Misbehaviour thrives in our age of capitalism without capitalists

There’s a vital lesson to be learnt from the latest episode in the saga of former chief executive Alan Joyce’s ignominious departure from Qantas last year: these days, no one’s in control of the capitalist ship.

It seems clear that, in his last years in the job, Joyce decided to give the size of his final payout priority over the maintenance of good relationships with the company’s staff and customers. He left Qantas suddenly in September last year with what was to have been a package of $23 million, including his final-year salary and bonuses.

But by then, many customers were complaining and the company’s behaviour was under investigation by the Australian Competition and Consumer Commission. The board decided to retain the right to claw back much of the payout, pending a review of the airline’s management.

Meanwhile, the High Court found that the company had illegally sacked 1700 ground handlers.

Last week the company announced the results of the review by Tom Saar, a former partner in management consultants McKinsey. He found that Joyce’s tenure as chief executive directly contributed to the erosion of the airline’s relationships with its regulators and customers.

He also found the board did not adequately challenge its executives and failed to acknowledge non-financial risks. The group’s management contributed to a string of failures that resulted in “considerable harm to its relationships with customers, employees and other stakeholders”.

The board decided to dock more than $9 million from Joyce’s final payout. It also decided to reduce the short-term bonuses of all current and former executives who were part of the leadership team last year. This included the new chief executive, Vanessa Hudson, who served as the group’s finance chief.

I recount all this because it’s just an extreme example of the licence chief executives enjoy because they work for companies that are owned by everyone in general and no one in particular. We know of billionaire company owners such as Rupert Murdoch, Twiggy Forrest, Gina Rinehart and Clive Palmer, but these are the exceptions.

In legal theory, the job of company boards is to represent the interests of the shareholders. In practice, as the Qantas case well demonstrates, boards defer to executives because they’re drawn from the same fraternity of managers.

It’s noteworthy that the person the board chose to review Qantas’ management was himself a member of that fraternity. Its board emphasised that his report contained “no findings of deliberate wrongdoing” but that “mistakes were made by the board and management”.

Considering the damage done to the airline’s reputation, and the abuse of its position as the dominant player in Australia’s domestic aviation, Joyce wasn’t docked as much as he could have been. And merely cutting other executives’ short-term bonuses by a third lets them off lightly.

In the phrase coined by the Australia Institute’s Dr Richard Denniss, we now live in a capitalist economy without any capitalists. This is true of all the developed economies, but it’s particularly true of Australia because of the way almost all employees are compelled to contribute 11.5 per cent, soon to be 12 per cent, of their wages to superannuation funds.

Those super savings now total more than $3.9 trillion, with about 28 per cent of that invested in listed and unlisted Australian shares, plus 27 per cent in foreign listed shares. This means those of us with superannuation account for about 38 per cent of the value of shares listed on the Australian stock exchange.

So, what say do people with super have in the running of the companies whose shares they own? Next to none.

Their super funds are run by trustees. Do members have any say in who gets to be a trustee? No. The trustees are under no obligation tell members which companies’ shares their savings are invested in.

Of course, almost all shares carry the right to vote at a company's annual general meeting. And at those meetings, shareholders do get to vote for or against the company’s proposed remuneration to executives. So, do the owners of shares via their super get the right to vote at company meetings? No, of course not.

Well, who does get that? Maybe the funds’ trustees, or maybe the managers of the “managed investment funds” in which your super fund has invested.

And do those trustees or investment managers actually vote at company meetings? Maybe they do, maybe they don’t. Who knows? Super members aren’t told.

It follows that, when they do vote, we aren’t told which way they voted. Did your shares vote for or against the big pay rises the directors and executives intend to award themselves? Did they vote for or against further investment in fossil fuel projects?

See what they mean about us living in an age of capitalism without capitalists? We live in a time when big business is run by executives, with surprisingly little to constrain their freedom of action unless they come to our attention by, like Alan Joyce, going way over the top.

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Faster growth demands better chief executives

Sometimes I'm tempted by the thought that a major economic reform would be for the Business Council of Australia to disband, so the nation's big business chiefs had to spend more time doing their knitting.

For them to spend less time attending committee meetings to decide what the government should be doing to make life easier for them and their business, and more time working on ways to improve their company's performance.

It always surprises me that economist upholders of free markets and business defenders of private enterprise so easily fall into the view that the fate of our largely private-sector economy rests on the actions of politicians.

Econocrats are susceptible to that misconception because their model's assumption that business decisions are always rational leads them to conclude any inadequacy in businesses' performance must arise from perverse incentives created by misguided government intervention.

For their part, it's almost unknown for business leaders to explain their company's poor performance as anything other than someone else's fault. The failures of our hopeless government – any government – have long been the favourite excuse of less-than-successful chief executives.

An entire career in the private sector has inoculated me against any delusion that businesses are always rational and never perform at less that their best.

One common human failing you won't find in any economics textbook is managers' tendency to be so busy fixing problems they find easy to fix that they have no time to grapple with more important problems they're not sure how to fix.

