The Impact of Theory on Practice

Gordon Pearson’s next article posting will be on 20th May, 2012.

© Gordon Pearson 2012, Gower Applied Business Research, ISBN 978-1-4094-4830-3

UK Only Price (inc P & P) £12.50 GBP

This critical analysis highlights the disastrous effects of using unrealistic mathematical models of human, organisational and market behaviour, to guide economic policy. It flags up the destruction of real economies, markets, firms, jobs and people, all caused by unwarranted trust in unregulated markets, the naïve adoption of maximisation targets, including acceptance of the falsely based focus on serving shareholder interests above everything else.

Though real markets work better than known alternatives, Pearson makes the crucial distinction between the real and the corrupted speculative-financial, where totally different realities apply. Failure to make that distinction has transformed financial sectors from supportive of the real economy, to the predatory, inequitable and often fraudulent reality experienced today.

Briefly reviews how the resultant greed-enabled, growth-focused culture is magnifying the impact of global population growth and unsustainable inequality, resource depletion and pollution of finite earth.

Pearson argues that these destructive impacts could be reversed by the adoption of more co-operative systems of corporate governance to protect the real economy from predation by finance and to positively engage all stakeholders in the future sustainable development of industry and business. A comparative analysis is provided of corporate governance theory, law, and practice in different jurisdictions, including UK and USA, Japan, Germany and the emerging economies of China and India. It is shown that outside Anglo-American jurisdictions, greater care is exercised to protect and develop real economic strengths.

The Road to Co-operation proposes realistic changes in policy and practice, which would facilitate different degrees of co-operation. These extend from employee involvement in specific corporate decisions, through various approaches to governance, including different co-operative formats, to full-on co-ownership. Change in this direction would be prerequisite to recapturing real long term economic success on a non-exploitative and co-operative foundation.

Endorsements
John Hassard, Professor of Organizational Analysis, Manchester Business School
‘This fascinating book offers a provocative reappraisal of the role of enterprise management in the world’s advanced and advancing economies. Eschewing economic rhetoric, Gordon Pearson provides a refreshing re-analysis of the theory and practice of management in which, on the one hand, he confronts head-on the nature of greed in corporate life and, on the other, suggests opportunities arising for, and the virtues of, increased cooperation. Characterised by clarity, depth and insight, the book should be required reading for those who seek to shape and regulate the economic environment.’

Peter Lawrence, Emeritus Professor, Keele Management School, Keele University
‘Pearson mounts a convincing critique of the neoclassical economic foundations of management theory and makes a compelling case for a new cooperative economic paradigm. This should be required reading for business academics and practitioners seriously interested in reversing the damage done to business and society by erroneous theory and practice.’

David Leece, Professor Manchester Metropolitan University
‘For anybody who thought that maximising shareholder value is and should be the main focus of our understanding of governance and business, think again! Pearson provides a cogent, entertaining and thoroughly compelling critique of governance and corporate policy while offering practical alternatives for a post credit crisis world.’.

Martin Parker, Professor Organisation Studies, Warwick Business School
‘In an era when management is celebrated and damned in equal measure, it is exciting to find a book which offers sensible but radical suggestions for actually doing something about it. Gordon Pearson’s diagnosis of the problems of short term shareholder focus and management greed are spot on, and this is a book I would recommend to anyone who wants to build a collective and fairer future.’.

Philip Whiteley, Author and Subject Matter Expert, Chartered Management Institute
‘Gordon Pearson’s The Road to Cooperation is a lucid critique of the cult of neo-liberal economic orthodoxy and its celebration of ‘maximising shareholder value’. Particularly telling is the contrast with the view of Adam Smith that self-interest should be gauged over the longer term. I unhesitatingly recommend this book.’

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Goldman’s Lloyd Blankfein, Citibank’s Vikram Pandit and, of course, Barclay’s Bob Diamond, all have something in common. Even their normally acquiescent shareholders have been moved to express concern about their latest round of excess, greed and thuggery. But they are only the tip of the ice-berg. It has become custom and practice for top people to take spectacularly from the businesses they command. Whether their take, largely for unacceptable performance, is £5m or £67m makes little difference. It obviously bears no relation to their true worth: their talent, or their hard work.

These are the unacceptable faces of capitalism, the reasons why people have so little trust in the integrity of corporate business. They are why people are demanding ‘new models of capitalism’, ‘ethical capitalism’, ‘capitalism with a conscience’, etc. And why Ed Milliband makes the clear distinction between what he refers to as ‘good capitalism’ and ‘bad capitalism’.
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How does a basic item of clothing, say a shirt, come into existence? Where does the cloth come from? And the colours or dyes, the buttons and thread, the machines that cut the fabric and the machines that stitch the bits together? And who dreamed up the designs and how did they get printed on the fabric? And what brought all these things together to produce the finished article? And how did it get distributed to people wanting such a shirt? The answer to all those questions is, of course, ‘the market’. No other form of economic organisation gets anywhere near as effective as the market, or provides a comparable degree of choice. All the tools of central planning and control of the former communist states, proved incapable of organising the production and distribution of shirts that people actually wanted to buy. That is the beauty and power of the market for something as simple as a shirt. For more complex products, and most products are, the competitive advantage of the market over any alternative, is far greater even than that.

