The Pragmatic Theory of the Firm is Rooted in Systems Thinking

In the current issue of Capitalism and Society, a publication of Columbia University, an article by Bartley J Madden is published. Understanding the Benefits of Capitalism through the Lens of a New Theory of the Firm , introduces The Pragmatic Theory of the Firm.

Bartley J Madden, is an investor who recently gifted $3million to support the creation of Madden Centre for Value Creation at Florida Atlantic University, with a focus on the “promotion of value creation for widespread prosperity.”

By way of introduction to this theory of the firm, Bartley argues, “what is invariably overlooked by critics, and even many supporters of capitalism, is the need for a viable theory of the firm that treats the firm as a holistic system and brings clarity to the purpose of the firm.” He then offers The Pragmatic Theory of the Firm as one such theory saying “It is rooted in systems thinking.”

He goes on to introduce the four-part purpose for the firm saying it should include a “social as well as economic mission”, a “commitment to building and maintaining win-win relationships with all of the firm’s stakeholders,” a commitment to sustainability, and the goal of continuous gains in efficiency and sustained innovation, to enable the firm to provide its investors with competitive returns.

Bartley also states, “importantly, the finance principle of maximizing shareholder value is best positioned not as the purpose of the firm but as the result of a firm successfully achieving its purpose.” He emphasises this point again in his conclusion saying,

“the seemingly never-ending debates about shareholder capitalism versus stakeholder capitalism can be defused by understanding that maximizing shareholder value is best positioned not as the purpose of the firm but as the result of a firm successfully achieving its four-part purpose.”

Readers familiar with the views of the Enlightened Enterprise Academy will not be surprised to learn that I agree with Bartley. I have frequently argued:

1. Any business or organisation should be viewed as a value creation system of systems, and that systems thinking should be viewed by directors and executives as a core competence. ?
2. The never ending debates about shareholder versus stakeholder capitalism is based on a false dichotomy.
3. Social contract obligations, not only the economic mission, must be a focus.
4. Collaborative advantage is at least as important as competitive advantage
5. The profits upon which shareholder returns depend should be viewed as a by-product of creating real value.

In relation to the first point, we currently offer the programme Critical Systems Thinking and the Management of Complexity to address the widespread "Systems Thinking Capabilities Gaps" that most directors and executives have, and their organisations have.

About this programme Bartley said,

“If I were granted one wish to be implemented in order to improve the long-term performance of the companies in my stock portfolio, what would it be? Easy--- All board members of these companies must attend this online course.”

In relation to the second point, we ran four online conferences in the "Beyond the False Dichotomy" series.

There is much more I would like to say about his article, but I will restrict my additional comments to what he says about systems thinking in this piece, as I regard this as being or primary importance.

That the Pragmatic Theory of the Firm is rooted in Systems Thinking is the reason it is so valuable. It is surprising then, that whilst all the functions in the system are taught in business school, systems thinking, which would show how they relate to the whole, very rarely features on MBA programmes.

To me this is astounding, because what is it that directors are directing and managers are managing? Systems, of course!

Teaching systems thinking would require cross-faculty, multi-disciplinary, collaboration. And that, I am told, explains why it is rarely taught in business schools - because faculties rarely collaborate.

No wonder few directors and managers have the systems thinking capabilities they need to direct and manage well, especially in an increasingly complex world, with ever more complex organisations to run. ???

Bartley notes that “as managers rise in the corporate hierarchy, the more important becomes their systems-thinking skill.” And he cites the former CEO of Unilever, Paul Polman, to back up this argument. Polman said…

“I truly believe that future leaders will be systems thinkers. It is inconceivable that anyone will successfully steer companies, or countries, through our volatile world without understanding the inter-dependencies between the systems on which we depend.”

Note: Polman’s remarks relate not only to business but to governments and all other organisations. And, let me echo, and elaborate on, Polman’s words to stress a point…..

As managers rise in the corporate hierarchy, the more important becomes their systems-thinking skill, and the more dangerous become any systems thinking capabilities gaps. But, as most board directors are former executives, and because the board bears ultimately responsibility for the actions of the executive, the greatest problems caused by systems thinking capabilities gaps originate in the boardroom.

Very usefully, Bartley explains the importance of systems thinking in relation to the other elements of his Pragmatic Theory of the Firm – the capacity for knowledge building, innovation, organisational systems and structures, recruitment policies, understanding and managing product and organisational lifecycles etc. I would urge you to read the article in full to appreciate these points, and I will refer to them in my future writing.

To conclude I suggest you reflect on your own systems thinking capabilities gaps, and those of the board and executive team in your organisation. Then consider the dangers of trying to steer a company, organisation, or country, through our volatile world without understanding the inter-dependencies between the systems on which we depend.

If you decide you, your board, or executive need to address systems thinking capabilities gaps, check out the new prospectus for our Critical Systems Thinking and the Management of Complexity programme, and consider joining our next cohort on September 26th. DOWNLOAD THE PROSPECTUS NOW ?

JOIN THE ENLIGHTENED ENTERPRISE HUB

It is quick, free and easy to JOIN ?????