Consuming for Christmas

Christmas poses the problem of management in microcosm. Never mind the quality, feel the width. Factories, shops and delivery services straining every nerve to meet Christmas demand and deadlines – management as heroism. Yes, but going full tilt to turn out singing plastic fish, belly-button brushes, electric shaving-foam warmers and other such items that will be landfill before you’ve finished singing ‘The 12 Days of Christmas’ is management as absurdism. As Peter Drucker put it, ‘There is nothing so useless as doing efficiently that which should not be done at all’.

There was a time when abundance was in itself something to celebrate, the long climb out of penury a monument to human exuberance, imagination and betterment. But at least in the developed world, that innocent age is long past. The 100th segmentation of yoghurt or the 45th fragrance of washing powder is not an addition to human happiness or even choice – it’s a burden that, without getting too killjoy about it, oppresses consumers and the planet can no longer afford.

Up till now, management has been most concerned with efficiency, what we might call process. Goodness knows, given the misguided routes taken by so many organisations, there’s still vast scope for improvement on this score, particularly in resource efficiency. But as Russ Ackoff never tired of saying, doing the wrong thing more efficiently actually makes things worse. ‘Therefore, it is better to do the right thing wrong than the wrong thing right. This is very significant because almost every problem confronting our society is a result of the fact that our policy makers [and corporate managers] are doing the wrong things and trying to do them righter.’

It’s time, in fact, to give purpose back its central management importance. Writing recently in the FT, Janan Ganesh impatiently laid out the conventional view: ‘There are first principles that politicians must relearn. Business exists to make a profit within the law. It contributes to society by employing people and producing goods and services, not by attempting the modish fad of “corporate social responsibility”’. I’m pleased to say that he was then ticked off readers making the point that the role of business is to serve the ends of society and culture, not the other way round, and that in the aftermath of 2008 we are all contemplating close up the dire consequences of elevating profit into purpose. Purpose comes before profit: profit is what makes purpose possible, and the score as to how well it is doing it. Sorry; past success has so altered the present that a new formula is necessary. Producing goods, services and employment is no longer enough to outweigh the growing burden of externalities that business imposes on society in the sacred name of profit in terms of inequality, exclusion and financial and global warming.

Of course, Ganesh is perfectly right that this does represent the prevailing view, incorporated into governance codes and authorised by academic theory. He is therefore also correct that if politicians don’t like it (and they’re right not to), they’re being naive if they think that handwringing and begging Amazon, Google and Starbucks to please pay a bit more tax will do anything to change it. Management is a powerful paradigm, anchored by vested interest and entrenched ideas, and shifting it will require action on many different fronts – political campaigning, possibly some law changes, more rigorous competition policy, and, just as importantly, academic and other effort to build a credible alternative.

And consumers? Yes, we have a part to play too. There’s a chink of light in the reaction of Starbucks to consumer pressure on the tax issue, inadequate as it is, and Apple to revelations about the pay and conditions of Foxconn workers in China assembling iPhones. We can make a difference. To do so, we need to keep up that pressure, both vocally and in our buying habits. On ‘Buy Nothing Day’ (24 November, in case you missed it), the New Economics Foundation launched a manifesto and pamphlet for a New Materialism: How our relationship with the material world can change for the better – a call not for a rejection of stuff, but for a more adult, less spoilt relationship with it. The new materialism, says author and NEF fellow Andrew Simms, ‘is about an economy of better, not more. It is rich in the good quality work created by providing useful services, making things that last and can be repaired many times before being recycled, allowing us to share better the surplus of stuff we already have’.

The new economy is beginning to emerge in things ranging from furniture, to tools, cars, fridges, clothes and food. DIY chain B&Q is rethinking its business model around leasing rather than selling. Marks & Spencer is selling suits made for easy disassembly and recycling, and offering fashion lines made from recycled wool. M&S director of sustainability Richard Gillies says that the group is proceeding as fast as it can down this route, but it can’t get too far ahead of of its customers: it is waiting for unambiguous signals that we are ready to sign up for not a hair shirt but one that is made with care, to last, and then be cycled round again. Among the items on NEF’s work-in-progress manifesto: Cherish, tend and respect what you have. Look after it. If possible, make, buy and keep things that are designed to last at least 10 years. By buying well, and, just as important, refusing to buy badly, consumers can do their bit to send the old management paradigm packing and help a new and better one emerge.

