As the British politician Nye Bevan once asked: “Why look into the crystal ball when you can read the book?” Drucker, of course, left dozens of books for us to study. But in spite of his impressive output we seem to have lost sight of some of his timeless ideas. How many meetings that you attend begin with an agenda and the word “objectives” being written up on a flip-chart or other visual aid? And yet, a few (or more) hours later, how often has the discussion strayed far from the path that leaders declared they wanted to follow? “Mismanagement by missing objectives” was not what Drucker had in mind.

Over four decades ago Drucker alerted us to the emergence of something called a “knowledge worker”, who would have to be managed with great care. How good a job are we doing of managing them today? Drucker even suggested that we should think of our employees as, essentially, volunteers. And yet authoritarian corporate regimes continue to suppress initiative and new ideas, driving bright people away while preserving a sterile (and doomed) status quo. We had been warned, but we were not listening carefully enough.

In an age of over-complication and excessive noise Drucker’s voice can still cut through all the distractions. We need some of his lucidity today. We could start, for example, by turning again to his fundamental definition of the central task for any business: to “create” (find) and keep a customer. Is that what you are busy doing in your business? Is most of your energy being directed to meeting that challenge?

We could ask again his three basic questions for leaders: a) what business are you in? b) who are your customers? c) what are you doing for them that is valuable? These deceptively simple questions can force you to confront those under-discussed problems corporate leaders sometimes wish could just go away.

And we could recall perhaps his most important insight of all: that profitability is not in itself a purpose for business, just as breathing is not the purpose of life. Good businesses usually will be profitable, but commercial success comes as a result of doing the right things and operating in the right way.

In 1919 the Irish poet WB Yeats looked at the troubled post-war world and wrote:

“The best lack all conviction, while the worst/Are full of passionate intensity.”

(“The Second Coming”)

A dose of Drucker right now would help the best develop some conviction, and persuade the worst to abandon their destructive “passionate intensity”. We don’t need a new guru. PF Drucker will do.

 AUTHOR:

Stefan Stern, a former FT columnist, is Visiting Professor of management practice at the Cass Business School, London, and director of strategy at Edelman. He has attended all three of the previous Global Drucker Forum events.

Given the importance with which Peter viewed pension funds – essentially as the savior of modern capitalism – it is interesting to ask what he would think about the central role they now play in stock lending worldwide.  Stock lending is somewhat of a murky business.  Any institution that owns a share of stock can lend it out and earn a fee for the providing that service. The value of stocks lent at any given time is open to great debates. The International Securities Lending Association estimated the value of outstanding stock loans as $1 trillion in 2007. Finadium Institutional Investment Manager Survey estimated the size to be $4.7 trillion in 2007 and $2.5 trillion in 2008, and found over 90% of institutions surveyed engaged in stock lending.  So it is a gigantic business and almost all pension fund managers lend stocks, and due to their large size, are almost certainly the largest lenders of stocks.

This begs the question: Who is on the other side?  Who are the borrowers?  The answer is short-selling hedge funds and other proprietary traders.  They need to borrow stock in order to be able to short it.  So they borrow stock, short sell it, hope that it goes down in price, buy it back at the lower price, make a big profit, and return the stock back to the lender.

Let’s consider the systems dynamics of this relationship.  Pension funds are the most long-oriented investors in the entire capital markets.  They have 30, 40, 50 year obligations.  Their only interest is in having stocks increase in value over time to the highest level possible in order to meet their obligations to their pensioners.  In stark contrast, hedge funds have interest in maximum volatility because they make their biggest money on the 20% carried interest that they earn and that carried interest appreciates most with big movements in the securities which they hold. They couldn’t care less whether stocks go up or down. The only thing they care about is that stocks don’t move slowly and steadily; that would be bad for them.  Pension funds put in their hands the capacity to put a $1 trillion+ perpetual short on the world’s stock markets and on top of that, the capacity to jerk markets wildly up and down with how they execute their short positions.

And this is in the interests of pensioners how? It is disgraceful.  Yes, the pension funds can earn fees from stock lending that will measurably increase their annual returns.  But at the same time, it immeasurably reduces their long-term returns.  But since the latter is an opportunity cost not an easily measurable cost like the former, it isn’t counted.