We worry about the era of low productivity and low growth our economy – and every other advanced economy – seems caught in, and it's true there are "reforms" governments could make that would improve our performance – though they're not the reforms highest on the business council's list.

But the deeper truth remains that the nation's productivity is fundamentally determined by the performances of its many businesses. And if our business leaders took it into their heads to lift their companies' performance, the nation's productivity improvement and growth would be faster.

If you don't believe that, you must be a socialist.

A study by Deloitte Access Economics for Westpac assembles evidence that there's plenty of room for improvement in the performance of Australia's managers.

A report prepared for the federal government in 2009 used the methodology of the World Management Survey to rank the quality of our management sixth of 16 countries studied, behind Canada, Germany, Sweden, Japan and the US.

A paper by Nicholas Bloom and others, from Stanford University, finds that well-managed firms perform better than their peers and make a greater contribution to a nation's total-factor productivity.

Differences in how well-run businesses are help explain differences in productivity between nations. For instance, thanks in part to its successfully run businesses, the US has one of the highest total-factor productivity levels in the world.

Bloom and colleagues estimate that, across all countries, 29 per cent of the difference in productivity between the US – which has the highest management effectiveness scores – and other nations can be explained by how well businesses are run.

Using this finding, Deloitte Access estimates that, if the gap in management quality between Australia and the US were halved today, our productivity would rise to 80 per cent of the US level, up from its present level of 77 per cent.

Achieving such an increase today would lead to a 4.3 per cent increase in gross domestic product over its present level.

This represents an increase in GDP of about $70 billion, equivalent to about $3000 a person per year.

Such a boost would raise our ranking on the league table of GDP per person (adjusted for differences in the purchasing power of particular currencies) from 19th to 14th in the world – just the "metric" that so appeals to the top dogs on the Business Council.

Deloitte Access concludes from other research that fast-growing businesses "take an attitude that success is in their hands and nobody else's.

"High-growth firms perceive issues they cannot control – such as economic conditions and competition – as less of a barrier to success than [do] low-growth firms, placing greater concern on issues they can control, such as recruitment and cash flow …"

So "businesses' own decisions and strategies drive their success. The state of the economy and industry trends are clearly important factors affecting business profitability …

"But business success can come during any market conditions, and opportunities can arise in any industry, provided there's the right leadership to seize potential."

So that's what our over-paid and under-performing chief execs are getting wrong.

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KPIs a dumb way to encourage good performance

You've been doing good work lately, and the boss is thinking of acknowledging your contribution. How would you like to be thanked? With a bonus, or with some kind of award?

If you want the money rather than the glory you'd be in good company. That's how most bosses want their own good work rewarded (and arrange their compensation package accordingly).

And it's how almost every economist would advise your boss to reward you. But don't be so sure it is what you really want, what would yield you the most lasting satisfaction.

One of the big issues in business - particularly big business - is how best to motivate and reward good performance.

Since economics is defined by some economists as the study of incentives, you'd think this was right up their alley. But economics is so focused on monetary incentives that most economists tend to assume away any non-monetary motivations.

They'll tell you the best way to "incentivate" people is performance pay: promise them a particular bonus provided they meet the targets you've set on a few "key performance indicators". Apart from that, just pay the good performers more than the poor performers.

But there's a lot more to human motivation than that and, fortunately, some economists are starting to take a less narrow approach to the topic. One is Professor Bruno Frey, of the University of Zurich.

In a paper with Jana Gallus he discusses The Power of Awards and puts them into the context of other forms of reward. Money is obviously the most common form and it has the great advantage of "fungibility" - you can spend it however you choose. And it can be applied marginally - do a bit more, get a bit more; do a lot more, get a lot more.

A second form of reward is non-monetary, but still a material award: fringe benefits, such as a company car or a particularly attractive office. These have the disadvantage of lacking fungibility (I might prefer money to a car), but usually carry a tax advantage. Even a corner office brings me status that isn't taxed.

Money and cars are "extrinsic motivators" - you do a good job as a means to getting what you really want. The message is slow to get through to business, but among behavioural economists there's now more interest encouraging "intrinsic" motivation - you do a good job because it makes you feel good. You're good at what you do and you enjoy doing it. You like knowing you've done a lot to help your customers.

The way to foster intrinsic motivation is to treat your staff well, of course, but the key is to give people discretion in the way they do their jobs. It's the opposite of trying to tie them up with KPIs.

Frey and Gallus say awards fall somewhere between these two approaches - they're extrinsic, but often not material. They include titles, prizes, orders, medals and other decorations. They are ubiquitous in society, if not business.

They're widely used in public life (various ranks of the Order of Australia), the entertainment industry (Oscars, Grammys, Logies), journalism (Walkleys, journalist of the year), sport (Brownlow medal, Dally M medal, Olympic medals), academia (fellowships of prestigious scholarly bodies, honorary doctorates, Nobel prizes) and the Catholic Church (canonisation and papal knighthoods).

The point is that the many advantages of awards suggest they should be used more in the business world.

