SPEAKING UP for trust in recent years has been about as thankless as hippy Neil’s exhortation of ‘peace and love, man’ against the brutal realpolitik of Vivian in The Young Ones. The latter has all the good lines, and if they don’t work, a swift head butt will finish the argument. In the same way, what weight does namby-pamby trust carry against the arguments of self-interest and the knockout blow of Loadsamoney?

We now know the answer. As today’s banking paralysis demonstrates, trust is something business can’t do without. It isn’t some fuzzy nice-to-have it’s the lubricant without which the City and Wall Street are as frozen as a rusted motor.

If there is debt or credit, there has to be trust. It doesn’t have to be personal, or even direct: when you use a card to buy a meal in a restaurant, it’s not you the restaurant is trusting, it’s HSBC or American Express, which will do nicely.

Just how important this impersonal or institutionalised trust has become is described by Paul Seabright in his book The Company of Strangers. When you buy something as simple as a shirt, he says, you are the final node in a global trust network straddling a dozen countries, the whole chain dependent on confidence among all the other nodes that their unseen customer or supplier on the other side of the world will keep their side of the bargain. According to one estimate, in developed economies all but a tiny proportion of GDP is ultimately attributable to trust.

As Seabright’s example hints, historically business and trade were considered a civilising influence on humanity. Trust is a kind of moral leverage. Making trade (and wealth) rather than war required people to be honest, respect contracts and collaborate readily with strangers – all essential elements in the ‘commercial syndrome’ of behaviours identified by Jane Jacobs in her masterly investigation of the moral roots of business and politics, Systems of Survival

Alas, few people advance the doux commerce thesis these days. Rather the reverse: the City and Wall Street have become bywords for selfishness and greed not for nothing was the book about an earlier outbreak of insider greed, the leveraged buyout of RJR Nabisco in 1990, entitled Barbarians at the Gate. Trust may be crucial, but is also extremely hard to manage. As the present crisis graphically shows, too much is as bad as too little, a succinct description of today’s situation being that investors have gone from trusting anybody to trusting nobody almost overnight.

The institution of management bears much of the responsibility for this debacle, having eagerly adopted a model that encourages managers to maximise short-term profits (and their own pay packets) at the expense of the greater good. This doctrine enshrines suspicion and lack of trust at its heart, and deliberately declines any concern with morality. By this means managers have indeed enriched themselves, but at the expense of wholesale loss of their own trust and legitimacy, which has come back to bite them. Company executives have not only forfeited the trust of their own employees and society as a whole – they don’t even trust each other.

This is serious. Not surprisingly, and rightly, regulation is in the air. New rules will inevitably come, but it is not inevitable that they will have the effect intended. Consider Sarbanes-Oxley (Sox), the US legislation hastily passed after the Enron and WorldCom scandals in 2002. Sox is now thought in many quarters to have been a disaster, increasing frictional costs and bureaucracy and providing a field day for legal and accountancy firms, without changing the behaviour which causes the problems. Witness Northern Rock, AIG and Lehman: they may not have committed legal offences, but in their excessive short-termism they are Enron’s spiritual heirs.

If son of Sox can’t prevent the emergence of another generation of Enrons in a decade’s time, what can? One radical answer is put forward in the October issue of Harvard Business Review. Two prominent Harvard professors, Rakesh Khurana and Nitin Nohria, argue that to repair managers’ shattered legitimacy, ‘business leaders must embrace a way of looking at their role that goes beyond their responsibility to the shareholder to include a civic and personal commitment to their duty as institutional custodians. In other words, it is time management became a true profession’.

Unlike doctors and lawyers, they say, managers ‘don’t need a formal education, let alone a licence, to practise. Neither do they adhere to a universal, enforceable code of conduct’. They think managers should have to swear a version of the Hippocratic oath, a rigorous code of ethics covering personal conduct and responsibilities to society. Controversial? Certainly. But unless managers urgently find ways to restore society’s broken trust, they will find their legitimate jobs hemmed in by much tighter restrictions – and have only themselves to blame.

The Observer, 12 October 2008

ONE OF the glaring fault lines running through the financial crises of recent years is ownership. In the days of hedge funds and day-trading, who owns companies? And what rights and obligations does ownership bring?

Finding a balance between these competing claims will be a key element in whatever emerges as post-crunch capitalism, according to Mark Goyder, director of the think-tank Tomorrow’s Company, which is launching a report on the subject next month. It’s the point where the otherwise diverging fields of finance and the real world intersect – and an area where theory and practice have grown so far apart they have almost lost touch with each other.