But stock lending by pension funds combined with short selling by hedge funds is a key part of gaming the game of democratic capitalism.  The hedge funds simply trade and toll value.  They don’t care if they are damaging the capital markets on which they depend.  They contribute to volatility in legal and illegal ways.  By far the biggest enabler of this gaming is the pension funds who lend them the stock to engage in short-selling and on top of that, provide them lots of their funding through limited partner investments from their alternative investment portfolios.

Neither is in the interests of pensioners or democratic capitalism.  If we want to protect the good game of democratic capitalism against the gamers who would destroy it, we need to honor Peter Drucker’s memory by preventing pension funds from hurting their pensioners by enabling hedge funds.

AUTHOR:

Roger L. Martin has served as dean of the Rotman School of Management, University of Toronto since 1998.  His research work is in Integrative Thinking, Business Design, Corporate Social Responsibility and Country Competitiveness. He has written 14 Harvard Business Review articles and published seven books. In February 2013, his eighth book, Playing to Win: How Strategy Really Works, co-authored with former P&G CEO AG Lafley, will be released (HBR Press, 2013). In 2011, Roger placed 6th on the Thinkers50 list, a biannual ranking of the most influential global business thinkers. In 2010, he was named one of the 27 most influential designers in the world by BusinessWeek. In 2007 he was named a BusinessWeek ‘B-School All-Star’ for being one of the 10 most influential business professors in the world. BusinessWeek also named him one of seven ‘Innovation Gurus’ in 2005.  Roger received his  MBA from Harvard Business School.

1. The management mindset
2. The role of managers
3. The way work is coordinated
4. The values practiced and
5. The way people communicate.

Five fundamental shifts in management practice

Shift #1: Management mindset: From inside-out to outside in
To accomplish the transition to customer capitalism, reflecting the shift in the balance of power in the marketplace from seller to buyer, firms must change from an inside-out mindset (“We make it and you take it”) to an outside-in mindset (“We seek to understand your problems and will surprise you by solving them”).  As Ranjay Gulati notes in Reorganize for Resilience (2010), the shift goes way beyond strengthening customer service: it means orienting everyone and everything in the firm to the goal of delivering more value to customers sooner, and aligning all decision-making with this goal.

The shift was foreshadowed in 1973, by Peter Drucker: “There is only one valid definition of business purpose: to create a customer.” To create a customer today, an organization must do more than satisfy the customer: it must continue to innovate and meet needs that the customers may not even know that they have. Time assumes a new importance: if value can be delivered sooner, it is more likely to generate delight. Examples: Apple, Amazon, Zappos.

Shift #2: The role for managers: From controller to enabler
Focusing on continuously adding new value for clients requires a change in the way work is carried out, Hierarchical bureaucracy is not well adapted to innovation, as work is increasingly knowledge work and tight control stifles the key ingredients of today’s productivity: worker passion and creativity.

 
To reach the new level of performance, the organization has to empower those doing the work, so as to facilitate collaboration, rapid learning and innovation. The result is a dramatic shift in the role of the manager from controller of individuals to an enabler of self-organizing teams. Instead of the workers reporting to managers, the managers are in effect accountable to those doing the work, both for setting direction and for removing any impediments that are hindering the work. This reversal of the polarity recognizes that the engines of productivity, innovation and creativity resides in the energy and ideas of the people doing the work, working together across boundaries, drawing on new technology, to become more productive and innovative. Examples: Morning Star, W.L. Gore & Associates.

Shift #3: Coordinating work: From bureaucracy to dynamic linking
Hierarchical bureaucracy coordinates work through the use of detailed plans, rules and reports. Management specifies both the goal and the methods for achieving that goal; progress is systematically tracked by reports to managers. The approach achieves disciplined execution with scalability but is insufficiently agile for today’s rapidly shifting marketplace.

 
Meshing the efforts of autonomous teams with client delight while also achieving disciplined execution requires a set of measures that might be called “dynamic linking,” The method began in Japan, was outlined in a 1986 HBR article by Professors Nonaka and Takeuchi entitled “The New New Product Development Game”, and has since been most fully developed in software development with methods known as “Agile”, “Scrum,”  and “Kanban”.

 
“Dynamic linking” means that (a) the work is done in short cycles; (b) the management sets the goals of work in the cycle, based on what is known about what might delight the client; (c) decisions about how the work is to be carried out to achieve those goals are largely the responsibility of those doing the work; (d) progress is measured (to the extent possible) by direct client feedback at the end of each cycle. Example: Salesforce.

