Why do corporations elicit such powerful love-hate responses? On the one hand, amid the decay of influence and legitimacy of other institutions — such as states, political parties, churches, monarchies, or even families — the corporation has emerged as perhaps the most powerful social and economic institution of modern society. Versatile and creative, the corporation is a prodigious amplifier of human effort across national and cultural boundaries. Corporations, not abstract economic forces or governments, create and distribute most of an economy’s wealth, innovate, trade, and raise living standards. Historically, they have served as a pervasive force for civilization, promoting honesty, trust, and respect for contracts. As the market sphere has grown to annex areas such as health and sports, companies loom even larger in the lives of individuals. People look to them for community and identity as well as economic well-being.
Yet, in the closing year of the century, corporations and managers suffer from a profound social ambivalence. Hero-worshipped by the few, they are deeply distrusted by the many. In popular mythology, the corporate manager is Gordon Gecko, the financier who preaches the gospel of greed in Hollywood’s Wall Street. Corporations are “job killers.”
There is so much uncertainty about what companies represent that Bill Clinton in the United States and Tony Blair in the United Kingdom set up reviews of companies’ roles. Big business arouses big suspicion in France, Korea, and Germany. Even in the United States, executive salaries have caused a public furor, while the equally astronomical remuneration of entertainers, entrepreneurs, and bond traders raises scarcely an eyebrow. When asked by pollsters to rank professionals by ethical standing, people consistently rate managers the lowest of the low — below even politicians and journalists.
People are right in their intuition that something is wrong. But this is not because large corporations or management are inherently harmful or evil. It is because of the deeply unrealistic, pessimistic assumptions about the nature of individuals and corporations that underlie current management doctrine and that, in practice, cause managers to undermine their own worth.
It has been said that every living practitioner is a prisoner of the ideas of a dead theorist. Obsessed though they are with the “real world,” managers are no exception. Ironically, in their day-to-day actions and choices, the hardest driving of today’s managers are conforming to theories to which the real “real world” no longer corresponds.
1. M.E. Porter, “What Is Strategy?,” Harvard Business Review, volume 74, November–December 1996, pp. 61–78.
2. S.S. Roach, “The Hollow Ring of the Productivity Revival,” Harvard Business Review, volume 74, November–December 1996, pp. 81–89.
3. M.E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors (New York: Free Press, 1980).
4. O.E. Williamson, “Comparative Economic Organization: The Analysis of Discrete Structural Alternatives,” Administrative Science Quarterly, volume 36, June 1991, pp. 269–296, p. 279. See also:
O.E. Williamson, Economic Institutions of Capitalism (New York: Free Press, 1985).
5. Elsewhere, we have used the terms “allocative” and “adaptive” in place of “static” and “dynamic,” respectively, to better distinguish the type of efficiency that results from two types of resource deployments. Allocatively efficient deployments are those that tend to allocate resources to their best-known use (i.e., “best” as defined by the combination of resources and forces that exist at any time). As Schumpeter cautions, however, these allocatively efficient deployments may prove in the long run to be mistakes. Adaptively efficient deployments are those (often allocatively inefficient) deployments that facilitate the pursuit of new and possibly better uses (thus permitting the resources and forces that define what is allocatively efficient to more efficiently adapt to possibilities that arise). See:
J.A. Schumpeter, Capitalism, Socialism, and Democracy (London: Unwin University Books, 1942), p. 83;
D.C. North, “Institutions,” Journal of Economic Perspectives, volume 5, Winter 1991, pp. 97–112, p. 80; and
P. Moran and S. Ghoshal, “Markets, Firms, and the Process of Economic Development,” Academy of Management Review, forthcoming.
6. H.A. Simon, “Organizations and Markets,” Journal of Economic Perspectives, volume 5, Spring 1991, pp. 25–44.
7. Schumpeter (1942).
8. J. Nahapiet and S. Ghoshal, “Social Capital, Intellectual Capital, and the Organizational Advantage,” Academy of Management Review, volume 23, April 1998, pp. 242–266.
9. C.A. Bartlett and S. Ghoshal, “Rebuilding Behavioral Context: Turn Process Reengineering into People Rejuvenation,” Sloan Management Review, volume 37, Fall 1995, pp. 11–23.
10. This is what Coleman describes as “independent viability” and “global viability” that, according to Moran and Ghoshal, characterize organizations. See:
J.S. Coleman, The Foundations of Social Theory (Cambridge: Harvard University Press, 1990); and
P. Moran and S. Ghoshal, “Value Creation by Firms,” in J.B. Keys and L.N. Dosier, eds., Academy of Management Best Paper Proceedings, 1996.
11. This is a core argument of the theory of internal labor markets. See:
P.B. Doeringer and M.J. Poire, Internal Labor Markets and Manpower Analysis (Lexington, Massachusetts: D.C. Heath, 1971).
12. N. Tichy and R. Charan, “Speed, Simplicity, Self-Confidence: An Interview with Jack Welch,” Harvard Business Review, volume 67, September–October 1989, pp. 112–120.
14. A. Duncan, “Unipart Group of Companies: Uniting Stakeholders to Build a World-Class Enterprise” (London: London Business School Case, 1996), pp. 4–5.
15. S. Ghoshal and C.A. Bartlett, The Individualized Corporation (New York: Harper Collins, 1997).