For one thing, they're cheap to confer, but highly valued by the recipient because of the recognition as well as status they bring - provided you don't give out too many, make them too easy to attain or award them to the clearly undeserving.

More significantly, they avoid the drawback of KPIs and performance pay. The authors say such inducements are appropriate only if the performance criteria are precisely determined and measured. But for many complex activities, this is  not possible.

If it isn't, KPIs encourage what social scientists euphemistically call "strategic behaviour" - gaming the system by performing well only on those dimensions that are measured.

Monetary rewards may reduce work effort by crowding out intrinsic motivation, training people to try hard only when there's money to be gained. Why spend time helping a colleague when this might help them achieve their KPIs at the expense of your own?

The authors say monetary rewards don't induce employee loyalty. They're a strictly commercial transaction. But awards do encourage loyalty, as well as intrinsic motivation.

Overpaid chief executives shouldn't assume their workers are as materialistic as they are, nor should they imagine their firm would do better if their workers' materialistic tendencies were heightened.

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Red tape begins at home for business

Having worked all my life in the private sector - mainly for big business, including a big accounting firm - I've long known it's not just the public sector that's bureaucratic. Waste time and money on pointless rules and procedures? Sure.

To imagine otherwise - that the profit motive makes business immune from inefficiency - you'd have to have spent all your life working in the public sector. In the old Treasury, say, or a university.

Even so, private sector inefficiency is not a subject to be raised in public. No, nothing must be said that could undermine the contention that governments and their intervention in markets are the sole source of poor economic performance. That if our rate of productivity improvement is flagging, the only conceivable explanation must be the passing of some law big business didn't like.

This is why I've been waiting for the Australian Enforcers of Right Thinking to start beating up Chris Richardson, of Deloitte Access Economics, the way they tore into some poor sap from Treasury who mentioned in a speech research suggesting Australia's manufacturers were less than perfect.

Richardson has had the temerity to publish a report purporting to show that the cost of self-imposed red tape in the private sector far exceeds the cost of government-created red tape.

In a report titled Get Out of Your Own Way, he urges business to lift its productivity by lifting its game.

My guess is it's a problem limited largely to big business, with inefficiency increasing with the size of the firm. It's one of the diseconomies of scale, such as those that commonly cause company takeovers to be less profit-enhancing than imagined (while still justifying a big pay rise for the surviving chief executive).

Multinational corporations are likely to be worse on red tape than national companies. Companies with monopolies - or access to economic rents, such as the financial services sector - would have the most scope for wastefulness. As had our miners before commodity prices fell.

Richardson suggests the problem has built up over the long period of prosperity since our last big recession, and I don't doubt he's right. Nothing like a recession to subsequently improve productivity (but don't tell the Business Council I said so).

The other Richo's report is so full of uncommon common sense it deserves closer attention. "To be clear," he says, "rules and regulations are vitally necessary.

"They cement the key foundations of our society, protecting the rule of law and a wealth of standards in everything from health to safety and the environment. And they can help businesses to reduce risk and plan for the future."

But our rule-makers - both government and business - often try to achieve the unachievable, the report says. They set rules that are too prescriptive, overreact to momentary crises, let new rules overlap with existing rules, don't listen to those most affected and don't go back later to check how well their rules are working or if they are still required.

"So Australian businesses have bulked up, employing many people whose role is to create and then enforce a whole bunch of rules and regulations. That doesn't just mean some lawyers and accountants. It also includes some people in finance and information technology and human relations functions, as well as in fast-growing governance and security roles."

As a result, there are already more "compliance workers" across Australia than there are people working in construction, manufacturing or education. In fact, one in every 11 employed Australians now works in the compliance sector.

New technologies are delivering a huge dividend but we're not seeing the gains, the report says.
There's been a huge decline in "back-office" workers such as switchboard operators [why have them when you can make your customers deal with some fast-talking, incomprehensible and powerless person in Manila?] mail sorters and library assistants. They have been rapidly shrinking as a share of the workforce, yet those productivity savings have been swallowed up amid the rising cost of Australia's compliance culture.

Corporate Australia has let that culture grow partly because firms overestimate the extent to which they can insulate themselves from costs (a rogue employee, a nasty story in a tabloid, a grumpy customer) and partly because humans are bad at estimating risks, we're told.

Among the many examples of business craziness Richardson and colleagues quote, my favourite is the firm that insisted staff complete an ergonomic checklist and declaration when they moved desks, then introduced "hot-desking" so that everyone spent 20 minutes a day filling out forms.

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How to save money and wreck productivity

I've just had a great idea for raising the productivity of Australia's knowledge workers: try treating them with greater consideration so as to improve their concentration.

Simple hard-headed economics tells us that the scarcer the skills of workers, the more you have to pay for their services and the better you have to make their working conditions.

It's only those workers with few skills and who can be easily and cheaply replaced that you can get away with treating badly.

But many modern managers seem to regard these simple truths as no longer applicable. Businesses may be becoming ever more reliant on their knowledge workers and their ability to do their work well - perhaps to counter the effect of work intensification as head counts are reduced - but why not skimp on their working conditions?