Shift #4: What really matters: From economic valueto values
Given its goal of making money for shareholders, hierarchical bureaucracy was preoccupied with economic value and efficiency, rather than values. A preoccupation with shareholder value encouraged firms to cut costs and eliminate what was key to generating the future. Management 2.0 rests on values that are aligned both with delighting the customer and inspiring autonomous teams to contribute their best. They include radical transparency, continuous improvement and sustainability. Example: Whole Foods.

Shift #5: Communications: From command to conversation
Management 2.0 requires that managers elicit the energies, imagination, and creativity of those doing the work. This means communicating predominantly in the language of peer-to-peer, competence-based, adult-to-adult, horizontal conversations. This contrasts with hierarchical bureaucracy where communications are typically impersonal, top-down, authority-based and adult-to-child. In Management 2.0, communications tend to be in the form of stories, metaphors and open-ended exchanges of views. Example: Intuit, Bridgewater Associates.

Bottom line: alignment
None of these five shifts is new in itself. What is new is putting all five shifts into operation at once.  The agenda is challenging but it offers significant benefits. When well executed, it generates simultaneously high productivity, continuous innovation, disciplined execution, greater job satisfaction and client delight.

 
The shift entails more than a change in management practices: it amounts to a revolutionary shift from an ecosystem in which workers and customers are manipulated as things to an ecosystem in which workers and customers are interacted with as human beings.

AUTHOR:
Steve Denning’s latest book is The Leader’s Guide to Radical Management (Jossey-Bass, 2010). It describes management principles and practices required to reinvent management to promote innovation and adaptation. He is also the author of The Leader’s Guide to Storytelling (2011) and The Secret Language of Leadership (2007). His website is www.stevedenning.com and his Forbes column on radical management is at http://blogs.forbes.com/stevedenning/. This post draws on Steve’s article, “Reinventing Management: the practices that enable continuous innovation,” in Strategy & Leadership, 2011, Volume 39, Number 3, 2011.

 
As Drucker lays out what this new society should look like, he builds upon another great thinker of Austrian origin, Joseph Schumpeter, who had positioned the entrepreneur at the heart of capitalism – as the life force of a market-based, competitive, dynamic and wealth-creating economy. The question for Europe is: Has this sea change happened? Have we seen enough “creative destruction” to meet Drucker’s vision? Have we seen enough new companies and industries emerging from Europe during the past 50 years and taking leading positions in global markets? Regrettably the answer is a resounding “no.”

 
With an overblown social protection system and a state that has become in a number of countries obese and suffocating, it has become more difficult for entrepreneurs to develop and sustain their businesses. France provides a sad example of a nation that adheres to an anti-business and anti-entrepreneurship attitude, with a president who does not like those who were successful and hence may have made some money; “les riches” are despised and insulted by media and large parts of the public.

In a recent seminar for the Board of the European Institute of Technology and Innovation  -the first broad-based entrepreneurial venture to receive seed funding by the European Commission – the challenges for an entrepreneurial Europe were laid on the table.

Broad consensus appears to have emerged that the way beyond the current financial crisis will not be achievable only with austerity. Something positive and constructive is needed. And this is where entrepreneurial attitudes and capabilities come in, be it starting up new businesses, “intrapreneurship” in large organizations, new ways of independent working such as freelancing and contract work – in short everything where individuals take responsibility for their lives and pursue opportunities to create value.

 
In order to move toward a new paradigm where entrepreneurs are appreciated, celebrated and supported two major areas must be addressed.

 
First, man-made obstacles for entrepreneurial action must be eliminated. Among them: crippling tax regimes, rigid labour markets, absurd laws where bankruptcy is treated as a criminal offence of sorts, excessive red tape and lack of access to finance, again due to mistrust in risk-taking. Interestingly enough, the Eastern part of Europe seems to be showing the way in the right direction while the Western European countries appear to be trapped in the anti-entrepreneurship and anti-business cultures. Remember former U.S. Defence Secretary Donald Rumsfeld talking about “old” and “new” Europe?

 
It’s important to note that entrepreneurialism does not mean abandoning social security. Rather, it requires finding better and more targeted ways to support and protect those who are truly in need.

