By Rafael Andreu & Josep M. Rosanas
The current world economy crisis creates difficulties for many. Beyond “mechanical” causes, we posit that bad management in the institutions affected is a crucial one. An exaggerated emphasis on immediate financial results (always short-term) as the sole purpose of management, betrays a pessimistic conception of human beings that react only to economic stimuli, paradoxically neglecting other fundamental management dimensions. We point out some starting points for better management. After analyzing concepts and practices that contributed to the crisis, we propose the foundations of a better conception of management.
The recent disastrous economic crisis in the developed world has created a very difficult situation for many people. Its causes are many and complex. Yet we believe that bad management by the people in charge of many of the institutions affected has been crucial. In a paper we have written, “Manifesto for a better management: A Rational and Humanistic View”1, we attempt to show how this has taken place and what remedies can be applied to such bad management.
Some of the problems leading to the crisis are well known. Credit rating agencies recommended investments that they should not have recommended, underestimating certain risks or putting their own interests ahead of their supposed assessments “neutrality”. Investment banks invested where they ought not to, then inducing their customers to do the same trying to save themselves from disaster. Commercial banks extended loans to people unfit to borrow, aggressively inducing the financially incapable, contrary to the industry’s traditional standards of prudence, because this was the “modern” thing to do, taking advantage of the ignorance of people whom they genuinely deceived.
The academic world, mainly the economics departments, justified ridiculous management practices with the excuse of preserving the free market. So did business schools, which ought to have known better but which in recent years have become mere mouthpieces of the economics departments and have applauded any practice that could demonstrate some short-term financial success, often forgetting the governance needed to put business strategy into effect.
Managers in general uncritically designed and used management systems – in particular, perverse incentive schemes – that enabled, motivated and reinforced all these behaviors; in particular, patterns of bad practices that led to vicious circles, sustained by a perverse spiral in which managers and regulators joined forces to benefit one another. Finally, there was the arrogance, or hubris, of some managers, who thought themselves better than everybody else, and were encouraged by the approval of society at large and business schools in particular.
Conceptual reasons for the problems
We believe that conceptually, the main reason for the problems is what can be called economism, which consists of taking economic and financial variables as the primary, or even exclusive, consideration. The economistic attitude, or ideology, is grounded in the idea that the price system is such that if companies maximize their profits, they automatically make the greatest possible contribution to social welfare. But as Adam Smith already saw in the 18th century, this is only true if business owners are “enlightened” profit maximizers, with a view to the long term. As the present crisis shows, that is not always the case. The modern version of profit maximization, designed to more explicitly emphasize the long term, is usually expressed in terms of maximizing shareholder value. This forgets at least two things: that shareholder value is only part of the value of the firm (the value of the debt should be included too) and that the inputs for determining the value of the shares are often short term variables like quarterly earnings.
But the economistic approach goes beyond that. It does not take into account the details of what companies are or how they work. It reduces companies to “production functions” that express the technologically possible combinations of inputs and outputs. All management considerations are therefore dispensed with. It is surprising that many business schools should base their approaches on this conception. In particular, they do not use concepts such as “competitive advantage” and “distinctive competency”2 (Selznick, 1957) to explain how companies obtain “above normal” profit, even though developing, using and maintaining such an advantage and competency (i.e., deploying the necessary learning) is very typically a management activity. And they accept, without solid justification, an unequal distribution of the economic value created to the advantage of business owners.
Self-interest is then the only driver of management, indeed of all human action, as opposed to the “higher ends” that Khurana refers to (2007).3 Consistent with these points, economism has an instrumental conception of the human person, in which people are mere instruments of companies as producers of shareholder value. If the firm is merely a production function designed to enrich shareholders; if labor is simply an input – one of many – that is purchased in a competitive market and if employees can only be motivated with incentives, then the concept of the person as instrument follows logically.4
Consistent with the concept of the person-as-instrument, the possibility of learning is not considered. Management techniques are repetitive and largely mechanical, as it is assumed that the people using and experiencing them do not change. If there is any concept of learning, it is purely machine-like and even follows a certain mathematical formula: an improvement of skills that allows a reduction in operating costs.
