Wednesday, October 11, 2006
The 'Psychopathic' Organisation
Recently i read a popular history of the British East India company and it brought back a few of the old questions. If we look at the modern organisational form of the "limited liability multinational" it is a very recent advent. Hardly a couple of hundred years old. It may be argued that the industrial revolution is only two centuries old and hence this is no surprise. Other forms - partnerships, properitorships, trade guilds, trust-based co-opratives are on the decline with the modern corporation ('Big Money') obliterating virtually all other viable organisation models at a global level.
However there are some problems with this almost-universally accepted organisational form :- The modern multinational is 'psychopathic' by design. A 'psychopath' is someone who does not have the power to diffrentiate between the the right and the wrong. This does not mean that the person is 'evil' or 'bad' instrinsically. A psychopath simply does not have the 'ability' to recognise something is bad...The modern organisation is 'psychopathic' by design. Why ? Essentially the single minded quest for profit. The modern mulinational is supposed to be this ruthless efficient profit-making machine. It is rewarded handsomely if it does so and is reviled as a failure if not. In this complete and total quest for profit, it rarely has the time or the energy to look at the 'means'. The pressure is all the more if the organisation is not doing well. A profitable corporation is perhaps able to 'afford' values. A loss making entity just does not have that luxury in order to survive in this era of global cut-throat competition.
Digging deeper - Why do organisations become 'psychopathic' ?
In my view two basic reasons :- the agency problem and market fundamentalism.
Agency Problem : Today's corporations are 'limited liability' by design. This means that ownership is diffused and ownership and management is separated.
By limiting the liability of the corporation, it's actions cannot be attributed to a single person. Since it is so easy to invest in a company without being actually responsible for what it does, an investor feel strangely 'insulated'. This is also a kind of 'moral insulation'. For example, due to the policies of the East India company, around 10 million people died in Bengal of a completely man-made famine in the 1770s. However, a commoner in London was free to trade in the company stock without feeling in the least morally obligated to own up this human tragedy. So long as the company was paying an above-market dividend, it was just a smart investment choice.
In separating ownership and management, also lies an intrinsic risk of losing one's moral compass. Since most of management's renumeration is linked to the performance of the organisation, a manager will go to almost any length to make the company successful. One of the ways to earn super-normal profits is to possess 'market power' through whatever means. While today great attention is paid to the "legal" legitimacy of the means, nobody thinks about the 'moral' legitimacy. In this scenario there is no self-correcting mechanism. Managers go on a path which promises them greater compensation and the owners (investors) silently egg them on in their hope to earn return on their investment. An unholy nexus is created. Simply put there is no mechanism to promote moderation, assess the damage the organisation may be doing to the wider community. 'Conscience' in a manager is taken as a sign of weakness and 'Emotions' are dubbed unprofessional behaviour. The unsaid message the manager gets is - "If you are too squeamish to do the job, we will get somebody else".Down the line, junior managers simply employ the Nuremberg defense - We were following orders as our jobs were at stake.
A second reason why organisations become psychopathic is our almost blind alligience to the market. We seem fundamentalists in our defense of the market. Naively believing that the market is the ultimate arbiter of economic success. Any form of govt. intervention/regulation is deemed 'unnecessary' and 'growth-hampering'. What the markets cannot handle is the propensity of human greed and excess. Take Enron or Worldcom. Think artificial stock market bubbles and crashes. Or the gross inefficient allocation of capital done by some of the smartest minds on Wall Street. This mentality of the 'sanctity' of the market blurs our moral sensibility. Just because the market rewards something does not make it 'right'. Organisations measure their sucess through the lens of the market making them psychopathic.
Organisations try to apply band-aid solutions to fend off these psychopatich tendencies. There are audit and ombuds committees, formal whistle-blowing channels, community feedback forums and hotlines to the top management. But the bigger issue of organisation design and economic organisation will not be solved by taking a few credits on "Business Ethics" in MBA schools. Or the self-indulgent MDP junkets on Corporate social responsibility for senior management. There are no easy solutions here. Realistically the modern corporation is too vital and entrenched to discard it. But constant education and vigiliance of all might alleviate some of the risks.
