Keeping the wrong company

Good management theory is not only highly practical, it is also an urgent necessity, writes Simon Caulkin

Most managers abhor theory. They pride themselves on inhabiting the "real world", in which "academic" is another word for "irrelevant.
Yet new interest is stirring in management theory-and the reason is its inextricable, although often hidden, relationship to management practice. For all their scepticism, managers resemble other practical men described by John Maynard Keynes 50 years ago: “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is run by little else. Practical men, who believe themselves exempt from any intellectual influences, are usually the slaves of some defunct economist . . . It
is ideas, not vested interests, which are dangerous for good or evil."
Management's intellectual influences usually go unexamiued, even in business schools. But a nucleus of bolder researchers, disturbed by some of the directions of current practice, are stripping the assumptions back to bedrock-and not liking what they see.
Their starting point is a striking gap in public perceptions. While in reality there is a tight correlation between national prosperity and the health of the corporate sector, there is an undoubted crisis of corporate legitimacy. A growing number of people believe that far from benefiting the world, companies pillage the environment, exploit the weak and operate at the expense of the many for the benefit of a greedy few.
People are right that something is amiss, says Professor Sumantra Ghoshal of the London Business School. But it is not that companies and management are inherently evil.
It is because the deeply unrealistic, pessimistic assumptions about the nature of individuals and corporations that underlie current management doctrine cause managers to subvert their own legitimacy. Because the proposed solutions -such as tighter corporate governance- are based on the very theories that caused the problems in the first place, they can only make matters worse.
The danger is compounded by the treacherous nature of social science theory. In the physical sciences, a theory that the sun revolves around the earth may be wrong, but it doesn't change anything. With social sciences, if enough people act on a wrong theory it becomes "right” because it is self-reinforcing.
Thus corporate governance based on the idea that managers can't be trusted to maximise shareholder value without strong incentives, creates managers who demand huge stock options. Executives who manage people on the assumption that they are opportunists whose behaviour needs to be closely controlled, foster opportunism that justifies those controls. Strategy based on the theory that to maximise profits a company must appropriate value not only from competitors but also from employees, partners and society as a whole, generates corporate monsters such as Enron that distort competition and eventually destroy thernselves.
This is why good theory matters. So where has dominant theory gone wrong? Ghoshal identifies two kinds of "badness" The first is the grotesquely partial view of human nature on which today's management edifice is built-the idea of homo economicus, men and women as exclusively rational maximisers of their own (economic) self-interest. This allows no role for positive human attributes such as loyalty, altruism and generosity..
An impoverished view of human nature has created management that is just plain bad
Although, empirically, these qualities are as powerful in shaping behaviour as opportunism and self-interest, management has focused predominantly on preventing bad behaviour rather than encouraging good. All too often the result is a gloomy self-fulfilling prophecy.
The second element of badness is related to the first. A travesty though he is, homo economicus has the advantage of being compatible with the greater requirement of what might be called the "management project" - the aspiration of researchers to make business studies a "hard” science like physics, governed by identifiable patterns and laws.
This kind of science leaves no place for the vagaries of human choice and intention-and by the same token, for morality or ethics. But such determinism traduces the essence of human organisations, which is precise-ly that they are purposeful intentional entities. Unlike biological or inorganic phenomena, organisations can, and do, choose strategies that involve present sacrifice for future gain -“one step backward, two steps forward".
This combination of inappropriate determinism -what Ghoshal calls the “pretence of knowledge"- and a grimly impoverished view of human nature have produced a model of management that is doubly bad: bad as in plain wrong, and bad as in amoral under-socialised and pathological, more suited to the running of a criminal gang or penal establishment than a company of knowledge workers.
It's often said that there's nothing so practical as a good theory. Never has this been more true. "Good" management theory-both more realistic and more positive-may now be practical management's most urgent and ambitious need.

Training for business Guardian Weekly, March 4-10, 2004