As instruments, people can have neither intentions nor a sense of purpose. They must limit themselves to doing what they are told and the company’s management simply does what all other managements do. If there is no learning, managers and the people who interact with them cannot improve or deteriorate as people (i.e., other than as instruments) as a result of their interactions. This fundamentally excludes ethical considerations from management activities, as ethics is concerned with the mediation between a subject and its acts, in the sense that any act of a person gives rise to a structural modification of the person, precisely as a result of having acted. A person learns to serve customers better by persevering in serving them, just as a person who steals regularly, even if obliged to do so, will learn to be a competent thief.
Often, people are analyzed using approaches and methods properly intended for other types of phenomena. For instance, researchers look for patterns such as are found in the natural sciences, using statistical analysis, on the implicit assumption that people always react in the same way. This is highly unrealistic when researching the behavior of human beings, who learn and, as a result, change their behavior – unlike basic particles or stars.
Some practical implications of the problems of today’s management
Below are some of the counterproductive conceptions of management. As a rule, these conceptions originate from the academic world and then cross over to the business world, where their implementation is quite variable (in other words, there are quite a few real companies that are very well managed and that have not fallen into the trap of these conceptions). But the following examples are illustrative.
1. A lack of an “administrative point of view” and a failure to consider sufficient criteria when making decisions
Any problem that arises in an organization has to be understood in its context, making explicit what is supposed to be achieved by solving it. Not all organizations – nor all companies – are the same, nor are all companies in the same industry the same. In fact, if a company has a clearly defined strategy, by definition that strategy makes it different from any other company in its industry. Unfortunately, this is commonly overlooked. The problem is seen in isolation from everything else and a “technical” solution is applied, perhaps one recommended by an outside expert as an off-the-peg option, which may solve part of the problem, while making another part of the problem bigger. This lack of an administrative point of view manifests itself in particular in the following four aspects:
• An overspecialization and a lack of a “general management view.”
• A mechanistic view of persons as “something” that does not change or learn.
• Strategy formulation understood as something mechanical, almost exclusively the result of passive industry analysis.
• The virtual disappearance of strategy “implementation”, except for incomplete indicator systems.
Both in teaching and in practice, management problems are often seen as small technical problems that can be solved easily using the judgment of a specialized expert or by applying standard techniques. If there is a financial problem, for instance, it is assumed that a financial markets expert will be able to make the decision, isolating it from its specific business context. Any link between the problem and a view of the company and its strategy as a whole is conspicuously absent. The solution application is colorless, odorless, blind and aseptic. Furthermore, the impact that the solution is likely to have on other aspects of the company and possible implementation difficulties are not taken into account.
With respect to the last point, in a recent article, Joseph Bower summed up very clearly the history of general management courses, specifically of the Policy Implementation course. Essentially, it used to be thought that once a strategy had been designed, it had to be put into practice through an appropriate organizational structure, instilling in employees the necessary motivation. This course started from a conceptual framework that Bower summarized as follows:
“The leader of the firm was a general manager whose most fundamental responsibility was for the formulation of purpose (Barnard), institutionalization (Selznick), and the building of organization and systems for its implementation (Chandler), in a way consistent with market needs (Barnard), and societal demands (Selznick).”
Unfortunately, a few years later:
“Across academia, work in competitive strategy gained increasingly economic rigor. At the same time, the role of managers in the course began to disappear, especially the general manager…” (Bower, 2008).5
One may agree or disagree with this description, but what is beyond doubt is that the role of the general manager used to be considered important, and that academicians used to think that the general manager role afforded a crucial point of view for addressing real-world problems. Today, this view has virtually disappeared.
2. Problems relating to functional areas
If we carry out a brief and systematic (though not exhaustive) review of the various functional areas, we find a list of problems or false solutions:
2.1. Misuse of accounting and management control systems, mainly in relation to performance assessment and measurement.
Accounting has always had a significant utilitarian component as an input for decision-making. But because accounting has to be standardized to ensure consistency between companies, accounting data has become “hyper-technical”. Moreover, they are often used mechanically. For instance, if the aim is to meet customers’ needs (which it normally is), instead of thinking about the customers and how their problem can best be solved, an indicator is established (e.g., a questionnaire on supposed customer satisfaction). Management as such – i.e., any attempt to assess the whys and wherefores (which will inevitably be subjective), any boss-subordinate dialog, any attempt to learn for the future – is left out of the picture.
