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Business writers of a certain age (John Kay is one, I am another) have lived through two great waves in management theory and practice in our professional lives.
The first was the shareholder value movement of the last quarter of the 20th century, in which incentivized business leaders relentlessly pushed for short-term profits to boost stock prices. The second began when the knowledge economy attracted a younger, hipper group of business leaders in the years immediately before and after the millennium.
Both waves now coexist, and Kay’s new book The corporation in the 21st century The author gives a brilliant and erudite account of them and of their study. Using as examples the decline of former corporate icons such as GE, ICI and Deutsche Bank, the message he conveys from the first wave is that financialisation works better for the financiers than for the financed and that, taken to the extreme, shareholder value was in fact (to paraphrase its former standard-bearer, Jack Welch, the hawkish former CEO of GE) the dumbest idea in the world. And yet, although partially discredited and watered down by broader shareholder concerns, shareholder value remains influential in many boardrooms.
This is so even though new economy companies like Meta, Apple and Alphabet, which differed from their predecessors by relying on intellectual rather than financial capital, redefined management. Gone were command and control and transactional relationships in favor of collaboration, employee participation in decision-making and a shared sense of purpose.
Outsourcing and the purchase of specialized services replaced internal self-sufficiency in hollowed-out corporations. Problem solving replaced efficient production as the main competitive weapon, requiring a more flexible management approach with social and commercial consequences.
But the interplay of these waves has led to the paradox that consumers love products but hate producers. Despite offering strikingly innovative products and services, global companies have lost the public’s trust. The lack of respect is so severe, Kay believes, that “as a result of the erosion of business ethics and the evidence of indefensible inequalities, the 21st-century corporation faces a crisis of legitimacy.”
All of this is a good story well told, but it has been told elsewhere and the details sometimes obscure the author’s important claim that academic models have not kept pace with these changes. The idea that “business has evolved, but the language widely used to describe it has not” is the most original and thought-provoking part of the book.
Traditionally, scholars look at firms from the perspective of an economy designed and controlled by a capitalist elite, but Kay turns this idea on its head: in his pluralist or market economy, which allows freedom to experiment but quickly terminates failed experiments, no one is in control for long.
When capital-intensive plants and machinery were the means of production, the capitalist elite had permanent power over workers. But now control resides with professional managers who derive power not from ownership of the physical means of production or accumulated wealth, but from their transitory role in the firm. Thus, “workers are “the means of production”—and Kay’s italics are important.
On this basis, the importance of capital needs to be redefined and redefined, argues Kay, a former FT columnist. In a suggestion that will shock those who actually run companies or try to get them off the ground, the capital requirement of modern companies is relatively modest. But it is hard to argue with the observation that the modern IPO is more a means of enabling founders to extract capital than of raising it.
This shift in the relationship between soft intellectual capital and hard financial capital is one reason Kay believes we need to re-evaluate the language with which companies are analysed. If the term “capital” is to be useful, it should extend beyond financial capital to human, social and natural capital. And, as a financial metric, it is more useful as a measure of personal wealth than as a factor of production.
Profit should no longer be seen as a return on financial capital, but rather as economic rent earned by providing goods and services to customers. Economic rent thus becomes a term of approval, while “rent seeking” remains a term of disapproval. It is an interesting approach that may or may not redefine the study of business and management, but it should certainly give theorists pause.
The book is more than occasionally and sometimes unnecessarily scathing. Kay names a lawyer in ill health who “retired early to study history at Oxford, but lived long enough to see the chaos he had helped cause.” The anonymous decision-makers (or non-decision-makers, as Kay would see them) at Oxford University, where Kay was briefly founding dean of the business school, will not enjoy certain passages, and neither will some equally anonymous former colleagues at the failed HBOS bank, where he was once a non-executive director. Other economists are fair game – “disconcertingly, Piketty seems to suggest…” – as is the financial services sector, “driven by managerial egos and the fees they generate.” The reputations of fallen corporate idols such as Sandy Weill, Welch and Eddie Lampert are ruthlessly demolished.
Score-settling aside, this is not a grumpy book and will interest the serious general reader capable of handling intellectually challenging ideas. It will disappoint those expecting a vision of the future of the 21st-century corporation and there may be a feeling that it stops short of considering the latest in cutting-edge business practices. For example, there is barely any mention of artificial intelligence, which could form a third wave and will undoubtedly affect the social aspect of business relationship management, on which Kay gives high marks. A forthcoming second volume, which will examine the implications for both business and public policy of what is happening in contemporary business, may provide an opportunity to correct that.
The Corporation in the 21st Century: Why (Almost) Everything We’re Told About Business Is Wrong By John Kay Profile Books £25, 448 pages
The author is the author of several books on the City and Wall Street.
John Kay will speak at the FT Weekend Festival September 7th
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