Ownership matters, although not always in the ways you might expect. Thus all current corporate governance is predicated on it. At the heart of the Financial Services Authority’s Combined Code is the assumption that the central issue of corporate governance is the ‘agency problem’ – how to get managers and directors to act like owners. The separation of chairman and chief executive roles, the bonus culture, and the emphasis on non-execs, among other things, all have their origins in the assumed need to prevent managers from using their inside knowledge to usurp the rewards of ownership from the rightful beneficiaries.

Ownership makes a difference in more direct ways. For example, empirical research suggests that partly or wholly employee-owned companies can benefit from an ‘ownership dividend’ – a well of commitment not available to others. A firmness of purpose that looks beyond making money – ironically, a key to making much more money than those companies without it – is dependent on stable ownership. So much so that many distinctive companies opt to remain private rather than submit to the pressures to conform inherent in public ownership. Stable ownership also favours the patient work of organisation – and relationship-building, as opposed to financial engineering. Few would argue that the companies acquired by Warren Buffett (preferred holding period: forever) would have done better outside his benign long-term embrace.

Yet ownership is a surprisingly slippery concept. While few people would dispute the ownership claims of an entrepreneur over his or her start-up or a farmer over a family farm, the rights afforded by a parcel of shares in a public company are clearly much weaker. Even long-term shareholders do not ‘own’ the company in the sense that the owner of a house or a car does and the distance is increased by the growth of pension and other funds as intermediaries. This also means that there is no longer a single identifiable shareholder interest. In any case, as Goyder points out, fund managers who formally own the majority of a firm’s shares can’t act as owners (as they are often urged to do) in a stewardship sense, since they owe their fiduciary duty not to the company but to their funds’ beneficiaries. Since fund managers are often judged on their short-term performance, the ironic result of what Peter Drucker identified as ‘pension-fund socialism’ has actually been an intensification of short-term pressure on companies. The rhetoric of corporate governance is based on a fiction.

All this, moreover, before the hardcore financialisation of the last 15 years, which has seen ownership sliced, diced and reconstituted into instruments and derivatives that are even further removed from the world of customers, products and relationships. When derivatives can be used to hide a raider’s identity, and hedge funds can borrow shares from a fund manager to take a punt on driving the price down, ownership has simply lost the sense of obligation that attached to its original meaning.

With hindsight, the hole at the heart of ownership – with the nominal owners disqualified from acting as such and directors browbeaten (not unwillingly) into adopting the travesty of ‘shareholder value’ – has been an important factor in the economic transformation of the last few years, in which the City has grown to believe itself the ‘real’ economy, while companies that produce things have let themselves be turned into abstractions to be chopped up and sold on.

However, as it usually does, the real world has reasserted itself – and in resounding fashion. The limitations of virtual ownership now having become abundantly apparent, at least one of the questions Tomorrow’s Company asked itself – is the idea of ownership obligations a sentimental anachronism getting in the way of the efficient allocation of capital? – seems to have answered itself. Those obligations do still matter, as they do to the farmer and entrepreneur. Renaming and redefining the roles combined in ownership – and particularly separating the investment and stewardship functions – may sound boring. But the real world is just as broken as the financial one, and fixing it is just as important.

The Observer, 28 September 2008

MANAGEMENT IS mostly left out of the pontificating about the credit crisis. But we’re now beginning to see how much it matters. As the scariest financial auto-destruct of the last 75 years unfurls, it suddenly becomes clear: it’s no longer the public sector that is the priority for reform it’s the private.

This is long overdue. But with the emperor’s stark nakedness revealed for all to see, reconstituting a wardrobe for 21st-century capitalism may be easier, because at least we can see in merciless detail the bits that it needs to contain.

Many commentators are already resigned to the impossibility of regulating to prevent future crises – for them, technical financial regulation will either create opportunities for regulatory arbitrage or stop innovation dead (although some might consider that no bad thing). But thinking of it in terms of management – both of companies and markets – opens up a different and more optimistic vista.

To do that, we – particularly the left – need to get much more sophisticated than in the past about what the public sector, private sector and markets actually do. It’s usually carelessly assumed, for example, that markets and the private sector are the same thing. Markets are what companies and other organisations (including some public-sector ones) operate in, as different from each other as a forest and the animals that live in it. As in any ecology, it is the interaction between the different entities that constantly moves the system forward or back. Managing the system as a whole starts here.

In doing so, the first thing to dispose of is the idea that today’s institutions are somehow God-given. As a correspondent remarks, the ‘free market’ is a myth all markets have rules and restrictions, or have the edges softened by other means. Thus companies over the years have gained immense privileges in their relationship with markets: limited liability, legal personality and easy incorporation.

Both markets and corporations are creatures of state power, established to serve the public good. To underline this point, note that today’s crisis is primarily one of the Anglo-Saxon model. It is the ‘Washington consensus’ that is on trial. Other countries whose economic ecology has developed differently, such as France and Germany, are trying hard not to let their schadenfreude show.