2.2. A finance function that either turns into ideological microeconomics or becomes “hyper-technical”. Absence of financial policies.
The financial function is important in any company. Finding out where (short or long-term) funds can be raised, what type of funds can be raised and how they can be invested is perhaps one of the most important financial problems, both for society in general and for companies in particular. It is not at all a “technical” problem. In contrast, long-term decisions (equity and debt issues, investments, dividend policy) are sometimes presented as irrelevant, based on certain theoretical models, while short-term decisions (sources of working capital and how to use it) are treated as if they were a matter of knowing how to use EXCEL sheets.
2.3. A concept of marketing which considers customers as passive entities whose behavior is fully captured by statistics, and which forgets that its fundamental goals should be to meet customers’ real needs and create consumers.
The most popular version of marketing is the one that sets out to persuade customers by any means to buy something – through advertising, mechanically trying to determine what consumers respond to; and through sales, chasing them with all kinds of tricks.
The classics of management literature express a very different view. Here we shall cite just two. Peter Drucker6 (1954) says that the purpose of business is to create a customer. Philip Kotler, perhaps the best known author in the field of marketing, proposes that:
“The organization’s task is to determine the needs, wants and interests of target markets and to deliver the desired satisfactions more effectively and efficiently than competitors in a way that preserves or enhances the consumer’s and the society’s well-being.” (1984, p. 29)7
2.4. A mechanical way of understanding production which forgets that those who must actually do it are human beings who know more about the real production process than their managers.
Unfortunately, operations management has come to be seen as something merely technical and computer-based instead of as the core of the human aspects of the organization, like it had been for many years.
2.5. An organizational behavior that: a) is merely descriptive as far as organizations are concerned, and b) considers people as mere instruments of organizations.
Very early on in the development of management theory it became apparent that problems relating to people’s behavior reached beyond purely mechanical and economic factors. What has changed substantially in recent years, however, is the objective and emphasis of behavioral research. On the one hand, it has become supposedly more scientific by using statistical methods. On the other, it has become more instrumental, trying to find ways to use those measurements to influence people so that they serve the “interests of the company” (which in reality tend to be the interests of a few senior managers), losing the genuine concern it initially had for the well-being of all the people involved.
Foundations for a renewed conception of management
Management must be based on the idea that companies are made up of people who work, organize themselves, manage, produce goods and services, sell, etc., with certain objectives – both individual and collective – in mind. These people and their interests are heterogeneous. Therefore, their non-homogeneous role in ensuring that companies perform their functions must be an important factor in the design and functioning of companies. Consequently, mostof a company’s activities (including management activities) must involve people (either members of the company or people belonging to its immediate environment).In other words, organizations, which are the context in which “management acts” take place, must be communities of people who interact on the personal level and so evolve over time, fundamentally through learning. They cannot be considered as impersonal collections of contracts, protocols and rules of conduct that exist and perpetuate themselves independently of their human members. Management must therefore explicitly acknowledge that it is at the service of people, rather than people being at the service of management, or of particular managers. In this respect, it is important to recognize that people have certain characteristics that are neither exclusively nor directly economic, including friendship, loyalty, identification, enthusiasm, motivation, and so on.
1. Learning is particularly important because it consists of changes in people, their way of seeing things, even their desires. Employee careers in companies need to be carefully thought through, explicitly considering what all those involved will learn (and not only on operational aspects). Consequently, at any level but especially at management level, learning from the results of one’s actions is fundamental. It is at the origin of “business ethics”. It is consubstantial with the management profession, which essentially means that management, even when apparently centered on purely technical issues, is by nature never neutral in this sense.
