Why we manage our companies so badly

“The best leader knows how to make his followers actually feel power themselves, not merely acknoledge his power.”

Mary Parker Follett, 1933 [1]

“Above all, the assumptions of Theory Y point up the fact that limits on human collaboration in the organizational setting are not limits of human nature but of management’s ingenuity in discovering how to realize the potential represented by its human resources.”

Douglas McGregor, 1960 [2]

“Perhaps this is the current problem: too many who presume to lead do not see more clearly and, in defense of their inadequacy, they all the more strongly argue that the ‘system’ must be preserved - a fatal error in these day of candor.”

Robert K. Greenleaf, 1970 [3]

"The first and often the main reason for managers' reluctance to face the problem of making the worker successful is a confusion of power and authority in the minds of managers. Managers fight the demand for worker accountability [...] They believe their own authority will be undermined if they 'give up power'.”

Peter Drucker, 1974 [4]

“’Our troubles lie entirely in the work force.’ - The supposition is prevalent the world over that there would be no problems in production or in service of only our production workers would do their jobs in the way that they were taught. Pleasant dreams. The workers are handicapped by the system, and the system belongs to management.”

William Deming, 1980 [5]

“The right to be right (in your management’s eyes or your government’s eyes) is irrelevant; it’s only the right to be wrong, that makes you free.”

Tom DeMarco, Timothy Lister, 1987 [6]

For over 100 years, we have been grappling with the question of how to manage and organize companies "correctly". During this time, a lot has been done to increase productivity, but mostly without really raising the potential of the people who work there. According to a study conducted by Ernest & Young in 2023, there is a clear, positive correlation between employee satisfaction, motivation and opportunities for participation. Unfortunately, according to the study, in 83% of German companies it is still the manager alone who makes the final decision [7].

For some reason, the intellectual debate on the subject of leadership and organization, which is reflected in the quotes above, does not reach those who determine what happens. At best, we see local effects, driven by individual perpetrators of conviction. And we see a flourishing consulting market that is trying to anchor a more participative way of thinking in companies.

The system hardly seems vulnerable: We simply remain true to our hierarchical tree structures with more or less authoritarian leadership behavior.

Personally, that makes me sad. And at the same time it arouses my curiosity: Why is that? What mechanisms work so effectively in the background that a sustainably more cooperative, more human and more social corporate management and organization does not prevail?

In the following sections, I would like to address precisely this question.

Management and fashion

First of all, we seem to have become accustomed to standing still. Although there is - and I count myself among them to a certain extent - a thriving scene of people who preach change and in some cases have also implemented this very successfully in their own environment or made it their business model, actual change in a global sense has failed to materialize.

Topics and approaches gain popularity, are on everyone's lips, are advised and trained, but are then all too often forgotten again. All that remains are process relics and ways of speaking that can be assimilated into the existing system and perhaps even make the system more successful. In essence, however, little changes in the basic structure. The commercialization of consulting and coaching new approaches does not exactly increase the quality: in fact, much of what is presented as new is just old wine in new bottles (see also the quotes at the beginning ...).

On the other hand, this pattern encourages people to dismiss anything that deviates from the norm in terms of management and leadership as fashionable. This is a natural, conservative defense reflex to resist change. In fact, it is even a rather miserable reflex, because it is usually only accompanied by a meta-dealings with the new ideas and does not deal with their core statements in any depth.

In my view, there is no need for this devaluation of new ideas through the stigma of management fashion: the hierarchical-authoritarian system is protected by something other than fatalists who deduce from the recurring failure of more progressive approaches in organizational development and leadership that the best possible state has already been achieved in principle and banish everything else to the world of fantasy.

The external, preserving mechanisms

This consideration takes us a step further in answering the initial question in that it supports the systemic perspective of the self-preserving capacity of organizations. The fashion discussion must be placed in this context.

But this is not the only system-preserving mechanism. I would like to discuss two other mechanisms that primarily influence companies from the outside.

The organizations that restructure the companies are completely aligned with the hierarchy within the companies. Be it trade associations, clubs, forums, etc., their addressees are either people with money or with power. Power is expressed on an economic level through an elevated, individual position in companies. The general expectation is that once you occupy such a position, there is a conscious will to exercise power within your own sphere. I myself have often experienced that if you do not demonstrate this, e.g. if you make clear the need for internal coordination when making a decision, this is perceived as a weakness and a relativization of your role. This kind of behavior is outside the expected horizon.