I can’t think of a better Christmas present tp us all.

Teachers’ pay: must do better

Here we go again. Handing headteachers the responsibility for deciding teachers’ pay increments according to performance sounds plausible – indeed, who could be against it? We need good teachers, don’t we? So what better way of attracting and encouraging stars than rewarding them accordingly?

Actually, if ministers consulted their history, they’d find that they are by no means the first to whom this bright idea has occurred. Victorian Gradgrinds thought it was plausible enough to try it more than 100 years ago. But, alas, as they also discovered, it’s in the large category of things (like George Osborne’s shares for rights) that only makes sense to those who don’t know the first thing about management.

In their essential book on evidence-based management (or more accurately the lack of it) Hard Facts, Dangerous Half Truths and Total Nonsense, Stanford Professors Jeff Pfeffer and Bob Sutton demonstrate that ideas that seem like common sense in management generally aren’t. They devote a number of pages to showing why merit pay for teachers is a classic example.

It’s not just that done according to the letter almost all appraisal-based performance pay systems quickly crumble. Either they create such acute problems of perceived fairness (the aptly named teacher’s pet syndrome) that they demotivate as many people as they encourage. Or managers compensate for the waves of bad feeling created by giving everyone satisfactory appraisals. If merit pay for teachers worked, it would already be in place. In fact, it is always more trouble than it is worth and quietly buried a few years later.

But leaving aside the practical difficulties that affect all such schemes, consider the conditions that would need to be fulfilled for performance incentives to be effective in the specific case of teaching. Are teachers’ effort and motivation (since intelligence is unfortunately insensitive to incentives) the single or most important causal factor in student learning and achievement? Are teachers motivated by money? Are tests and exam results a reliable guide to a student’s educational achievement? Is teaching a solo activity requiring little cooperation with others in the school?

A nanosecond’s reflection indicates that the answer in each case is ‘no’. Much the most important factor in student achievement – more than anything that happens at school – is the home environment. The logic of incentivising teachers rather than parents or indeed students themselves is therefore unclear. On the whole people motivated by money are more likely to go into the City or highly-paid private-sector occupations than teaching. Whether we would want teachers to be motivated by money is anyway moot: giving people incentives to influence something that is not directly under their control (students’ exam results) is an invitation to do so by other means, including cheating. Sure enough, research cited by Pfeffer and Sutton shows that in these conditions cheating is a predctable outcome, and one ‘quite sensitive’ to the size of the incentives on offer. Exam results are a reliable guide only to the ability to pass exams. Right on cue, the CBI recently complained that current emphasis on exam results was not supplying employers with the rounded individuals capable of joined-up thinking that they need. And of course school culture, quality of resources and facilities, and peer support and learning from colleagues all play an important part in teachers’ performance. Since the strings being pulled aren’t attached to any levers, it’s not surprising that trying to relate teachers’ pay to performance is ineffective. ‘Merit-pay plans seldom last longer than five years and […] merit pay consistently fails to improve student performance,’ conclude the authors.

Ironically, it’s a safe bet that those behind today’s scheme who automatically assume that teachers are motivated by money would forcefully deny that they are so influenced themselves. This persistent bias explains why even people who ought to have a clue about management consistently overestimate both the effects of money and the extent that it can be used to compensate for management shortcomings in other areas. In fact, money is what is HR folk call a ‘hygiene factor’: while not enough of it is a powerful demotivator, the reverse is not the case. Beyond a certain point it has little positive motivational effect. The bottom line: the bad news is that the effects of bad management can’t be undone by applying a dusting of cash. The good news is that the best thing to do with pay is to uncomplicate it: pay people enough that it isn’t an issue, so that they (and you) can stop obsessing about it and concentrate on the job instead.