Open-plan offices have been becoming more prevalent for decades, but these days it's not just a matter of replacing a warren of private offices with a cubicle farm. Why not get rid of the dividers and the modicum of privacy they provide - purely to encourage collaboration and break down silos, you understand - and move to "hot-desking" - providing fewer desks than the number of people you employ?

Even more progressive is the move to the "virtual office", where workers are issued with their own mobile phone, a laptop and a locker, but denied a particular desk. You want them moving from desk to desk each day, even morning to afternoon.

To ensure they don't break the rules and bags a particular desk, you impose a "clean-desk policy" where cleaners are instructed to toss away anything they find on desks overnight.

They may be knowledge workers but they're not likely to need books or papers for reference, are they? That's what Google is for.

I'm sure the reduced office space required has yielded savings, but I suspect it's a false economy when you take account of the effect on workers' productivity. Indeed, there is growing evidence the costs of these policies exceed the benefits.

Diane Hoskins, of Gensler, a big US office design firm, has been researching the question using surveys of more than 90,000 people from 155 companies across 10 industries.

Her people found that knowledge work consists of four modes: focus (individual work involving concentration and attention devoted to a particular task), collaboration (working with another person or group to achieve a goal), learning (acquiring knowledge of a subject or skill through education or experience) and socialising (interactions that create trust, common bonds and values, collective identity and productive relationships).

They found that the most significant factor in workplace effectiveness is not collaboration - the stated justification for most of the office changes - but individual focus work. Whoever would have thought being able to concentrate on your work could be so important?

They also found that focus is the thing the new-style offices make hardest. "Co-worker interruptions, auditory and visual distractions all combine to make focus work the modern office's most compromised work mode," she found. Who could have known?

The four work modes are highly interconnected, the researchers found, with focus as the primary component and the key predictor of all other effectiveness.So office arrangements that sacrifice individual focus in pursuit of collaboration result in decreased effectiveness for both.

Other research by Gensler finds that workers who can focus effectively are 57 per cent more able to collaborate, 88 per cent more able to learn and 42 per cent more able to socialise in their workplace than their peers who are unable to focus.

Justine Humphry, of Sydney University, says clean-desk policies are used as a way to prevent employees from "nesting": settling in one place for too long and giving it their personal stamp. This is intended to yield cost savings and productivity gains by reducing overall floor space and facilitating collaboration among staff, thereby breaking down the silos and barriers of the standard cubicle office.

Her research finds that workers continue to go about personalising and nesting in their work environments, undermining the design of a mobile and flexible office. "Studies have highlighted identity expression and professional status as key reasons for personalisation at work," she says.

"But in my ... research conducted on professional knowledge workers, it was found that personalising or nesting is also performed for practical reasons ... to enhance wellbeing, to create opportunities for privacy or collaboration, to facilitate social interaction and to save time."

It couldn't be that penny-pinching and fads in office design are part of the explanation for our less than sterling productivity performance since the 1990s, could it?

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Darwin improves on Adam Smith

What can the theory of evolution tell us about how the economy works? A lot. But probably not what you think it does.

Famous economists such as Joseph Schumpeter (author of the notion of "creative destruction") and Milton Friedman, and the contemporary economic historian Niall Ferguson, have viewed economies as Darwinian arenas: competition among firms reflects the ruthless logic of natural selection. Firms struggle with each other, with successful firms surviving and unsuccessful ones dying.

Thus evolution seems to support three pillars of the conventional, neoclassical model of the economy. First, that "economic actors" are self-interested, second, that self-interest works to the good of the public (propelling Adam Smith's "invisible hand") and, third, that together these lead the market to deliver the community ideal outcomes ("optimisation").

But there's a basic fault in this contention, as Dominic Johnson, of Oxford University, Michael Price, of Britain's Brunel University, and Mark van Vugt, of Amsterdam's VU University, point out in their paper, Darwin's Invisible Hand.

In conventional economics, "economic actors" can be either individuals or firms, although the theory tends to treat firms as though they were individuals. In reality, however, firms are groups of individuals - in the case of big national and multinational companies, thousands of them in one firm.

So if Darwinian selection applies to competitive markets, this implies that selection pressure acts on groups, not individuals. And group selection, as opposed to conventional Darwinian selection at the individual level, leads to the emergence of traits that act against self-interest.

With group selection, "we should expect the suppression of self-interest among individuals, not its flourishing", the authors say.

"Firms with less self-interested workers will compete more effectively and spread at the expense of firms with more self-interested workers, which will compete less effectively and decline. In other words, the model predicts nasty firms but nice people.

"Firms vie for market share and profits, group selection would predict, while individuals within those firms sacrifice their own interests for the good of the group. They will work long hours, accept low status and low salaries, co-operate with each other, share resources, accept hierarchy, obey their bosses, volunteer for extra duties and never help - or move to - rival firms."

Does that sound realistic to you? No, me neither.

"In reality," the authors say, "firms are made up of individual human beings, with various goals and motives but, most importantly, considerable self-interest.

