Column: Bad Management Theories Lead to Bad Organizational Practices

Los Alamos

When I was in graduate school, I often had disquiet feelings about certain theories, especially the ones based in economics, with neat and elegant equations, or models constructed with impeccable rationality. 

But being a student, while we might be able to voice some of our criticism in private or in class discussions, one does not foolishly challenge these theories too publicly (certainly not without research evidence) as these theories or models are usually published by well established authority figures. 

This is as much about the state of the field of management as it is about the nature of academic dynamics.

So, it was with a delight – however belatedly and privately it was – when I read a poignant article refuting some of the issues that gnawed me as a student, in a major journal, written by a prominent scholar. 

Sumantra Ghoshal, an eminent professor at the London Business School at the time of his death, published posthumously an article, “Bad Management Theories Are Destroying Good Management Practices,”

in Academy of Management’s Journal of Learning and Education (2005, vol 4, No 1, pp 75-91,

In it, he highlights three theories that have been widely pushed by business schools but are fallacious in that they are devoid of fundamental understanding of the complexity of human behavior, relationships, and emotions.

His work should be known to a much wider audience. This is my attempt to summarize.

The bad theories

The three theories on which Ghoshal focuses are:

1.  “Agency theory,” which states that managers cannot be trusted to know how to maximize shareholders’ value. Even though the very notion that shareholders’ value should be the only focus for corporation is seriously flawed, it is nevertheless the premise on which the popular practice of tying managers’ salaries to stock options is based. 

2.  “Transaction Cost” theory, which assumes that people act opportunistically whenever possible, i.e. cheating, lying, or shirking. So organizations build ever tighter monitoring and control systems to prevent, detect, deter, and/or punish employees for such behaviors. 

3.  “Competitive Strategy,” which advocates that companies cannot just focus on their competitors; they should compete against their suppliers, regulators, customers, and even employees. Little wonder the expectation of “trust” has been steadily eroding over the past decades. 

Business schools have been teaching these theories, if not by names then certainly by concepts, to hundreds of thousands of MBAs and various levels of managers through executive education programs. 

Even more people have absorbed these theories and concepts through osmosis. 

And while these theories may not themselves be well known by name, their practices reflect worldviews that have been deeply rooted into the consciousness of most managers.

These theories are based in economics; they lack the morality and emotion which usually surround people’s intentions and choices. 

These natural human qualities are not easily accounted for nor are they convenient for creating elegant mathematical formulae; this inconvenience then upsets a professor’s stream of publications for getting that coveted tenure. 

In their desire to promote simplicity, concepts expressed in statistics, and mechanical tools offering controlling methodology, the business schools have pushed these theories onto managers to absorb and apply. 

Social sciences differ greatly from physical sciences. Human thoughts, intentions, behaviors, and emotions are not easily quantified, controlled, manipulated, or predicted, not with 100 percent accuracy, not even half of that rate at half of the time. 

Furthermore, there is the self-fulfilling prophetic effect about which physical scientists do not have to worry but with which social scientists, and practicing managers, have to contend. 

If managers assume that people would cheat or shirk, they structure the organizations to catch cheaters and shirkers; by doing so, the organizational environment becomes stifling and more employees behave with organizational interests at low priority. 

This in turn feeds into managers’ expectations, and they continuously design ever-increasingly vigilant organizations. Have you noticed that rules and regulations seem only increase? Do we ever take some rules off the table?

There are ill effects on the managers as well. For instance, by making the profoundly erroneous assumption that managers are not to be trusted to maximize shareholders’ values, organizations tie their salaries to the stock value which then becomes managers’ major focus. 

“Profoundly erroneous” because the real worth of an organization is not in the stock market but in combinations of employees’ knowledge, relationships, skills and talents, equipment, structures, and liabilities. 

Stocks are but one aspect of a company’s values, but as a consequence of this assumption, managers are driven to concentrate their efforts on only the measurable factors that they can manipulate at the expense of “softer” aspects, such as morale, respect, trust, creativity, and innovation. 

These are words which can be mouthed in the forlorn hope that saying them often enough, about, for example, respect, becomes tantamount to truly respecting others.

Ironically though, these “softer” aspects are some of the hardest to understand, grasp, delineate, foster, and accomplish, and so they are usually the first casualty in management practices, especially during a period of dramatic changes. 

Does the criticism apply to not-for-profit organizations?

Though not-for-profit (NFP) organizations, including government agencies, do not worry about stock. Somehow, we have come to assume that companies in private industries are the “right” models to emulate, despite the repeated monstrous scale of the foul-ups we have witnessed over decades, again and again, from Enron to J.P. Morgan to the latest Libor scandal. 

In some of my dealings with government agencies and NFP organizations, they hold onto the same metrics that are prevalent in the private sector. This is another topic worthy of deeper exploration at a later time.

It is much easier to assign numbers, anything on a 1-5 scale, to tangibles such as timelines, milestones, or even performance measures (assuming one has a good definition of performance.)

A project that can meet milestones may not offer room for exploration, which is the foundation of creativity and innovation.

Can anyone predict when you might be creative, or what the outcomes of innovative endeavors might look like? Is 10 percent finding of unhappy employees a serious concern? 

Or, should the dissatisfaction rate be above 50 percent before management would treat it seriously? In a similar sentiment, sticking to the measurable and the concrete, there are so many manuals for procedures and protocols that one wonders if that also has rubbed people off their sense of imagination (too dangerous?) and responsibilities (hey, not my fault, I am just following the rules.)

Over the decades, my observations of several organizations with emphasis on research and development all have gone to growing restrictive mode. 

Safety and security trump everything. And because no one with the right mind would openly state that accidents may be an inevitable cost for creativity and innovation, we implicitly go along with the ever increasing regulatory volume. 

Complaints are only held at water cooler areas or private dinner gatherings. I keep wondering if US’s losing the leading edge in new technologies, such as in the green energy area, might not be directly related to our growing intolerance of accidents? I know many scientists feel so. 

As for the competitive mode of operation, I guess that’s the sacred cow of market/capital economy. However, does competition mean that my gain shall always lead to someone else’s loss? 

While it may not be possible to always have a win-win solution, it is a much more empowering goal than what the traditional win-loss would bring to people. 

We may feel that sometimes this society is too competitive; yet, we are all also powerless to change it.

So, in my next piece I will delineate a framework/an approach (not mine) to aim for constructing than constricting, for building than attacking, for energizing than enervating. Sounds too good? Why assuming impossibility? Sounds too saccharine? Or, are we so saturated with acidic bile in our mouth that a little sweetness is a suspect?

Till then … stay safe & charging ahead.

Editor’s note: Elena Yang is a new columnist at the Los Alamos Daily Post. She has a  PhD in Management from the Wharton Business School of the University of Pennsylvania. Her dissertation title is: The Role Of Culture In Business Networking. She taught at Wharton for a number of years, and consulted for small groups and small organizations and on cross-cultural issues. Her professional worldview comprises three pillars: 1. All organizations are social systems in which elements are inter-related. 2. To improve organizations, we should focus on the positive dimensions on which to build. This philosophical foundation is Appreciative Inquiry. 3. She subscribes to the methodological perspective that she is part of the instrument from which to gain quality data from respondents, and with which to compare and contrast with others’ realities.


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