By definition, a vibrant economy needs a combination of successful companies, dynamic markets and (as many people have suddenly remembered) a solid public sector to function that’s what a vibrant economy is. But the current system is massively unstable. Rebalancing it requires looking again at both companies and markets, as well as the public sector.

The credit crunch conclusively demonstrates that we can no longer afford a corporate model that generates repeated crises for society as a whole as a byproduct of pursuing vast rewards for a few. This makes a mockery of the corporate social responsibility movement, of which the City is a pillar. CSR is simply incompatible with the unbridled incentive schemes, lemming-like pursuit of risk and unaccountability that have produced today’s meltdown. It is time to bring CSR inside – to do what New Labour flirted with ever so briefly in 1997 and then abjectly abandoned – and lay on companies the formal obligation to take into account the wider interests of all stakeholders, including the community, on pain of having their charter removed. To the conventionalists who object that the notion of benefiting all stakeholders is a recipe for fudge and compromise, tell that to rivals of Toyota (largest auto company in the world), Whole Foods Market (fastest-growing retailer), John Lewis, and many other successful companies that include wider social wellbeing in their corporate aims.

Internalising these costs and disciplines in companies would go some distance towards preventing further outbreaks of madness. But markets, too, should be enlisted to add their discipline to this endeavour. The market’s ‘messy processes of experiment and correction’, in John Kay’s words, work because they do a better job of mobilising dispersed knowledge and dispensing feedback than any central authority, however powerful or well-meaning: see the Soviet Union.

So, for example, in the case of energy, mobilise that knowledge not by dictating technologies but, as George Monbiot has suggested, by setting strict CO 2 and public safety conditions and then allowing the energy companies to find the cheapest means of delivering it. It will be harder to find a simple formula for finance, where there is no single overriding end, but surely not impossible.

Ecologies are always evolving. Unchallenged, companies have grown arrogant and self-serving, and the market has become an end rather than a means. But they are what we have and, for all their flaws, they remain immensely powerful. They got us into this mess the ultimate management task is to create incentives for them to get us out again.

The Observer, 21 September 2009

THE SUBJECT of women in management evokes the same stifled groans these days as feminism. Response to the latest report from the Equality and Human Rights Commission, which earnestly estimates that it will now take 55 years for women to achieve parity in the judiciary, 73 years in FTSE boardrooms, and 200 (apparently the same as it would take a snail to crawl the Great Wall of China) in Parliament, ranged from an irritated ‘yes, yes, we know it’s slow it’s a matter of waiting for the culture to catch up’, to an equally dismissive, ‘well, we can’t help it if women make different choices, can we?’

How very 1990s, is the subtext: now can we move on to something that’s more, well, important?

Of course the EHRC figures indicating that in 12 of 25 fields of work women at top level are losing ground to men rather than gaining it could be a blip. But taking them with other recent findings, it’s hard to avoid the conclusion that management is as unreconstructed as ever and equilibrium, let alone parity between men and women, as unlikely as finding Elvis on the moon.

Last year, for instance, researchers at London Business School’s Lehman Centre for Women in Business found that women were unlikely to thrive in organisations where fewer than 30 per cent of senior executives were female – ie, most.

Now comes a truly extraordinary study of senior executive pay by a team from Exeter University and Tilburg in the Netherlands, which throws a sharp and unforgiving light on the assumptions about the nature of men and women managers’ performance at work.

In a study presented to the annual meeting of the US Academy of Management last month, the researchers compared the pay of 96 matched pairs of men and women executive directors doing similar jobs at listed UK companies between 1998 and 2004. They discovered not just a 19 per cent gap in total pay (a median £257,000 for women and £316,000 for men), which was even larger than expected but also far more striking disparities in bonus payments. Basically, women’s bonuses change very little however well or badly the company does. Men, on the other hand, are punished much more for poor performance but hugely more rewarded for good.

Thus, to take the extreme cases, in the worst performing companies women did better than men in bonus terms, taking home top-ups of £71,000 compared with £32,000 for men. But that difference was insignificant compared with the gap that opened up when performance improved: for companies moving from bottom to top of the performance table, male bonuses soared by 263 per cent (to £151,000) while the increase for women was 4 per cent (to £73,000). Men got nine times more benefit from improving company performance than women.

What explains this discrepancy? Many observers believe it is due to fundamentally diverging beliefs about the impact and effectiveness of men and women managers. So, put crudely, men’s dramatic bonus changes reflect traditional stereotypes of top male executives as dynamic risk-takers whose actions have a decisive effect on company performance (for both good and ill) while women’s timid additions reflect an equally stereotypical view of female passivity, low impact and weak appetite for risk. The extent of the caricature came as a surprise to the research team. ‘We expected to find that women got smaller bonuses than men,’ says Michelle Ryan, one of the co-authors, ‘but not that they would hardly vary no matter what the company performance was. Women are credited with neither kudos nor agency.’

