The Impacts of the Manager/Markets Relationships on Management Behaviour and Organisations.
The development of increasingly close and symbiotic relationships between top managers and the financial markets represents a fundamental shift in the balance of power between the stakeholders in industry and the economy.
These closer relationships have impacted significantly on the values, behaviour and actions of the managers.
The consequences of these changes are now becoming quite marked and are having a profound effect upon the skills and practise of managers and therefore on the organizations that they lead. We are beginning to experience the effects of a marked and enlarging deficit in strategic, leadership and organizational skills amongst top managers.
These days, only one Stakeholder matters.
The Combined Code on Corporate Governance is a most powerful set of guidelines for the directors of quoted companies. A read through the more than 100 pages of Codes of Practice, 'Guidances' and the like gives a pretty good picture of the fundamental assumptions made by their authors. But before getting into that, it is worth reflecting that the Code is really an attempt by government to pass the main responsibility for governance to 'shareholders' - in reality the financial markets.
Just what this means can be clarified through reflecting that proper shareholders are the owners of shares. Those who own shares are mainly individual savers, pension fund members, holders of endowments and life insurances, most of whom place their money on the financial markets through institutional investors. These investors are the agents of real shareholders described above, who are only asked their opinions about where their money goes in a very imprecise sense - certainly they are not asked about important governance decisions.
So, when politicians and the media talk of 'shareholders', they usually mean investors, who are really not owners in the literal sense.
So, back to the Combined Code, which states in its Preamble: Whilst realising that directors are appointed by shareholders who are the owners of companies......
So, little doubt as to whom directors are accountable. Trouble is; as we have said, the real shareholders are not asked either about the boards of directors of the companies in which their money is invested by their agents. This places vast power in the hands of institutional investors, who are not subject to much governance - and none at all in relation to responsibilities towards companies in which they invest.
Moving on, the Code picks on several key roles of boards, amongst which are:
- To ensure that obligations to shareholders and others (our italics) are met.
- To ensure that the necessary financial and human resources are in place. So people and money seem to have an equal value as 'resources' and employees are relegated to the status of 'others', whilst customers and the wider public hardly get a mention.
We can then observe that of the 100-odd pages of guidance and codes of practice, sixty-four are taken up by the Turnbull Guidance on Internal financial Control and the Smith Guidance on Audit committees.
In all the rest, there is generally an eerie silence about the duties of leaders to their employees, customers and the like No wonder directors are quite certain where the power lies!.
(i) Combined Code on Corporate Governance.
Agency Theory is undermining boards and changing their work.
The research by Dr.John Roberts and Don Young on The Role of the Board in Creating a High Performing Company heard a litany of negative comment from directors about the detrimental effects of the pressures from the investment markets for excessive short-term performance and the narrower aspects of governance. Example: Fund managers don't have any experience of running companies and are more concerned about building their financial models - but feel they have a bigger and bigger remit to interfere in the management of the business, even indirectly, through corporate governance - FTSE100 director.
The researchers commented that the state of relationships between investors and managers represented 'Agency Theory' writ large. Agency Theory is based on the dubious assumption that as the roles of managers and owners are separate, managers will act in a self-interested manner and have to be policed by elaborate controls, sticks and carrots. Only in this way, says the Theory, can 'owners' ensure that managers do their bidding. The researchers discovered that a combination of huge pressures for short-term performance and pressure for narrow governance 'box-ticking' was putting UK non-executive directors in the role of policeman, thus splitting the board and robbing it of the constructive contribution of the non-executives.
It matters not that research by Booz, Allen Hamilton reveals that, despite Enron, over 80% of value destruction is the result of bad strategies and value-destroying acquisitions. The markets and the media are firmly fixated on dishonesty and evasion.
All of these pressures are the privilege of directors of large quoted companies - those from smaller companies and non-quoted enterprises do not have to suffer in the same way - and it isn't as if all the pressure brings superior performance.........
The bottom line is that the overwhelming pressure is on directors to do that which investors wish, and hang the consequences for others.
Hedge Funds don't give a toss about employees and they don't care about long-term sustainability. FTSE 100 director.
All of this is a far cry from the words of Sir Stuart Hampson, chair of retailer the John Lewis Partnership, reporting another storming year in 2005, whilst quoted competitors languished: We believe the strength of our business is that it is owned by our partners (employees). They are our visible (to directors and customers alike) shareholders.
(ii) The Role of the Board in Creating a High Performance Organisation, Dr. John Roberts, Judge business School, Cambridge University and Don Young, Performance and Reward Centre (PARC). 2005.
In May, 2002, under the headline, Business Schools fail to develop Leadership, The 'Financial Times' reported that despite the rapid expansion of management education in the past 20 years, the main leadership skills are 'in short supply from the top to bottom of organisations'. The MBA - the flagship course of the business schools - 'has succeeded as a qualification but has not developed future leaders', says the Council For Excellence in Management.
