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What I'm reading

June 29th, 2003

Bad Company: The Cult of the CEO by Gideon Haigh. It’s the latest Quarterly Essay and the first to cover an economic policy issue. Until now, the focus has been on the concerns of the cultural Left (environment, foreign policy, Aboriginal issues). QE encourages responses, and I’m going to submit one on managerialism in general. It’s long, so I’ve included it in the extended entry below. Comments from readers would be much appreciated.

I’m also reading Teach yourself Perl in 21 days by Laura Lemay. I’ve made numerous efforts of this kind over the years, with mixed outcomes. My most successful has been with HTML, also using Lemay’s books. I’m hoping that knowledge of Perl will enable me to improve my blog and even perhaps revive the lost comment threads of past incarnations.

Gideon Haigh’s deflation of the pretensions of the imperial CEO is thorough and effective. But CEO imperialism is merely the monarchical version of the managerialist doctrine that has dominated both business thinking and public policy in the Western world for the past two decades.

As with most terms ending in ‘ism’, and therefore imputing an ideological framework, ‘managerialism’ is more often used pejoratively than favorably. Where it is dominant,, ideology appears as common sense and requires no name. The standard assumption, backed up by the existence of university departments of management and business schools generating thousands of MBAs every year, is that management is a science on a par with physics, or at least with economics. As Thomas Frank observes in his One Market Under God‘the management literature as a whole serves primarily as a PR exercise to legitimate management.

Given the profitability of the MBA and related products, universities from Harvard to Hobart politely ignore the fact that management theory is dominated by faddish nonsense rather than scientific research. As Micklethwait and Wooldridge observe in their survey of the field, aptly titled The Witchdoctors, although management theorists occasionally draw on the work of academic disciplines like psychology and economics, the favour is rarely returned.

Management theorists do not even perform the basic function of developing their own ideology. As Haigh notes, the most significant theoretical contributions to the cult of the CEO came from economists such as Jensen and Rosen rather than from schools of management.’

Where managerialism needs a name, the choice is usually one that conceals or obfuscates the role and interests of managers as a class. The most important examples are ‘the New Public Administration’ in the public sector and ‘shareholder value’ in the private sector. ‘Shareholder value’ is of particular interest in the way it represents managers as the mere agents of the shareholder principals.

The central doctrine of managerialism is that the differences between such organisations as, for example, a university and a motor-vehicle company, are less important than the similarities, and that the performance of all organisations can be optimised by the application of generic management skills and theory. It follows that the crucial element of institutional reform is the removal of obstacles to ‘the right to manage’.

The rise of managerialism has gone hand in hand with that of the radical program of market-oriented reforms variously referred to as Thatcherism, economic rationalism and neoliberalism. (Despite very different histories, all these terms are now generally used in a pejorative sense). Managerialism may appear inconsistent with traditional free-market thinking in which the ideal form of organisation is that of competitive markets supplied by small firms, in which the manager is also the owner. However, managerialism is entirely consistent with the dominant strand in the neoliberal approach to public policy, which takes the corporation, rather than the small owner-managed firm, as the model for all forms of economic and social organisation.

In particular, managerialism and neoliberalism are at one in their rejection of notions of professionalism. Both managerialists and neoliberals reject as special pleading the idea that there is any fundamental difference between, say, the operations of a hospital and the manufacturing and marketing of soft drinks. In both cases, it is claimed the optimal policy is to design organisations that respond directly to consumer demand, and to operate such institutions using the generic management techniques applicable to corporations of all kind.
The main features of managerialist policy are incessant organisational restructuring,,sharpening of incentives, and expansion in the number, power and remuneration of senior managers, with a corresponding downgrading of the role of skilled workers, and particularly of professionals.

Reorganisation is a natural product of managerialism in any setting, since it produces visible evidence of managerial activity, whether or not it is beneficial. As Haigh notes, this tendency, like so many other aspects of managerialism, reached its peak in Enron, with six full-scale reorganisations in eighteen months.

