The difficulty in managing things that cannot easily be measured

Andrew Hill in The FT 

If there were a tournament for Peter Drucker’s best-known dictum then “what gets measured gets managed” would make it to the finals, even though nobody seems able to pin the saying directly to the Viennese-born management thinker. Repeated misattribution has gilded the truism and propelled it into the Management Maxim Hall of Fame. 

En route, unfortunately, the assumption has taken root that everything can be measured. Worse, anything that does not submit to mathematical evaluation need not be managed, or is simply unmanageable. 

This is the most prominent example of a widespread phenomenon: the tendency to pay more attention to hard facts, targets, outcomes and initiatives than to soft factors that are equally, or sometimes more, important. 

Big data is hard. Culture is soft. Financial goals are hard. Non-financial targets are soft. Gender quotas are hard. Workplace inclusivity is soft. “Stem” subjects are hard. Humanities are soft. (Drucker himself described management as a liberal art.) Machines are hard — very hard. Humans are all too soft. 

The Harvard Business Review tries to reconcile the hard-soft tension annually in its ranking of the “best-performing CEOs in the world”, measured over their whole tenure. Jeff Bezos wins every time. Except he doesn’t, because in 2015, the publication changed its methodology and added soft environmental, social and governance factors to its hard financial assessment, knocking Amazon’s founder from first to 87th. Mr Bezos has crept back to 68th in the latest ranking, topped by Pablo Isla, chief executive of Spanish retail group Inditex with its (soft) family values. I bet, though, that most investors would allocate capital on the hard measures of Mr Bezos’s and Mr Isla’s success. 

The dominance of hard over soft is not uniform, though, and in a few areas it is receding. Would-be leaders aiming for MBAs have for years set equal, even greater, store on the value of the difficult-to-measure human networks they build during their studies. The hard MBA qualification itself has started to crumble, while employers increasingly stress development of executives’ soft skills. 

Elsewhere, companies have finally begun to realise that feedback (soft) trumps forced ranking and even bonuses (both hard) when it comes to appraising and motivating staff. Governance codes now place emphasis on long-term success, healthy cultures and corporate purpose, offsetting boards’ longstanding deference to pure shareholder value. 

Many of these pairs should coexist, of course. Too frequently, though, when a balance of two approaches would be best, the hard solution wins out as soon as pressure is applied. 

In the classic tussle between long-term sustainability and short-term returns, too many directors and executives still obsess about hitting close-range targets. Purpose makes way for profit. The demand to compete overcomes any impulse to reap the benefits of collaboration. 

Even if Drucker did not utter the “what gets measured” axiom, he had plenty to say about measurement. In 1955, he wrote in The Practice of Management how more sophisticated ways of gauging performance would enable managers and workers to direct their own work. But he also warned that if this ability were used to impose control from above, “the new technology [would] inflict incalculable harm by demoralising management and by seriously lowering the effectiveness of managers”. 

Persuading executives to take greater account of soft factors requires a concerted effort. One approach is to play to their utilitarian preference for hard facts and try to measure the unmeasurable. The mania for measurement has extended beyond the production output and profit margins that could be assessed in the 1950s. Start-ups and consultancies frequently pitch to me with new ways of quantifying corporate culture, for instance. 

 Putting a number on the nebulous is one way to give soft achievements a hard edge. Reminding directors of the hard landing that awaits those who ignore, condone or contribute to rotten cultures is another. 

At the same time, managers need to comprehend elements that cannot yet be recorded in 0s and 1s: the strength of team relationships, the importance of empathy, the value of intuition. Ingenious machines may one day put all the mysteries of human behaviour into a spreadsheet. I doubt it, though. This week’s Drucker Forum, in honour of the writer, will explore “the human dimension” of management. At least some of that dimension will always be difficult for chief executives to collect, crunch and codify on their digital dashboards. As a result, they must resolve to try harder to manage the things they will never easily measure.

Management theory was hijacked in the 80s. We're still suffering the fallout.