"Darwinian selection at the level of groups implies that the interests of group members are weaker or synonymous with the interests of the group as a whole. In the real world, they are not. There is often some overlap, of course: the boss will want his workers to perform well; the workers will want the firm to survive.

But we also have strong personal desires for salary, status, rank, reputation, free time and better jobs.
"In short, any evolutionary model must account for two opposing processes that operate simultaneously: competition between firms and competition between the individuals within them."

So the authors are adherents to a relatively new school of thought holding that selection occurs at both levels: "multi-level selection theory". And this leads them to conclude that taking account of the role of evolutionary selection doesn't really bolster the conclusions of the neoclassical model.

Economic actors are self-interested only sometimes. Self-interest promotes the public good only sometimes. And these things mean markets produce optimal results only sometimes.

Great. But where does that get us? The authors argue that being more realistic by integrating the factors at work at group level with those at work at the individual level allows us to make better predictions on which interests - individual or group - will dominate in particular circumstances.

"A one extreme, if selection among groups is frequent and severe, we may expect an increased alignment of individual and group interests resulting in successful firms with hard-working, groupish, highly committed employees," they say.

"At the other extreme, if selection among groups is rare and weak, we may expect increased conflicts of interest resulting in inefficient firms and lazy, self-interested workers."

By group selection they mean cultural selection - some ideas and practices beat others - not biological selection. And, because ideas can spread so quickly, not needing to wait for genetic evolution to occur generation by generation, cultural evolution is much faster and more powerful.

The authors say competition between firms may be a quintessential example of cultural selection.

A weakness of the neoclassical model is that it exalts competition between economic agents while ignoring the co-operation within firms that is such an important part of real-world competition in markets.
The evolutionary approach, however, does much to illuminate the role of co-operation.

"Individuals are adapted to co-operate in groups but do so in individually adaptive ways," they say. "That is, we are co-operative, but only so long as our own individual costs and benefits are taken into account."

People want to be rewarded for their contribution but also to see that their reward doesn't compare badly with the rewards fellow workers are getting relative to their contribution.

But whereas the conventional economic model focuses on only monetary rewards and punishments, the evolutionary approach predicts that individuals will be powerfully motivated to strive for social status and prestige within their firm, even at the expense of material rewards or the risk of punishment.

The evolutionary approach also offers a better explanation of why individuals would want to take on stressful and time-consuming leadership positions, which are not always compensated by higher salaries: higher social status rewards.

The key to improving the performance of firms, we're told, is not to strike some inefficient compromise between the interests of individuals and their group but to work with the grain of human nature to bring individual and group interests into alignment. If you know what you're doing, this can be achieved relatively easily and at low cost.

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Why KPIs are a dangerous fad

You have heard of painting by numbers, but these days the great fad is management by numbers. I call it the metrification of business - although it's just as prevalent in the public sector. If you know what the initials KPI stand for, you'll know what I'm talking about.

I've been a bean-counter all my working life, first as an accountant, then as an economic journalist. So I've long believed in the importance of measurement, of getting the measurement as accurate as possible and of understanding the strengths and weaknesses of particular measures.

Much of my apprenticeship as an economic journalist was spent making sure I understood how all the economic statistics were put together. But as I've watched the enthusiasm for "key performance indicators" and other "metrics" grow, I've become increasingly sceptical about their usefulness.

The rise of metrification has been built on repetition of the seeming truism that what gets measured gets managed. It follows that what isn't measured isn't managed.

It's certainly true that what we measure affects what we do and the way we think about the phenomenon being measured. So in the drive to hold workers accountable - that is, to increase control over them - and improve their performance, it's become fashionable among managers - private and public sector - to measure key aspects of an organisation's performance.

It's only a small step to setting targets for the performance measures and, often, raising those targets from year to year. You might have targets for the performance of organisations, but also for the performance of individuals. And it's only another small step to link performance to remuneration. We pay for results - what could be fairer?

The rapid escalation of executive remuneration over the past 20 years has occurred not so much because of the rise in basic salaries as the proliferation of "performance pay". A study by Mihir Desai, of the Harvard Business School, found that, in America, the proportion of the total pay of senior managers that is based on share prices rose from 20 per cent in 1990 to 70 per cent in 2007.

But, as The Economist reported last year, Desai found this had warped incentives and fostered malfeasance. Managers had won huge payouts simply because the share market had gone up, regardless of whether they had personally added value.

"They have also gamed the system, sometimes illegally, to hit targets that put fat sums in their pockets," it said.

The trouble with this measurement approach to accountability and reward is that, as the American psychologist Martin Seligman has said, "If you don't measure the right thing, you don't get the right thing."

When the push for micro-economic reform was at its height, someone got the bright idea that if you calculated and made public the equivalent of key performance indicators for all the many responsibilities of the state governments, you'd encourage them to compete among themselves to improve their standing in the league tables.

The Productivity Commission has now compiled and published these indicators for many years. But someone who should know warned me they'd become completely unreliable. Why? Because managers in each state had manipulated their results to make them look good against the competition.

