"The learned fool writes his nonsense in better language than the unlearned, but it is still nonsense." - Benjamin Franklin
Organized religion has often been accused of becoming a business. More recently, there is talk that the management of business has become a religion.
According to Schumpeter in this week’s edition of The Economist, the principles of management as currently practiced resemble an evidence-free religious faith—even “a compendium of dead ideas.”
Thus while businessmen present themselves as fact-based pragmatists, The Economist suggests the opposite: the basic principles of management are pursued irrespective of the evidence. “Management theory has lost touch with the world.”
In effect, The Economist urges reconsidering the fundamental validity of business thinking. “Management theorists sanctify capitalism in much the same way that clergymen of yore sanctified feudalism. Business schools are the cathedrals of capitalism. Consultants are its travelling friars.”
It is time, says The Economist, to do what Martin Luther did to the Catholic Church back in 1517, namely, nail a list of management’s big bad ideas to the door of the cathedral of capitalism and begin again. “Management theorists,” says The Economist, “need to examine their church with the same clear-eyed iconoclasm with which Luther examined his… Management theory is ripe for a Reformation of its own.”
And The Economist is not alone in calling for revolutionary reform. “The orthodoxies governing finance,” wrote Harvard Business School Professor Clayton Christensen and Derek van Bever in Harvard Business Review in June 2014, “are so entrenched that we almost need a modern-day Martin Luther to articulate the need for change.”
In the same vein, The Market as God (Harvard, 2016) by Harvey Cox argues that the market is “the most powerful religion of our era, the one with its curia in the basilicas of Wall Street.” We are now imprisoned by the dictates of a false god that we ourselves have created. We need to break free and reclaim our humanity.
As it happens, detailed statistical support for these broadsides can be found in the publication just last week of the Shift Index 2016, which reconfirms the declining performance of U.S. firms over half a century.
A reconsideration of management principles is also timely, given the recent nomination of billionaire businessmen to cabinet-level positions in the U.S., who seem intent on running the country on the very business principles that these gurus bewail.
So what are the dead ideas that these aspiring Luthers are lamenting?
Four Moribund Business Ideas
The Economist calls out four of them.
First, competition is strong. In reality, the scope of mergers and competition makes a mockery of the notion that big firms are locked in fierce competition. There are an average of 30,000 M&A deals a year worth 3% of GDP. Big firms sit on hordes of cash, much of which is deployed to head off any competitive threat by buying it. Central banks facilitate the game by providing a seemingly endless supply of almost free money. Meanwhile anti-trust implementation can be deflected or blocked by astute political lobbying. Silicon Valley and airlines are cited as prime examples of monopolies and oligopolies.
Second, firms are entrepreneurial. In reality, we live in an era of secular economic stagnation: economic growth barely exceeds population growth. The rate of business creation in the U.S. has been in steady decline for decades: more companies die than are born. In Europe, the situation is even worse.
Third, firms act fast. While theorists believe that business is getting faster, The Economist says that “in many respects business is slowing down. Firms often waste months or years checking decisions with various departments (audit, legal, compliance, privacy and so on) or dealing with governments’ ever-expanding bureaucracies.”
Fourth, globalization is inexorable. Contrary to popular opinion, The Economist says that globalization is neither inevitable nor irreversible. Political phenomena like Trump and Brexit suggest “an increasingly nationalist future.”
Eight More Management Fallacies
And that’s just a beginning. Leading management thinkers have identified at least eight other fundamentally flawed pillars of the current pantheon of management—ideas that are still taught in every business school and practiced by our largest corporations.
Fifth, money is scarce: Harvard Business School Professor and leading management guru, Clayton Christensen, argues that we should no longer husband capital which is abundant and cheap. Many of the elaborate tools of financial analysis are based on this premise. The reason why firms are failing with innovation lies in “an unexamined economic assumption. The assumption—which has risen almost to the level of a religion—is that corporate performance should be focused on, and measured by, how efficiently capital is used. This belief has an extraordinary impact on how both investors and managers assess opportunities.”