Legal regulation has a similar effect. While, on the one hand, it increasingly demands social responsibility from companies, firstly towards their employees and, in the sustainability debate, increasingly towards society as a whole, on the other hand, it focuses the responsibility for a company's actions on individuals. When the chips are down, it is no longer the legal entity of the organization that is liable, but the management or the board itself.

This individualization inevitably leads to special rights that those who ultimately have to take the fall for the corresponding decisions want to exercise. As a board member myself, I feel the same way. When it comes to topics such as data protection or social security issues, participative approaches to corporate management reach their limits.

Both the construction of the organized social space of companies (associations, etc.) and legislation have a stabilizing effect on hierarchical, authoritarian structures. This is simply because their point of connection to the corporate systems is always the manager exercising power.

Being authoritarian seems less risky

Now that we have become familiar with the system's defensive reflexes and have become aware of the external, preserving mechanisms, I would like to become more explicit and look at the internal factors of companies that support the hierarchical-autocratic system.

My focus here is on the role of corporate management. Here we need to differentiate whether we are talking about managing directors or board members and also whether or not they hold shares in the company they manage.

The salaried management - or the board of directors, which remains the same at this point - is committed to the owner structure and is appointed by it. The owners are primarily driven by capital interests and the type of company management does not matter to them as long as it is economically successful and scandal-free. The external profit expectation rests entirely on the management.

This makes the step towards more participative management with shared responsibility in the organization a personal matter for the management. Mistakes can be made in the organization that endanger the very economic existence of the management, as the owners can be forced to resign as a result.

But even quite independently of this case of maximum escalation, it is more likely to be the exception if a board of owners - be it the shareholders' meeting or the supervisory board - reacts with understanding to the fact that certain decisions are deliberately delegated to the organization by the appointed company management and thus those who are actually responsible for increasing the owners' capital limit their own influence in the company. In these circles, many people have the feeling that the buck stops here ...

The owners' materialistic expectations, combined with the dependency of the company management, promote structures in which the company management keeps all the strings in its own hands. It almost inevitably seems more personally advantageous and less risky to restrict the degree of freedom and involvement in the company, as it is ultimately about one's own skin.

Management as a journeyman

In large companies in particular, Management Board members often receive share options or even share packages as part of their remuneration. In addition to the fundamental dependency of the Management Board described in the previous section, an additional, extrinsic motivation is introduced here, which is intended to create an alignment of interests between the Supervisory Board and the Management Board. The side effect is that the tendency to focus decisions on the Management Board body is strengthened: When in doubt, there is not only something to lose, but possibly quite a lot to gain. This ultimately opens up scaling opportunities for individual wealth creation. A similar, but not quite as strong effect is achieved by setting targets for company management.

Ultimately, the owners are doing themselves a disservice. If company management follows the carrot it has been given, its focus is on simple, less sustainable decisions that can be implemented within the expected legislative period. In order to be able to pursue these intensively and unhindered, the creation of the greatest possible penetration in the company is apparently the best solution. And once again we are at the point where the hierarchical-authoritarian system for satisfying individual needs is ahead. Whether all this helps to equip the organization for the future remains to be seen.

Overcoming the inner bastard

It becomes even more complicated if the company management holds a large number of its own shares. In a GmbH, this is more likely to be the case if the management has actively bought in or was part of the founding team. The same applies to AGs that are not traded on the stock exchange.

The company management involved now has a greater degree of freedom to establish more participative forms of organization because there is no risk of separation. At the same time, however, practice has shown - and I have experienced this myself - that owner interests in the form of monetary optimization cannot necessarily be reconciled with the interests of a workforce involved in the sense of co-determination. Although it is understood that there are decisions that are made by the owners from the owners' perspective, the gray area of this decision-making primacy in the operational business is difficult to resolve. The danger of going too far here in the conflict of interests, even as a progressive-minded managing director, and thus nipping the seeds of participation and initiative in the bud is great.

This situation becomes particularly challenging during phases of change in the ownership structure. If the management knows that at a certain point in time the company value will be determined according to defined rules and KPIs and the sales value of their shares will be calculated from this, the temptation to take over decisions that were previously communalized is great, even in an established, participative system.

But as difficult as it may be, it is possible as a managing owner to develop and remain faithful to a participative, non-hierarchical organizational and management approach.

