December 3, 2012 12:03 am

The wrong direction

man directing traffic, illustration by Andrew Baker©Andrew Baker

To mark the journal’s 90th anniversary, the Harvard Business Review website has run a series of blogs and articles under the strapline “Why Management Matters”. Alas, the content does not engage with the proposition itself, taking the importance of management for granted.

This is a common stance. Management is so omnipresent that it is mostly invisible. But nearly a century after it emerged in modern form, it is a good time to pose that fundamental question: does management matter, and if so why? The answer of course is that it does – but more and in less congratulatory ways than most people suppose.

At least materially the balance sheet for the first century would show a substantial credit. Advanced economies are organisational economies – there is a strong correlation between rising wealth and the growth of large companies. As the marshalling yards of the economy’s resources, they reliably supply us with almost every component of modern life.

Yet, with hindsight, diminishing returns set in from the 1980s. Gains came at an ever higher price, for individuals, society and the planet. Inequalities began to grow. Scandals, like buses, arrived in groups. The impact was at a human level. “The harsh reality,” writes London Business School’s Prof Julian Birkinshaw, “is that today’s large business organisations are – with notable exceptions – miserable places to spend our working lives.” As management’s claims to academic and social status grew, the discrepancies between theory and practice became so glaring that at times it seemed only managers could not see them.

Sceptics’ worst fears were confirmed in 2008. As the smoke cleared, it became clear that the meltdown was fabricated in company board and dealing rooms. Companies got every basic task wrong, misincentivising people, misallocating resources and treating customers with contempt. As Alan Greenspan, former chairman of the US Federal Reserve, said, the idea that stopping companies auto-destructing could be left to self-interest turned out to be catastrophically wrong.

“The problem is managerial, it’s not economic,” says McGill University’s Prof Henry Mintzberg of the crisis. “So many companies have been so mismanaged, the whole economy is faltering.” Somewhere along the line, management stopped being Dr Jekyll and turned into Mr Hyde – the biggest destroyer of shareholder value since the Great Depression and world wars.

A century and a half after its birth, the modern business corporation, an artificial person made in the image of a human psychopath … is seeking to remake real people in its image

- Joel Bakan, The Corporation, 2004

Most people assume that management is fundamentally technocratic and pragmatic. If something does not work, it will be replaced by something that does. But the persistence of horrors such as call-centre sweatshops and value-destroying mergers shows otherwise. Management is a prisoner of its past. The reality, wrote author Gary Hamel, is that management operates to a template fixed “by a small coterie of long-departed theorists and practitioners who invented the rules and conventions of ‘modern’ management” a century ago, a template locked in permanent obsolescence by the free-market revolution of the 1980s.

The crash illustrates the first reason why management matters: when it screws up everyone suffers. But why it screwed up relates to its role as a carrier of ideas. This derives from the built-in amplifier that is the power of expectation. Well known to social science as self-fulfilling prophecy, expectation has the power to create its own reality. If managers expect subordinates to perform well, expectations tend to lead to better performance. The reverse is also true.

The consequences are profound. In management and economics, the battle of ideas is decided not by which best explain the world but which most affect it and thereby become true as a result of their influence. Companies are the battleground. Firms whose managers act on the principle that employees are self-interested opportunists who must be forced to do their job will tend to create just that. Conversely, a company that functions on the basis of trust and co-operation creates a system in which honest, co-operative people flourish. Self-fulfilling prophecy makes every company a force for either good or ill.

Since the 1980s, the assumptions baked into the management model are the pessimistic ones. In the crash of 2008 we can see where the template based on them (incentives, compliance with letter rather than spirit, rejection of ethical considerations) leads. If the 21st century that management makes possible is to end happily, managers will have to absorb its most important lesson from the 20th: what matters most in management is not what you make but what you believe.

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