It’s time to recognize that conventional management ideas are broken — and start thinking of something better.

In the American Civil War, Admiral Farragut achieved immortality with an order usually simplified as, “Damn the torpedoes! Full speed ahead!” During the Battle of Mobile Bay in August 1864, Farragut ordered his ships to charge into the bay, despite a minefield (mines were called ‘torpedoes’ then), to attack and defeat the Confederate force waiting there. His action pretty much sums up the attitude to management in recent years. Over more than a decade of short-term thinking, leaders have rushed, full-tilt, into action, ignoring the risks in a headlong charge for glory — and the huge personal rewards it could bring.

From hedge-funds to motor manufacturers, there has been only a single goal: to make as much profit as quickly as possible, more or less regardless of any other considerations. Such justification as any bothered to seek came from people like Milton Friedman, who preached notions of laissez-faire economics and the duty of ‘maximizing stockholder return’ without regard for anything else. In time, this was transformed into undiluted self-interest on the part of executives. It could hardly be otherwise, since the stockholders were increasingly impassive and disinterested in anything but profit themselves. When most of the shares in a corporation are owned by huge money funds who buy and sell on the basis of numerical analysis — or index funds who will own whatever is needed to match the chosen index, regardless of any other considerations — stockholders plainly have little or no direct interest in the business itself.

How did we come to ignore such obvious risks?

“Those whom the gods wish to destroy they first make mad” is an Ancient Greek proverb, often wrongly attributed to Euripides. Whoever wrote it, it certainly fits the bill today. Through nearly 20 years of growth and recurring stockmarket booms (and subsequent busts), those in charge forgot that almost anyone can make money when things are going well. From the late 1980s until a few months ago, accepted wisdom was that those who plunged into action without ‘wasting time’ on too much thought were destined for greatness.

Here’s and extract from a recent article Umair Haque, Director of the Havas Media Lab, wrote for Harvard Business Publishing:

Consider this. Why did everyone — literally every single player in the financial value chain, from mortgage brokers to prop traders — compete mercilessly to hoard benefits, and shift, hide, and obscure true costs? That’s what ripping the other guy’s head off really is, after all.

Because it’s exactly what orthodox strategy teaches us to do. In fact, that’s the very definition of market power: the ability to allocate costs and benefits regardless of the preferences of others [. . .] That might have been sustainable in a disconnected, asset-heavy industrial economy. But it cannot hold in a hyperconnected edgeconomy. When all of us can trade ten billion times a day, if everyone’s simply trying to claim benefits from everyone else, while shifting costs and risks to everyone else, the result is economic implosion [. . .] In an edgeconomy, chasing competitive advantage is like playing a game of economic musical chairs — one where you leave a grenade on your chair every time the music starts up again. Sooner or later, everyone gets blown up.

Business strategy has lost its way

We have been treating business as simple matter of having the biggest, most efficient guns. Many a general has relied on sheer brute force to win a battle, only to lose to a cannier opponent. Instead of standing back and making long-term decisions based on seeking sustainable differences, businesses have mechanically worked to do the same as everyone else, only bigger and more efficiently. ‘Making the numbers’ has overtaken making sound judgments.

The obsession with productivity and short-term profit is the problem, not the solution. As Henry Mintzberg wrote recently in his article “A top down problem”:

Productivity is a measure of output per hour worked. So a company that fires all its workers and then ships from stock can look very productive — until it runs outs of stock. Of course, no company can do that, but many U.S. companies have been shedding workers and middle managers in great numbers — the figures for this January were up 19 per cent from a year earlier.

Meanwhile, those employees left behind must work that much harder, often without increased compensation. Workers’ wages, adjusted for inflation, fell in 2007, continuing a trend throughout this decade. That, too, is ‘productive’ — until these overworked people quit or burn out.

Business thinking cannot be mechanized

Applying “the impersonal discipline of financial markets” to business leadership, to quote Minztberg again, is destined to be a failure. After all, it’s already failed — spectacularly — with financial markets themselves. The notion that the market always knows best lies today in tatters, destroyed by forces no one seemed to notice were there: the way a rumor or panic can ripply around the world electronically in milliseconds; the potential for determined short-selling to bring down even a healthy organization; the irrational ways that human beings make critical decisions.

Leading a business doesn’t mean plotting figures on a spreadsheet. What really drives the business environment are millions of human decisions, with all the fallibility that each on contains. A corporation is a community of people — a mob, if you prefer — with all of a mob’s tendency to insularity, arrogance, disdain for reason and the likelihood of being motivated primarily by basic emotions like fear or greed.

The mechanized thinking of maximizing shareholder value has been seized on by executives, not because it works for the business, but because it works for them. Alongside the mad rush towards purely financial goals, companies also embraced the false belief that executive pay should be linked to the same, purely financial targets. Never mind if a corporation is headed for the rocks, so long as the stock price is rising, executives’ pay will be rising too. Indeed, there’s no incentive at all for executives to work towards long-term stability and success.

Let’s think about that for a moment: executives have no reason (save perhaps some vestiges of personal honesty) to base their decisions on anything save short-term returns. With the aid of clever lawyers, most have ‘golden parachutes’ at hand if — no, when — things go wrong and they are ousted. Being able to make money by taking short-term risks, with no real downside if you get it wrong, is the same as what is happening with organizations like Fannie Mae and Freddie Mac: you privatize the profits (to stockholders and executives) and nationalize the losses (the taxpayer picks up the bill when disaster strikes).

Taking the time to rebuild

A generation of MBAs has been raised mostly on management myths and a belief in mechanized, numerical approaches to making decisions. Management and leadership are not, of course, simple tasks that can be handled by rote. Circumstances change all the time, necessitating changes in strategy and tactics. No corporation is large enough to impose its will on the world. Handling people — not ‘human resources’ or ‘human assets’ (two of the silliest and most misleading phrases ever coined) — requires insight, thought, empathy and wisdom, not the ability to crunch numbers and calculate ratios.

What we need now is the willingness to call a halt and rebuild our basic understanding of what it takes to run a successful business in today’s globalized marketplaces. We don’t need simplistic panaceas and fragmented attachments to separate aspects of the whole business — we need to stop howling after the moon of supposed quick and easy solutions — we need to stop thinking about solutions completely.

So long as business schools focus their teaching on numerical analysis, followed by stock solutions, people are going to try to find ways to use them — even if this means warping reality to make the problem ‘fit’ the pre-chosen solution. “Full speed ahead!” and “damn the torpedoes!” may be the stuff of legend, but it’s a damn risky way to lead. Survive, and you’ll be a hero; hit a torpedo and you’ll be called a bloody fool. But is there really any difference between the two, save dumb luck?

Conventional management thinking and analysis aren’t the answer, they’re the problems that got us into this mess. The only true answer is to think deeply about the full nature and extent of the problems we face, free from any preconceptions. Analysis won’t save us, but creativity just might.

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