Sixth, size requires bureaucracy. Another central tenet of traditional management thinking is that, like it or not, the only way to run a big organization is top-down bureaucracy. Supposedly we learned this the hard way when railroads, steel and mass-production factories were invented and bureaucratic management is still thriving in large organizations. However, there are now more Agile ways to run large enterprises. A study by Gary Hamel and Michele Zanini estimates the annual cost of bureaucracy to be in the order of $3 trillion. Bureaucracy is one of the key reasons behind the declining rates of return on assets of U.S. firms. We know now that there are better, more Agile ways to run large organizations.
Seventh, large firms create jobs. In reality, studies by the Kauffman Foundation show that over the last twenty five years, almost all of the private sector jobs have been created by businesses less than five years old. “In fact, between 1988 and 2011,” write Jason Wiens and Chris Jackson of the Kauffman Foundation, “companies more than five years old destroyed more jobs than they created in all but eight of those years.”
Eighth, innovation is flourishing. In reality, as Jeffrey Pfeffer, Professor of Organizational Behavior at the Stanford Graduate School of Business, pointed out at the recent Drucker Forum, the rate of new business formation in the USA has fallen by 50% since 1978. Today, there are more deaths of businesses than there are new business births.
Ninth, the purpose of a firm is to create shareholder value. This idea, which is said to be “the biggest idea in business” has been identified even by Jack Welch as “the dumbest idea in the world.” Pursuit of it leads to the destruction of shareholder value. The better view is, as Peter Drucker pointed out in 1954, that the only valid purpose of a firm is to create a customer.
Tenth, share buybacks add value As William Lazonick, Professor of Economics at the University of Massachusetts Lowell pointed out in his award-winning article in Harvard Business Review, share buybacks are happening on a massive scale. Yet they represent stock price manipulation and systematically undermine long-term shareholder value. In a world in which corporate performance and executive compensation are linked to earnings per share and the firm’s share price, share buybacks are an easy way to create an illusion of success. A shortfall in earnings? No problem! Executives can just have their firm buy a swathe of their own shares (generally in secret) and hey presto, the share price rises; they get their bonus and short-term investors make a quick buck. The Economist calls it “corporate cocaine.” The underlying reason for the bad behavior is the prevailing business ideology that the very purpose of a firm is to maximize shareholder value as reflected in the current share price. (The practice was illegal until 1982, when the Reagan administration instituted Rule 10b-18 of the Securities Exchange Act.)
Eleventh, offshoring is inexorable. While international trade agreements are now widely blamed for the loss of manufacturing jobs, Harry Moser, founder of the Reshoring Initiative points out that off-shoring is a choice. “Many companies," says Moser," that offshored manufacturing didn’t really do the math,” As many as 60% of the decisions were based on miscalculations. The result, as noted by Gary Pisano and Willy Shih in their classic article, “Restoring American Competitiveness” (HBR, July-August 2009), offshoring has been devastating whole US industries, stunting innovation, and crippling capacity to compete long-term. (Studies also show that the USA lost proportionately more manufacturing jobs than comparable countries. For instance, between 2000 and 2009, U.S. lost 33% of its manufacturing jobs, while Germany only lost 11%.)
Twelfth, performance reviews enhance performance. As a slew of books point out, in reality, performance reviews typically kill performance: see for example: How Performance Management Is Killing Performance by M. Tamra Chandler (Berrett-Koehler 2016)
Six More Flawed Economic Dogmas
But that’s not all. In his book, The Market as God , Harvey Cox points to six more fallacious economic dogmas that support these management fallacies.
Thirteenth, markets are efficient: One might have thought that the financial meltdown of of 2008 would have ended the notion once and for all that markets always get the price right. On the contrary, there is still the firm belief among economists that financial assets are correctly priced because markets reflect all relevant information, while competition will iron out any “temporary divergence” between price and value. The financial meltdown was just one of those “exceptions and anomalies” to the efficient market hypothesis, that are “too small to matter” for macro-economic analyses and forecasts. Cox compares such thinking to the doctrine of papal infallibility which gives rise to similar issues.
