Markets not Managers: Redux

What is a business person? More specifically, what is a business person today, in the creative age? There are many definitions, but let me be so bold as to put one forward here:

A business person is someone who allocates resources (money, time, raw materials) to create the maximum possible sustainable return (value) on resources invested (value).

Put another way, a business person is someone who creates more value than they use (cost), and does so in a way that be continued over time. “Sustainable” must be part of our definition of a business person because it encompasses concepts of ethical behavior, interconnected systems consciousness and “true cost / benefit analysis”, most of which seem to be lacking from modern corporate systems.

One assumes that a manager is an individual who controls resource and expenditures in order to extend the competitive advantage of the organization. But in corporate functions this is rarely true. In fact, in corporate functions, a manager is usually one who controls resources and expenditures in order to ensure the longevity of their job, even while that actually diminishes the advantage of the organization relative to its competitors, present and future.

There is nothing especially new or novel in this thought. In fact, it was first brought up in 1932 by a couple of professors named Berle and Means (sounds like a heck of a vaudeville act). They wrote a blockbuster (at least for that time) titled The Modern Corporation and Private Property that, as reported in The EVA Challenge (a book I highly recommend for finance geeks) (page 2):

Asserted that so powerful were large corporations that “private initiative” was no nonexistent, that self-perpetuating groups of managers dominated the economy and often pursued agendas contrary to the interest of owners and, presumably, to that of the country as a whole.

A couple of months ago I wrote a passionate and pithy piece about why managers should be replaced by markets. That post got some negative feedback, and as I reread it I have to admit that it was over the top (John Sumser told me that “it is fine to give someone a proverbial poke in the nose to make a point, but beating up a class of professional  in public does everyone a disservice” – after rereading the piece, I have to agree with him).

But regardless of the form of my tirade, the basic point is consistent with Bearle and Means' point – when managerial and corporate incentives do not align with shareholder value (defined as broadly as possible and taking into account the concept of true cost) you end up with capitalism at its worst. Bowing down before the god of short-term returns on invested capital is at the heart of this dysfunction.

In 1995 John McKnight wrote a book which ticked a lot of people off. It was called The Careless Society. McKinight was saying that the rise of a professional class of "care givers" was in fact destroying the fabric of our society. This passage is telling (page 19):

Given the professional power to define problems, treat them, and evaluate the efficacy of the treatment, the client as a person has been a residual category in the process. As professions have become integrated into large-scale specialized systems... the professional has increasingly secured a guaranteed income. The consequence is that the client's residual role as a volitional purchaser of service, or even as a human being in need, has disappeared and the professional is free to use the client without pretense of service.

While I may not agree with all of McKnight's conclusions, take the above statement and replace "professional" with "corporate functionary" and "treatment" with "service offering" and you start to get my drift about why the position of the modern manager is broken. Their ultimate client (the company) is incidental to their secured position as arbiter of the efficacy of their service. To put it mildly, this is bass-ackwards.

When Fast Company came out with their article "Why We Hate HR" they were talking about symptoms (finances henchman, etc.). McKnight’s comments start to get at the heart of the "why" behind the "hate", the causes of the symptoms. When people can define what service they are going to provide and whether that service succeeds then the customer becomes secondary to the vendor.

Corporate functions such as finance, HR, legal, facilities and administration usually believe that they are answering to a higher calling: regulation and risk abatement. It is hard to argue with this fact. When legal doesn't protect the company the resulting damage can cost millions. When HR doesn't protect the company from the aggravated employee people can get killed. These are not trivial matters. But when the corporate functions mentioned above put the needs of their "higher calling" above the needs of the business, they do more harm than any possible good they could generate by serving as corporate bureaucrats.

When people are more valuable than money, the corporate functions must serve another purpose than just saving money. The rules and regulations that corporate bureaucracies protect often kill the creative spirit, the very engine of modern innovation. Only by aligning the requirements of good shareholder governance, value against true cost, and the primacy of talent over capital can we avoid these pitfalls and build enduring companies that not only summon the human spirit but also generate fantastic sustainable returns.

Comments

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