Wednesday, February 27, 2013

Management theory was hijacked in the 80s. We're still suffering the fallout | Simon Caulkin | Comment is free |

Management theory was hijacked in the 80s. We're still suffering the fallout | Simon Caulkin | Comment is free |

The answer is that management in the 1980s was subject to an ideological hijack by Chicago economics that put at the heart of governance a reductive "economic man" view of human nature needing to be bribed or whipped to do their exclusive job of maximising shareholder returns. Embedded in the codes, these assumptions now have the status of unchallenged truths.

Companies are like a tree, they are usually more stable when they have Bi unions like upper root systems and V cooperative management. A strong Iv-B economy from R-B technological revolutions can cause this V-Bi component to shrink with unions being replaced by workers competing with each other lowering wages. It can also cause management to become more Iv competitive and often deceptive, they aim for commissions as stock options and growth rather than a V equilibrium or normal company business. When many companies do this they compete with each other to maximize shareholder returns, this cause people to buy into companies with the most momentum heading towards a ceiling and then crash. 
The consequences of the hijack have been momentous. The first was to align managers' interests not with their own organisations but with financial outsiders – shareholders. That triggered a senior management pay explosion that continues to this day. The second was that managers abandoned their previous policy of retaining and reinvesting profits in favour of large dividend and share buyback payouts to shareholders.

An explosion is a sing of Iv-B growth.
Ironically, the effect of this stealth revolution was to undercut the foundations of the very shareholder value under whose flag the activists had ridden into battle. Along with corporate welfare and customer service, among the functions squeezed in the shareholder bonanza was research and development. Innovation has stalled since the 1980s, prompting some economists to query whether the era of growth itself is over.

A stealth revolution is Iv-B, it is usually hidden and revolutionary with new ideas that often collapse later like growing weeds instead of trees. 
But it's not economics, it's management, stupid. Unsurprisingly, downtrodden and outsourced workers, mis-sold-to customers, exploited suppliers and underpowered innovation cancelled out any gains from ever more ingenious financial engineering – leaving shareholders less well off in the shareholder-value-era since 1980 than in previous decades. The great crash of 2008 stripped away any remaining doubt: the economic progress of the last 30 years was a mirage. As Nassim Nicholas Taleb put it in The Black Swan, the profits were illusory, "simply borrowed against destiny with some random payment time."
Iv-B growth is deceptive like a mirage, it uses too much leverage like trees with roots and branches that are too fine until it becomes easy to knock over.

Over the last decades, misconceived ideologically based governance has recreated management as a new imperium in which shareholders and managers rule and the real world dances to finance's tune. A worthier anniversary to celebrate is the death seven years ago this month, on 11 November, of Peter Drucker, one of the architects of pre-code management, which he insisted was a "liberal art". Austrian by birth, Drucker was a cultured humanist one of whose distinctions was having his books burned by the Nazis. In The Practice of Management in 1954 he wrote: "Free enterprise cannot be justified as being good for business. It can be justified only as being good for society".

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