Thank small. Save the world

It seems heartless to say it when the begging bowls are out, but aid doesn’t work. Despite the $1 trillion spent since 1950, debt relief on $33 billion of loans and modestly fairer trade, the share of world income of the poorest fifth of the planet’s population has halved in the last 40 years. Three billion people still exist on less than $2 a day. Appallingly, Africa is 25 per cent poorer than at the time of the first Live Aid concert 20 years ago.

Yet many of the elements of a solution to the development problem are to hand. It’s not the poor’s fault. They have to be endlessly ingenious and resourceful to survive. Aid gets to some of them, but not enough. Markets and individual incentives work well in some places (see China and India) but all too often ignore the poorest.

Meanwhile, much-vaunted corporate social responsibility is too small, too impermanent and simply not core enough to make a difference. When companies can’t see a business case for developing medicines to cure the diseases of the poor, it is pointless to think that charity will do the trick.

The result is an unjoined-up system that is infinitely less than the sum of its parts, a set of impotently spinning gear wheels rather than a motor of change. In these circumstances, no amount of money will make it work..

One has only to look at the negligible impact of IMF/World Bank lending on the growth rates of developing countries (see graph right) to see that this is so. According to Chris West, deputy director of the Shell Foundation, financial viability must be central to the war against poverty.

‘It is the same set of questions about delivery, access and affordability that business addresses every day,’ notes West. ‘Simply put, how do you deliver basic services that are affordable for the poor but still offer a livelihood to those providing them?’

The Foundation, an independent body with an endowment of £250 million from Shell, thinks it has an answer: nurturing small enterprise in poor countries, thus providing a vital link between the market and the poor. It is hoped that this will connect the gear wheels and release the energy latent in the system.

In the foundation’s case, this so far takes two forms. The first is underwriting investment funds (one for $5 million, another $25 million) for small energy-sector businesses in east and South Africa. It is drawing not on Shell’s money but on its brand and business clout and deep knowledge of the energy sector to provide forms of collateral.

‘The public sector – donors and NGOs – look at the private sector as a set of deep pockets when its real value is in its ability to solve problems and, crucially, go to scale,’ says West. The money already exists in African and other banks: connecting it to potential clients through referrals and then supporting the new businesses with mentoring support is key to sustainability.

If the funds work – and West is confident they will – this could be big. There is plenty of money waiting in the wings, and not just in Africa.

What’s in it for Shell? In the first place, nurturing small enterprise develops a local supply base. In South Africa, where black empowerment and entrepreneurship are high on the political agenda, doing business with small black firms may become a regulatory requirement. But the same reasoning applies to any country.

Foreign direct investment, in development terms, is another ‘spinning wheel’. It hasn’t had the anticipated catalytic effect because most of the money flows straight back out of the country to foreign suppliers. ‘Engaging the core business catalyses the social returns from FDI,’ says West. ‘Contributing to pro-poor small business is the key to unlocking growth in the developing world and getting poverty on the run. But it also means big business can contract more local suppliers and boost jobs. This strengthens its licence to operate and reduces costs without incurring unacceptable risk.’

In the longer term, of course, all development contributes to energy demand. Much the same thinking informs the Foundation’s other main project, which is applying business thinking to the problem of indoor air pollution. Inhaling smoke from open fires kills around 1.6 million poor people a year. The problem is well-known but so far has resisted NGOs’ attempts to address it.

The issue, emphasises Foundation project manager Karen Westley, isn’t technology – most of the deaths could be averted by the use of very basic cookers – but a viable market infrastructure in a segment that is way below the radar of large companies.

Accordingly, the Foundation is conducting pilot projects to reengineer the supply chain from the customer’s point of view. Poor consumers won’t just accept what they’re given, says Westley. A robust supply chain giving consumers what they want and can afford is the first essential step to scale.

This is real ‘bottom of the pyramid’ innovation, linking business and development thinking in a way that challenges both. In particular, it goes well beyond conventional ideas of CSR. Business itself must recognise that sustainability is not about money, West insists.

‘If a large corporation is serious about generating societal and developmental returns, it need only look at how its core business solves problems,’ he says. ‘This is about its ability to organise, launch, develop and scale up successful business operations in all parts of the world.

‘So whether it is devising goods and services, mapping supply chains or selling to customers, success rests on financial viability and scaling up. There is a role for big business to play in nurturing small enterprise in poor countries and a business case to support it, but I wouldn’t describe it as CSR.’

The Observer, 19 December 2004

Outthough, outsmarted, outmanoeuvred

Does it matter who owns the London Stock Exchange, now under siege by Frankfurt’s Deutsche Börse? Yes, it does, and for several different, but interlocking, reasons. In the first place, it matters because of the direct implications for the City. Many – though not all – would support the view that there is scope for European consolidation and cost-cutting among exchanges. Indeed, that process has already begun. But on whose terms?

The initiative for the present £1.3 billion merger attempt, the second in four years, comes from Deutsche Börse. Importantly, Frankfurt’s approach to the business is different from London’s.

Although Deutsche Börse is making conciliatory noises about respecting ‘established market models’ and leaving existing London management intact, this resembles a takeover rather than a merger. Leaving aside the question of which business approach is better for customers, it is scarcely unreasonable over the long term to expect the benefits to be calculated to accrue to the bidder – Frankfurt – rather than the target – London. ‘Bums on seats may be in London, but the brains will be in Germany,’ one insider predicts.

Given the different approaches, the general view in the Square Mile is that in the long term there is room for only one main European financial centre, just as there can be only one headquarters for a combined company; this tips the balance away from London, the present leader, in favour of Frankfurt.

The German bid may, of course, flush out others, which would give a different outcome more favourable to London. Even so, there are other reasons to fret about the bid.

