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The Nature of Organizations Interview with Arie de Geus David Creelman
Arie de Geus, who for many years was a senior manager at Royal Dutch/Shell, has earned admiration for his work on knowledge management and scenario planning. His book, The Living Company, remains one of my favorites - an inspiration to anyone who aspires to create an organization that is more than a machine for generating money. David Creelman spoke to Mr. de Geus about the nature of organizations.
AG – It worries the hell out of me so that I hardly know where to begin. I think the cause of this lack of commitment is excessively efficiency-oriented personnel policies. These reached their high point in the late1980s and early ‘90s, the epoch of re-engineering and of "employability." Firms lost so much trust that the new generation felt it was stupid to believe in the old-fashioned value of loyalty. Companies were very clear in saying, "We're not going to give you a job for life." They said, "Do come and work for us for a couple of years, we may then throw you out but at least we'll have increased your employability." The impact of that era is still working its way through the system. Although there is never just one explanation for an important phenomenon like this, I believe deep in my soul that it was that efficiency orientation that ended the era of trust.
AG - This poses the question, What is the nature of an organization? If the CEO doesn't belong to the company anymore and if the people who man it are only bundles of skills being bought for a limited purpose before being disposed of, what then is the essence of the organization? Are shareholders the essence? Or, are managers the essence? Which can't be, if even the CEO is short-term. Is an organization the abstract transactional entries on the register of a chamber of commerce? I can't tie that up with the reality of companies I know. The alternative view is that companies are communities of human beings that come together to produce goods and services. If this is so, the question becomes, Who are the members of this community? If employees don't consider themselves to be members, and shareholders tell management they are not necessarily long-term members either, then we see a hollowing out of companies, which is the source of my concern. This hollowing out is one reason why I think we are seeing a shortening in the life expectancy of companies. As you probably know, at Shell I looked at the average life expectancy of companies in North America, Europe and Japan, and it was then below 20 years. Since then I've done a partial re-visit of that research and found that for Europe and Japan the average life expectancy is down to 12.5 years. I think we are killing off companies at a very fast rate. This transactional attitude, whether it be shareholders, the employees, or management, leads to an exploitation of companies, almost a rape of the commons. That is especially worrying because we now live in a situation in which human talent has become the critical element of commercial success. It's clear in your industry that it's not the quality of the printing press or the computers that make a publication a success but rather the quality of the human talent. Even in capital-asset-based industries like the oil industry or automobile industry, success is largely dependent on the human talent. A beautiful example is that the company to beat in the automobile industry is Toyota. Why is it Toyota? It's because consistently over the decades Toyota has been at the forefront in the design of the cars, the design of the manufacturing processes and the design of the marketing. Basically, Toyota gets more out of the talent working for it than other automobile companies. Human talent works better in teams and these teams get better if they stay together over time. I believe that organizations, just like humans, learn over time. There is an accumulation of experience and companies know more when they get older. In this world where companies treat people just as a bundle of skills to be hired for a limited period of time we don't create loyalty and we don’t create enduring teams. If human talent is a commodity you buy off the shelf then you run it as efficiently as possible until it wears out. Behind this sort of thinking is the use of the word "efficiency" as if the essence of business is simply being efficient. That may have been the case when businesses relied mainly on capital; however, when business relies mainly on human talent the key word is not efficiency, but effectiveness. By that I mean you have to run business in a way that gets the most out of the human talent that you have been able to attract into your business.
AG - We must not make the mistake of thinking that the people who populate the management ranks in companies are stupid people, that is not at all the case. They are, either consciously or sub-consciously, very aware of the shift from maximizing the use of capital assets to maximizing human capital. Business people recognize that human talent is a critical success factor and duty number 1 is to get access to that talent. We have seen more and more companies increasing their recruitment qualifications. They are not necessarily looking for higher educational levels, but they are much more critical towards, shall we say, the potential of the people they are hiring. Another notable development is how far they search for talent. Firms are poaching talent from South Africa and South America, not to mention India. There are talent scouts all over the place. This is particularly true in the area of health. Once you have the talent, the issue is how to develop it. Ten or 12 years ago I noticed that companies, particularly in America, would say that training was pointless since you could just hire what you needed on the open market. That attitude surprised me as a European. Now I find that practically everybody talks about training and development. They are sending people to universities or starting their own universities. Another clear change in the attitude of business people is that I can't recall seeing any more talks in HR conferences on the subject of "employability." Instead I see the topic of "retention." Although we're not very successful at retention, it clearly is getting a lot of attention. So we shouldn't create the impression that business is not reacting to these issues. If they are not succeeding it gets back to the issue of why the transactional mindset is so prominent. And it is because previous attitudes and actions led to a loss of trust in the incoming generation—that is really very fundamental. That loss of trust hasn't disappeared and has been reinforced by the fact that businesses, even if they're trying to do the right things around hiring, developing and retaining talent, run up against the fact that the ultimate power lies still, by law, with shareholders. Shareholders nowadays are almost always institutional shareholders—pension funds or insurance companies. The little old lady coming down to the AGM from the Highlands is gone. They have their own goals and they want to maximize their return on investment. As a result the pressure on corporate management in terms of the reduction of their time horizon is just tremendous. As I read the newspapers and talk to business people it sounds like the maximum time horizon that management is allowed to think about is one quarter. Twelve months is being treated as long term.
