The Telegraph
Since 1st March, 1999
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- The real scarcity is of human capital, not money

Professors of management of Indian origin have developed high reputations for their thoughts in the United States of America. Sumantra Ghoshal was among the tallest of them. A simultaneous PhD from both Harvard and MIT, he had worked in Indian Oil Corporation before studying abroad and then teaching at INSEAD and the London Business School. He died prematurely at 58.

Sumantra was a frequent visitor to India for spending time at home in Calcutta, as dean in the first few years of the Indian Business School and with the advanced management programme in Bangalore of the All India Management Association, of which I had the good fortune to be course director during the three years that he spent a week at a time in Bangalore for the AIMA. The second week of the programme was his week when he mesmerized the class with practical theory and his chain-smoking.

Ghoshal’s focus was on the management of change and the process of corporate revitalization. He tried to identify the key factors that influence an organization’s ability to achieve radical improvement and surf a rapidly changing business environment.

Among his themes was that market economics failed to take account of “human intentionality”, the element that enables management theories to become self-fulfilling. “A theory that assumes that managers cannot be relied upon by shareholders can make managers less reliable,” he wrote. In another context, William Lazonick of the University of Massachusetts has argued that so-called ‘free’ markets in the West and in Japan are the product of considerable government support and interference. Market economies are not very different from statist ones. Governments have played a major role in Japan’s development, as has the US government’s support with massive expenditures in research and development, and guaranteed sales to many American businesses. Ghoshal’s argument was that management theories and arguments led to behaviours that were not socially responsible.

Ghoshal’s concept of social capital was that the value of an organization’s workforce can be more than the sum of its parts. Corporations had to move from an industrial-age emphasis on “strategy, structure and systems” to a modern-age emphasis on “purpose, process and people”. Thus, the corporation was not a mere consequence of market imperfections but at the heart of the “organizational economy”. The modern business organization is the key to the industrial age. Understanding how it can function better requires a close study of people.

He took issue with just about everything currently done in management — including and especially the role of business academics. Ghoshal wrote: “We — as business school faculty — need to own up to our own role in creating Enrons...It is our theories and ideas that have done much to strengthen the management practices we are all so loudly condemning.” Recent company excesses in the US, from World Tel to Enron, have their roots in ideas developed in business schools over the past 30 years. If managers were seeking ever-more inventive ways of boosting share prices, paying themselves over the odds for doing so and offloading the costs on to society, they were just doing what business-school courses on strategy, transaction cost economics and agency theory had taught them. The conclusion is obviously that managers have to work for more than maximizing shareholder value. They have responsibilities that transcend market valuation alone. Market valuations are more sustainable when embedded in strong ethics, value systems and social responsibility.

Ghoshal said that there was an unspoken academic project to make business studies ‘respectable’ by removing the subjectivity of analysing company behaviour in terms of human choices and actions. Instead, they looked for explanations in impersonal patterns and laws. Management teaching tried to create a kind of business physics. The pretension to science excludes moral or ethical dimensions from management since they are about intentions, not subject to modelling or quantification. Management academics want only to admit strictly economic motivations. They can be quantified. Establishing shareholder value as the one true end of management reduces all the complex variables that go into corporate life to a neat set of equations.

However, the laws of physics are blind; humans and their organizations have intentions and choices and employ strategy — one-step back, two steps forward — that are not available in the natural sciences. Managers, who treat people as opportunists taking chances, encourage opportunism. Governance that assumes that managers are untrustworthy when it comes to maximizing shareholder value without hefty incentives, breeds managers who require huge stock options. A strategy based on the idea that maximizing profits involves a battle for value with employees, partners and society, generates corporate monsters such as Enron, which do in fact distort competition and eventually destroy themselves. To “really wish to reinstitute ethical or moral concerns in the practice of management, we have first to reinstitute them in management theory”.

He said, intellectually, top management understands the need for radical change. Top management also recognizes some of the first steps they must take; but they do not have the courage to do what they see and believe what they need to do. The real problem is not the intellectual gap in knowing what they need to do. It is the courage gap resulting in not being able to do what they know they should be doing.

He said that charismatic leadership is not a pre-requisite for radical performance improvement. Azim Premji or Narayanamurthy have created the highest value for their companies. They are by no means charismatic leaders if charisma is about personality, articulation, and attracting people to follow them. Success has given them a halo. Charisma helps, but it is not a pre-requisite for success. The need is for an ability to inspire confidence in customers, employees, and among the investor community. Premji, Narayanamurthy and many other leaders are authentic, no different from what they appear to everyone. Sincerity, transparency, and unshakeable value systems are more important than pure charisma.

High performance is not only for sunrise industries. Outstanding performance is possible even in an industry that is shrinking. For example, L.N. Mittal expanded his empire by rebuilding sick units to profitability and become the largest producer of steel in the world. Jute has been the worst off among Indian industries. Yet, Hastings is creating new capacities, building new mills because it is breaking through the traditional logjam of owners-versus-employees, owners-versus-trade-unions, and so on, to build partnerships to a shared destination.

Management primarily influences a company’s performance over time. Jack Welch’s “Control your destiny” means that if you become better than the best in whatever you do, you develop control over your destiny.

Ghoshal often talked of “the smell of the place”, contrasting between the cool forests of Fontainebleau (where INSEAD is located) with the tiring heat and humidity of Calcutta in July where he and his family spent vacations. He said that many companies smell of lethargy and defeat. He said that many companies in India have environments that sap away all the energy and creativity. This certainly is true of many public enterprises, family businesses and ‘professionally’ managed companies that are mired in procedure and hierarchy and stifle initiative. The challenge for managers is to change the environment to an invigorating smell that releases entrepreneurship that is captive in the company.

The dotcom bubble taught that money is not a scarce resource. The real scarcity is of human capital and the real issue is true value-creation. The effective CEO must recognize that it is not capital, but people, that is the fundamental issue.

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