Financial services, after all, are something the UK is supposed to be good at. The continuing pre-eminence of the City of London, and what has been dubbed the ‘golden prize’ of the Stock Exchange within it, is complacently used to justify everything from staying out of the euro to abandoning manufacturing. So what does the possible sale of the jewel in the crown say about City management? As Angela Knight, chief executive of the Association of Private Client Investment Managers and Stockbrokers, wrote in the Financial Times , ‘the most astounding part of the story is that the LSE now finds itself in a situation where it is the target rather than the bidder’.

But just as extraordinary is the fact that, in another sense, this is perfectly normal. Although pension and insurance funds remain in British hands, few other institutions of importance in the City are now UK-owned. City investment banks, stockbrokers and fund-management groups are all in foreign ownership.

If that represents ‘Wimbledonisation’ – having the most beautiful grass courts in the world but no tennis players – selling the LSE is like flogging off the All England club as well.

The worrying thing, of course, is that this has happened before. It is a rerun of the trajectory of large parts of manufacturing. The motor industry is emblematic. No one needs reminding that Rolls-Royce and Bentley, along with Jaguar, Aston Martin and Land Rover, have gone the way of volume carmakers, into foreign hands. This is also the pattern in many other industries and sectors of the economy.

In one respect that may actually be an advantage: foreign-owned manufacturing plants in the UK are more productive than UK ones, and there is no doubt that intensive courses in competitiveness at the hands of Japanese, US and continental plant managers have greatly benefited UK plc as a whole. Yet that has not prevented the UK manufacturing sector from shrinking faster than in many rivals.

Its share of the total economy, at around 17 per cent, is larger than in the US or the Netherlands but smaller than France and Italy and considerably smaller than in Germany and Japan. And despite dozens of investigations and initiatives, industry productivity obstinately trails that of France, Germany and the US.

Economists often argue that the move from manufacturing to services is inevitable and makes little difference in terms of wealth creation. But, like many economists’ theories, this is only half the picture. Management counts, too. While economic forces are strong, being blind they can be trumped by clever managers using deliberate strategy. In manufacturing, while the economist is right to say that ‘wage and other costs are lower in India and China’, a manager can counter: ‘But we can organise better to offset that advantage and offer higher-quality goods.’ This is also true of services.

Looked at from a managerial point of view, manufacturing and services aren’t alternatives but part of a continuum. Each trades with, and is dependent on, the other. Likewise, shifts of ownership in manufacturing affect services, and vice versa. Thus, foreign manufacturers buying into the UK often bring their domestic insurers and bankers with them. No big decision about global car advertising is currently taken in the UK.

While it’s not the whole picture, the surrender of large swathes of manufacturing may have contributed to what happened, and is continuing to happen, in the City.

One of the big questions for the future of the economy is whether a country that has proved notoriously poor at managing the complexity of large-scale manufacturing can expect to make a better fist of high-value services.

Anecdotal evidence is that services are way behind manufacturing in work organisation and productivity in general. The hollowing of the City is not reassuring in this respect.

The truth is that the London Stock Exchange has been outthought, outsmarted and outmanoeuvered – outmanaged in fact – by a smarter overseas rival, just like City fund managers and investment groups, electronics and car manufacturers before it. What happens when there’s no more family silver left to sell?

The Observer, 19 December 2004

Money for less than nothing

EXECUTIVE pay is among the most extraordinary (some would use another word) social and economic phenomena of our time.

Conventionally, chief executives’ pay is determined by markets and performance. An influential branch of academic inquiry, agency theory, has legitimised the idea that pay should be used to incentivise managers to boost performance to the benefit of shareholders.

Corporate governance codes have striven to put this into operation – last week the Association of British Insurers (ABI) was congratulated in the press for updating its remuneration guidelines and announcing that 70 per cent of the FTSE-100 met standards designed to ensure that executives are generously rewarded only for outstanding performance.

They must be joking. The best efforts of US and UK researchers have failed to unearth a link between pay and corporate performance in the short term. But some explosive research from academics at Manchester and Royal Holloway business schools* blows away the idea of any correlation between CEO pay and performance in the long term as well.

The results, says Manchester’s Professor Karel Williams, one of the authors, are ‘pretty devastating’. They show that from 1983 to 2002:

* Real CEO pay in the UK and US rose by 25 per cent a year, come rain or come shine, compared with sales and profits growth of less than 3 per cent

* Aggregated, while real sales and pre- tax profits of FTSE firms increased just over 50 per cent over the period, CEO pay shot up more than 500 per cent over his (and we do mean his) tenure of seven years, a chief executive could expect to see his salary double twice

* While the real market value of the firms increased substantially (350 per cent), this indicator has least to do with management, being largely the product of the long stock-market boom and steady additional flows of investment funds

* Although meaningful markets for top managers do not exist, a ‘going rate’ for FTSE-100 CEOs has been established at around pounds 1 million, regardless of the level of performance

* While soaraway CEO pay has towed other senior managers in its wake, there has been no spillover to average employee pay. The cats are relatively as well as absolutely fatter: CEOs now pocket around 50 times as much as ordinary employees compared with nine times 20 years ago. In the US, disparities have risen from 50 to 281 times.

In terms of individual companies, the value creation vs pay story is even less ‘outstanding’. Of FTSE survivors, only GlaxoSmithKline showed long-run real sales and profits growth in line with extravagant increases in CEO pay, the paper says. Of the three other companies where CEO pay had gone up most – more than 1,000 per cent – Aviva had seen pre-tax profits plunge by 152 per cent, GUS by 22.3 per cent and Marks & Spencer 25 per cent.

Of course, such calculations are greatly affected by the chosen beginning and end points. But in sales terms a surprising number of the companies were actually smaller than 20 years before.

The fundamental points, says Williams, are that giant firms are ‘GDP companies’ – they grow more or less at the speed of the economy, whatever happens but although managers do little to create long-term value, they are ‘uniquely positioned to enrich themselves without obvious victims as neither shareholders nor labour lose directly en masse’.