However, you must be aware that this may involve personal material losses. Not because the company is less successful in an alternative organizational and management approach, but because there is no short-term (and in the long term harmful for the company) opportunity gain. This is because in a mature, participative organization, employees think entrepreneurially and therefore sustainably in the interests of the company. Dodge tactics to maximize short-term profits for the ownership structure have little appeal there.

Milton Friedman sends his regards

All of the above can be traced back to the fact that

1. the purpose of the vast majority of companies is solely to make money. This is why people invest in companies. This approach has been with us since the end of the 1970s [8].
2. the responsibility for economic success is individualized. The individual either participates directly in the profits or works for investors who have a corresponding expectation.
3. the individualization of responsibility suggests a bundling of power. The exercise of power is the most trivial form of establishing the ability to act, and without the ability to act, no responsibility can be assumed.

The remaining degree of freedom of this derivation lies in the third point. The relationship between the ability to act and the bundling of power is not unambiguous*.*

However, taking the alternative path is not the trivial, easiest way. Building a participative, hierarchy-reduced structure requires ...

1. ... the realization that the purpose of the company from a capital perspective, namely to earn money, is not called into question. This has already been proven many times (including by our own organization). However, in addition to the pursuit of profit, participation also brings other, organization-specific and social values to the fore.
2. ... the realization that, as a managing director or board member, I do not lose my ability to act even in such a structure. Unlike in the authoritarian structure, my success depends on establishing effective decision-making procedures and having the best argument.
3. ... a slight willingness on the owner's side to accept material losses for these convictions. These sacrifices are investments in the sustainability of success.

If I do not have the necessary attitude for this, it cannot be easily created. I need a strong drive as to why I want to take this more arduous, less recognized path. This may lie in the way in which you envision collaboration, in the image of people or in the view that companies managed in this way are more successful in the long term. An understanding of this on the part of the owner is also essential, which is easily achieved when the owner and company management form a personal union.

I remain an idealist

The analysis thus comes to a less than encouraging conclusion. It seems that the degree of freedom to develop alternative management and organizational approaches is massively restricted by market and social forces.

All those who have set themselves the goal of making companies more humane and participative should be more than aware of these systemic limitations. As long as there are no fundamental changes to these framework conditions, I believe we will remain stuck in hierarchical and authoritarian structures.

But I am not losing hope. Milton Friedman's nimbus - "The social responsibility of business is to increase its profits" [8] - has begun to crumble since the 2007 financial crisis at the latest. Today, it should actually be in the interest of every entrepreneur to create structures on their own initiative that do not just exhaust the scope of what is legally possible in order to make a profit. Rather, what is needed is the development of an awareness within the organization that reflects the social climate and also regulates the visible actions of the organization.

In my view, this is best achieved by implementing a higher degree of participation. Participation promotes a culture of debate, alternative value concepts are openly reflected upon and are incorporated into the decision-making process. It is no longer just up to the capital-driven management to determine what happens in the company.

The more companies adopt this way of thinking and take on more social responsibility, the lower the risk of provoking the emergence of an increasingly dense network of legal regulations.

Unfortunately, the trend towards rethinking has so far only been very tentative. However, this does not bother me: I am an idealist in this matter and have firmly resolved to remain true to this.

Sources

[1] Metcalf, Henry C.; Urwick, L., “Dynamic Administration - The Collected Papers of Mary Parker Follett”, Sir Isaac Pitman and Sons LTD, London, 11. Auflage, 1965

[2] Greenleaf, Robert K., “The Servant as Leader”, Center of Servant Leadership, Erstausgabe 1970

[3] McGregor, Douglas, “The Human Side of Enterprise”, Annotated Edition, McGraw-Hill Companies, 2006

[4] Drucker, Peter F., “Neue Management-Praxis”, Econ-Verlag Düsseldorf, 1974

[5] Deming, William E., “Out of the Crisis”, MIT, 1982

[6] DeMarco, Tom; Lister, Timothy, “Peopleware - Productive Projects and Teams”, 3rd Edition, Addison Wesley, 2013

[7] Ernest & Young, “EY Jobstudie 2023”, 2023, https://assets.ey.com/content/dam/ey-sites/ey-com/de_de/news/2023/05/ey-jobstudie-motivation-2023.pdf

[8] Friedman, Milton, “A Friedman doctrine - The Social Responsibility of Business Is ti Increase Its Profits”, The New York Times, 13.9.1970, https://www.nytimes.com/1970/09/13/archives/a-friedman-doctrine-the-social-responsibility-of-business-is-to.html