The danger of self-fulfilling prophecy is obvious. As salaries are proxies for credibility and expected impact and influence, low-paid women will tend to get less good jobs than their qualities warrant, the authors speculate, in turn reinforcing the gender stereotypes of nurture and communality at the expense of drive and ambition, and causing ambitious women to leave or turn off. This ‘organisational apathy’ to women, they charge, is the very antithesis of equality.

It is hard to know what to be most depressed about in the catalogue of myth and misapprehension revealed in these findings. It’s not just about women: the gender stereotypes are equally crude on each side. What the bonus disparities suggest under the fake rationality of laboriously calculated pay-for-performance schemes is a Tarzan and Jane model of management, in which the attributes of management manhood are as exaggerated as those of management womanhood. Mine’s bigger than yours yours is more cuddly than mine. As long as such Neanderthal attitudes persist, women will continue to be underrated and disappointed, men overrated and more likely to take stupid risks, and all of us suffer the consequences.

The Observer, 14 September 2009

ONE OF the thorniest business conundrums of the past 30 years has been top management pay. Without rhyme or reason, rain or shine, year in year out, company bosses have pocketed double-digit annual pay increases. With the effects of compounding, differentials have widened like Jaws at mealtime. In 2004 a FTSE chief executive earned 54 times more than the least-paid employee, compared with nine times in the 1970s. In the US, always more extreme, the pay gap is an almost unbelievable 430 times.

It goes without saying that these rises have far outpaced the growth of shareholder returns. In other words, whatever is being paid for here, it is not performance: despite hectares of spreadsheet calculations and libraries-full of studies, no one has established a link between the two that’s stronger than coincidence.

Paradoxically, the Ferrari-type acceleration of exec remuneration has come as pay for performance has been a central preoccupation of the entire governance system. Indeed, that’s what the 1995 Greenbury report, with its incentives to align managers, agency-style, with the interests of shareholders was expressly about. In this, it has failed by a margin that in any other sphere would merit derision and humiliation.

In an important new working paper ( Rethinking Top Management Pay , by Julie Froud et al, of the Centre for Research on Socio-Cultural Change, Manchester University), researchers suggest that it is time to stop obsessing with the non-existent performance-pay link. They say we should start thinking about top salaries in a different way. Previously, they suggested that top managers in giant firms were in a position to ‘value-skim’ – deduct imperceptibly small change from turnover that still added up to very large individual salaries because total sales were so huge. In smaller companies, such an option was not available since huge salaries would materially affect profits and, to a lesser extent, turnover. So what were these companies doing instead?

What researchers found was that top salaries at a 123-strong selection of companies from the FTSE 250 were broadly consistent with the idea of a fee, consisting of a minimum ‘going rate’ plus a weighting for size (the bigger the market capitalisation, the higher the fee). Thus there was in practice a minimum going rate for a chief executive and finance director team of pounds 1m between them, with an upward progression for size.

Reformulating top management pay as a fee instantly raises some interesting questions. Charging fees is a well-established professional means of getting paid. Many other professions – lawyers, management and other consultants, architects, surveyors, private medicine, even freelance journalists – do so, often with a minimum and an automatic adjustment for size or length of assignment. But how many others bump the amount up by 10 per cent a year?

Equally important, is size the right criterion for scaling pay? While it helps to determine, say, architectural fees, there is no necessary link between size and better share performance. Indeed, it could be argued that by encouraging growth at all costs the de facto scale adjustment has given executives incentives to do mergers and acquisitions irrespective of the long-term interests of shareholders and employees. As the paper notes: ‘If shareholders do not want larger companies with more mediocre returns, then non-executive directors need to think again about pay-for-size incentives for empire-building by top managers’.

But if size is not the right criterion, what is? The conclusion of 30 years’ experience is that pay for performance in shareholder terms is probably unachievable and often counterproductive. It is a formula for increasing pay whatever the performance. So why not abandon trying to focus top management attention on things they can’t influence directly, like the share price, and concentrate on the things they can and which drive value in the long term, such as quality, resource efficiency and so on?

Finally, how much is enough? The long-term real return on equities is 5.3 per cent the research found that in the sample companies 2007 top management pay accounted for 0.4 per cent of market cap (with a time lag) and 3.1 per cent of current profits. But the latter is on a rising trend, which by definition cannot continue at today’s pace without coming into conflict with shareholders’ interests, which indeed it may be already. In fact, taking fees in their historical context, the researchers consider they are quite high enough indeed, ‘one of the aims of non-execs on remuneration committees should be to cap the percentage take, or at least inflect rates of growth downwards’.

In the time-honoured phrase, more research is needed. But according to co-author Professor Karel Williams, the fee-based approach is arousing interest in governance and pay circles, and at least one major fund manager is known to be highly sympathetic.

