• Thu. Nov 26th, 2020

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Technology

Ten Reasons Why Big Firms Stick With Obsolete Management

One of the great puzzles of the corporate world is why big corporations are still being run on obsolete 20th Century management principles when there is an obvious better alternative—21st Century management—that is producing unprecedented financial returns and market capitalizations.

“Most [firms] today are run on the basis of ‘legacy’ management systems that have become obsolete,” writes Menlo College professor Annika Steiber in The Silicon Valley Model. But why?

Even though 20th Century management is a coherent and consistent way of running a company, it is an increasingly poor fit with today’s fast-moving customer-driven marketplace. It has difficulty changing direction. It lacks agility. Here are ten reasons why 20th Century management still dominates.

1.    20th Century Management Operates As An Unstoppable Flywheel

Since 1970, 20th Century management has been preoccupied with a single-minded goal—to maximize shareholder value. The goal leads to a very specific way of running the company. Because the goal is uninspiring to those doing the work, workers need to be closely monitored. So, the goal leads inexorably to a structure of work that is bureaucratic—individuals reporting to bosses—and the organizational dynamic of a top-down hierarchy of authority, as shown in Figure 1.

Figure 1

These three 20th Century principles—goal, structure of work, and firm dynamic—in turn lead inexorably to the familiar set of 20th Century corporate processes. Thus leadership has to come from the top because it is only the top that is deeply committed to those principles; as a result, leadership is inevitably transactional rather than transformational: it has to resort to carrots and sticks, rather than inspiration. Strategy inevitably turns into “coping with competition”, as Michael Porter wrote in both 1979 and 2008; it is defensive and aimed at building moats against competitors. Innovation slides into enhancing existing products and services, because generating truly innovative products and services is risky, and may threaten the existing marketing hierarchy. Sales and marketing are devoted to maximizing profits by inducing customers to buy the firm’s current products and services. Since the staff tend to be disengaged, HR necessarily involves controlling them as resources; workforce creativity and risk-taking are not systematically valued. The annual budget often turns into a battle for resources among the organizational silos that are generated by the vertical hierarchy of authority. The financial focus of the firm is on short-term share value, and compensation is heavily skewed towards the top.

In Jim Collins’ memorable image of the firm in From Good To Great, the firm is full of “disciplined people, disciplined thought, and disciplined action… The process resemble[s] relentlessly pushing a giant heavy flywheel in one direction… The huge heavy disk flies forward, with almost unstoppable momentum.” Therein lies the problem. When the marketplace changes, these giant unstoppable flywheels can’t easily change course, even when it is heading in the wrong direction. Not surprisingly, far from having above-average returns as promised, most of Jim Collins’ supposedly “great” firms have under-performed the S&P 500.

2.    A Head Fake Doesn’t Change A Corporation

Amid growing public concern over low-quality  jobs, economic inequality, and left-behind communities, the goal of maximizing shareholder value—which even Jack Welch called “the world’s dumbest idea”—eventually came under such heavy fire that in August 2019, more than 200 chief executives of major corporations signed a statement of the Business Round Table (BRT) publicly renouncing it. The BRT declaration stated, “Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities, and our country.”

“But this way of framing the issue is unhelpful,” writes Wharton School finance professor, Raghuram G. Rajan. “If all stakeholders are essential, then none are.”

Since the declaration was issued, researchers have found no indication of significant change in corporate behavior. Harvard Law Professor Lucian Bebchuk and colleagues found that few of the signatories obtained the approval of their boards to sign the announcement. Nor has there been any apparent effort to change the many processes and practices that reinforce the goal of maximizing shareholder value. And in cases where the firm has had to make a clear choice between shareholders and other stakeholders, these firms have invariably chosen shareholders ahead of other stakeholders. Massive share buybacks that benefit shareholders, particularly executives, continue to flourish, even where there has been a collapse in profits. Bebchuk concludes that the BRT statement was signed “mostly for show.”

Indeed, the declaration may be serving as a cover for an even tighter focus on shareholder returns.  According to Professor Rajan, “Recent evidence even suggests that the corporations that [signed on to BRT statement] have been more likely to lay off workers in response to the pandemic, and less likely to donate to relief efforts.”

The BRT declaration thus appears to have been a head fake, designed to deflect the negative press that 20th Century management engenders. While the senior executives may use public statements to deflect criticism, their staff can see that all the old processes supporting shareholder value are still in place. So the safest thing for them to do is to go on acting as before.

In the same way, preachy declarations of social purpose will do little, if anything, to change the corporate processes all geared to maximizing shareholder value, unless all the internal management processes are also changed.

3.    Executives Are Paid To Keep Things The Same

A key reason why 20th Century management remains supreme in most big companies today is that extravagant executive compensation depends on it. An important accelerator of shareholder value was the 1990 article in Harvard Business Review by finance professors Michael C. Jensen and Kevin J. Murphy. The article, “CEO Incentives—It’s Not How Much You Pay, But How,” suggested that many CEOs were still being paid like bureaucrats and that this caused them to act like bureaucrats. Instead, they should be paid with significant amounts of stock so that their interests would be aligned with stockholders.