In 2005 the website Crikey.com.au ran a letter from an anonymous public servant reporting their experience with management by KPI.

"Early in June our manager discovered we were a few percentage points away from meeting operational requirements for the financial year. Rather than explain to his boss that staff cannot perform well when there are continual computer problems and weekly changes in procedures and priorities, he instituted a series of ludicrous schemes to improve the statistics," the person wrote.

"Any work that was already out of time was placed on the backburner, not to be touched until after July 1, when it would be counted in the next year's statistics. In other words, work that was overdue would not even be looked at for another fortnight.

"For two days staff did nothing but go through their files searching for cases that could be closed without further action or referred to another area. We achieved absolutely nothing in terms of genuine output for those two days, but our percentage of resolved cases sky-rocketed. We then started on the new work, but only worked on simple cases that could be closed well within the acceptable operational time frame...

"On June 30 our manager proudly announced that we had achieved operational requirements."

I've been around long enough to know that measurement can be a trap. People can be mesmerised by numbers. Because they're objective, people take them to be infallible. They forget (if they ever knew) the assumptions and other limitations on which they're based, they take them to be measuring something they're not and they forget how easily others can manipulate them for their own purposes.

It's easy to measure quantity, but much harder to measure quality. Most jobs are multi-dimensional, but you can't have a KPI covering every dimension. In which case, I can always meet my KPIs by cannibalising some dimension - some aspect of quality - not covered by a KPI.

Einstein said "not everything that counts can be counted". The modern preoccupation with metrics is an attempt to over-simplify the managerial task by confusing quantity with quality.

Sorry, life wasn't meant to be that easy.

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High dollar’s job losses will raise productivity

If your goal is to raise Australians' material standard of living, the debate about what must be done to increase our flagging productivity is vitally important. But if we want the debate to achieve something, we should stop talking so much weak-headed nonsense.

People are talking about productivity as if it's motherhood for businessmen - all fluffy and soft. Sorry, productivity is more nasty than nice. Sometimes it's red in tooth and claw. It always involves effort and unsettling change, and often involves people being thrown out of their jobs.

As the headlines scream at us every day, many of our industries are being put through the wringer at present, and are shedding workers to prove it. This is not a downturn in the economy, it's the economy being hit by multiple pressures for structural change.

Manufacturers (and tourism and education - not that anyone cares about them) are being hit by the high dollar. Retailers are being hit by the end of a 30-year period in which consumer spending grew faster than household income and by globalisation as the internet breaks down longstanding national price-discrimination schemes. Shopping-centre owners are also in the gun.

Banks are still adjusting to the continuing global financial crisis, which has increased their cost of funds while also increasing their pricing power. Newspaper and media companies, and book publishers and sellers, are adjusting to the information and communication revolution. Qantas is adjusting to deregulation and globalisation.

Guess what? All these nasties are in the process of increasing Australia's productivity - as we speak. To the extent firms are shedding labour faster than their unit sales are declining, they're increasing their productivity as a matter of simple arithmetic.

More fundamentally, structural change is presenting all these firms (bar the banks) with an ultimatum: shape up or die. As they fight for corporate survival in a radically changed world, they will become leaner and fitter. In the process, they'll almost certainly contribute to an increase in national productivity.

What this means, however, is that all the business people, union leaders, opposition politicians and commentators pressuring the government to protect industries from change are fighting to prevent productivity improving. And every time the government gives in to those pressures it's acting to stop productivity improving.

I'm convinced many of the worthies banging on about productivity don't actually know what it is. Productivity is output per unit of input. That means it's about comparing quantities, not prices or values.

This is why productivity and profit (or profitability - profit relative to the equity capital or assets employed to earn the profit) are quite different concepts, not pretty much the same thing - as many business people seem to imagine.

Usually productivity is measured as output divided by units of labour inputs (hours worked), giving the productivity of labour. If you divide output by units of both labour and capital inputs you get "multi-factor [of production] productivity" (which always grows at a much slower rate).

The great delusion of the productivity debate - one inadvertently fostered by crusading economists - is that productivity improvement is a gift governments deliver to business, provided they have the political courage to implement "reform".

Rubbish. As our great private-sector productivity expert Saul Eslake has said: "Productivity only happens as a result of the decisions that are made and implemented in places of work."

So there's an obvious question no one is asking: why have Australia's chief executives failed to increase their firms' productivity for the past decade? Obvious answer: because it's been easier for them to increase their profits without doing much to increase their productivity. (And a big part of the reason for this is that the economy's been growing reasonably strongly, year after year, for 20 years - with just a mini-recession in 2008-09.)

Research suggests few firms actually measure their labour productivity. That's no surprise: the goal of firms isn't to increase their productivity it's to increase their profit - which is what they do measure, carefully and often.

Increased national productivity may be the key to rising material living standards, but increased productivity is just an incidental by-product of a firm's efforts to increase its profit. There are often many easier ways to increase profit than to improve your productivity.