The Observer, 7 September 2008

IN AN ILLUMINATING column, my colleague Heather Stewart recently noted that it’s not just house prices and growth rates that have tumbled down in the credit crunch. It’s the whole easy assumption that the market knows best.

For three decades a single dominant thought has crowded out all others: that managing, whether of economies or organisations, is a matter of switching on the automatic pilot of the market’s invisible hand and letting rational selfishly motivated individuals do the rest. NHS, railways, pay, investment, economic structure… there was no problem for which the free play of the market would not provide the answer.

But the dominant idea is now under attack. One prong of the offensive is the course of events after all, it wasn’t supposed to be like this. Over the past decade, rather than a stimulating pat on the back, the invisible hand has administered a succession of increasingly damaging haymakers: South East Asia, hedge fund LTCM, the dotcoms, Enron and other corporate scandals, now the sub-prime shambles. After several knockdowns, the unfettered market has put the global economy on the canvas for the count.

Despite the efforts of the cheerleaders, only a tiny minority actually benefited from the era of rampant financial capitalism inaugurated by Wall Street and the City and, as polls consistently show, few in either the US or UK have any trust in its institutions or officers. They are right to be suspicious. But, as Stewart also noted, just as the practice of financial capitalism is being questioned, so are its intellectual underpinnings. As it excavates the foundations, the burgeoning school of behavioural economics is shouldering aside the desiccated calculations of economic man to make legitimate space for emotion, altruism and fair play in economic behaviour.

The final element in the attack on orthodoxy comes in the shape of what we have learnt about management over 25 years. From the performance of exceptional outliers in a surprising number of industries – John Lewis and Whole Foods Market, WL Gore, Nucor, Southwest Airlines, Semco, Toyota – we know that good work can thrive in a variety of ownership and incentive structures.

It has nothing necessarily to do with stock options, private ownership or extravagantly paid senior executives. It does have to do with effective work organisation and systems, which the individual performance management regimes favoured by the private sector are as likely to destroy as to support.

It is now apparent that where the pri vate sector does excel is in disguising the full costs of its incentives by externalising their dysfunctional results on to society as a whole. Today’s credit crunch is the most stunning example of this perverse behaviour in economic history.

Of course there’s no hiding that much public service is depressingly bad, but again this has nothing to do with public or private customer service in the private sector is equally poor. This is not surprising because, ironically, the badness in both cases could be said to be another market externality – the purchase of identical IT-based mass-production service systems geared to meeting the internal incentives of the management consultancies that sell them rather than the needs of the end customer. Intrinsically, there is no reason why public-sector organisations cannot provide service at least as good as the best private sector outfits – and a growing number of them do.

The discovery that, pace private equity, work organisation is just as important for performance as agency theory or ownership liberates – or should – all kinds of new thinking about how services could be organised and delivered. It’s not the market that will provide the answer to poor public (or indeed private) service: it is, as it always was, the hard work of establishing what the customer wants and organising the work to meet it with minimum fuss, and therefore least cost.

No one would want to return to some of the methods of the nationalised industries of the past – although it now appears that their performance may not have been as bad as it seemed at the time. But as we have seen, the public sector has no natural monopoly of management badness any more than the private sector of good.

The late JK Galbraith once noted that the left needed to be smarter about management than the right, since it insisted on taking under its control industries which the private sector had given up as basket cases. The conclusion still applies, but for the opposite reason. Ironically, if it is tragically the case that after all the frantic activity of the past 11 years, public services are still as much in need of reform as ever they were, it’s because of New Labour’s simplistic reliance on the invisible hand. Management of the market is more important than management by it.

The Observer, 31 August 2008

ONE OF the fallacies earnestly and unquestioningly maintained by New Labour is that we live in a primarily individual economy. We don’t. To adapt Adam Smith, it’s not through the efforts of the individual baker, farmer and consumer that toast, eggs and tea materialise on our tables in the morning – it’s through the very visible hand of Tesco, Associated Foods, Nestle and the utility companies. No organisations, no breakfast.

The consequence of living in an organisational economy is that management – the orchestration of collective activity – matters greatly: at least as much as individual ability and skills. A good system can provide the support, motivation and, indeed, education that makes everyone a better player, whatever the individual ability level. A bad system turns stars into dunces (which is why expensive transfers, in business or the Premier League, so often flop).

Because of their fixation with the self-interested individual, governments and their minions regularly misinterpret the needs of both individual and organisational economies. Take the Leitch report on workforce skills. Now nearly two years old, it was an attempt to scare us into improving competence at work. The focus is strictly economic and it is full of exhortations about world-class competition and threats of what will happen to people if they don’t ‘raise their game’ – skills as instruments of economic warfare and social Darwinism. As such, Leitch offers little that is new: it is the latest in a line of hand-wringing reports going back at least 150 years linking the UK’s poor productivity record with our shortcomings in education and training and attempting to solve the first problem through the second.