Good governance went out of the window when the Chicago school's reductive view of human nature took hold

• 
• • Simon Caulkin
  • guardian.co.uk, Monday 12 November 2012 08.30 GMT

'Managers abandoned their previous policy of retaining and reinvesting profits in favour of large dividend and share buyback payouts to shareholders.' Photograph: David Karp/AP

This week the City has been congratulating itself on 20 years of UK corporate governance codes. Since the original Cadbury document in 1992, the UK has basked in its role as governance leader, with 70 other countries having followed its example and adopted similar guidelines.

There's just one problem: is it the right kind of governance? The day the FT carried the story, Incomes Data Services reported that FTSE 100 boardroom pay went up by a median 10% last year, a soaraway trend that the best code in the world has complacently overseen. Nor could it prevent the RBS meltdown, Libor or PPI mis-selling to the tune of £12bn, the biggest rip-off in financial history. It didn't stop phone-hacking or BP taking short cuts. It has sanctioned wholesale offloading of risk, whether individual (pensions, careers) or collective (global and financial warming) on to society, while rejecting any responsibility of its own except to shareholders.

So jerry-built is the corporate economy erected on the scaffolding of the City codes that it can no longer deliver even the material progress by which it justifies its privileges: even with a return to growth, living standards for lower and middle earners may be no higher in 2020 than in 2000, according to the Resolution Foundation. The truth is that UK corporate governance has neither headed off major scandal nor nurtured effective long-term management. In fact the opposite is true.

The irony is that we know what makes companies prosper in the long term. They manage themselves as whole systems, look after their people, use targets and incentives with extreme caution, keep pay differentials narrow (we really are in this together) and treat profits as the score rather than the game. And it's a given that in the long term companies can't thrive unless they have society's interests at heart along with their own.

So why do so many boards and managers, supported by politicians, systematically do the opposite – run companies as top-down dictatorships, pursue growth by merger, destroy teamwork with runaway incentives, attack employment rights and conditions, outsource customer service, treat their stakeholders as resources to be exploited, and refuse wider responsibilities to society?

The answer is that management in the 1980s was subject to an ideological hijack by Chicago economics that put at the heart of governance a reductive "economic man" view of human nature needing to be bribed or whipped to do their exclusive job of maximising shareholder returns. Embedded in the codes, these assumptions now have the status of unchallenged truths.

The consequences of the hijack have been momentous. The first was to align managers' interests not with their own organisations but with financial outsiders – shareholders. That triggered a senior management pay explosion that continues to this day. The second was that managers abandoned their previous policy of retaining and reinvesting profits in favour of large dividend and share buyback payouts to shareholders.

Ironically, the effect of this stealth revolution was to undercut the foundations of the very shareholder value under whose flag the activists had ridden into battle. Along with corporate welfare and customer service, among the functions squeezed in the shareholder bonanza was research and development. Innovation has stalled since the 1980s, prompting some economists to query whether the era of growth itself is over.

But it's not economics, it's management, stupid. Unsurprisingly, downtrodden and outsourced workers, mis-sold-to customers, exploited suppliers and underpowered innovation cancelled out any gains from ever more ingenious financial engineering – leaving shareholders less well off in the shareholder-value-era since 1980 than in previous decades. The great crash of 2008 stripped away any remaining doubt: the economic progress of the last 30 years was a mirage. As Nassim Nicholas Taleb put it in The Black Swan, the profits were illusory, "simply borrowed against destiny with some random payment time."

Over the last decades, misconceived ideologically based governance has recreated management as a new imperium in which shareholders and managers rule and the real world dances to finance's tune. A worthier anniversary to celebrate is the death seven years ago this month, on 11 November, of Peter Drucker, one of the architects of pre-code management, which he insisted was a "liberal art". Austrian by birth, Drucker was a cultured humanist one of whose distinctions was having his books burned by the Nazis. In The Practice of Management in 1954 he wrote: "Free enterprise cannot be justified as being good for business. It can be justified only as being good for society".