 
The other fundamental area of change that’s required lies in the field of capacity building. While there may be quite a number of born entrepreneurs, Drucker rightly observed that there are just not enough of them. This is all the more true given that the need for entrepreneurial capabilities is not confined to business; it is just as important for non-profits, for health, education and even for public services. Hence, we need to form and educate entrepreneurs, and we must cultivate a deep and systematic understanding of the discipline of entrepreneurship.

 
As a discipline, entrepreneurship must be taught in the classroom as well as learned from experience and enhanced constantly by research. Colleges and universities—and high schools, too – should make the study of management and entrepreneurship mandatory, and not only for those interested in pursuing careers in business.

 
Dan Shechtman, who won the Nobel Prize in Chemistry in 2011, has been a teacher for technology entrepreneurship over the past 25 years. Like others who studied at Israel’s Technion (Dan received his doctorate in materials engineering from there in 1972), he was exposed throughout his education to a strong entrepreneurial spirit – one of the keys, undoubtedly, to Israel’s innovation miracle. We are proud to have Prof. Shechtman as the opening speaker at the 2012 Global Peter Drucker Forum on November 15 in Vienna.

 
We have lost too many good years to make our European societies future-proof; unfortunately, more pain is on the way. But it is still not too late. We require lighthouses and role models. The EIT, with its focus on the Knowledge Triangle (Education, Research and Business), seems to be a step in the right direction.

 
The huge challenge for European Governments and policy makers at all levels is to “get it.” One of the most important tasks is to enable entrepreneurship as a foundation for innovation,  growth and as a consequence for employment. This is the time to stand for values and principles that may not have the majority in the opinion poll of the day. Are our politicians ready for that?

 
The key aspect of a management paradox is that it contains two equally valid, but contradictory viewpoints which need to be managed over time so that neither one is totally neglected. Work-family balance is one of the easiest paradoxes to understand, but there other many others in business such global-local balance and quality-cost management.

 
While philosophically many would agree to the expansion of corporate responsibility from maximizing shareholder value to creating shared value for society, the current forces in place allow little deviation from a corporation’s original responsibility to maximize shareholder value. The vast majority of these forces are not Wall Street greed (although this is obviously a factor), but the fact that our global economic system has built a dependency of investors, including pensioners around the world, on a consistent return on investment from the corporate sector. As a result, the pressure from the investment community to keep corporations focused on maximization is relentless. Under these circumstances, how will the role of the corporation be expanded to include a better balance of shareholder value and shared?

 
I believe the answer is very simple and very complex – it will depend on leadership. Leadership that is committed to managing the paradoxes of profit and purpose and short-term vs. long-term needs.  And there are signs that the next generation of leaders, as well as their corporate and academic mentors, are taking on that commitment. Consider the following.

 
In January 2009, in the middle of the financial meltdown, I conducted a session on global leadership for the Young Global Leaders at the World Economic Forum in Davos. The Young Global Leaders are 150 leaders under 40 chosen by nomination and are considered to be some of the best and brightest young leaders from all parts of society and the world. They attend the World Economic Forum to provide input on what the younger generations are seeing and thinking about the issues discussed during the Forum.

As part of the preparatory day I spent with them, they were asked to work in small groups to analyze what they thought were the primary reasons for the economic turmoil in which the world found itself. After much deliberation, their report-outs can be summarized in two conclusions:

• They felt the current generation of leadership had defined the scope of its responsibility too narrowly. These leaders had not just maximized shareholders’ value, but also had maximized personal bonuses, and the success of their corporations at the expense of everyone else. The young leaders believed that their generation would have to redefine this scope of responsibility to be more inclusive of others in their society and in the world. In other words, they would needed to see themselves as “global leaders” as  well as “local leaders.”

• These young leaders also believed the current leadership generation defined their responsibility in too short a timeline. They felt that concentration on short-term returns without adequate consideration for longer-term sustainability had reached a point of no return. They felt their generation would be faced with balancing these forces more than ever before.

Think scope and time – broader scope and longer timeframes of responsibility are needed for leaders to sustain corporations as engines of shared value for society today and tomorrow.

 
In the end Capitalism 2.0 will be about leadership.  It is easy to acknowledge the merits of Capitalism 2.0, but implementing a broadened agenda will require leaders who have the courage to stand for a new vision of the corporation. Globally responsible leadership begins with the vision that a leader has for his or her stewardship. The best leaders understand that leadership is not about them, but about what they enable others to do for their organization and the world.

Guest Blog Post by Stephen Rhinesmith

www.stephenrhinesmith.com