In this light, says the paper, ‘pay for performance’, and corporate governance in general, can be seen more as ideological incantations designed to sell ‘market capitalism with responsibility’ and high pay as an element of that, rather than a realisable programme.

Paradoxically, the academic theory that sets out to explain performance pay and the regulatory framework to keep it in check have served to free it from any other sort of control. As the paper notes, time after time outcry over ‘excessive’ pay has preceded ineffectual attempts to regulate it that have only succeeded in setting a higher baseline.

Pointing out that the emperor has no clothes arouses indignation. But, as Williams says, breaking the link between pay and performance allows for very different thinking about executive salaries – and a more promising agenda than bankrupt agency theory debates.

On the first, the paper suggests that today’s corporate managers are somewhat like landed aristocracy in the 19th century, or political elites of the Third World: the benefits they receive, and any value they create, are the result of the prevailing form of development rather than any real functional contribution. That leads to important questions, some of which will be studied at a new Economic and Social Research Council centre for studying socio-cultural change, and in a forthcoming book.

What is strategy in giant firms growing no faster than GDP? Shouldn’t inclusion embrace top earners soaring out of sight as well as the bottom? Why should one set of managers be paid on a completely different scale from others having tasks of at least equal complexity and responsibility – prime ministers, permanent secretaries and generals, for example? And what should be the going rate for a large company CEO? On a long-term view, how many deserve any increase at all in the years ahead?

*’ Pay for corporate performance or pay as social division: rethinking the problem of top management pay in giant corporations’ by Ismail Erturk, Julie Froud, Sukhdev Johal and Karel Williams

The Observer, 12 December 2004

Can we take the high road?

SCIENCE, INNOVATION and skills is the new government mantra for UK plc. Gordon Brown’s emphasis in the pre-Budget report on the three magic words only reinforces the message delivered by the five-year science strategy and the DTI’s sudden metamorphosis from dull trade and industry bureaucrat to the caped miracle worker of technology and innovation. British enterprise needs to turn off the crowded ‘low road’ of competition through low wages and other input costs and join the more select class of competitors purring along the ‘high road’ of high wages, high investment, and high added value.

Few would disagree with this prescription. There’s little future in competing on commodity products and services with China and India. The CBI may be exaggerating slightly when it says there will soon be no unskilled job vacancies in Britain, but not by much.

However, although in that sense the notion of ‘moving up the value chain’ is uncontroversial, let no one think it will be easy. It is much more than individual firms deciding to spend more on R&D. Innovation and non-innovation are not the mirror image of each other, but completely different things. Shifting the economy from one to the other poses the biggest peacetime challenge to the economy for at least a century.

The challenge is twofold. The first, emerging from research by the Advanced Institute of Management Research, is to do with the institutional framework which conditions the way business operates. To a marked degree, economic policy over the past 20 years has favoured market-type reforms: privatisation, labour and financial market liberalisation, curbing trade union power. Britain is now one of the least regulated, most business-friendly countries in the world.

The good news is that the companies which have survived this dose of market discipline are fitter than they were. The bad news is that ‘business-friendliness’ is a two-faced ally. In Britain’s case, market-based institutions have encouraged firms to compete through just those low-cost production factors – particularly cheap, flexible labour – that are now keeping it in the slow lane. Outsourcing is a striking example of service companies playing the cost card (when a portion of its customer base, incidentally, might prefer quality).

So one task for managers and policy-makers is to ween companies off today’s institutional supports (eg, financial engineering and cheap labour) and proactively begin to craft new ones – close-coupled supply chains built on trust and a more skilled workforce, for example.

The second challenge is transforming the institutions of the firm itself – and that may be even harder. In a research report commissioned by Microsoft on the future role of trust in work, LSE’s Dr Carsten Sorensen points out that innovative services cannot be managed in the way companies have always managed mass production.

In a seller’s market, where the only issue was to meet production quotas, companies could get by turning out standardised products using command-and- control methods with a hierarchy to enforce them – basically, central planning. That never worked very well – see the Soviet Union – and still doesn’t, but for services the results are even worse.

This is because services, and even more innovation, are subject to huge variation at the point of delivery. This means that the knowledge critical to delivering them is ’emergent’ – it appears as part of the process.

‘It is at the front line of the supply chain that decisions emerge they cannot be decided in detail beforehand,’ says Sorensen. In other words, they cannot be commanded. Traditional command-and- control breaks down. There is no alternative to a bottom-up approach.

In Sorensen’s view (and naturally Microsoft’s), technology and trust have the potential to reconcile the need for individual autonomy on one hand with that of performance management on the other. Indeed they do. But that does not make it a foregone conclusion. Even Microsoft accepts that technology on its own is not the answer: used to command and control, it can actually erode trust and make innovation less likely, not more.

And for many reasons, command-and- control is heavily ingrained in the British management psyche. One is the institutional framework already referred to. Another, as Sorensen perceptively notes, is culture. This is partly a matter of class: in the UK, management is a position, not a role, and the position is one of superiority, ie, command. In contrast to Sweden, where highly paid individuals are trusted to manage themselves, ‘there is perhaps in the UK with significantly lower labour costs a tradition of employing one person to do the job and two to check the job is done’. Piquantly, the UK’s obstinate productivity gap may be something to do with the proportions of chiefs and indians: having too many managers who add no direct value and not enough skilled workers who do.

This may be why, in another piece of Microsoft research, British workers are so lowkey about the prospects for innovation. Six out of 10 office workers complained that it was complicated and difficult to get good ideas turned to money-making account, and three out of 10 feared they would lose ideas or fail to gain support to put them into action.

Strengthening the UK science base, persuading companies to do more R&D and getting them to invest in the skills of their workers are all a necessary part of making UK plc more innovative. But they may be the easy part.

