A warning about pay

There has been much talk of inequality of pay in recent years. Given how much it has grown, it’s extraordinary that it hasn’t led to more widespread social discontent. One reason, however, may be that traditional protesters’ policy responses tend to be limited to tax and regulation. Better run organizations would provide a more lasting approach, safeguarding jobs. A new blog by the Chartered Management Institute picks up the theme, and points out that the theory behind executive and other pay is quite illogically different:

Moreover, when it comes to their own pay, senior executives employ a different theory; one which has led to huge increases in their remuneration in recent decades. This is known as ‘agency theory’. In this, the ‘agents’ of the shareholders (senior executives) have to be motivated by vast amounts of cash and share options in order to be incentivised to maximise financial returns. It doesn’t work, usually – there is considerable evidence that managing for all stakeholders improves performance in the round, including financial returns – but it has been the norm.

For the full blog, click here.

People don’t hate change

A new post on Philip’s blog highlights one of the more cynical, and questionable, assumptions about organizational change: that people ‘hate’ change, and that a tiny elite of planners therefore has to impose it upon them. He writes:

It goes like this. You have an underperforming business. Profits are under pressure. Ah, the bean-counters say, some salaries are high and we have a lot of office space. If we reduce costs, we’ll restore margins! So they freeze or cut salaries and posts, and move to open-plan offices, hot-desking and the like. People will resist this, naturally. But people hate change! They tell themselves. So they impose change upon resistant people, and see if it works. If it fails, of course, they’ll blame the resistance, not the plan.

But the idea that people hate change is contradicted by every-day observations. We are actually relentlessly curious and impatient as a species. He adds:

So if a wage freeze prompts people to start leaving in droves, costs shoot up, because high turnover is expensive (and routinely not measured). Very probably customers depart also. If an open-plan office is inappropriate for the business, because a lot of confidential conversations are necessary (I’ve heard this comment twice in the past few weeks from people protesting at stupid change), then a lot of time is wasted looking for meeting rooms … What people hate is not change; it’s poorly thought-through accountancy-based reorganizations that damage the organization as well as our careers. 

You can read the full blog here.

A robotic prediction

Every ten years or so, a futures-technology guru predicts the inevitable phasing out of the ordinary employee, to be replaced by machines. In 1982, it was ‘IT Year’ in the UK. The first cars had been assembled with the assistance of robots. Unemployment stood at 3.5 million after swathes of jobs had been lost to traditional industries. Trends seemed to be heading all in one direction. But life went on, and people soon forgot about it as services industries took off and unemployment plummeted.

A decade later the world wide web appeared. The mutterings began again. They reached a crescendo in the early 2000s with the rise of online retail. The traditional shop and shop assistant would disappear, we were solemnly informed. While online retail has indeed transformed many business models in the years since, many new roles for humans have been created. The picture is complex.

Now, we are told, this time is different, people really are going to be replaced by robots, and business columnists have gleefully reported the doom-laden predictions of the Second Machine Age, by Erik Brynjolfsson and Andrew McAfee.

The trouble is, these are the same business columnists who almost never report the actual practice of business management and have little or no understanding of the role of human capital and the value that it adds. Using human capital and relationship analysis, you can make a strong case that automation, far from being under-exploited, needs to be partially reversed. How many service companies check the rate at which existing or potential customers are lost through irritating automated phone services? Is there an exhaustive cost-benefit analysis of enabling customers to talk to a real human being?

Many of the dotcoms, having cheerfully removed phone numbers from the home page in the early years, quietly reinserted them, recognizing that people are best at the following qualities: common sense; taking the initiative when something unexpected has gone wrong; empathizing with the customer.

The technology gurus and their bean-counters typically make two false assumptions in advising business strategies based on maximizing automation:

1)      The projected transaction cost is the actual cost,

2)      Machines never fail.

This is not a missive against modernization; quite the reverse. We urgently need to modernize our business metrics, away from quarterly accounts and transaction costs (15^th Century measurements) in order to account for the human contribution. Only then can we make an informed judgement on the proper role of machines and people.

