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Business writers of a certain age — John Kay is one, I am another — have lived through two major waves in the theory and practice of management during our professional lives.
The first was the shareholder value movement of the last quarter of the 20th century in which incentivised business leaders relentlessly drove short-term profits to boost share prices. The second started when the knowledge economy brought in a younger, cooler crowd 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 provides a brilliantly erudite account of them and their study. Using the collapse of former corporate icons such as GE, ICI and Deutsche Bank as examples, the author’s message from the first wave is that financialisation works better for the financiers than the financed and that, taken to extremes, shareholder value was indeed — to paraphrase its one-time flag-bearer Jack Welch, GE’s hard-charging former chief executive — the dumbest idea in the world. And yet, although partially discredited and softened by wider stakeholder concerns, shareholder value remains influential in many boardrooms.
This is true even though new economy companies such as Meta, Apple and Alphabet, distinguished from their predecessors in relying on intellectual rather than financial capital, redefined management. Out went command and control and transactional relationships, in came collaboration, involving employees in decision-making and a shared sense of purpose.
Outsourcing and the purchase of specialist services replaced in-house self-sufficiency in hollow corporations. Problem-solving replaced lean production as the principal competitive weapon, requiring a softer management approach with social as well as commercial consequences.
But the interplay of these waves led to the paradox that consumers love the products but hate the producers. Despite offering breathtakingly innovative products and services, global business has lost the trust of the public. Disrespect is so severe, Kay believes, that “as a result of the erosion of business ethics and the evidence of indefensible inequalities, the twenty-first-century corporation faces a crisis of legitimacy”.
This is all a good story well told but it has been told elsewhere and the detail sometimes gets in the way of the author’s important assertion that academic models have not kept up with these changes. The idea that “business has evolved but that the language that is widely used to describe business has not” is the most original and thought-provoking part of the book.
Traditionally, academics look at business from the perspective of an economy designed and controlled by a capitalist elite, but Kay turns this on its head. In his pluralist or market economy, which allows freedom to experiment but is quick to end unsuccessful experiments, no one is in control for very long.
When capital-intensive plant and machinery were the means of production, the capitalist elite had permanent power over the 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 transient role in the business. Thus “the workers are the means of production” — and Kay’s italics are important.
Building on this, the importance of capital needs downgrading and redefining, Kay believes. In a suggestion that will jar with those actually running businesses or trying to start them up, the capital requirement of modern business is relatively modest. But it is difficult to argue with the observation that the modern IPO is more a means of enabling founders to extract capital than to raise it.
This changed relationship between soft intellectual and hard financial capital is one of the reasons Kay believes we need a reappraisal of the language with which business is analysed. If the term “capital” is useful at all, 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 as economic rent achieved by providing goods and services to customers. Economic rent thus becomes a term of approbation, whereas “rent-seeking” remains one of disapproval. It is an intriguing approach that may or may not redefine the study of business and management but it should certainly make the theorists think.
The book is more than occasionally and sometimes unnecessarily waspish. Kay names a barrister in poor health who “retired early to study history at Oxford but lived just long enough to see the havoc which he had helped cause”. Unnamed decision makers (or non-decision makers as Kay would see them) at Oxford university, where Kay was briefly founding dean of the business school, won’t enjoy certain passages and neither will some also unnamed former colleagues at the subsequently failed bank HBOS, where he was once a non-executive director. Other economists are fair game — “Mystifyingly, Piketty seems to suggest . . . ” — as is the financial services sector, “driven by managerial egos and the fees it generates”. The reputations of fallen idols of the corporate sector 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 able to handle intellectually challenging ideas. It will disappoint those expecting insights into the future of the 21st-century corporation and there is perhaps a sense that it stops short of considering the very latest in cutting-edge business practice. For example, there is barely a mention of artificial intelligence, which might form a third wave and which will certainly affect the social side of managing business relationships, on which Kay sets great score. A forthcoming second volume, which will examine the implications for both business and public policy of what is going on in contemporary business, may provide an opportunity to put that right.
The Corporation in the 21st Century: Why (Almost) Everything We Are Told About Business Is Wrong by John Kay Profile Books £25, 448 pages
The author is the writer of several books on the City and Wall Street
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