As Microsoft UK managing director Alistair Baker puts it, unless there is a change in the historical command-and-control management mentality, ‘no amount of IT investment, however innovative, will deliver the desired productivity gains that we must see to keep Britain competitive’.

The Observer, 5 December 2004

The unacceptable face of regulation

GOODHART’S Law – an insidious Catch-22 decreeing that targets are fine until you start using them to manage by, at which point they are irredeemably corrupted and therefore useless – is not just a public sector phenomenon. As a reader points out, it is alive and well in corporate governance, where it has the same debilitating effects.

John Drummond, chief executive of consultancy integrity, told a Chatham House conference last week that corporate governance was becoming ‘a mile wide and an inch deep’.

He notes that lots of indices and specifications have been developed for use by investment groups to establish governance quality, but most of them put the emphasis on structural elements – type, quality and independence of non-executive directors, separation of chairman and CEO and so on.

‘All companies are being judged this way, with little regard for how employees are enlisted in the quest for good governance and sound conduct,’ he complains. ‘This disconnection means that the surface is getting lots of attention and what really matters – the culture – is getting none.’

In theory, everyone is against the deflection of attention from substance to form that has become known as box- ticking, but many believe that that is what is happening. Even in the UK, where the Higgs reforms were business-led or at least formulated, there is talk of ‘governance fatigue’ in the US, discontent with the Sarbanes-Oxley act is reaching mutiny proportions.

Enacted in 2002 with the attention of heading off more Enron and WorldCom-type scandals, Sarbanes-Oxley runs to 1,100 sections and complying with it, companies grouse, has become an industry in its own right. Meeting its requirements costs large firms about $9 million a year each, according to one survey, and the burden of detail is leading some European companies to considering delisting from New York to escape it.

Of course, many people would shrug and say that companies have brought tighter regulation on themselves. It wouldn’t have happened if they hadn’t misbehaved in the first place. Although there’s some truth in that, there’s a deeper issue. The late Sumantra Ghoshal pointed out that meta-analysis of 85 separate academic studies showed that neither the proportion of non-execs on the board nor splitting the top two roles had the slightest bearing on company performance. As for promoting better governance, Enron had in place many of the things that today’s codes recommend: independent directors, separate chairman and CEO, independent directors in charge of key committees and regular self-evaluation by the board.

Because of the underlying assumption that the board’s primary job is to police the actions of opportunistic and untrustworthy executives, Ghoshal argued, the codes had put in place a set of prescriptions based on ‘ideologies, unfounded opinions and myths’. Not only did they not prevent wrongdoing; they had the effect of making it harder for the board to do its job of encouraging innovation and legitimate risk-taking.

At the same time, by prescribing precise legal limits, they encourage executives to work right up to them rather than change their behaviour. Anything that isn’t forbidden is permitted compliance is with the letter rather than the spirit of the law. In fact, corporate governance is a particular subset of a larger case. The more extensive and detailed any regulation is, the greater the scope for unintended consequences (what we might call Goodhart effects). Take the financial services industry, where it is at least arguable that poor regulation has had the opposite effect to that intended. In the effort to foresee and forestall abuses, the rules are now so complicated and draconian that it’s actually quite hard to buy or sell savings products. The result is that pension firms are closing funds and people who should be saving are buying property instead. Abuses may be fewer – but an improvement bought at the price of a property bubble and a pensions crisis is a Pyrrhic one.

Let’s be clear. The argument is absolutely not the free-market one that there should be no regulatory constraint on companies’ ability to make money for shareholders, nor the often mealy-mouthed plea for self-regulation as a way of softening the options. Rather the reverse: safeguards are needed, but they need to be real rather than bolt-ons.

As with corporate social responsibility, the only way of circumventing the diabolical consequences of Goodhart is to bring regulation inside the company. Internal regulation enforced by values is both more efficient and more effective than external regulation enforced by the compliance police.

In this context it’s perhaps depressing to note that the Institute of Business Ethics, which among other things monitors the ethical temperature of the business world, notes declining interest in ethics in business schools – especially on MBA courses, where ethics, if it exists at all, is often taught as an elective rather than a mainstream part of business.

This, too, is a Goodhart effect, at least partly the result of business-school rankings that are heavily weighted towards before-and-after salaries as a criterion of merit.

Corporate governance is a means, not an end. Apparently impeccable behaviour on all the dimensions of Higgs or Sarbanes-Oxley, which drives out enterprise, may in the larger picture be a sterile bargain. The two don’t have to be in opposition but reconciling them requires everyone in the company to know what their purpose and values are and stick by them. As with quality, you can’t inspect good governance in after the event. Like letters in a stick of rock, it has to run all the way through.

The Observer, 28 November 2004

Big business brought to book: Inspiring or deadly?

THE OBSERVER is moving offices next week, and I’m dismally contemplating a life-endangering heap of business books on my desk that I shall have to deal with before the removal men arrive. Why, oh why, are there so many? Do I have to read them all? Why, as Mark Twain once put it, do most of them seem like ‘chloroform in print’?

The short answer is that, despite the health hazards, like chemical substances they are addictive. Although publishers say that appetites are more discriminating than in the roaring 1990s, when almost any management title would sell, business is still good business. People buy basic ‘how to’ and ‘self-help’ titles year in, year out, there is a sizable textbook market (business is the single most popular undergraduate and postgraduate course), and while blockbusters have become fewer with the fall of the charismatic CEO, a big autobiography – Giuliani or Jack Welch, say – can still turn out to be a bestseller.

But business books are much more than commodities. Publishing can be seen as an essential part of the the much larger ‘management ideas industry’, where the prizes are much higher. In the volatile market for ideas, business books form a key conduit linking idea-producers (often consultants or academics) with their target manager-consumers.