The article was very well received on Wall Street. The use of the phrase “maximize shareholder value” exploded. Compensation practices changed. And indeed, CEOs became very entrepreneurial—but often in their own cause, not necessarily the organization’s cause. Stock-based compensation became the norm for the C-suite. Shareholder value became the gospel of American capitalism. Is it any wonder when executive compensation is directly tied to the short-term share price, executives continue to support management practices that prop up the short-term share price?

4.    Business Schools Keep Teaching 20th Century Management

As the world undergoes a Fourth Industrial Revolution that is “fundamentally altering the way we live, work, and relate to one another—in its scale, scope, and complexity, a transformation … unlike anything humankind has experienced before”—one might imagine that business schools would be hotbeds of innovation and rethinking, with every professor keen to help understand and master the management needed to cope with this emerging new world.

Paradoxically, it’s often the opposite. For the most part, today’s business schools are mainly teaching and researching 20th century management principles and, in effect, leading the parade towards yesterday.

Take for instance this first-hand account in The New Republic by John Benjamin, an MBA student and Dean’s Fellow at the M.I.T. Sloan School of Management. “MBA programs are not the open forums advertised in admissions brochures… Business school instruction is routinely blinkered… An MBA class will consider a business issue… in isolation. Its challenges are delineated; its society-level implications are waved away. The principals’ overriding goal—profit maximization—is assumed. With mechanical efficiency, students then answer the question of how to move forward. Individual choices are abstracted into numbers or modeled as graphs…”

As Sarah Murray has written in the Financial Times: “While there is growing consensus that focusing on short-term shareholder value is not only bad for society but also leads to poor business results, much MBA teaching remains shaped by the shareholder primacy model.”

Despite excellent individual thought-leaders in business schools, there has been little change in the core curricula of business school teaching as a whole. The disconnect between what is taught and the vast ongoing societal drama under way continues. And it’s difficult to discuss, because such a discussion could put in question careers, competencies, job tenure, values, goals, and assumptions of the role of the business-school in the world.

5.    Management Writing Is Highly Fragmented

Management writing today is highly fragmented. Even leading thinkers tend to pick on a single piece of the management jigsaw puzzle and then put it forward as “the solution.” Often there is little indication of how the other pieces of the jigsaw puzzle may prevent the chosen solution from being widely successful or what can be done about them.

Take for instance the leading thinkers in the current Thinkers50 ranking: W. Chan Kim and Renee Mauborgne with their books Blue Ocean Strategy (2004) and Blue Ocean Shift (2017). They offer an excellent process for creating new businesses that will attract new customers by finding a part of the marketplace where there is currently little or no competition. The problem is that this is just one piece of the jigsaw puzzle of management. In most big corporations today, the principles and processes of 20th Century management are systematically operating to thwart the creation of a “blue ocean.”

The authors recognize the issue and address it briefly on page 114 of Blue Ocean Shift, where they say: “Is your organization dysfunctional? Ridiculously bureaucratic? Or highly political so that getting things done feels akin to walking through a minefield? Large, older organizations may feel this way. So can government entities. In these situations, in addition to putting the team together and selecting the right team leader, you also want to think about enlisting a consigliere…. As a respected insider, he or she can advise the team and provide air cover from potential detractors, as well as garner support from individuals who might otherwise want to thwart the initiative actively or through passive aggression.”

That’s it. The change team appoints a consigliere, who will somehow magically resolve all of the tensions created by the other principles and processes of the firm: inconsistent goal, bureaucratic structure of work, vertical hierarchy, transactional leadership, controlling HR, short-term financial focus and so on. All these principles and processes will be operating at odds with the task of creating a blue ocean.

How on earth is a single consigliere going to fight and win all those battles? Sadly, the book offers no guidance. That’s the consigliere’s problem. In the meantime, they offer their silver bullet—the blue ocean strategy.

The inevitable result is that in most cases the supposed blue ocean strategy will in firms operating with 20th Century management be crushed by the fearsome countervailing principles and processes. In effect, the blue ocean risks becoming a small muddy pool that quickly dries up for lack of sustenance. In effect, blue ocean strategy is one piece of the jigsaw puzzle of management, but unless the firm deals with all the other pieces, nothing sustainable is likely to happen.

Stay tuned for Part 2 of this article which covers five more reasons why big firms stick with 20th Century management:

  • The Transition To 21st Century Management Is Hard Work
  • Small Change Experiments Don’t Last
  • There Is No Objective Measure Of Truth
  • Lack Of Executive Awareness of  21st Century Management
  • A Different Way Of Thinking

What 21st Century Management Looks Like

Ten Reasons Why Big Firms Stick With Obsolete Management

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