• A Parliamentary seminar is to be held at the House of Commons at 2pm on Tuesday 11 March. Chaired by Barry Sheerman MP and Chartered Management Institute President Peter Ayliffe, it is organized by the CMI. More from philip.wood@managers.org.uk

Living wage debate misses the point

In the UK, an appearance of ‘growth’ is returning – the inverted commas are necessary because, as this column has reported before, a change to Gross Domestic Product is not a reliable indicator of growth. The Labour opposition, having used the same indicator itself during its dreadful metaphor of ‘flatlining’, would now lack credibility if it tried to highlight the unbalanced nature of recovery.

Instead, it is focusing on living standards. There is much talk of a living wage, and above-inflation increases to the minimum wage. This has been combined with attacks of profit-making by energy companies and a pledge to restore a 50p top rate of tax. The left wants profits squeezed and a fairer distribution of wealth.

Predictably, there is a backlash, with accusations of Labour being anti-business.

But as usual in these types of debate, left and right are both wrong. Both stick with the ‘zero sum’ mentality of accountancy-based economic theory. For example, businessman and former Conservative MP Archie Norman, writing in The Sunday Telegraph, said that an ‘incomes policy’ would cause business costs to rise, and said the minimum wage should be kept low, or people would be replaced by machines.

There are two wildly inaccurate assumptions that he makes: that the wage cost is the employment cost (it’s very different, as this blog explains), and that management is unimprovable. The cost of poor management – weak personal leadership skills; high staff turnover; lost custom through automated customer service systems – vastly outweighs the cost of improving wages. But good management, sadly, remains the exception.

What research and much experience now show is that you can improve wages and profits, simultaneously. There is an alternative to left-right sectarianism. It’s called better management.

Thoughtful reflections

Soren Andersson is a thoughtful environmentalist (hopefully, one day it will be the people not caring about sustainability who are the minority and will need a special term), who blogs at http://sorenandersson.com/. It’s well worth a read – and not only because he reviews New Normal Radical Shift! Though that’s a good reason too.

Here’s an extract from the ‘About Me’ section:

“It is alarmingly clear that we really need a transformational change in the way we live on this planet. Some people have realized that if our children and their children are going to have any chance of a life quality close to ours, we cannot continue to ‘overuse’ our planet the way we currently do.”

In this blog, he picks up on the simultaneous absurdity and lack of humanity in the term ‘human resources’, and the mechanistic metaphors for human organizations, lifting this quote from New Normal Radical Shift:

“People [in business theory] became ‘human resources’, and their motivations divorced from strategic consideration, placed in a separate category, hived off to the HR department and consigned to a single patronizing paragraph in the annual report about ‘the most important asset’, without acknowledgement of the fact that this precious asset also happens to generate all the others…”

If you want to know more about Soren, you can follow him on Twitter, at @sorenande

And a happy new year, everyone!

Big Data should serve people

There is much hype around ‘Big Data’ and ‘the Internet of Things’ currently in business and management circles. Quite right too: as this blog by the Chartered Management Institute demonstrates, intelligent systems can help us reduce waste and carbon emissions, and support enlightened leadership.

The exhortation needs balancing, however, with an urge to modernise our approaches to governance and management. If IT had been introduced at the same pace at which we follow the evidence base on people management, we wouldn’t have got round to the mainframe yet. It is 80 years since the Hawthorne experiments clearly showed the significance of morale and commitment in the workplace, yet employee engagement is still only taken seriously in a minority of workplaces.

The best way to implement Big Data is to remember that data is supposed to serve people, not the other way around; incorporating a radical shift to an understanding of the organization as a community, not a set of structures or resources.

The pace of change is too slow

A common observation at business conferences is that the pace of change is dizzyingly fast. There is an alternative view: that it is agonizingly slow.

To be more specific: while innovation in information technology races ahead, business and economic reporting systems are still based primarily on the quarterly report – not much more sophisticated than Luca Paciola’s innovation of double-entry book-keeping in the 15th Century. Our politics is the 18th Century ‘left-right’ perspective, which is hopeless for addressing the challenges of weak governance and ecological degradation.