Moreover, in a neat piece of positive feedback, books recycle ideas back into the business schools, where as teaching aids they indoctrinate a fresh crop of potential consumers. So as well as being consumer items, books are also producers – of gurus and stars, of fashions, and thereby also, crucially, of markets for consultancy, whose rewards dwarf those of publishing.

A successful book, itself often an expanded version of an article in Harvard Business Review, can easily catapult an author from humble academe to the consultancy stratosphere. The speaker circuit alone can bring in a seven-figure income. Quick to twig the benefits, consultancies have become rich closed-loop publishing markets in themselves – both writing and then buying large numbers of books as selling tools and as a means of demonstrating so-called ‘thought leadership’.

Management books are thus more slippery and complex than they might appear – at once a product and a vehicle, the medium and the message. As products, it is easy to dismiss most of them as trivial or worthless. As in any other branch of publishing, or indeed any other human endeavour, the 80/20 rule applies: ‘Ninety per cent of everything is crap,’ as science-fiction writer Thomas Sturgeon more colourfully put it. There’s a less dismissive way of looking at it, however. The crap is the soil from which the stuff of real value grows. In any field you can’t have only masterpieces: masterpieces grow from, and define themselves against the lesser material.

Paradoxically, while the unappealing pile on my desk serves a boring but necessary function, the ‘masterpieces’, or at least the bestsellers, are much more problematic. This is because, like cookbooks but unlike fiction, people act on them. As Keynes famously remarked about the impact of economists, practical men, who believe themselves immune to intellectual influences, are usually the slaves of some defunct theorist, in managers’ case acting out in their daily lives the ideas of Adam Smith (division of labour), FW Taylor (mass-production techniques) or even Dilbert (fear, uncertainty and doubt).

A poor recipe is unlikely to kill you. But bad management advice can, and regularly does, lay waste whole companies. Fortunately for the rest of the world, ‘Chainsaw Al’ Dunlap’s brutal version of shareholder capitalism was discredited before his book Mean Business could make too many converts. Not so Michael Hammer and James Champy’s phenomenally successful Re-engineering the Corporation. Although the success of re-engineering (the concept) is moot, Re-engineering (the book) certainly caused mayhem: at the height of the fashion in the mid-1990s, three-quarters of large US and UK firms were reportedly engaged on three re-engineering projects each, and 500,000 people lost their jobs.

Books on theory may seem dull, and many are. But ironically, it’s the absence of theory that makes many ‘practical’ books potentially much more dangerous. Without a robust underlying theory, giving managers bold prescriptions about re-engineering or transformation is like giving me a scalpel and sending me off to do a little brain surgery.

Lack of a theoretical tether, too, encourages fashion bubbles as managers rush all over the place to adopt the next thing, while the practices of the book trade only increase the publishing churn. The result is not only that all those predictions of change and turmoil become self-fulfilling prophecies, but also that the noise makes it harder for more reflective, less prescriptive texts to be heard, or perhaps even written in the first place.

So what is the thinking manager browsing the airport bookshop – or me surveying my desk – to do? Caveat emptor, is the answer – understand where these books are coming from and the motivations that brought them into being. It’s not that they’re all bad. The best are clever and thought-provoking, even inspiring. Just remember that you can’t outsource responsibility for reflection, contextualisation and critical judgment as to how applicable they are.

As Stanford’s Jeffrey Pfeffer has noted, managers ‘must decide whether they will be swept up in the fads and rhetoric of the moment or will recognise some basic principles of management and the data consistent with them’. Unless, of course, managers are so anaesthetised by the din that their mind is already made up. Perhaps Twain was more literally right than he supposed.

The Observer, 21 November 2004

Take aim: you’ll always miss

W ITH AN election looming, public services and their improvement – or lack of same – have climbed to No 2 on the political agenda just below Iraq. As with foreign policy, it promises to be a white-knuckle ride. For while there’s clear water between the two main parties on the public sector – the government’s focus is on improvement, whereas the Tories’ is on cost-cutting – ministers face a growing problem of evidence.

Basically, voters refuse to believe public services are improving as fast as the government says they are. Unease at the ‘perception gap’ is almost palpable. Nick Raynsford, the local government minister, has already puzzled over the fact that local authorities’ customer satisfaction scores are going down at the same time as their official performance indicators are going up. The same theme was a subtext to many of the presentations by Whitehall bigwigs at last week’s Economist conference on the public sector.

For every area of policy, the conference heard, almost all the government’s traffic-light performance indicators are green. There are more doctors, nurses, policemen and teachers. Crime is down, school achievements up, NHS waiting lists are shorter. Speaker after speaker told the conference that from where they were sitting, services were getting better – it was only the extent of the improvement that was in doubt.

What’s more, as the presentations documented, this is in the perspective of a government for which public services really are important. They are seen, rightly, as an essential component of a competitive economy and, at a guess, No 10’s performance management system, at least in form, is by some distance the most sophisticated ever put in place.

So why isn’t it delivering? Identifying answers has become a Whitehall industry in itself. One suggestion is poor expectation management: people expect too much. Another is a time-lag between the personal (‘the hospital treated me quite well’) and the general (‘the NHS is getting better’). For Raynsford, more bizarrely, it appears to be something to do with a lack of public leadership.

But there is a much simpler explana tion to hand. The signals ministers are receiving do not mean what they think because they are not transmitted by service users but by service managers. They reflect a corporate rather than a public experience, not the same thing at all. Yes, it’s the old problem of targets.

Last summer a borough chief executive predicted to me the divergence between his government and public satisfaction figures. ‘The targets and specifications handed down from the centre oblige us to do things the public don’t care about,’ he explained. A striking example is e-government – web-enabling public services. In the latest round of specifications, councils are encouraged to make it possible for citizens to browse their council tax online. ‘How sad would I have to be to want to browse my council tax payments online?’ mused another service director.