Strikingly, the incentives in the government’s Work Programme, where private-sector providers are rewarded for for getting the unemployed back into work, are based on similarly dubious assumptions. Since it’s not in the job agencies’ gift to create new jobs from thin air, it’s not obvious why incentivising job agencies would be more successful than incentivising, say, the Chancellor to create the economic growth of which jobs depend. Expect, then, the scheme not to work very well, or if it does seem to be working, for there to be evidence of fiddling the books. It doesn’t, there is, and the case rests. Incentivising people to do things that are outside their control falls squarely in the third of Pfeffer and Sutton’s title categories. As the old saw has it, never try to teach a pig to sing. It wastes your time and annoys the pig.

Outsourcing chickens come home to roost

If there’s one practice that the same time embodies both the triumph and bankruptcy of management 1.0, it’s outsourcing.

Its triumph, obviously, is that, pushed by consultancy-cum-IT firms that profit directly from it, mandated by governments using it as a form of stealth privatisation, and seized on by firms desperate to cut costs, everyone does it. Industry researcher Gartner estimates that IT outsourcing alone was worth $250bn in 2011. Manufacturing, HR, payroll, customer service, and management itself (hospitals, prisons, schools) would add hundreds of billions more. ‘Outsource everything but your soul!’ once exhorted an excitable Tom Peters – and to their shame, of course, some companies have even tried that.

It’s easy see outsourcing’s appeal. It makes perfect sense to managers who have been brought up to believe that companies are machines, people are a cost to be minimised like any other and shareholder value is the only thing they have to look out for – with management 1.0, in fact. Outsourcing is the economist’s obsession with specialisation, economies of scale and unit activity costs translated into management practice. When IT made it possible to break services down into their separate activities and then recombine them later, wow! Outsourcing seemed finally to promise the Holy Grail of optimising the cost of each and every part.

Which is how its purveyors present it. But it’s a fraud. It doesn’t have to be – in itself, outsourcing is neither good nor bad but neutral – but most of what’s done in its name fails on at least one of three different counts: it’s the wrong thing to do (or done for the wrong reason), it’s done wrongly, and the contract is likely to be rigged in favour of the provider.

Take the latter first. Many of the big consultancies have a vested interest in selling outsourcing, since they are providers too. As you would expect, having had a lot of practice they are good enough at it to make it handsomely profitable for themselves.

Often less so, however, for customers. Whatever they say, the chief reasons companies outsource are to cut cost and shed responsibility. These are both self-defeating. Outsourcing is usually only cheaper because outsourcers’ pay and conditions are worse, which does not make for a happy and productive workforce. Offloading responsibility is similarly a false economy because eventually it comes back to bite you in a tender part of your reputational anatomy, as Nike, Apple and countless other companies have found to their cost.

‘Cheaper’ is in any case usually an illusion. Outsourced industrialised processes are only cheaper in terms of unit costs. But total costs are end to end, and by fragmenting the end-to-end flow, industrialisation invariably drives costs up, while worsening service for the customer.

Conventional outsourcing of this type is the exact opposite of systems thinking, and relying on it has precisely the effect that systems thinkers predict, namely to drive up costs elsewhere in the system. (As W. Edwards Deming insisted: ‘If the various components of an organisation are all optimised, the organisation will not be. If the whole is optimised, the components will not be.’)

As the chickens flap home to roost, the reputational and literal costs of outsourcing are spiralling, more than wiping out any unit-cost gains. The opprobrium visited on the big banks, the utilities and, alas, much of the public sector in response to their charmless, dehumanising service, is one such cost. As Apple among many others is discovering, in a connected world it is no longer possible to decouple supply-chain responsibility from the brand by outsourcing. So if Marks & Spencer outsources garment manufacture to Bangladesh, it will have to pay production workers a living wage, whatever it says or doesn’t say in the contract. Starbucks, Google and Amazon can testify that even laundering technical decisions over tax through accountancy no longer washes whiter.