AG - If you are in a business where the length of a project cycle is 15, 25 years, or more then an attitude that forces you to keep your eye firmly on the next quarter’s financial statements is not going to help you run that business with a view to long-term survival. A short-term view can be very detrimental to the long-term goals of the corporation. I'm fairly certain that this is one of the causes of the reduction in the life expectancy of companies.
AG - We need to start a discussion about the influence of the current company legislation on the real nature of business as it has developed over time. The basic concepts of business law are a hundred or more years old; they go back to the period when capital was the critical success factor, to the days when people were talked about as "hands."
AG - I hope that the present debate about governance will create some sort of common opinion over time on what needs to be done. I mention governance because that is where the tensions between law and corporate reality come to a head. Secondly, governance issues are of a nature that attracts wide public attention. The third reason is that it is here we come to the issue of power: Who really has power in the corporation? In the Anglo-Saxon countries it's quite clear the final power is in the hands of the shareholders. In continental Europe we have had experiments with stakeholders, such as company councils and trade union representation—these are all on-going experiments that are still only variations on the 19th century context of our legislation. In the little writing I've done on this subject the only conclusion I've come to is that companies should be looked at the same way we look at nation states. In a nation state we do not allow outsiders, be they other countries to whom we export our goods ("customers"), or countries/institutions who invest money in our country, to tell our "national CEO" what to do. In a nation state, power comes from inside. In a democratic society, power is distributed in a way that keeps checks and balances and avoids autocratic concentration of power. Admittedly, decision-taking is slow and frustrating, yet these countries are more enduring and flourishing than any dictatorship. I suspect this is the direction we should be going for company governance.
AG - Where the laws don't change quickly enough, and businesses are weakened, I believe mankind will find a way out. An encouraging sign that I'm beginning to see is that human-talent-based companies are looking for legal constructions other than the limited liability company – that typical product of the 19th century capital based economy. Obviously, there are partnerships. Also, in many countries, as an alternative to limited liability companies, there are legal structures that avoid the external pressures from the people who happen to hold shares and have objectives very different from the company-insiders. In Europe there is an interesting debate about what are called "mutuals" in the UK, or "co-operatives" in continental Europe. Some people want to do away with them, and pocket the accumulated value that previous generations have built up, but at the same time, there are some very interesting things going on. In Spain one of the most successful, if not the most successful, companies is a co-operative called Mondragon, which has a very democratic-like management structure. By being a co-op, power is internalized and it completely avoids the short-term pressure that comes from shareholders and financial analysts. Also, a limited liability company is a license for the concentration of power and for the exercise of absolute power from the top down. That's not the case in a partnership or co-op. Another interesting observation from the world of co-ops is that the only big bank in the world with a triple-A credit rating is the Dutch co-op Rabobank. Finally, and possibly even more significant, I am beginning to meet more and more of the new, young generation which is beginning to experiment with organizational structures that avoid the weaknesses of current company law.
AG - Yes, but it would probably be better to change the law, because otherwise there are many companies that won't get out of the trap and we will continue to have a very high corporate mortality rate. In addition to the trend toward arrangements like partnerships and co-ops, there has been a trend for firms with large family holdings to buy back shares and bring them back into the private sphere. There may be many reasons to do this but undoubtedly one of the reasons is to get out from the excessive pressure for short-term gains that comes from the institutional shareholders. It is these shareholders who fire all the CEOs that you mentioned earlier.
AG - I think the reason is that I see HR as being the critical activity of top management in companies. That was in the past, and nowadays, when human talent is the critical success factor, it is clearly even more so. You have modern line management, if I may use that old term, who understand that their business success depends on the way they manage people. But you also need some rules of the game and some referees to whistle when one of the line managers kicks the ball out of touch. In my view, HR is the referee and the guardian of that process. I know the man isn't as popular as he used to be, but remember that Jack Welch often mentioned that he spent 40 to 50 per cent of his time on people matters. That's a reflection of how good line managers are at recognizing that the world is changing, and that success relies on people.
This interview was first published on www.hr.com and is reprinted with kind permission.
David Creelman is Senior Contributing Editor for HR.com. He has also embarked on several new ventures including: Helping companies value intangible human capital, (Un)consulting to companies who have got bogged down in scorecard implementations, A magazine to help managers lead more meaningful, ethical lives. Prior to working in HR, David worked in Finance and IT. He has an MBA and an Hons B.Sc. in Biochemistry and Chemistry.