Ian Christie, an independent environmental consultant, notes, the CSR industry has had nothing to say about the pay and incentives issue, a crucial part of any post-crunch reform, at least in public, and if it has been conducting advocacy on it in private, it was to singularly little effect. A similar outbreak of mutism has greeted the failure of financial self-regulation – indeed, arguing against regulation is a key point on the City agenda. Christie asks: ‘Has any member of any CSR club been ejected or suspended for breach of the spirit of CSR or for flagrant irresponsibility? I think the answer is no.’

How little influence CSR is able to wield within companies was charted in a recent article in Ethical Corporation noting the imperviousness of sales teams to ethical concerns. Sometimes scornfully labelled the ‘sales prevention team’, CSR professionals were ‘completely excluded’ from debates about how to treat customers. Given the ritual obeisance to customers and the central role played by their abuse in the current crisis, this is an extraordinary revelation, kicking away any pretension CSR might have to pose as a saviour in today’s troubles. Rather the reverse: the reputational issues faced by the banks are only matched by those facing CSR itself.

READING THE opinion and letters pages of the Financial Times these days gives a curious sensation of seeing cogs and gears that have not moved for 30 years creaking into motion. The past couple of weeks have seen an article putting forward happiness as a better goal for economic activity than growth a proposal from the Aylesbury Socialist Party to contain banking exuberance by socialist planning and, scarcely less heretical, a declaration by Jack Welch, formerly head of GE and the foremost management icon of the age, that shareholder value is ‘the dumbest idea in the world… a result, not a strategy… Your main constituencies are your employees, customers and products.’

Welch’s comments mark a psychological turning point. While he didn’t invent shareholder primacy, which emerged from seminal US academic work in the 1970s, GE under Welch became a past master at managing it, making a fetish of delivering quarterly earnings and dividend rises – using judicious disposals as necessary to make the numbers. With the crunch, that possibility is no more, along with GE’s treasured ‘AAA’ credit rating. Hence, perhaps, the recantation.

However, while saluting Welch’s conversion, a subsequent FT editorial on ‘Shareholder value re-evaluated’ shows how little the wheels have actually turned. Surviving the ‘re-evaluation’ are all the structures of existing governance: companies as entities run for the benefit of shareholder-owners (even if, as Welch implies, the means are indirect, rather than direct, managing of the share price) alignment of directors and shareholders pay to reflect performance. In short, once the crisis is over, with a tweak or two here and there, it’s safely back to business as before.

This expectation is shared in the City. Entrusting a review of the Combined Code on corporate governance to the Financial Reporting Council – just like the preposterous appointment of Lord Laming to report on the working of his own reforms in child protection – simply guarantees a ‘steady as she goes’ response. How could it be otherwise?

But don’t these people realise the platform is blazing beneath them? This column has long maintained that, regardless of theory, a system that encourages the same organisation to pay one person 470 times what another gets will eventually blow up. This it has now done – in America, of all places, where the freewheeling social contract has broken down under pressure of the crisis. Confidence in business has hit rock bottom. In a recent poll, just 17% of US respondents said they would trust what a CEO told them a ratio of 3:1 wanted tougher regulation.

Does anyone seriously think that assurances about ‘better bonuses’ (as misguided as ‘better targets’, of which they are a close relative) will stem this tide of outrage? It isn’t a question of refining the incentives, chaps – it’s a question of reversing them. As Welch rightly notes, share prices are supported by the value created in product markets by the interrelationship of employees, customers and suppliers. So why should alignment run upwards from directors to shareholders?

’My guess,’ writes Gary Hamel in The Future of Management ‘is that… shareholders would have been better served if their chairman could have bragged about being aligned with employees and customers. It seems to me that a CEO’s first accountability should be to those who have the greatest power to create or destroy shareholder value.’

In any case, the entire notion of the shareholder has to be rethought. In an age when a listed company’s share register suffers 90% churn each year, the very concept of ‘the shareholder’ dissolves, corporate governance expert Professor Bob Garratt told a recent meeting of the Human Capital Forum. Calling for a ‘cultural and behavioural transformation’, Garratt declared that the first duty of directors was not to shareholders, but to the company itself. Organisations have to move from agency theory to stewardship theory, he believes – restoring the original concept of the board’s role from the 17th century.

Ironically, from that perspective it is today’s ‘business as usual’ that is the aberration. In a forthcoming book, The Rise and Fall of Management, Gordon Pearson shows how corporate law, including the 2006 Companies Act, takes a much more enlightened approach to governance than current practitioners want to admit. Contrary to common assumptions, shareholders do not own companies (how could they and benefit from limited liability at the same time?), and directors owing their duty to the company can’t be ‘agents’ of shareholders – indeed, they are charged with acting fairly as between all company members. It’s a measure of how much present governance has lost its way that resurrecting such ideas should now seem so radical – and so urgently necessary.

The Observer, 29 Mar 2009