Management 22/3/2010

Drop the Mantras of Contemporary Management

Over the last two decades, management has been a bit like high fashion. From one year to the next you have to throw away expensive clothes because they have gone out of style.
Management mantras end up being adopted by the majority of companies, but then fall out of fashion, and sometimes out of luck. The latest version of management by mantra says stock options and executive bonuses are bad, rather than understanding why and when have been misused or wrongly designed.
Many managers, tired and disillusioned by management fads, have started to re-read last century's management classics like Peter Drucker. One of his fundamental statements is that the objective function of a firm should be neither the shareholders' nor the stockholders', not any other simple objective: "The search for one objective is essentially a search for a magic formula that will make judgment unnecessary. But the attempt to replace judgment by formula is always an irrational act. 
The compass for managers should be pursuing the good of the company, which means its short-term survival and long-term prosperity. The good of the firm must be should by looking at "what it's right for the firm", rather than what it's right for shareholders, employees, or stockmarket value. If a decision is not right for the company, it is also not right for its stakeholders.

Over twenty years ago, Drucker lambasted top management salaries that went beyond a 40:1 ratio with respect to wage-earners. Too large differences in personal earnings push executives to take decisions based on "partial optimizations" on a too-limited time horizon, thus endangering the long-term corporate health. When Drucker died in 2005, this ratio had skyrocketed to 400:1. He had come to believe such inflated compensations had become detached from the real value produced and had lost any relation with business measurements and long-term performance, and in the end would end up damaging shareholders themselves.
Drucker's most famous contribution to business literature, management by objectives, is based on the idea of linking compensation to performance. However this required a careful balancing of short-term profitability and long-term objectives. “Predictions concerning five, ten, fifteen years ahead a are always 'guesses'. Still, there is a difference between an 'educated guess' and a 'hunch', between a guess that is based upon a rational appraisal of the range of possibilities and a guess that is simply a gamble.” Annual bonuses de-linked from long-term performance have pushed many managers to gamble with the money of shareholders. 
Eighteen months into the crisis, the nefarious consequences of management by mantra are clear for all to see. To get out of the present predicament, good advice for executives would be to re-read two fundamental books by Peter Drucker The practice of management (1954) and The effective executive (1966). Have a good read!

by Francesco Castellaneta, PhD School, Università Bocconi