Now, it goes without saying that improvements in individual literacy and numeracy are vital and welcome, not just for economic reasons but for making sense of the whole range of what the world has to offer, including the aesthetic and the emotional. In fact, the aesthetic and emotional aspects, although ignored in the report, are equally important, both for their own sake and because of the need for collective endeavour. It’s the ‘soft’ linking-up bits – harnessing, using and nurturing individual skills in other words, management – that the UK is bad at. And in some ways the situation is getting worse, suggests Ruth Spellman, chief executive of the Chartered Management Institute.

For example, at a time when graduates form 40 per cent of those entering the workforce – ‘one of the biggest transformations of our lifetime,’ she says – many graduate entry schemes have been closed down. This means that new recruits’ first contact with management is with those who have little professional formation. Currently, 41 per cent of UK managers have less than a level-two qualification – that’s five good GCSEs – according to Leitch, and only 20 per cent have any qualifications at all.

That puts the UK well behind Western equivalents, and even further back when spending on management development are taken into account. UK policy-makers like to point to our superior levels of entrepreneurship – but the mortality rate among start-ups is painfully high, and the failure of so many UK small companies to grow into successful medium-sized and large ones is largely due to lack of basic management know-how. British managers are slow to see the promise in promising practices conversely, one of the most important elements in vibrant US performance seems to be the ability of managers to adapt their organisations to capitalise on innovation.

Management qualifications aren’t everything. But role models and first impressions are crucial in setting expectations of what management is and could be, says Spellman. The time is therefore ripe to complement Leitch’s primary emphasis on low-level skills with an equal focus on the higher-level ‘meta-skills’ that are essential for getting the most out of the individual ones. ‘We need top-down as well as bottom-up,’ she says. She would like to see a large-scale mentoring programme that would give every university-leaver a confidant and role model as they move into the world of work, the start of a lifetime relationship as they move upward, particularly in the insecure but highly influential middle-management years.

What is needed, she believes, is an accepted leadership model that begins with investing in people rather than extracting from them, and gives managers and leaders the confidence to do what they sense is right. At the moment, she says, that is very far from the case. It’s a big, indeed daunting, reform agenda. But the prize is something that has eluded the combined forces of policymakers, business people and educators since Victorian times. As Spellman says: ‘Just think what the overall result would be if we could lever up the management performance at every level of all organisations by just a few degrees’.

The Observer, 10 August 2008

THE SYSTEM for training and employing the UK’s junior doctors was always a bit of a black box. Traditionally, the annual announcement of placings was followed by a period of furious informal horse-trading as individuals and institutions swapped places to get as close as possible to their real preferences. They were usually successful. To the government, however, this was a mess that it decided to reform, using an IT system to match applicants precisely with posts.

The result was a disaster. It wasn’t that the computer didn’t work. It was too precise. While the removal of ‘give’ in the system made it tidier, it also took away the flexibility in timing and negotiability that made it work. Messy is sometimes more efficient than neat and tidy.

The government’s error is a common one. Obsession with order is the malady of modern management. According to the splendid A Perfect Mess: The Hidden Benefits of Disorder , by Eric Abrahamson and David Freedman, ‘organising’ – decluttering junk-piled desks, closets and spare rooms – is a $100m-a-year industry in the US and growing. Organisations are also compulsive tidiers, addicted to diagrams of boxes and col oured lines, even though these are often more wishful thinking – a sort of naming and taming – than description of reality.

In fact, liberating as this book is, the euphoria at discovering you aren’t a freak if your desk is untidy – just human – is rapidly swamped by a wave of despondency as you realise how determined organisations are to stamp out deviance. The point is that because randomness is an essential part of nature (goodbye evolution without it), all organisation comes at a cost – the cost of carrying out the classifying and sorting, and the subsequent, less obvious, cost of complying with it, or preferring one form of organisation over another.

Reasonable organisation owes everything to context – the Japanese ‘5S’ good housekeeping policy (‘sort, straighten, sweep, standardise, sustain’) makes perfect sense in a busy factory but is anal lunacy when applied to the position of a stapler or paper clips on desks in a revenue office (I’m not kidding).

When costs outweigh benefits, organisation becomes over-organisation – the denial of humanity. It’s surprisingly common. Ever get the feeling that these days all change is for the worse? You’re right – and it’s to do with over-organisation. The parallel growth of regulation and organisational stupidity, for example, is not coincidence: it is driven by obsessive classifying of every form of risk or failure, aided and abetted by the use of computers to analyse the figures.