From the viewpoint of employees, the most important feature of managerialism has been the sharpening of incentives. The corporation was formerly characterized by implicit contracts between companies and career employees, in which employees committed themselves to the goals of the organisation in return for a high level of job security. Until the 1990s, white-collar employees (the main group of core employees in most corporations) lost their jobs only as a result of serious personal conduct or when the corporation faced a financial emergency sufficient to threaten its survival.

By contrast, as Haigh notes, the corporations of the 1990s practice both routine dismissal of individuals as a management device (‘rank and yank’) and large-scale layoffs in the pursuit of short-term cost-cutting. More generally, individuals and units within corporations are given sharp incentives to achieve corporate goals. By necessity, since the associated rewards and punishments must be delivered in a short time-frame, the focus is on short-term measures which, it is hoped, correspond to some long-term measure of the extent to which the enterprise is achieving its goals. The paradigm case is the share price of a corporation which, according to the efficient markets hypothesis, represents the best possible estimate of the value of the corporation, taking account of all available information.

Such a sharpening of incentives may be beneficial if the behaviors that are rewarded are exactly aligned with the interests of the enterprise (or in the case of public policy, the society) as a whole. In practice this is rarely the case. Sharp, but imperfect incentives give rise to arbitrage opportunities, that is the capacity to buy cheap in one market and sell dear in another. Cost-shifting between state and federal governments in health and education is one instance of this phenomenon. The accounting devices used by ‘incentivised’ managers to manipulat reported profits are another.

Because they reward those who can ‘game’ the system most effectively, rather than those who try to achieve the long term goals of the enterprise, sharp incentives corrode organisational culture. The effect is heightened when managers combine reliance on sharp incentives with appeals to residual stocks of loyalty and commitment to the goals of the enterprise, thereby debasing both coinages. Managerialism systematically erodes both altruism and professionalism.

From the viewpoint of managers themselves, the most salient feature of managerialism is the growth in their incomes, power, prestige and numbers it has produced. Australian universities provide an excellent example. In a sample of seventeen universities studied by Marginson and Considine, the total number of deputy vice-chancellors and pro-vice-chancellors more than tripled, from 19 in 1987 to 69 in 1998, a period in which student numbers increased 70 per cent and academic staff numbers were static. Allowing for the new full-time position of executive dean, the proliferation of highly paid senior managers outside the academic hierarchy (marketing directors, promoters of research commercialization, public relations promoters and so on).and the associated personal support staff, the new managerialism has consumed resources sufficient to staff a large new university. All of this, taking place at a time when the university system is in a state of financial crisis, is typical of the operations of managerialism.

The growth of the managerial class has reached the point where it has a significant impact on macroeconomic aggregates. Measuresuments of the share of corporate profits in the economy, for example, vary substantially depending on whether returns to senior managers are treated as wages, as profits or, as in the case of stock options, disregarded altogether.

Similarly phenomena such as the ‘branch office economy’ arising from decisions to relocate corporate headquarters to ‘global cities’ like New York and London are motivated more by managerial self-interest than by any net benefits to shareholders. The cost savings from less centralised locations outweigh any benefits from the clustering of corporate power. But the opportunities for managers, both in career terms and with respect to high-status consumption, are far greater in these locations than in, say, Omaha Nebraska, where Warren Buffett’s phenomenally successful investment firm, Berkshire Hathaway, maintains its headquarters. The rise of the global cities reflects the fact that managerialism produces a form of ‘crony capitalism’ based on personal connections.

All of these criticisms would be beside the point if managerialism actually delivered the goods, in the form of a general improvement in living standards. American critics like Frank were marginal figures during the boom of the 1990s, when it seemed as if stockmarket gains would make everyone rich. Similarly Australian criticism has been muted by the durability of the current economic expansion which has continued for more than a decade since the end of ‘the recession we had to have’.