2. Just as economism may produce a self-fulfilling prophecy from a fallacy, a management based on the principles we have indicated should have the same effect, but in reverse. In other words, it should help to develop in organizational members motives other than economic ones, including those mentioned in the previous points, by assuming they have them.
3. Another consequence is the fact that it is much easier for a shareholder, by selling his shares, to sever relations with a company than it is for an employee who has made a personal investment in specific knowledge, learning, cultural fit, etc. (which are at least as necessary, for the company to function satisfactorily, as the capital contributed by shareholders) (Ghoshal, 2005).8 It is often argued that managers deserve their astronomical pay awards because they have “all the merit” of results to which many other people, through unfairly treated as passive instruments, have actively contributed. These systems need rethinking from the ground up.
4. Any attempt to measure performance or the result of actions, even imperfectly, is positive if the measure is used sensibly. But it is important to bear in mind that accurately measuring the excellence or quality of a management act in one dimension is impossible because management acts have so many different dimensions, including their results, which by their nature are of different types and cannot generally be offset against one another. In fact, the aspects that are most important at any given time tend to be the most difficult to measure, which means it is impossible to automate management acts, which by definition are largely discretionary and subjective.
5. The preceding points do not mean that good management is based on tolerating any kind of behavior and accepting incompetence and shirking. On the contrary, it is based on demanding an adequate performance, which is absolutely indispensable but does not mean treating people like animals, or mechanical devices.
In summary, it would help a lot to develop a better “social ethos”, along the lines described by, among others, Gintis and Khurana (2008):9
“By abjuring professional standards for managers in favor of a culture of greed, it is likely that business schools that have promoted the neoclassical model of stockholder-manager relations have so undercut the culture of professional honor among managerial personnel that the mechanism of informal third-party punishment and reward has sunk to dramatically low levels, thus contributing to a deficit in moral behavior on the part of contemporary managerial personnel.”
About the Authors
Rafael Andreu joined IESE in 1969 and today teaches in the Departments of Strategic Management and Information Systems. His areas of interest include information systems and business strategy, new technologies and management education; strategy implementation; organizational structures and competitive advantage; learning trajectories and professional careers, and management as a profession. He is the author or co-author of several books, journal articles and case studies.
Josep M. Rosanas joined IESE in 1971 and is a professor in the Accounting and Control Department. His areas of specialization include cost accounting systems, management control systems, economics of organization and management and organization theory. He is the author or co-author of several books, journal articles and case studies.
1. “Manifesto for a Better Management”, Chapter IV in Ricart, J.E, and Rosanas, J.M., ed., Towards a New Theory of The Firm: Humanizing the Firm and the Management Profession. Madrid, Ibersaf Editores, forthcoming.
2. Selznick, P. 1957. Leadership in Administration. Berkeley, CA: University of California Press.
3. Khurana, R. 2007. From Higher Ends to Hired Hands: The Social Transformation of American Business Schools and the Unfulfilled Promise of Management as a Profession. Princeton, New Jersey: Princeton University Press.
4. The conception of people as instruments goes back a long way, to before the colonization of management by economic theory. It was more or less the conception held by Taylor and his followers in the early 20th century. According to March and Simon (1958), Taylor and his followers considered people as “adjuncts to machines”, that is, as instruments, possibly even in a lower category than machines.See March, J. and H. Simon 1958. Organizations. New York: John Wiley & Sons.
5. Bower, J. 2008. The Teaching of Strategy: From General Manager to Analyst and Back Again? Journal of Management Inquiry 17(4), pp. 269-275.
6. Drucker, P. 1954. The Practice of Management. New York: Harper and Row.
7. Kotler, P. 1984. Marketing Management: Analysis, Planning and Control. 5th ed. Englewood Cliffs, New Jersey: Prentice-Hall.
8. Ghoshal, S. 2005. Bad Management Theories are Destroying Good Management Practices. Academy of Management Learning & Education 4(1), pp, 75-91.
9. Gintis, H. and R. Khurana. 2008. Corporate Honesty and Business Education: A Behavioral Model. In Moral Markets: The Critical Role Of Values In The Economy, ed. Paul J. Zak. Princeton, New Jersey: Princeton University Press.