Or take the ubiquitous automated voice-response systems used by call centres. In effect, these are crude ‘categorisation engines’ designed to force human variety into arbitrary categories. Unsurprisingly, these categorisations fail to match customers’ needs in a huge percentage of cases, breeding contempt and despair – and causing half of them to take their business elsewhere.

Such counterproductive classifying reflects a propensity, common to all institutions, vastly to overestimate the importance of formal organisation. A report by consultants Booz & Company notes that companies have a knee-jerk tendency to ascribe both problems and solutions to organisation – in both cases misguided. While restructuring and organisational change are often the first resort of managers, they don’t even figure in the top 10 for effectiveness, according to Booz.

Of course, a degree of creative disorder is not the same as slobbishness or lack of discipline. Newspaper deadlines impose tight timing and resource disciplines no one would want doctors and nurses to ignore infection procedures for the sake of creativity. The difference is well illustrated by Google, as described in this column last week. Managerially, Google can only be described as a mess, with what looks to others like an unfeasibly large amount of play in the system (not least the 20 per cent of time allowed to developers to pursue their own projects). But its aim – to organise the world’s information – certainly is not, and its disciplines of fierce product reviews and thrashing out important issues transparently are anything but. The results suggest that Google has the balance much righter than most conventional companies.

So before you guiltily vow to turn out and reorganise your sock drawer, filing cabinet or sales organisation, think again. Of course you don’t want to be crushed by an avalanche of books and papers, as happened to one pathological hoarder in the US. But comfort yourself with Abrahamson’s finding that work messiness increases with education, salary and experience and remember that a pinch of mess, randomness and redundancy is as essential for innovation and robustness as salt in food.

As Albert Einstein, who apparently maintained his desk in a state of stupendous disarray, sweetly inquired: ‘If a cluttered desk is a sign of a cluttered mind, of what, then, is an empty desk?’

The Observer, 3 August 2008

YOU CAN love Google or hate it – or perhaps a bit of both (see my colleague John Naughton’s surgical probings of the past two weeks) – but you can’t deny its extraordinary effectiveness. In January 2008 it had 65 per cent of the online search market and the share is increasing. Better (for Google), of every dollar spent on search advertising, Google snaffled 77 cents. According to one report, in the second quarter of 2008 that proportion rose to 110 per cent, meaning advertisers were not only shovelling all their new ad spend Google’s way, but simultaneously yanking some away from Microsoft and Yahoo!.

That franchise has won Google a market capitalisation of $150bn, profits of $4bn and 20,000 employees. Last week, consumers voted it the UK’s No 1 consumer brand. Not bad for a ‘one-trick pony’, as one analyst must now regret calling it, that only went public in 2004.

Remarkable as this is, it is matched by its management style. Make that non-management. In a Q&A at ManagementLab’s recent California conference, Google’s chief executive, Eric Schmidt, honoured the theme of ‘inventing the future of management’ by making it clear that ‘management’ has always taken second place to what the company set out to do. While it worries ceaselessly about what will ‘scale’ – as you do when you’re growing at 50 per cent a year – it will not be adopting anyone else’s management approaches any time soon.

So how does Google work? The company was not planned, says Schmidt it emerged from the happy failure of founders Sergey Brin and Larry Page to understand they had actually left college. Google tried management once, Schmidt arriving in 2001 to find that Brin and Page had promoted five engineering executives to provide organisation and direction. A few months later, he recounts, they did a ‘disorg’, getting rid of the management and instead requiring 150 people to report to one individual – ‘an interesting experience,’ notes Schmidt laconically, which deliberately limits the power of anyone, including the CEO, to micro-manage. Since then, management experience has been treated as a recruiting minus rather than a plus, ‘because if you came in with experience you would apply old models to new problems’.

For a long time Google did not have a strategy either, apart from a ‘top 100 list’ of priority projects (actually about 250 so much for the company’s famous numeracy) around which groups self-organised. It now does, to an extent, only working on problems that affect many people maintaining a self-organising, auction-based advertising model focusing on developers above all – and it has worked, ‘to a point’. Whether it will continue to do so at current scales is a different matter.

Schmidt’s role is correspondingly unusual. Decision-making, he says, is the ‘wisdom of crowds’ model. Every issue, no matter how small, is debated – and seniority does not count. To get the best decisions, one of his most important tasks is to identify dissidents (good decisions require disagreement), but then to establish a deadline to prevent discussions from continuing indefinitely.

Basically, Google management boils down to a few immovable principles around which things just evolve. People’s sole job is innovation – ‘it’s amazing how many smart young people there are who just want to keep doing stuff’ – with total transparency and ferocious product reviews to instil discipline. To this end it hires the smartest people (but rarely managers) uniquely for a company this size, the founders sign off every single hire. Next, it treats them ‘as if they were the only asset. Other companies say that, whereas we understand that in an innovation model it’s only about the people and the innovation engine.’ Among the conditions is that employees can spend 20 per cent of their time on their own projects, another powerful deterrent to micro-management.