The clash between rapid technological development in IT, and conservatism in reporting, governance and politics, has resulted in some disastrous change programs in recent decades, as this recent blog in the Chartered Management Institute observes:

…not all innovation is effective. Some strategic errors in recent decades appeared to be modernisation at the time. Examples include the ‘business process re-engineering’ fad which ‘forgot the people’ and ignored the huge economic contribution of employee engagement. Another is securitisation in financial services, which was intended to reduce risk but sometimes has had the opposite effect.

A good starting point would be to implement, if not 21st Century management ideas; at least those from the 20th Century, which have emphasized the benefits of teamwork, strong leadership and interdependence. This excerpt from New Normal, Radical Shift observes:

Richard Kwiatkowski of Cranfield University has pointed out that many of the current principles of leadership were well established nearly a century ago, though often with different terminology. And a little while before this period, the remarkable speaker and author Mary Parker Follett (1868-1933) demonstrated the importance of communication, intelligent leadership and harnessing informal networks within the complexity of the enterprise. What an historic tragedy that Milton Friedman, not Mary Parker Follett, has been the most influential figure on contemporary management practice in the past century!

Time to get enlightened

Politicians get a tough time in New Normal, Radical Shift. We argue that the left-right turf wars – for example over how big the state is – are less important than such matters as sustainability, governance, leadership and management. These subjects, the focus of our book, are neglected because they don’t fit into left-right doctrines, not because they are unimportant.

So we are delighted that some enlightened parliamentarians in the UK are working with the Chartered Management Institute to help renew leadership and management, and to illustrate their economic contribution. They have formed the All-Party Parliamentary Group on Management.

Even better, New Normal Radical Shift author Philip Whiteley has been appointed as editor-writer for the Commission, which will publish its report on the future of leadership and management for the UK economy in mid-2014.

For more on the Parliamentary Group, click this link.

Quote from New Normal, Radical Shift:

The accountancy scandals of the early 2000s, the failures of risk management in banking that gave rise to the credit crisis, the high rates of failure of Government projects and mergers & acquisitions, dangerous ecological degradation and volatile commodity prices, point to systemic failures and flawed thinking. This is changing, but only slowly. In our work we come across many examples of enlightened leadership, creating strong organisations that perform across a range of measures: financial, societal, and environmental. There has been impressive innovation in the past decade. Yet to achieve this, leaders often have work against the biases of the governance infrastructure in which they operate, and the attitudes that support them, in a febrile atmosphere of quarterly accounts, 24-hour news, and short tenure among many posts in commerce and government.

A growth measure that is really Gross

In tweets, blogs and in our book New Normal Radical Shift, we make the case that a change in Gross Domestic Product does not measure growth: it does not take debt bubbles into account, records much wasteful activity as a positive, and doesn’t distinguish between effective and ineffective investment.

In the week that the UK GDP figures come out, it’s useful to have supporting voices in The Atlantic magazine. Here’s what its recent article said:

There’s bipartisan incentive to fix GDP.  The indicator fails economic conservatives (by failing to properly account for debt), progressives (by failing to account for inequality), environmentalists (by failing to account for pollution), businesspeople (by failing to account for entrepreneurship), and social conservatives (by failing to account for time spent with family).  Nearly all players have a stake in seeing some improvement to the system.

We argue that the ‘New Normal’ ‘is the recognition that the emphasis upon short-term returns and measurement by accountancy or GDP growth is unsustainable. The “Radical Shift” is the new philosophy that shows how to combine sustainability with business success, and the very different politics that flow from this approach.’

More on the failures of extreme inequality

The Strategic Management Forum and the New York Times have published analysis that reveals breathtaking enrichment of a tiny number of executives despite a poor return for shareholders. The article exposes how perverse incentives in compensation deals:

‘[allow] top executives to reap the pay benefits associated with a short-term bullish stock market, which may have nothing to do with their company’s specific business or operations.’

A doctrine of ‘maximizing shareholder value’ doesn’t even benefit shareholders – at least not in a sustainable or useful way. This chimes with the recent Radical Shift blog showing that equitable, sustainable businesses actually benefit all stakeholders, including investors. One of the problems is the cultural belief that exploitation and inequality encourage efficiency and business growth. They don’t.

Spread the word!