Sometimes firms increase their productivity in response to opportunities or incentives - carrots - created by governments. This is what chief executives dream about while primitive tribes dream about planes dropping cargo from the sky.

Sometimes firms increase their productivity in response to governments beating them with sticks to force them to lift their game. This is known as "micro-economic reform". You slash protection against imports, allow the dollar to float, dismantle a host of interventions designed to give industries an easy life and tighten up the Trade Practices Act.

All this increases the competitive pressure on firms - from imports and local competitors - forcing them to lift their performance and their productivity. Is this the "reform" the business lobbies are crying out for? I doubt it.

Sometimes national productivity is improved by nothing more than firms doing what they do: striving to increase their profits. But, as we've seen, that hasn't been happening for a decade.

Alternatively, national productivity is improved as a by-product of firms grappling with adverse changes in their economic environment that threaten their profits and even their survival.

That's what's happening in our economy right now. You want higher productivity? Your wish is about to come true. When we've got through the present bout of structural adjustment we'll have a much more efficient set of industries. But everyone seems to be hating it.

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Breakdown in relations is everyone's business

I get to meet a lot of famous and interesting people in my job, but few have had more influence on me than Dr Michael Schluter, the social thinker, social entrepreneur and founder of Britain's Relationships Foundation.

They say genius is being the first to say the obvious. If so, Schluter is one. I'm sure Socrates or Aristotle beat him to it but, in our time, Schluter is the first to forcefully remind us of something we all know: the importance of our human relationships.

We are, above all, social animals. After we've secured our physical survival, the most important thing in our lives is our relationships: with friends, neighbours, workmates and, above all, with our families - our parents, siblings, spouse and children.

Even if we've avoided speaking to them for years, even if they're dead and gone, we can't stop thinking about them. If we've cut ourselves off from our families, be sure we've sought to fill the vacuum with other relationships. Take away all our relationships and who'd have much reason to live?

So much for stating the obvious. But here's Schluter's simple, unarguably telling, point: if our relationships are so fundamental to our well-being, why do we keep forgetting to take account of them in our strivings? Wouldn't we be better off if we got into the habit of viewing all our endeavours through a lens that focused on their implications for our relationships?

How often do divorce lawyers advise people to avoid all attempts at reconciliation with their estranged spouse for fear of weakening their legal position? How often do doctors treat physical symptoms that aren't what's really troubling their patient?

How often do politicians who loudly proclaim their support for the family then consider 101 policy proposals without a thought as to their implications for people's relationships? As for economists, their model is so narrowly focused on the individual that they become oblivious to the potential effects of the policies they advocate on the relationships that sustain all individuals.

The truth is much of our ever-increasing material affluence over the past 200 years has been achieved at the expense of our relationships; by making the workings of the economy ever bigger, more complex and impersonal; by encouraging economic transactions between people who've never met, let alone had a relationship with each other.

Back to Schluter's insistent reminder: aren't we paying a price for ignoring the relational implications of all this? Wouldn't we be better off if we put the protection and promotion of our relationships back into the formula?

So far have we strayed from recognising the primacy of our relationships that the proposals of the mild-mannered, respectable, god-fearing Schluter sound positively radical.

About 150 years ago, the invention of the limited-liability company allowed people with money to invest to become owners of companies without taking any part in their management. The development of stock exchanges allowed people to buy and sell their shares in a company as easily and often as they liked. From these innovations came the huge corporations that dominate the economy today.

Economists see them as milestones on our path to prosperity. Schluter sees the downside. So, last month, in troubled Britain, he and a colleague, Jonathan Rushworth, launched a plan, Transforming Capitalism from Within: a Relational Approach to the Purpose, Performance and Assessment of Companies.

He proposes that enlightened firms submit themselves to the discipline of a 10-step ''relational business charter''. Step one is for the company to include in its articles of association a goal to become a profitable and sustainable business for the benefit of all its stakeholders - owners, directors, managers, employees, suppliers and customers - and the wider society.

Step two is to promote dialogue among company stakeholders, preferably through regular, face-to-face meetings.

Step three seeks to reduce ''relational distance'' between shareholders and the employees and other stakeholders by promoting share ownership by named individuals and family trusts rather than institutional investors such as pension funds.

The goal could be 25 per cent direct ownership pursued, partly, by encouraging employees to own shares. Ideally, a growing proportion of shareholders will live close to the company's main base.

Next, to achieve commitment, involvement and responsibility by shareholders, relational firms should encourage long-term ownership, perhaps by issuing additional shares to those who hold their shares for long periods.

Step five is for companies to help their employees achieve work-life balance by minimising long working hours and work at unsociable hours (including weekends) wherever possible. These things have a direct effect on the families of employees, particularly if the employee will not be present to share the bringing up of children.

Then firms will seek to respect the dignity of all employees by minimising remuneration differentials within the business. A ratio of 20:1 between top and bottom would be a good benchmark.

Relational companies will treat suppliers fairly and with respect, paying them promptly and giving them support to develop their businesses.

Relational companies will treat their customers and the local community fairly, respecting their concerns about reasonable payment terms and adequate service.