David Norburn, ex-director of Imperial College Business School, commented: A lot of the schools have copied American business degrees which place too much emphasis on formulation and not on implementation.
None of this is too surprising when it is realised that the products of the leading business schools mainly graduate into the financial markets and consultancy - not management. So-called management education turns out business analysts who know little of managing.
This assertion is reinforced by Prof. Henry Mintzberg, one of the deepest management thinkers of our time. Mintzberg asserts that conventional MBA classrooms over-emphasise the science of management, while ignoring its art and denigrating its craft, leaving a distorted impression of its practice. We need to get back, says Mintzberg to a more engaging style of managing, to build stronger organisations, not bloated share prices.
Trouble is, the investment markets rate managers who 'know the numbers', can communicate with them in their own language, and preferably have a financial background as well. Thus, management education and the financial markets reinforce each other, creating little or no demand for the real, hidden, human skills of leadership. Emotional intelligence is crowded out by cold numbers and rational analysis - and corporate offices become more and more a mirror image of the financial markets.
(iii) Managers and Leaders: Raising our Game, Council for Excellence in Management. 2002.
Managers, not MBA's, Henry Mintzberg, Berrett-Koeler, 2005.
We have already commented on the comprehensive research into the world of big companies conducted by Professor Karel Williams and his colleagues at Manchester University. The thrust of this research is into the relationships between the financial markets and the top managers of massive companies. Their field of study is the US S&P 500 and the UK FTSE 100, representing some of the world's biggest companies.
The researchers observe that the growing strength and aggressiveness of the investment markets has wrought a fundamental change in the perspectives and practice of top management over a period of study starting in 1980 until 2003.
Their observations can be best understood through the observations of a top City sell-side analyst. Said he: When I talk to the corporate managers of large German and Japanese companies, they speak of products, quality, customers and cost. They seem to assume that if they produce innovative, attractive high quality products at a competitive cost, they will do well and be profitable. With UK and US managers, the opposite applies, they give me numbers and a sort of story about initiatives that will ensure that the numbers continue or improve. Many of them seem to be a million miles from the real business and actually comment on it in exactly the same way as I would.
Corporate strategy has undergone a fundamental change under the pressure of the investment markets, and - say the authors - so has the relationship between the corporate office and the operating infrastructure of the company. Top managers are more and more focused on the financial markets, which weakens their connections with the real company that they are supposed to lead.
They express it this way. The change....: Arises from the intrusion of the capital market, signalled by the increasingly vociferous investor demands for 'shareholder value' since the late 1980's in both the UK and USA. This book tackles the problem of how capital market pressure has reshaped what American and British giant-firm management says and does.
In a nutshell, the authors identify that managers:
- Seek to impress the markets by providing comprehensive financial analyses and projections that are aimed specifically at supporting share prices.
- They complement these 'Numbers' with often elaborate 'Narratives' that are designed to influence and convince the market that management are fully competent and doing all the right things to keep the numbers moving in a positive direction. If the markets believe the Narratives, they will often elaborate them, so writing managements' 'stories' for them. If the Narrative coincides with a periodic management 'fad'; then big consultancies and the sort of business academics who promote the notion that they have found the secret of success will join in. Thus successful Narratives attain the status of a modern Nordic Saga, complete with fabulous superheroes - as in the case of GE. (Readers really should read the GE case in the book to understand the differences between corporate fables and hard reality.)
- Having lost touch with the operating infrastructure and front line troops, corporate managers have been forced to adopt a limited range of interventions to support performance. The authors describe this as: "Having many moves, but few levers". This explains the massive growth in Merger and Acquisition activity, financial engineering, corporate restructuring and big top-down cost reduction exercises, few of which have positive effects on long-term performance, as we shall see in the next Section.......
(iv) Financialisation and Strategy: Narrative and Numbers, Froud, Johal, Leaver and Williams. Routledge, 2006.
Rich Rewards - Managers' pay heads for the stratosphere, leaving other employees trailing.
Yet another potent sign of the closer relationships between top managers and the markets has been the explosive growth of top executive pay. The 'policing' of top executive pay has in effect been left to the 'shareholders' and the Combined Code of Corporate Governance, also in effect policed by the investment markets.
Top managers have benefited from attempts to align their rewards with the interests of shareholders through the idea of shareholder value and through using shares as the strongest medium for delivering executive rewards. This has been something of a disaster, as it became apparent that the value of shares was driven more by booms and busts, M&A and other market-pleasing activity than by the skills and intelligence of managers and the performance of their companies. So, managers have benefited hugely from windfall events in the markets, whilst the pay of the average employee has languished. For example, in 1978/9, the ratio of top managers' pay to that of the average employee was 9:1 - in 2002/3, for the same group of large British companies, it was 54:1. In other words, the widening pay gap had taken managers into another world, divorced from that of employees, despite the fact, as we shall see that the performance of the companies they led was very mediocre.......
(v) Financialisation and Strategy, Having Their Cake, Incomes Data Services and any quality national newspaper from time to time.