Across the field, public service managers are diligently ticking off and reporting what matters to government, not to citizens. This explains baffling (to the public) rankings like three-star NHS trusts or ‘excellent’ councils. ‘Improvement’ or ‘excellence’ is in the eye of the government, not the public. Hence the gap.

But this is in the very nature of targets. The particularly ingenious Catch 22 to which they are subject is so well documented it has a name. The social-science equivalent of the uncertainty principle in physics, Goodhart’s Law states that the instant a measure is used as a target, it loses all value as a measure.

This is because managers understandably devote their efforts to meeting the target, not what the target stands for. Targets, as Michael Barber, director of the Prime Minister’s Delivery Unit, helpfully reminded the conference, are ‘representations’, abstractions from the aim beneath. Indeed: and that’s the problem.

It’s sensible that all A&E casualties should be treated as quickly as possible consistent with clinical need. But as soon as that is represented as ‘all emergencies must be seen within four hours’, as currently mandated, doctors divert attention from juggling patients according to clinical need – which may mean operating on one person within two minutes and leaving another for six hours under observation – to cramming everyone through the arbitrary threshold to avoid a waiting-time ‘breach’.

Where the target and common sense are in conflict, staff employ a variety of recording ruses to reconcile them. As Goodhart predicts, the measures are no longer reliable – doubly so, since the target was an inadequate representation of a complex aim in the first place.

Compounding the problem, as Lucy de Groot, executive director of the Improvement and Development Agency, reminded listeners, is that ‘the target regime is derived from silos’ – individual departments or agencies, or even sometimes departments within departments. Being un-joined-up, they fail to coincide with the lived experience of citizens.

At worst, as documented in a previous column, that leads to a situation where a water company has measures in place for how long it takes to answer the phone or make an appointment, but none for the end-to-end time to fix a burst main. It can meet all its service standards – and thus proudly claim ‘excellence’ – while it leaves the water running for weeks.

The government is now well aware of some of the shortcomings of target regime. It has cut their number from about 700 to 100 departmental Public Service Agreement targets, according to Barber. A full-scale assault is being launched on the pounds 11 billion regulation industry – an initiative welcomed by Audit Commissioner James Strachan, a champion of the need for regulatory value for money.

And it is saying all the right things about getting away from top-down control and giving service deliverers the freedom to deliver ‘personalised’ services. Former Treasury adviser and prospective MP Ed Balls suggested that the Bank of England should be the model for future public sector reform, offering a stable framework within which specialists could make decisions unencumbered by short-term politics. ‘One of the things we’ve learnt is that we need to get systems, rather than individuals, right,’ he said.

But the government still cannot help getting targets in a twist. Witness the new goal of halving MRSA infections in hospitals in the next three years. Think what this looks like from the patient’s point of view: in three years’ time, I will have half the chance of being killed by going to hospital than I do now. The only acceptable ‘target’ here, as in all such cases, is perfection, and the only acceptable measures those that show both public and providers how progress towards it is being achieved, year by year.

The Observer, 14 Noember 2004

Roll over, Beethoven

ARE THE wheels coming off the luxury German charabanc? For a long time as closely identified with quality as sauerkraut was with wurst, the exclusive image of German cars is taking a battering in the area it can least afford.

* DaimlerChrysler recently admitted that quality problems at Mercedes had kicked a hole in group profits this year and would do so again in 2005. The three-pointed star has tumbled from top of the influential JD Power US reliability rankings to 28th in a decade.

* Volkswagen, once a byword for reliability, has sunk to 33rd in JD Power. The VW division, with fleets of unsold cars, is in ‘a clear loss situation’ and faces labour unrest at home as it seeks to slash costs by a third.

* Uber-aspirational BMW, too, is not immune to quality woes. ‘If only everything in life was as reliable as… a Japanese car,’ quipped the Which? headline on its annual reliability report in August, noting that the Munich firm and Audi had joined VW among the least reliable makes.

* Even Porsche, the best-placed German marque, was only average in the Which? ratings, while in another hefty dent to German bodywork, the VW Polo, the old-model Mercedes E-class and super-trendy Audi TT had the worst record of all new cars for breakdowns in the first two years.

The common quality dip in German cars is no coincidence – and it may be serious. ‘It’s attacking the German manufacturers at the core of their brand and business model,’ says Mike Sweeney, professor of operations management at Cranfield Management School. ‘It’s a real challenge.’

The Germans face not one but two testing issues. The first is how to manufacture increasingly complex and sophisticated products. Traditional vertically integrated operations – doing everything in-house – have served German firms well in the past but are increasingly difficult to do cost-effectively as complexity outstrips even the capabilities of a legendarily well-trained workforce. So firms are outsourcing sub-assembly to ‘prime suppliers’, which instead of delivering individual parts now send whole modules – a complete power-train, for example – to the production line.

For the final assembler, says Sweeney, modular build has the advantages of simplifying production, shifting responsibility for managing the supply chain to first-tier vendors, and dramatically reducing investment needed in its own plant and equipment.

In the long term, it should yield substantial cost and quality gains. In the short term, however, there are big transition problems as suppliers grapple with unfamiliar tasks of managing global supply chains and advanced manufacture, while final assemblers come to terms with concomitant loss of control. ‘There’s a big decision to make now,’ notes Sweeney. ‘Do they go in and sort things out or wait for the suppliers to get it together?’

But systems engineering is only part of the problem. Anxious to underline their reputation for cutting-edge technology, German manufacturers have eagerly embraced electronics in everything from engine management to navigation. But if integrating and managing mechanical systems is difficult enough, in electronics it is a nightmare.

‘Of course, technology is part of their marketing strategy,’ says Dan Jones, co-author of The Machine That Changed The World and chairman of the Lean Enterprise Academy. ‘But they went beyond the capability of the electronics they were using. There are some red faces at the likes of Bosch – the systems were just not robust enough for the auto environment.’