The thing that makes the market so effective is competition: the existence of alternative suppliers of cloth, dyes, thread, machines and the rest. Without competition, the market would be no different from the central planning and control system. That failed not only because of its inherent inefficiency and proneness to bad decisions, but because the empowered bureaucracy was vulnerable to self-interested, even corrupt and illicit decision making. Monopolists are in exactly the same position: inefficient and vulnerable, and likely to take corrupt and predatory decisions to further their avowed aim of maximising shareholder wealth.
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Keynes referred to them as the ‘madmen in authority’, referring to the policy makers and top financial and business executives, who rule our world. Maybe ‘madmen’ doesn’t quite capture their essential characteristics today. After all, mainstream economists would argue they are not mad, but wholly rational in their unwavering pursuit of self-interest without regard to any broader, more enlightened consideration. In a talk to TED’s global conference (TED – Technology Entertainment Design – bills itself as a nonprofit devoted to Ideas Worth Spreading), economist Tim Harford identified a ‘terrible affliction’, one that the ‘madmen’ might be suffering from. It was both ‘debilitating to individuals and corrosive to society’. He referred to it as ‘the God complex’, the symptoms of which could be simply described as: ‘no matter how complicated a problem, you have an absolutely overwhelming belief that you are infallibly right in your solutions.’

The UK coalition government has more than its fair share of sufferers: Andrew Lansley at Health, Michael Gove at Education, and, of course, Prime Minister Cameron, self-confessed expert in how to manage hospital wards, deal with binge drinking, solve racism in football and make child adoption processes fairer and faster, to name but a few recent self-confessions. These are individuals convinced of their infallibility, despite the complexity of the issues they confront, and not prepared, unless forced, to consider the possibility they might be wrong and other solutions might be better.
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Management scholar, Sumantra Ghoshal, accused mainstream business schools and university departments of teaching ‘bad management theories’ that were ‘destroying good management practices’. His arguments were persuasive, both as to how bad the theories were and how effective they had been in destroying good management practice. The bad theory was that management had no other social responsibility than the legal duty to maximise shareholder wealth. The good practices this bad theory destroyed were related to concern for employees, customers, the local community, the environment and (therefore) the long term, all of which were exploited and impoverished, or at the very least neglected, on the altar of short term shareholder interests.

Ghoshal argued that destroying the bad theory would be an essential first step to renewing good management practice. If the bad theory remained intact, the greed enabling culture it supported would remain as the dominant set of beliefs. Under that circumstance, initiatives promoting sustainability, transparency, fairness and integrity, as characteristic of the role of business in society, would be doomed to fail. At the end of the day, no matter how worthy an action would be, if it meant reducing shareholder return, it would not be sustained. And if an action were to harm employees, customers, the community or environment, but would enrich shareholders, it would be justified. For this to be reversed, the bad theory must be totally overturned.
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Professor Gary Hamel’s new book is ‘What Matters Now: how to win in a world of relentless change, ferocious competition, and unstoppable innovation’. Hamel is a breathless optimist. He sees the world changing and he encourages and motivates managers to achieve near impossible ends. He believes in the potential greatness and goodness of industry and teaches bright young people how to raise their game so as to take us forward to the promised land. He is today’s Peter Drucker, with slightly less gravitas, but rather more academic shape and a whole lot more bounce. We need Gary Hamel. Big business under the Hamel code would be honest and trustworthy, exciting and innovatory, giving people real opportunity to develop to their full potential and encouraging them to participate in decision making at all levels. He puts five issues at the centre of whether a business will ‘thrive or dive’ in the years ahead: values, innovation, adaptability, passion and ideology. They’re all people based factors which together ratchet up corporate performance to winning. But there’s a problem with Hamel’s brave new world. It’s not going to work.

Management practitioners today, at least the vast majority, believe in something quite different. They are taught to be, and have become, dedicated followers of the Friedman line: their bounden duty, they believe, is to maximise the wealth of shareholders, having no other social responsibility than that. To hell with everything else! Oblivious of the fact that maximising any one thing necessarily results in the neglect and impoverishment of everything else, they are taught that the relentless pursuit of shareholder value will end with the best result in the best of all possible worlds. But that, as Sir Mike Darrington of the Pro-Business Anti-Greed campaign would put it, is ‘total bollocks’.
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A news item on budget day, commanding all of two column inches on an inside page of some of the national press, was of far greater importance than anything Mr Osborne had to say. It reported the completion of Glencore’s acquisition of Viterra, Canada’s largest grain handling company. Glencore, the world’s largest by far commodity trader, has ways of making money as reported previously on this site (see http://www.gordonpearson.co.uk/28/glencore-and-their-ilk-are-screwing-the-world/). Briefly, they bet on the future price of a commodity in a market they can fix. They then fix the price and take the profit. The example given in the previous posting was Glencore’s bet on future wheat and corn prices. Despite Russian harvests in 2010 being threatened by drought, prices didn’t rise sufficiently for Glencore to profit, till Yuri Ognev, the relevant Glencore executive, “suggested” to Moscow they might be well advised to ban wheat exports. Two days later exports were banned and prices rose by 15%, enough for Glencore’s profit. That’s how Glencore works. An unfortunate bi-product of Glencore’s price rise would be added numbers starving to death in the Horn of Africa and elsewhere.