At higher level, the costs are even more pervasive. Irony of ironies, in order to manufacture in the US, as Foxconn is now proposing, the Taiwanese firm is having to invite dozens of American engineers to its Chinese plants to learn how to do it: US firms have outsourced too long for them to be able to bring production lines back home unaided, Foxconn CEO Terry Gou told President Obama on a recent visit.

It goes further. It is not just that outsourcing has hollowed out the US (and UK) economy to the point where it may be impossible to recreate a viable manufacturing sector: the ‘designed in California, made in China’ model followed by the likes of Apple, far from improving matters makes them worse. By sourcing and assembling abroad, the iPhone alone reportedly contributes $2bn to the US trade deficit. Nor does it create the secure, well-paid industrial jobs in the US that sustained a middle-class lifestyle for those without an advanced degree. Instead, those unfortunates have been obliged to seek employment in services, depressing wages in an already low-paid sector and increasing inequality to the point where it is unsustainable. Systematic outsourcing has contributed to similar structural imbalance in the UK.

As with many other areas of management, the moral of the outsourcing story is: be very careful what you wish for. When viewed in system terms, something that seems obvious and advantageous for conventional managers in an individual firm turns into the economic equivalent of ash die-back, disastrous for the economic ecology as a whole. The outsourcing short cut has turned into a very long way round indeed.

A code of malpractice

This week the City has been congratulating itself on 20 years of UK corporate governance codes. Since the original Cadbury guide to boardroom practice in 1992, the UK has taken pride in its role as a world leader in the field, and the codes as a successful export. Seventy countries around the world have followed the UK example and drawn up similar guidelines.

There’s just one problem. Could it be the wrong kind of governance? The day the FT carried the story, Incomes Data Services was reporting that FTSE100 directors took home a median 10 per cent pay increase last year, continuing a soaraway trend that has continued year-in, year-out over the same period. And would this be the same governance, that has given us the RBS meltdown, LIBOR and PPI mis-selling to the tune of £18bn, the biggest rip-off in financial history? That failed to stop phone-hacking or BP taking dangerous short cuts? And that has sanctioned the wholesale offloading of risk on to everyone else, whether individuals (pensions, careers) or collective (global and financial warming), at the same time rejecting any responsibility of its own except to shareholders?

So lop-sided and jerry-built is the corporate economy erected on the scaffolding of the current governance codes that it can’t even deliver the material progress by which it justifies its many privileges: even with a return to growth, living standards for lower or middle earners may be no higher in 2020 than in 2000, according to the Resolution Foundation.

The truth is that much vaunted UK corporate governance has neither headed off major scandal nor nurtured good long-term management. In fact it has done the opposite.

The irony is that by now we know pretty well what makes companies prosper in the long term. Organisations are whole systems and have to be managed as such – you can’t optimise whole systems by optimising the individual parts. Pace Beecroft and Osborne, good people management pays dividends: fear makes people stupid and cussed, not clever and entrepreneurial.

We know that incentives and targets are dangerous (and sometimes lethal) things, all too often taking people’s eye off the real job and focusing it instead on the incentives themselves, damaging intrinsic motivation and undermining performance. Companies work better when pay differentials are less wide (ie, when we really are in this together). Lasting success comes from the hard work of organisation-building and devising products and services that please customers, not from doing deals, which mostly destroy value.

Lastly, it’s obvious except to themselves that in the long term companies can’t thrive unless they have society’s interests at heart as well as their own.

So why do so many boards and managers, sicced on by politicians, systematically do the opposite – run companies as top-down dictatorships, opt for mergers and financial engineering over pleasing customers, destroy teamwork with runaway incentives, attack employment rights and conditions, outsource customer service, treat their stakeholders as resources to be exploited, and refuse wider responsibilities to society?

The answer is that management in the 1980s was hijacked by an opportunistic alliance of impatient shareholders, corporate raiders and ambitious business school academics. The formula that they came up with cast management as a sub-branch of Chicago economics, based on an ideologically inspired view of human nature (homo economicus) needing to be bribed, whipped or both to do their exclusive job of maximising returns to shareholders. It is these assumptions, untested and hidden from view, that are at the heart of the governance codes and have taken on the aura of unchallenged truths ever since.