However there are some problems with this almost-universally accepted organisational form :- The modern multinational is 'psychopathic' by design. A 'psychopath' is someone who does not have the power to diffrentiate between the the right and the wrong. This does not mean that the person is 'evil' or 'bad' instrinsically. A psychopath simply does not have the 'ability' to recognise something is bad...The modern organisation is 'psychopathic' by design. Why ? Essentially the single minded quest for profit. The modern mulinational is supposed to be this ruthless efficient profit-making machine. It is rewarded handsomely if it does so and is reviled as a failure if not. In this complete and total quest for profit, it rarely has the time or the energy to look at the 'means'. The pressure is all the more if the organisation is not doing well. A profitable corporation is perhaps able to 'afford' values. A loss making entity just does not have that luxury in order to survive in this era of global cut-throat competition.
Digging deeper - Why do organisations become 'psychopathic' ?
In my view two basic reasons :- the agency problem and market fundamentalism.
Agency Problem : Today's corporations are 'limited liability' by design. This means that ownership is diffused and ownership and management is separated.
By limiting the liability of the corporation, it's actions cannot be attributed to a single person. Since it is so easy to invest in a company without being actually responsible for what it does, an investor feel strangely 'insulated'. This is also a kind of 'moral insulation'. For example, due to the policies of the East India company, around 10 million people died in Bengal of a completely man-made famine in the 1770s. However, a commoner in London was free to trade in the company stock without feeling in the least morally obligated to own up this human tragedy. So long as the company was paying an above-market dividend, it was just a smart investment choice.
In separating ownership and management, also lies an intrinsic risk of losing one's moral compass. Since most of management's renumeration is linked to the performance of the organisation, a manager will go to almost any length to make the company successful. One of the ways to earn super-normal profits is to possess 'market power' through whatever means. While today great attention is paid to the "legal" legitimacy of the means, nobody thinks about the 'moral' legitimacy. In this scenario there is no self-correcting mechanism. Managers go on a path which promises them greater compensation and the owners (investors) silently egg them on in their hope to earn return on their investment. An unholy nexus is created. Simply put there is no mechanism to promote moderation, assess the damage the organisation may be doing to the wider community. 'Conscience' in a manager is taken as a sign of weakness and 'Emotions' are dubbed unprofessional behaviour. The unsaid message the manager gets is - "If you are too squeamish to do the job, we will get somebody else".Down the line, junior managers simply employ the Nuremberg defense - We were following orders as our jobs were at stake.
A second reason why organisations become psychopathic is our almost blind alligience to the market. We seem fundamentalists in our defense of the market. Naively believing that the market is the ultimate arbiter of economic success. Any form of govt. intervention/regulation is deemed 'unnecessary' and 'growth-hampering'. What the markets cannot handle is the propensity of human greed and excess. Take Enron or Worldcom. Think artificial stock market bubbles and crashes. Or the gross inefficient allocation of capital done by some of the smartest minds on Wall Street. This mentality of the 'sanctity' of the market blurs our moral sensibility. Just because the market rewards something does not make it 'right'. Organisations measure their sucess through the lens of the market making them psychopathic.
Organisations try to apply band-aid solutions to fend off these psychopatich tendencies. There are audit and ombuds committees, formal whistle-blowing channels, community feedback forums and hotlines to the top management. But the bigger issue of organisation design and economic organisation will not be solved by taking a few credits on "Business Ethics" in MBA schools. Or the self-indulgent MDP junkets on Corporate social responsibility for senior management. There are no easy solutions here. Realistically the modern corporation is too vital and entrenched to discard it. But constant education and vigiliance of all might alleviate some of the risks.
