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Seeking New Values for the Innovative Corporation

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Sir Edmund LawrenceI was invited to deliver the keynote lecture at the St Kitts-Nevis-Anguilla National Bank Compliance Conference earlier this month (July 2011) and had the honour to meet the bank's CEO, Sir Edmund Lawrence. I also met several members of his management team, including Donald Thompson, his very able Senior Assistant Managing Director, and Stephen Hector, my fellow alumnus of the University of the West Indies Faculty of Law, and the director that is responsible for the bank's legal affairs. During my visit I was very ably assisted by the Executive Manager of the bank's Compliance department, Mrs Pamela Pogson. This bank is highly regarded in the OECS and having met the executive management team, I can see why. Sir Edmund has brought together an excellent cadre of executive management. The rest of the Caribbean has a lot to learn from this banking group of companies.

Donald ThompsonOn receiving the invitation I had suggested, and I thought it was agreed, that I would say some something on the “responsibility” of the directors and executives. In other words, I assumed that I would be expected to lecture on corporate governance.  Corporate governance is an area I am very interested in. It is also a field of study that we do not have good handle on. I was so focused on my original supposition that it never occurred to me that was not what the organizers had intended. It was only later that it became clear that organizers might have instead intended to invite a discussion on “corporate social responsibility.” There is a fundamental distinction between these two areas. The first is concerned with how directors and executives function within the corporation. The second is concerned with how the corporation functions within the society.  When I realized that I would have to give two lectures (the keynote address and a later public lecture), I decided to focus the later lecture on the corporation in the broader society and confine the earlier one to issues arising from the internal responsibilities of the directors and executives.

 

Management and Responsiblity

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MonaIt occurred to me the other day how irresponsible managers usually are. By that I mean to say that managers do not usually hold themselves responsible for the adverse consequence that follow from their bad decisions. Part of the problem stems, in part, because we have not developed, and certainly we do not enforce, effective indices to measure management's successes and failures. It is true, perhaps, that the most effective index of an organization’s success is the increase in its value to its shareholders; but how much of that increase in any case is genuinely attributed to any particular manager? And how can we find out? We have already seen the tendency of the members of modern management to walk away from failure on the basis that we can rarely attribute failure to one person. On the other hand, they all jump on the bandwagon to claim a share of the success. This is certainly not true for any other trade or profession. There are measures of success and failure for every other occupation, whether it is the gardener or the specialist surgeon. Managers and administrators alone are exempt from any assessment.

 

Ghoshal was wrong

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Sumantra Ghoshal

It is not often that you have an academic paper that, in the opinion of other academics, turns the world on its head. Sumantra Ghoshal’s paper, “Bad Management Theories Are Destroying Good Management Practices” is one such paper. At the time he produced the article, which was published posthumously in the Academy of Management Learning and Education, 2005, Volume 4, No 1, 75-91, Ghoshal was attached to the Advanced Institute of Management Research, UK, and the London Business School and was a well-established consultant, business strategist and teacher.

In his article, Ghoshal took an in-depth look at some management theories, in particular agency cost theory and transaction cost theory, that he suggested have had a negative impact on business executives and how they manage the modern business enterprise.

 

Public Service Quality

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Some years ago I carried out a research project on public service quality. The research was designed to show whether the investments in the new public service reforms were justified. The argument was that public service departments should deliver good public service; and the better the public service, the better the public service organization. I used the SERVQUAL instrument to measure public service quality in the new public service agencies and the traditional public service agencies. The expectation was that we would register better public service quality in the new public service agencies, and for the most part the results demonstrated that this is true. However, there was one significant and surprising result. Public service clients thought that they got superior service from the revenue collection agencies!

 

Executive Risk

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Three and a half decades ago Jensen and Meckling published their seminal article on agency cost ("Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure"). They recognised the invidious position in the which the modern executive was place: managing assets that he would almost inevitably apply to his own advantage. Jensen and Meckling were concerned with developing a model that would align the interest of the executive with those of his principals, the shareholders in the enterprise. Their analysis of the inclinations of the modern executive was exceptionally insightful, even if the solution they developed to overcome them, rewarding managers more to align their interests with those of the owners, have not proved to be particularly successful. Greater rewards for the modern executives have just made them more greedy.

To the plethora of risk contemporary investors must now consider a new one: "Executive risk." What are the changes that the manger you employ to husband your assets will simply dissipate it on gambles and his own reward? Unfortunately, it is very. Modern management theory must now address this problem. Jensen and Meckling where on the right tract. It is necessary to align the interests of the executive with those of the shareholders, but this cannot be done only by sharing rewards. It is necessary also to share the risk. The modern executive needs to face the consequences of his actions. Until the modern organization develop schemes to do this, there will be no way to avoid the dire consequences of executives risk.

 


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