The consequences of the hijack have been momentuous, over time remodelling society as well as business. The first consequence was to align managers’ interests not with their own organisations but with financial outsiders – shareholders. This triggered the explosion of senior managers’ pay that continues to this day.

At the same time, focusing outside rather than in made them less sensitive to the real-world needs and capabilities of their organisation and encouraged them instead to turn to deals as the preferred short cut to growth (and their bonus targets). This signalled the second major consequence, the switch from the previous policy of retaining and reinvesting profits for the benefit of all stakeholders, to ‘downsize and distribute’, contracting out as much as possible and cranking up dividends and share buybacks to shareholders.

The crowning irony is that this stealth revolution progressively undermined the foundations of the shareholder value under whose flag the activists had ridden into battle. Along with corporate welfare and customer service, one of the prominent victims of downsize and distribute was R&D. Innovation has stalled since the 1980s, prompting some economists to query whether the era of growth itself is over.

But it’s not economics, it’s management, stupid. Unsurprisingly, downtrodden and outsourced workers, mis-sold-to customers, exploited suppliers and underpowered innovation do not make for rising shareholder value despite ever more ingenious financial engineering.

When the Canadian academic Roger Martin crunched the numbers, he found that shareholders had done less well in the the shareholder value era since 1980 than in previous decades when lazy managers were supposedly feathering their own nest. The crash of 2007-8 stripped away any remaining doubt: the economic performance of the last 30 years was a sham. Overall, there were no profits – as Nassim Nicholas Taleb wrote in The Black Swan, they were ‘were simply borrowed against destiny with some random payment time.’

To sum up: what the City was congratulating itself on last week is a wonderful example of the wrong thing done righter. The ‘success’ of the governance codes is a triumph of bureaucratic process over substance. Never mind that we have a financial system that has lost both purpose and moral compass, an economy that is failing most of the population and an increasingly unequal society, look how well we tick the governance boxes! The truth is that governance has recreated management as a new imperium in which managers and shareholders rule, and the real world dances to finance’s tune. A worthier anniversary to celebrate is the death seven years ago this month of Peter Drucker, one of the architects of pre-code management. Austrian by birth, Drucker was a cultured humanist one of whose distinctions was having his books burned by the Nazis. In The Practice of Management in 1954 he wrote: ‘Free enterprise cannot be justified as being good for business. It can be justified only as being good for society’.

The real leadership crisis

If quantity of ink were the criterion, we’d know everything there was to know about leadership and more. The last time I looked there were 64,000 titles on the subject listed at Amazon (UK) – with another 2,000 added to the groaning shelves each year.

Yet it’s one of those topics that the more you read and talk about, the smaller the area of certainty becomes (‘I’m still confused, but at a higher level’, as Goethe said after reading Hegel). What’s more, the higher the pile get, the more confused thinking and practice become, triggering yet more effusions on the subject. No wonder there’s a ‘leadership crisis’, even though it’s not the one that most people think it is.

It was hard not to reach this conclusion at a fascinating recent symposium on the subject at Gresham College, London. It was illuminated by two dazzling lectures by Liz Mellon, executive director of Duke Corporate Education, and ex-headhunter Douglas Board, npw visiting fellow at Cass University, talking respectively of the way leaders think and the way they are appointed.

Reverse-engineering leaders, says Mellon, author of Inside The Leader’s Mind: Five Ways to Think Like a Leader, by breaking leadership into its component competencies and then finding (or forcing) candidates to fit the template, is doomed to failure. You might as well try to create a butterfly by pulling one to bits and using the parts as a blueprint for a new one. It’s only slightly less crude than the Frankenstein myth. What’s missing – what gives leadership life – is the way leaders think, and without it what you get is robots and clones: the exact opposite of what is needed for a world of ambiguity, few precedents, and incomplete information.