Viewed over the course of a complete economic cycle, however, the failure of managerialism to produce good outcomes for society as a whole is evident. Economic growth has been only marginally better than that of the 1970s and 1980s, and well below that of the social-democratic golden age of the 1950s and 1960s. Meanwhile, growing inequality in market incomes has meant that hardly any of the benefits of growth have gone to households in the bottom 60 per cent of the income distribution.

On the other hand, as would be expected from a class-based ideology, managerialism has been immensely beneficial to managers. Substantial income gains have accrued to the top quintile (20 per cent) of income-earners. Within this group, managers have gained relative to professionals, small business-owners and skilled tradespeople. In addition, the growing inequality of the income distribution as a whole is mirrored within the top quintile. The top 5 per cent has gained more than the next 15 per cent, the top 1 per cent more than the next 4 per cent and so on up to the 200 or members of the BRW rich list.

The spectacle of departing CEOs drawing million-dollar bonuses for their incompetence has rightly been criticized by Haigh and many others. But the managerial class as a whole that has been richly rewarded for very ordinary performance.

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  1. Dave Ricardo
    June 29th, 2003 at 16:10 | #1

    I agree with a lot of your comments, but these managers have arisen not just because a malign ideology has taken hold.

    Take hospitals. When doctors run public hospitals (as they still do, de facto, in NSW) thir attitude is: “I’m here to practice medicine, and buggar the cost”.

    “But you’ve blown the budget”, some hapless administator says to them.

    “I don’t care. That’s not my department”.

    Interestingly, when it comes to private hospitals that doctors actually own, they suddenly become very cost conscious.

  2. John
    June 29th, 2003 at 16:34 | #2

    You’re right, of course, and the same is true of neoliberalism/economic rationalism. Ideological shifts of this kind don’t arise because policymakers suddenly go crazy but as a response to real problems.

    That said, I think both managerialism and neoliberalism are cases where the cure is worse than the disease.

  3. Factory
    June 29th, 2003 at 17:29 | #3

    DR:
    OTOH the manager who who says ‘Bugger the medicine, I’m here to run a business.’ is just as bad. The idealised person who manages a business has to be someone who has an understanding of the field and business in general.

    As a citizism of the article, I’m not sure what it means by managerialism, except that it is associated with lots of bad stuff.

  4. Dave Ricardo
    June 29th, 2003 at 17:49 | #4

    I don’t disagree, Factory.

    As for the proliferation of pro- and other species of sub vice chancellors, at least they provide career paths for professors who can longer, or don’t want to, teach and do research.

  5. June 29th, 2003 at 19:29 | #5

    Don’t do it! Read that book as a single training activity, that is.

    I’m sure you know the merits of associating with users groups and doing hands on stuff. You can get some of that via the internet. I’ve received some useful Perl training from an organsiation down here in Melbourne, “Perl Training Australia”, and an internet search will not only give you them as a jumping off place, it will give you access to their downloadable manuals and training materials in PDF format.

    But I would suggest that if you can you should find a local perl mongers group and get advice on where to start, how to get there from here, from the horse’s mouth.

  6. s robertson
    June 30th, 2003 at 02:12 | #6

    had posted a comment but it got lost ‘cuz i failed to press something. asking a question about how if we can see the problem, why can’t we formulate an effective corrective response – ie through the potential residing in democratic process. it is malign, and not to be dismissed as ‘just a…’!

  7. John C
    September 8th, 2003 at 14:27 | #7

    Universities are indeed a very good example of where managerialism has brought out the worst in the institutions. However, applying a bit of management theory might in-fact deliver a lot of benefits to universities. Universties need to have very tight financial and strategic control (centralised) and fairly loose operational control (decentralised) at the interface between lecturer and student. Unfortunately, most universities clog up the works with incompetent PVCs and Resource Deans who may know something of their disciplines but nothing of management.

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