Glencore, the world’s largest commodity trader, listed in London but successfully avoiding UK taxes, is currently taking over its associate company Xstrata, one of the world’s largest mining and metals companies. Xstrata’s London IPO ten years ago established it from day one in the FTSE100. Its boast is that over the past decade it has grown faster than Amazon, largely by acquisition. It is now big enough to fix supply, and therefore prices, of strategic minerals such as nickel, zinc, platinum, chrome and copper and being highly influential in thermal and coking coal. Glencore with Xstrata will be able to create and exploit prices of all these commodities and more. And with Viterra on board they’ll be even more powerful in the grain markets, adding starvation to the millions already struggling for survival. The already weak and poor will pay for Glencore’s profitable growth. But they won’t be alone: we all will pay.
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All sorts of hares are set loose in the run up to the budget: removal of the 50% income tax rate, ending of national pay settlements in the public sector, imposition of a mansion tax, a clamp down on stamp duty avoidance, and so on, not to mention the various stimulus–austerity alternatives. Debate centres around the clash of two different motivations: the desire to get the economy going again, and the desire for fairness and equity, or not. All this punctuated by outbreaks of naked greed by the likes of Bob Diamond. Sometimes those motivations are opposed and sometimes they coincide. Underlying this cacophony, there are simplistic party dogmas, clearly based on half understood or partly remembered ideas from undergraduate economics. Blind faith in ‘free and open markets’ is one such tenet which quite ignores reality: freedom from government interference inevitably results in monopolistic control and predation, a far worse limit on freedom than that imposed by democratically elected government. Check out the audit industry, or the Glencore-Xstrata merger, and have fear.

In amongst all this, Vince Cable, the nearest thing the coalition has to a non-dogmatic, avuncular influence on the economy, is trying to make sure the better off shoulder more of their share of the burden, while those at the bottom of the heap are given some respite, which would also, coincidentally, have some immediate stimulus effect. One Cable initiative is to curb the excesses of executive pay by making it subject to shareholder control. Executive greed is certainly out of control, and on the face of it, restraint by shareholders doesn’t sound unreasonable. But it wouldn’t have the effect Vince intends. The problem is that the nature of shareholding has changed, and if initiatives are to have their intended consequences, they need to take full account of the new circumstances, rather than being based on old assumptions.
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The Prime Minister used the word ‘snobbery’ to deride what he referred to as anti-business rhetoric: the argument that business ‘has no inherent moral worth’, that it ‘isn’t really to be trusted’, and that it had ‘no social concerns’ but was solely to do with ‘making money that pays the taxes’. He was addressing the charity, Business in the Community, attended by the Prince of Wales. ‘Snobbery’ seems a curious word to use. Maybe it is some left-over frisson from the landed gentry, even royalty, of old England, for whom the idea of making money, rather than inheriting it, may be thought somewhat beyond the pale. But surely the Prime Minister doesn’t take such ideas seriously!

So far as is known, Milton Friedman was never accused of snobbery. But it was he, more than anyone, who persuaded business that it should have no social concerns and not strive after moral worth, but focus exclusively on making as much money as possible for shareholders [though he was less enthusiastic about paying taxes]. Snobbery played no part in his argument. It purported to emanate from the cold logic of economic theory, if such a thing were possible.
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The trouble with the provision of public services such as health, education and the police by private for-profit companies is pretty obvious. Successive governments from Thatcher on, have pursued this flawed policy which derives from a hopelessly simplistic ideology. Private providers, who are subject to the discipline of the market, are held to be more efficient than public providers. The late lamented Milton Friedman claimed they were twice as efficient. Therefore, the argument goes, services would be most efficiently provided by private firms operating in competitive markets so that, for example, NHS patients have choice, and providers who are not good enough to get chosen, will fail. That’s how markets work.

So far so good, despite the famous lack of supporting empirical evidence, and the difficulties, where real markets don’t exist, of creating pseudo-markets without the costly bureaucracy of targeting, monitoring and supervising pseudo-competitive performance. But another thread of that same ideology, most famously enunciated by the same late lamented Friedman, is that those who run for-profit businesses have no social responsibility other than to make as much money as possible for shareholders.

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