Fourteenth, man is an economic animal: Economists remain obsessed with mathematical modelling of the economy that relies on heroically unrealistic assumptions such as the belief in a perfectly rational, utility-maximizing, autonomous individual.
Fifteenth, big finance adds value. In reality, the excessive financialization of the U.S. economy reduces GDP growth by 2% every year, according to a study by International Monetary Fund. In the US and the UK the financial sector represents what, by historical standards, is a disproportionate share of the economy. Many of the products it peddles are of questionable social utility. The leaders of banking who were instrumental in precipitating the financial crisis continue to go about their business unpunished, and the banks that were deemed too big to fail in the crisis have become even bigger. “Wall Street is back,” says the New York Times, and the economic cost is high.
Sixteenth, money is the ultimate good. Since money can end poverty, it is potentially good: While capitalism has shown an extraordinary capacity to raise millions out of poverty, the way it does so inspires widespread concern and distrust. As John Plender argues in the Times Literary Supplement: “This is not just roller-coaster cycles, financial instability, labor exploitation, inequality, environmental degradation and the rest. There is a more fundamental source of distrust relating to the centrality of the money motive, or more bluntly, greed, in driving economic growth within the capitalist system. This was most pithily expressed in John Maynard Keynes’s dictum that capitalism amounts to ‘the astonishing belief that the nastiest motives of the nastiest men somehow or other work for the best results in the best of all possible worlds’.”
Seventeenth, business ignores externalities. Capitalism is heading the planet to environmental catastrophe, because the costs of pollution and environmental degradation are not borne by the polluter or the degrader.
Eighteenth, executives earn their keep: Extravagant executive pay is presented as a necessary market phenomenon. Yet in reality, pay levels are determined through bureaucratic decision-making in cozy remuneration committees, where, as in Garrison Keillor's Lake Wobegone, every executive is “above average” and compensation steadily ratchets upward by comparison.
Grasping The Scope Of The Problem
In effect, this weeks's edition of the The Economist is just scratching the surface. The “compendium of dead ideas” is vastly larger than the four sketched by Schumpeter. Until we understand the depth and breadth of the problems we are facing, we will never be able to resolve the issues.
We also need to understand inter-connectedness of the problems.
We can’t solve the problem of innovation, or speed of action, or performance reviews, if we leave bureaucracy intact.
We can’t solve the problem of bureaucracy if we leave the goal of shareholder value intact, because staff won’t accept shareholder value as a worthwhile goal, and hence managers need top-down bureaucracy to force adherence to the goal.
We can’t solve the problem of the problem of governance or executive pay or off-shoring, unless we address the issue of shareholder value.
Thus, we can’t solve the problems of business management by focusing on each issue individually. Instead we need a global approach to run firms in a post-bureaucratic manner focused on delivering value to customers. Fortunately, at the recent Drucker Forum, a great deal of light was shed on how to accomplish that, as explained here, here, here and here. As Professor Julian Birkinshaw of the London Business School declared, we live in an emerging "Age of Agile."
At the same time, we can’t solve the problems of management within firms without public sector actions in support:
• Fresh impetus to anti-trust reinforcement.
• The end to free money for big business from the central banks.
• A formal end to massive share buybacks.
• A scaling back the financial sector.
• Reinstatement of the ban on quarterly guidance by firms.
• Protections for those affected by globalization
• Provisions to ensure that externalities are passed on to those responsible.
What’s holding things back? It’s not lack of knowledge as to what needs to be done. Many factors, such as vested interests, entrenched habits and attitudes, all take time to change.
Yet the task will never be completed unless we begin. As Schumpeter suggests, it’s time to do what Martin Luther did to the Catholic Church back in 1517, namely, nail a list of management’s big bad ideas to the door of the cathedral of capitalism and jump-start the reform process. Our future depends on it.
And read also:
In Search of ‘The Entrepreneurial Society’
Gary Hamel: Can Big Firms Be Agile?
Follow Steve Denning on Twitter @stevedenning