This error is made worse by the extraordinarily lackadaisical way senior leaders are chosen, according Board, whose book Choosing Leaders and Choosing to Lead: Science, Politics and Intuition in Executive Selection, came out in the summer. Despite spending enormous amounts on headhunters – a search for a US CEO can easily cost upwards of $1m – candidates for top jobs almost never get the grilling they deserve (and that more junior executive would undergo) from either board or search officers. The role of politics and intuition is rarely taken into account. As a result, those who get appointed to the top jobs are those who are firmly convinced by search’s rituals of deference that unlike other mere mortals they are already equipped for and deserve them. Hence, perhaps, the hubris, sense of entitlement and narcissistic display that is in evidence in boardrooms almost every day.

But what if leadership, like happiness and even profits, is best looked at as an epiphenomenon – a by-product of doing something else? Here’s a quote on captaincy by Martin Corry, a former captain of the England rugby team: ‘It’s a simple matter of making sure everyone knows what he’s supposed to be doing, and then letting them do it. After that, it’s about maintaining your own standards, which is the most effective way of winning the confidence of those around you. It’s obvious to me that you can’t have a captain the majority of the dressing-room think is a tosser. How can you stand up and say your piece in a team meeting if you’re playing like a fairy every weekend? Your performance carries the weight of everything. That’s all you need to remember, basically.’

‘Your current performance carries the weight of everything’. Given the arid competency approach, it’s not surprising, as Mellon notes, that the hottest leadership courses du jour are on ‘authenticity’ – ‘being yourself’ – in other words, another fruitless attempt to pin down an abstraction that doesn’t exist in isolation from the behaviour itself. But how can anyone be ‘authentic’ when they are simultaneously being expected to conform to the same competency framework as everyone else? You can convincingly have one or the other, but not except in the very rarest cases both.

So perhaps we should stop searching for a mythical particle called ‘leadership’ and instead start looking at character and values as a predictor of behaviour under pressure. ‘Leaders must be true to themselves, but they also have a role to deliver that demands that they should rather bring the best of themselves to every situation’, says Mellon. ‘I believe we should ask leaders to get straight how they think about their role – and then trust that the right behaviour, across a broad spectrum, will follow’.

The proviso here, though, is that our current management model demands that leaders march their troops in the wrong direction. Take corporate governance arrangements, at the heart of which is financial alignment of top management with shareholders’ interests. Yet as überguru Gary Hamel has noted, while managers boast of their alignment with shareholders, ‘My guess is that… shareholders would have been better serviced if their chairman could have bragged about being aligned with employees and customers. It seems to me that a CEO’s first accountability should be to those who have the greatest power to create or destroy shareholder value’. Would there be £18bn claims on the banks, the worst banking scandal in history, for PFI mis-selling if CEOs were aligned with customers and employees rather than shareholders?

So, to sum up: the ‘leadership crisis’ does not consist of a dearth of great leaders (or rather, the unrealistic desire for great leaders is the wrong solution to a problem that does not exist in the form most people think it does). It is that senior leaders are poorly chosen, against mis-specified qualifications, and given a job that is designed to make them do the wrong thing.

On second thoughts, perhaps we do need a few more books on leadership after all.

Morality or growth – managing shades of grey across cultures

‘Morality’ isn’t as clear cut as we sometimes assume. Read my report for The Foundation here

Unblocking the arteries of innovation

As if we weren’t in enough trouble, among the wreckage thrown up by the still-receding economic tide is a crisis of innovation. It may be hard to credit in an era of apparently ubiquitous technology, but the innovation that has powered the rise of the western economies has stalled. Tyler Cowen in his 2011 book called it ‘The Great Stagnation’. ‘The American economy has enjoyed… low-hanging fruit since at least the 17th century, whether it be free land,… immigrant labor, or powerful new technologies’, he notes. ‘Yet during the last 40 years, that low-hanging fruit started disappearing, and we started pretending it was still there. We have failed to recognise that we are at a technological plateau and the trees are more bare than we would like to think’.