To get the reliability ratings back on track, German carmakers are now hastily backtracking on electronics. But having built their reputations on advanced technology, will they continue to be in a position to demand today’s high prices after the debacle?

This links to a third question. ‘There’s a big debate in Germany about diesel,’ notes Jones. ‘While they’ve been concentrating on diesel, everyone else is looking at hybrids’ – notably Toyota, whose second-generation electricity and petrol-powered car, the Prius, is well ahead of the competition. Hybrid, says Jones, promises ‘guilt-free motoring’, an especially alluring message in the US, land of gas-guzzling SUVs and pickups. Toyota’s next hybrid is a top-of-the-line SUV Porsche has adopted the technology for its Cayenne.

Until now, with a few niche exceptions, German carmakers have hogged the autobahn with high-tech, high-margin cars. But this may be changing. Thomas Bayne, chairman of ad agency Mountain View, who has worked with several motor industry clients, points out that competition is much greater at the top end of the market than it used to be. With cars in oversupply, the real issue now is differentiation, he believes, not quality as such – witness the Mini and Audi TT, both of which have become cult cars despite reliability ratings that would have taken less sexy designs straight off the road.

In this context, he speculates that the problem for firms like Mercedes and Volkswagen may be a loss of status and desire: ‘the badge may not mean what it used to’. In which case, better quality is not the answer. As for BMW, having introduced an entry-level 1-series, how far can it stretch the brand in search of volume without destroying the aspirational qualities that drove its success?

German manufacturers can thank their stars that they currently face little threat from the cash-strapped US Big Two: both Ford and GM lost money on cars last year, and some observers think Chapter 11 is a possibility for at least one of them.

But that still leaves the juggernaut bearing down on everyone: Toyota. The Japanese firm, which announced its own results last week, has money to burn, in the last half year overcoming tough conditions to record an operating profit of $8bn. Up until now, the company has been thought of as a cautious copier rather than high-tech innovator. But with its superior engine technology, its upmarket Lexus marque adding style to its formidable build quality and its adoption of electronics to add to its peerless manufacturing prowess, it is now poised to offer a serious challenge in the luxury sector. Toyota’s next-generation cars will be simpler, smaller, smarter, cutting out a new layer of cost as well – the opposite of the German approach. Roll over, Beethoven?

The Observer, 7 November 2004

Doing away with away days

THIS IS the year the employee went missing. On a notorious weekend in August, BA almost imploded for the feeblest excuse of all, staff shortages. Meanwhile, Royal Mail was incentivising postmen and women to deliver the mail rather than stay in bed by entering good attenders in a prize draw to win a car or holiday vouchers. And last week the Cabinet Office admitted that civil servants had stayed at home an average 10 days each in 2003, defeating attempts to reduce Whitehall sick leave to private-sector proportions.

In business, absence doth definitely not make the heart grow fonder. Absenteeism costs business pounds 11.6 billion a year, according to the CBI. In its 2004 survey, the Chartered Institute of Personnel and Development (CIPD) found that average sickness absence last year was 9.1 days per employee, fluctuating around 4 per cent of all working days, as it has done for the last few years.

‘Absence management has been going up the agenda as companies – and the Chancellor – see it as a way of improving productivity and cutting costs,’ notes CIPD employment relations adviser Ben Willmott.

Kneejerk reactions to all this are evident everywhere. Companies instinctively tighten up sanctions or institute incentives (bribes). Heart-sinkingly named ‘integrated absence management packages’ are something every well-equipped HR manager’s gotta have, like gunbelts in the Wild West, and for much the same reasons: track down the offenders, persuade them to see the error of their ways, and if not, use force.

Seems reasonable? Of course, absenteeism matters, but it doesn’t follow that the best, or even a sensible, way to manage it is directly. Absenteeism, like unhappiness, is an epiphenomenon, a by-product of a system. Managing it directly is like trying to manage a dog by holding its tail, yielding little purchase, or insight, on the behaviour of the rest of the animal. Indeed, yanking its tail has a good chance of making it forget its previous grievances and bite you instead.

Obviously, absenteeism equals people not wanting to come to work. What makes people so unhappy with their jobs that they don’t turn up, with all the knock-on effects for colleagues and customers? Apart from coughs and colds, the answer, attested by the CIPD research, particularly for white-collar workers, is stress related to workload, management style, organisational change and the need to meet targets.

Stress-related dissatisfaction and absence are increasing. Apart from the CIPD figures, research from the University of Kent has identified a 10 per cent drop in job satisfaction over the last decade – at first sight surprising, since wage and employment levels are buoyant. But those advantages may be outweighed by perceived intensification of work and diminishing levels of control over the job.

Remind you of anything? These are exactly, and depressingly, the same complaints made against the factory system from the 1920s onwards. Offices, particularly in the target-obsessed, low-paid, inflexible public sector, are today’s alienating, top-down mass-manufacturing plants. Recent concerns about bullying as a factor in absenteeism, confirms Willmott, are not coincidence, though there is a fine line between legitimate and illegitimate pressure: ‘Where managers are themselves under pressure to meet quotas or targets, it’s all too easy to pass it on down the line.’

The conventional HR response is to say that absence management, while no panacea on its own, is needed as part of the bundle of practices – clear aims and roles, training, reward, etc – that make up the ‘high-performance workplace’. A more radical approach is to say absenteeism is a form of waste, and, as with any other waste, the only real answer is to design it out of the system.

A straw poll of the staff who work for Observer Business revealed that absenteeism here is a tiny fraction of the national average. How so? A combination of high adrenaline, crystal-clear expectations (miss a deadline? I don’t think so), extreme flexibility in meeting them, peer pressure and dependence (‘teamwork’ in the jargon), and the instant gratification of seeing your work in print at the weekend, means that, despite routine grumbles, the attractions of playing hooky are not as great as those of doing the job.

