Corporate Management is an institution in severe decline.
It needs a rethink.
by Hunter Hastings
The Peter Drucker Forum in Europe has announced their intention to design “The Next Management”, a reframing of management for the twenty-first century. Their proposed pathways include a higher role for innovation, ecosystems over enterprises, social enhancement over the objectives of individual firms, an integrated role for technology, and greater incorporation of art and humanism.
Whatever you think of that list and that framing, it is instructive that a management think tank feels the need to declare that management must be re-thought.
The reason they propose this new initiative is that it is widely recognized that corporate management has taken a wrong turn. In a book titled Aberrant Capitalism: The Decline and Revival of Customer Capitalism, Steve Denning and I trace the erosion of the core principles of capitalism through recent history to a low point at the end of the 20th Century. We note that there is some hope at the beginning of the 21st Century.
What do its critics say of capitalism? That it results in income inequality and wealth inequality; that it is founded on labor exploitation; that it results in environmental degradation; that its boom and bust cycles are disruptive; and that it erodes social welfare by asserting individual achievement over collective responsibility.
Many of these accusations can be interpreted as criticizing corporations, not the system of capitalism. It is corporations that pay wages and generate escalating asset valuations; it is corporations who are employers, and who use natural resources in production processes, that compete and strive and occasionally decline and fail; and it is corporations who focus on their own employees, suppliers, partners and customers, rather than the whole of society. And in criticizing corporations, we criticize management and management models.
This was not always true. The origins of capitalism are not to be found in corporations or management; they’re entrepreneurial. Entrepreneurship is a market-facing function, externally oriented, gathering an understanding from potential customers about ways in which they would like to improve their lives, and then creatively imagining , designing, assembling, implementing and distributing new and better solutions to meet those desires for betterment.
Management looks in the opposite direction, inwards towards the processes and mechanisms of running the organization. It seeks control and predictability and structure. In Aberrant Capitalism, we identify several ways in which 20th Century management turned in on itself.
More control
One of the essential features of entrepreneurship is dealing with uncertainty. It’s never clear what form future markets are going to take, or how customers will respond to innovation and new value propositions, or what competitors will do. Consequently, entrepreneurship is an adaptive function. It does not promise to hit targets, it undertakes to listen to feedback and respond, whatever form that takes. Resources can be allocated and reallocated, combined and recombined. It might be a bumpy ride.
Management aims at smoothing out the bumps by suppressing variability, which can often mean constraining adaptability, slowing down or squelching responses to marketplace feedback, and restricting change. The dynamic value creation of entrepreneurship is swapped out for fixed plans, tight budgets and rigid control structures.
Bureaucracy
One of the tools of management control is bureaucracy.
This is rules-based administration. It’s the opposite of market-facing entrepreneurship.
Bureaucracy does not have a profit-and-loss motivation (although it may keep track of how others are performing on that metric) and distracts the corporation’s attention away from customers by attending to internal rules. Businesses recognize this fault in themselves. An HBR survey seeking executives’ responses about the problems of bureaucracy identified many: diversion / waste of time (form filling and interacting with staff functions); barriers to customer responsiveness and disempowerment of close-to-the customer employees; disallowing innovation; breeding inertia; and hoarding power and control. Rules-making becomes bureaucratic management’s primary role.
Entanglement with government
Aberrant Capitalism depicts three major periods in US history when government exerted an exaggerated intrusion into how businesses were managed: the war economies of World War 1 and World War II, and the regulatory explosion of the New Deal between the two wars. (Similar interventions were experienced in other major economies, too.) In turn, private industry leaned in towards government. Many private industry executives became heads of war economy boards that determined what should be produced, at what cost, and sold at what price. It was central planning in its most highly developed form.
After the wars, many of the executives returned to private industry and took central planning concepts with them. The private industry language was “strategic planning”. Nor was the connection with government ever severed. Lobbying, government contracts, public-private partnerships, government subsidies, and investments, protective tariffs - all are evidence of corporations’ entanglement with government.
Financial self-dealing
When Milton Friedman declared (in a 1970 New York Times article) that the sole responsibility of business is to make a profit, he was not intending to be nihilistic about the broader contributions that businesses make: to customers by making goods and providing services that are valued, to employees and their community by paying good wages, and, through ripple effects, to strengthening families and upholding social structures. But he was misinterpreted by management practitioners and consultants, and business schools.
A doctrine of maximizing shareholder value (MSV) emerged, whereby corporations and their CEO’s were judged by their quarterly earnings reports and annual profit statements. To provide management teams with the incentives to perform against the shareholder value targets that were set for them, boards awarded stock grants and stock options, rewarding them directly as a consequence of the company’s stock price. It was a small step from there to the policy and implementation of dividend increases and stock buybacks to manipulate stock prices.
Professor William Lazonick has recorded numerous cases of companies over the period 2008-17 (GE and Disney are just two examples) of spending more than 100% of net earnings on stock buybacks plus dividends. These were cash flows that could have been directed to R&D and innovation projects.
There is hope
Corporate capitalism has arrived at a serious point of dysfunction. However, there is a new management model in the digital age that offers some improvement.
Digital age companies are directly connected to customers, and customer behavior and feedback can generate immediate response. Therefore change and new energy are injected into the system from the outside in and the bottom up. Corporations will change their internal practices as a result and may become more customer responsive and less internally oriented. The new business models of the digital era are just beginning to evolve. The required re-think of corporate management may be unfolding.
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Original article written by Hunter Hastings and authorized to be published in the World Management Agility Forum by Hunter Hastings.