Robert Gordon’s provocative paper, ‘Is US Economic Growth Over?’, goes over similar ground. In Gordon’s account, growth and progress have been driven by the pervasive uptake of General Purpose Technologies, or GPTs, that have fuelled three ‘industrial revolutions’ based on respectively steam and the railways, then electricity, the internal combustion engine, chemicals and petroleum, and finally, already 50 years old, communications in the shape of semiconductors, computers and the internet.

But productivity growth in the third wave has been much lower than in the second industrial revolution which reached its apogee in the decades after the Second World War. Both Cowen and Gordon attribute this to the fact that many of the advances in the first two rounds were one-offs, the magnitude of whose effects become progressively harder to reproduce. This may be true. But the incidence of innovation is also falling. Not only is the effort less effective, there is less of it about. Why should this be?

One important clue is in the dates. To anyone approaching the problem from the corporate end, the fact that the innovation began to falter in the late 1970s is a tell-tale sign. To see why, we need to look at the ecology of innovation, which is much more complex than the conventional picture of a couple of nerds tinkering in a garage allows.

Entrepreneurial inventors – Steve Jobs, Jeff Bezos, Sergey Brin and Larry Page – are the photogenic face of innovation. But iPhones, Amazons and Googles don’t spring from nowhere. For innovation to have systematic effect, would-be innovators need two other elements to be in place. With the great corporate labs (AT&T, Xerox) a thing of the past, one is state support for the fundamental blue-skies research that provides the seedcorn for long-term innovation. It is well known that the internet came out of the US Defence Research Projects Agency (DARPA); perhaps less so that Google’s search algorithms, some of Apple’s iPhone technologies and the whole US biotech industry also emerged from publicly funded research. Historically the US administration has been responsible for 60 per cent of the country’s R&D effort, and particularly the fundamental part.

The second element is finance. As Gordon Pearson notes (see his excellent The Road to Cooperation), the modern finance sector and the public limited liability company developed together as a means of managing the risks of bringing innovations to market. Finance supported corporate innovators by raising the capital necessary for the uncertain process of exploiting technological development, benefiting the economy as a whole.

But in a triple whammy, over the last three decades all three of innovation’s components have broken down, and for the same reason – the cult of shareholder primacy. In the corporate sector, innovation is a prominent victim (along with pensions, wages and long-term investment generally) of the ‘downsize and distribute’ policies that have been adopted since the 1980s to maximise short-term gains for stockholders (and thus also CEO bonuses). Companies are more concerned with protecting and extracting rents from existing positions than developing new ones. At the same time, finance has turned from means to end, and a predatory end at that. The roles have been reversed. Instead of supporting industry in the patient work of real-world value creation, finance has dedicated itself to value extraction. Instead of creative destruction, taking economies to a higher plane of efficiency, finance has pursued destructive creation, in Mariana Mazzucato’s phrase. Companies that innovate and invest for the long term are particularly vulnerable to the City and Wall Street raiders. For their part, governments in thrall to the same benighted notions of efficiency as the private sector have cut back on support for long-term research in favour of more applied projects. Austerity has just reinforced this tendency.

The result is a monument to perversity, a market failure of world-endangering proportions. On the one hand sits a financially and environmentally overheating real world in desperate need of a bundle of green GPTs to drive a fourth industrial revolution centred on sustainability. On the other are corporates stuffed with cash that they don’t know what to do with, while capital markets not only do nothing to connect the two but actively siphon off for their own ends the money that governments have printed to kickstart their economies. Thus the phenomenon noted by Mazzucato of ‘poverty (underfunding) in the midst of plenty (tens of trillions of dollars of wealth in search of high returns)’; venture capital retreating progressively from innovative startups; and b-school graduates whose entrepreneurial ambition is limited to founding social-media firms that can be flipped to Google, Facebook or Microsoft without the bother of establishing a business model capable of making money from real customers.

Instead of handing out yet more money to an unreconstructed finance sector, governments should be looking to unblock the arteries of corporate innovation by protecting companies from financial predation, speeding up City reform and setting careful incentives for long-term investment in green technologies – preferably before rather than after the lights go out.

Devil in the detail

Read my piece for FT Business Education, 15 October 2012, on the promise and perils of ‘big data’, here