The other fundamental principle is the need to make its own management decisions. As the fastest-growing company in UK history, says Schmidt, Google has faced every management problem ever invented, but simultaneously rather than in sequence. In an unpredictable future there will be plenty more. ‘I try to anticipate the problem and say, ‘OK, you guys, you think you’re so smart, what are we going to do about this?’ And that provokes the internal debate.’

With its huge market share, Google is in the fortunate position of depending more on tweaking the dials of its advertising than extra sales to make its quarterly figures. But Schmidt sharply rejects the idea that the company is too different to offer any general management lessons. Any company, he says, can ensure it makes decisions on fact and gets the issues on the table concentrate on essentials and above all listen to employees. Founders, youth and courage – Google’s other vital assets – may not be reproducible, but those things are.

The Observer, 27 July 2008

ASKED TO name employee-owned firms, most people would have difficulty getting past one finger of one hand: John Lewis. A few might have heard of ad agency St Luke’s. If pushed, those of a certain age might mention the ill-starred Meriden Co-operative, set up by Tony Benn to make Triumph motorbikes for a period in the 1970s.

In fact, chides Patrick Burns, executive director of the Employee Ownership Association, co-ownership isn’t the same as co-operative, which is about voting rather than ownership, and the clumsily named co-owned sector – companies where employees have a chunk of the equity above, say, 25 per cent – has an estimated turnover of around pounds 25bn, which makes it a larger component of the UK economy than agriculture.

There is very little systematic data on employee-owned firms in Britain (there is much more in the US), but it turns out that John Lewis is far from unique. Burns reckons that there are at least 200 either fully or partly employee-owned outfits in the UK, excluding co-ops, quietly making a good living in almost every market sector in the country – from Unipart (automotive) and Wilkin & Sons (jam) in manufacturing to Loch Fyne Oysters, Divine Chocolate, Central Surrey Health and a couple of care homes, and a whole slew of design and consultancy groups, of which the best known is probably Arup.

Even at a cursory glance, the list contains more than its fair share of interestingly different and successful firms. And this, according to a new report by an all-party parliamentary group, is no coincidence. Far from being quirky exceptions that prove the normal publicly traded rule, co-owned companies, says the report, are ‘exceptional mainstream companies’ operating successfully in competitive markets across the public and private sector. The co-owned model, it adds, ‘offers enormous potential for the UK economy’.

This is because of the performance dividend the model seems to generate. What most people experience as the ‘John Lewis effect’ appears to hold across the sector. ‘It stands to reason,’ says Burns. ‘When people know it’s to some extent their company, it releases huge productivity increments’ – a permanent boost of 4 percentage points, according to a US survey. In fact, ‘researchers now agree that the case is closed on employee ownership and corporate performance’, notes the US National Centre for Share Ownership. It adds: ‘Findings this consistent are very unusual.’

This doesn’t make it easy. There is a catch, but a logical one. Employee share ownership on its own makes little or no performance difference. It is only when it is combined with open and participative management that it delivers the goods. This makes intuitive as well as empirical sense, and accords with separate findings about the so-called high-performance workplace. As one company put it in evidence to the parliamentary group: ‘Co-ownership is perhaps half the equation of productive employee engagement. Of equal importance… is co-control: an employee’s feeling that he or she can genuinely effect change within the organisation. This is something that may be a likely, but not inevitable, consequence of co-ownership.’

It also means, as the Employee Ownership Association’s Burns points out, that companies ‘have to be brave twice over: sharing power as well as equity’. However, the payoffs are clear. As well as superior productivity, co-owned companies report higher levels of employee engagement, exceptional standards of corporate responsibility, and greater responsiveness to the needs of change and innovation.

Contrary to the expectations of outsiders, employee-owners are highly realistic about the implications of changing circumstances, sometimes more so than the board. In one case, aware of impending hard times, employees volunteered a pay standstill. This, of course, is one reason why the trade unions habitually distrust co-ownership but on the other hand, in times of difficulty they show impressive ‘durability under fire’, preferring to adjust pay rather than jobs when business is slow and preserving employment throughout the business cycle none of the Employee Ownership Association members is called Persimmon or Bovis or Redrow.

The UK is bad at asset transfer. Given the poor record of trade sales and the divisiveness of private equity, the parliamentary group argues that we would all be better off if more people were aware of the advantages of employee buyouts. The parliamentarians are not alone in believing that the model may be particularly suited to emerging public-sector markets, where ‘the social objectives of co-owned firms, married with the more equitable distribution of resources among employees, makes co-ownership a far more palatable option for outsourced public services than traditionally run plcs’.

The Observer, 13 July 2008