Step nine involves companies protecting their business and stakeholders by minimising the risk of financial instability, limiting their ''gearing'' - ratio of borrowing to shareholders' funds.

Finally, relational companies will fulfil their obligations to the wider society by paying a reasonable proportion of profits in tax in the country where those profits were earned. They will also spend a reasonable proportion of profits on corporate social responsibility.

The musings of a hopeless dreamer? I think our companies' present ruthless pursuit of profit at any cost is an excess that can't last. Schluter is a prophet pointing the way back to more sensible capitalism.

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Look within to pick up productivity

One of the tricks to success - in business, or in life - is to focus on the things that matter, not the things people (and hence, the media) are getting excited about this week. Of late we seem to be doing a lot of worrying about the wrong things.

For instance, our preference for bad news over good means we've been doing a lot of hand-wringing over the economic problems in Europe and the US. What's happening in China and the rest of developing Asia may be far less worrying - and hence, less interesting - but it's also far more important to the fate of our economy.

When we look at our economy, we give much more attention to the alleged two-speed economy - who's feeling hard done-by this week? - than to the truth that, with limited exceptions, the economy has been travelling well, is travelling well and is likely to continue travelling well.

As part of this, of late we've been devoting inordinate attention to the problems of the manufacturing sector (which accounts for 9 per cent of total employment), without any concern for the services sector (accounting for a mere 85 per cent of employment), even though two big service industries - tourism and education - have also been hard hit by the high dollar.

But even those of us happy to acknowledge how well our economy's travelling, thanks to high export prices and the mining construction boom, are less conscious of the sad truth that, underneath all that, the economy's productivity - output per unit of input - has stopped improving.

We're getting richer because the world is paying us a lot more for our exports and is engaged in a massive expansion of our mining industry, not because our businesses are getting more efficient at what they do.

That message is, however, getting through to big business and its various lobby groups. Only trouble is, in their search for a solution to the productivity problem they've been looking outside their firms, not inside. Perhaps if the government reformed the tax system, that would lift productivity. Or maybe going back to Work Choices would help.

It's possible that, while they come to our attention only when they're putting their oar into the public debate, most chief executives are busily engaged attending to their own, internal affairs. It's possible, but there doesn't seem much evidence of it.

That's why the most useful thing to come from last week's jobs forum in Canberra was the unveiling of a study on the leadership, culture and management practices of high-performing workplaces, sponsored by the Society for Knowledge Economics with funding from the federal government.

A team of academics from the University of NSW, the Australian National University, Macquarie University and the Copenhagen Business School examined 77 businesses in the services sector with more than 5600 employees. Most were medium size, and included law and accounting firms, advertising companies, consulting firms and employment agencies.

It's probably the most comprehensive study of workplace performance undertaken in Australia in the past 15 years. The performance of businesses was measured in six categories: profitability and productivity, innovation, employee emotions, fairness, leadership and customer orientation.

The study identified 12 high-performing workplaces and 13 low-performing workplaces, leaving most of the firms studied somewhere in the middle. So what are the characteristics of high-performing workplaces and how much better are they than the low-performing?

Well, not surprisingly, the best performers were more profitable and productive. According to the lead researcher, Dr Christina Boedker, high-performing workplaces are up to 12 per cent more productive and three times more profitable.

And it's not too surprising the best performers are better at innovation. They generate more new ideas and are better at capturing and assessing their employees' ideas. In consequence, they make more improvements to services and products, production processes, management structures and marketing methods.

But some treat-'em-mean-to-keep-'em-keen managers will be surprised that high-performing outfits do better on employee emotions. They have higher levels of job satisfaction, employee commitment and willingness to exert extra effort, and lower levels of anxiety, fear, depression and feelings of inadequacy. Part of the bottom-line consequence of this is lower rates of staff turnover.

The employees of high-performing firms tend to be more satisfied people, are being paid fairly and company policies are being implemented fairly.

High-performing firms rate better on customer experience. They try harder to understand customer needs, are better at acting on customer feedback and better at achieving their own goals for customer satisfaction.

But the study is particularly concerned with the performance and attitudes of managers, which business-types these days put under the heading of ''leadership''. In high-performing outfits, managers and supervisors devote more time to managing their people, have clear values and practise what they preach.

They welcome criticism as a learning opportunity. They foster involvement and co-operation among staff, give them opportunities to lead activities, encourage development and learning, give them recognition and acknowledgement and encourage them to think about problems in new ways.

The management practices that do best, according to the study, are being highly responsive to changes in customers' and suppliers' circumstances, encouraging high employee participation in decision-making, achieving on-the-job learning through mentoring and job rotation, making effective use of information and technology and attracting and retaining high quality people.

Of course, different managers have different cultures or styles. Some emphasise results, some their people and some coping with change. The study finds all three approaches can make a high-performance workplace. The one style that doesn't work is the ''control'' culture.

Wow. How'd you like to work for such a boss in such an enlightened business? Pity is, such firms accounted for only 15 per cent of the sample.

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