An exception? Well, no. It’s true that media and telecoms have low absenteeism nationally, as does consultancy. But most work has some of the same elements, and all work can be well or badly designed for its purpose. According to recent figures, employees at Lincoln City Council took an average 18.2 days – more than three weeks – off sick last year, a staggering four times more than the best performer, Hampshire’s Hart District Council, where employees were absent just 4.7 days. Even assembly-line work can (no, should) be designed to give employees control over what they do. Car workers at Toyota can stop the line if there’s a problem they cannot solve, but that’s not a people issue – it’s to do with ensuring that the job is done right in the first place.

Absence management, like appraisal and bureaucracy in general, is part of the heavy cost of a badly designed work system. It adds complexity to management and no value to the customer. The solution is therefore not to manage it better – a classic case of doing the wrong thing righter – but to get rid of the need for it altogether. The best kind of absence management is conspicuous by its absence.

The Observer, 2 November 2004

Portrait of a corporate psychopath

I F YOU DID a psychological profile of the corporation, what would it look like? Self-interested, manipulative, avowedly asocial, self-aggrandising, unable to accept responsibility for its own actions or feel remorse – as a person, the corporation would probably qualify as a full-blown psychopath.

Sensationalist? Joel Bakan, whose provocative film documentary, The Corporation , is due out at this month and whose book of the same is in the shops (Constable, pounds 9.99), doesn’t think so.

The opposite of a blunderbuss-wielding Michael Moore, Bakan is a Canadian law professor whose brief is as well- ordered, concise and sober as the accusation is grave: behind its benevolent face, he argues, the most important institution of modern capitalism is a Frankenstein’s monster that has broken its chains and is now consuming the society that created it.

Three key legal interventions have made the corporation what it is, Bakan says. The first two were the innovations of limited liability and the granting to the corporation of a legal personality. At a stroke, ‘the corporate person had taken the place, at least in law, of the real people who owned corporations’. And the company, previously dependent on government grant and charter, could now be seen as an independent being, a ‘natural entity’ with the same rights to exist as an individual.

The corporation turned out to be a work of genius, a brilliant amplifier of capital and effort that has made possible the sensational improvements in living standards (in the developed world) of the past 150 years. But it is a flawed genius, and the flaw, perhaps fatal, is the third enabling condition: exclusive emphasis on profit.

This is expressed in the book’s subtitle, The Pathological Pursuit of Profit and Power. On the basis of case law, Bakan insists, ‘managers and directors have a legal duty to put shareholders’ interests above all others’ and no authority to serve any other interests – the ‘best interests of the corporation’ principle.

The combination of these three conditions (Bakan could have added a fourth, which is that, unlike a human being, the corporation has no natural life span. It can in effect live and get bigger for ever) has far-reaching consequences.

The first is that among the interests the corporation has no business serving are those of the society that framed its governing rules. In the interests of shareholders, the corporation is not only entitled but obliged to offload on to others as many of the costs of making profits as possible.

In short, says shareholder activist Bob Monks, quoted by Bakan, the corporation is ‘an externalising machine, in the same way that a shark is a killing machine’ – not because it’s malevolent but because that’s the way it is designed. This in turn makes the whole notion of corporate social responsibility a logical nonsense, permissible only when it is in the best interests of the corporation (in which case it’s not corporate social responsibility) or when, ironically, it is insincere (ditto).

CSR, says Bakan baldly, ‘is an oxymoron’. You might just as well ask a great white to be nice to fish or a fox to go vegetarian. When it comes down to it, responsibility always takes second place to shareholder interests, in the name of which corporations constantly test the edges of legality and far overstep those of morality.

This truly is a world where, as he says, legal compliance is just another cost-benefit analysis. Bakan has hair-raising and gruesomely entertaining sections on spying, cheating and amazingly unethical marketing devices. He also notes three pages of alleged legal breaches by corporate role model GE sweatshops turning out goods for Nike and Wal-Mart and American companies’ reluctance to cease their involvement in Nazi Germany because it was good business for their shareholders.

Extraordinarily, Bakan recounts a fortunately inept but serious (and authenticated) business-backed plan to depose Roosevelt and install a fascist regime in the US in the 1930s.

The corporation has been much more successful by persuasion, to the extent that swathes of what used to be the public sphere and interest have been surrendered to it. And it still wants more.

But as the dominance grows, so do the flaws. In a nightmare version of the effect of the invisible hand, everyone pursuing their own self-interest increasingly produces results no one wants or intends (in the extreme, planetary collapse), but for which no one is responsible. And the pathologically narrow and materialistic view of human nature that underpins today’s corporate form not only dominates economic activity – it is also altering humanity.

‘In a world where anything or anyone can be owned, manipulated, and exploited for profit, everything and everyone will eventually be,’ Bakan warns. The sorcerer’s apprentice is running amok the corporation is remaking us in its own stunted and undersocialised image.

This lucid and urgent book does leave a couple of stones unturned. It perhaps overestimates the global hegemony of the US model (although not its fundamentalist zeal for hegemony) shareholders certainly own rights in companies, but the assets themselves?

Then again it underestimates, or rather does not address, the formidable extent to which the model is underpinned by dominant academic theory. And, perhaps not surprisingly, Bakan’s remedies are less well thought-out than his cool and authorititative analysis.

He is, though, undoubtedly right that it’s time to destroy the pernicious and self-serving idea of the corporation as a ‘natural entity’. It’s not. It has a right to exist because society gave it one.

The corporation was created as an instrument of public policy, and its licence can still, theoretically, be revoked. The presumption of freedom from regulation is otiose. The corporation needs to be re-made in our image – in law, in theory and in practice.

The Observer, 24 October 2004