It's a good question. It certainly ‘works’ (although that might not be the right word) on the downside: look no further than the banking meltdown and its ghastly aftermath – a man- or management-made disaster which has affected not just the financial companies involved but practically every person in the developed economies. But what about the positive side – something to justify those enormous CEO and top management salaries?
Here’s what economist Chris Dillow thinks. ‘To a large extent, the value of firms is beyond the control of CEOs’, he wrote in a recent blog (on Hester's bonus). ‘“Management“ functions rather like witchcraft. It’s a set of rituals which are wrongly supposed to have effects on the outside world. When, by happy chance, those effects materialise, the witchdoctor takes credit. And when they don’t he blames external malevolent forces - if not the debt crisis then the “challenging economic environment”, “fragile consumer confidence“ or (more feebly) “operational issues.”’
Overcynical? It rang some bells. Mickelthwait and Wooldridge’s book on management consultants was called ‘Witchdoctors’. Then I looked up a 2002 Harvard Business Review article by Rakesh Khurana, now dean of Harvard Business School, called ‘The Curse of the Superstar CEO’. Sure enough, in it he notes a belief in the powers of ‘charismatic’ (literally, in possession of gifts of the Holy Spirit) corporate leaders that borders on the ‘quasi-religious’, based on very little in the way of real evidence linking leadership to organisational performance. A CEO’s ability to affect performance is hemmed in by all sorts of internal and external constraints – laws and regulation, convention, the state of the industry and the economy, infrastructure, the organisation’s own history are just some of the things a CEO can’t easily change (no wonder Deming ascribed 90 per cent or more of performance to the system). Most academic studies, Khurana notes, suggest that 30 to 45 per cent of firm performance is attributable to industry effects and another 10 to 20 per cent to changes in the economy. Meanwhile, according to shareholder activist Nell Minow, fully 70 per cent of stock market gains are due to movements in the market as a whole rather than company performance. The best we can say, then, is that a CEO’s ability to affect the multiple and interrelated factors in corporate performance is greatly overexaggerated. In fact, what is generally called ‘success’ might be more accurately characterised as the ability to be in the right place at the right time. As a GE executive noted drily of Jack Welch: ‘Jack did a good job, but everyone seems to forget that the company had been around for 100 years before he ever took the job, and he had 70,000 other people to help him.'
The paradox is that management may matter a lot more lower down the food chain. Hardly controversially, evidence suggests that an engaged and happy workforce tends to perform better than one that is oppressed and bored. Engagement is the by-product of management that systematically gives people a good job to do and then works to make it easier for them to do it.
As such, the chief factor in engagement is your immediate boss. As Julian Birkinshaw and others write in their paper ‘Employee-centred management’, ‘a high-quality manager is the single biggest factor that determines whether you, as an employee, are engaged and happy in the workplace.’ So the fact that levels of engagement are in general appalling (around 20 per cent in the US and the UK) is squarely a management failure – and a failure whose tone is set at the top, since internal climate and work design are things that the CEO can influence.
We can spread it a bit wider. As Birkinshaw goes on to note in the same pamphlet, most large organisations still use a set of management principles that evolved more than a century ago to manage the early railroads and the manufacture of the Model T Ford – bureaucratic coordination, hierarchical control, extrinsic motivation and objective-setting by alignment. These principles worked, up to a point, when efficient replication was the name of the job but are now as obsolete, in every respect, as the products of the period. This, by the way, gives the lie to the earnestly promulgated idea that management is getting more difficult: of course gets harder if you’re resolutely doing the wrong thing. Acting like this bears some resemblance to John Locke’s description of a madman: ‘reasoning correctly from erroneous principles’ – a kind of Enlightenment version of the witchdoctor thesis.
And then we come to pay – which turns out to be the subject of the cloudiest, mistiest, most magical thinking of all. If management is the ritual, pay is the tribute that companies offer up to the gods in return for their favours. But no matter how tempting the offerings companies put forward as they vie with each other for attention from on high, it is often in vain. Alas, there is no reliable evidence linking CEO pay with company performance. In fact the inequalities that always accompany very high CEO pay tend to undermine engagement and thus sap performance. Some incentives, such as ‘guaranteed bonuses’, turn out to be the opposite – anti-incentives. And however generous the sacrifice, there is no guarantee that it will avert disaster. Jeff Skilling at Enron and WorldCom’s Bernie Ebbers are just the two most obvious examples. To quote the sage of Omaha, Warren Buffett, ‘With few exceptions, when a manager with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.’ To return to the thesis, let Deming have the last word. ‘Reward for performance,' he said, 'may be the same as reward for the weather man for pleasant weather.’ I think the ayes have it.