If the banking scandals and credit crisis had one positive effect, it was to highlight that institutions ultimately stand or fall due to human behaviour. The collapse of supposedly rational, self-regulating markets was so evidently the result of age-old human follies that understanding the ‘soft’ stuff suddenly became a priority.
Groupthink (the tendency of individuals with similar backgrounds to reinforce one another’s worldview), overconfidence bias (allowing past success to blind you to emerging risks) and confirmation bias (filtering out evidence that clashes with established narratives) created asset bubbles and major policy errors by traders, central banks and governments – and catastrophic business failures.
Ten years ago, an executive would risk ridicule by opening a board discussion with an invitation to scrutinise long-held beliefs, or try to make conscious some unconscious biases. Now, this is commonplace.
This builds on the well-established evidence base showing that factors such as personal resilience, patience, practical wisdom and team engagement have a major impact on the ability of a company’s people to serve their customers, generate economic returns and innovate to stay competitive.
There is one lingering cultural belief, however, that limits the humanising reform that such developments have brought: While at the level of individuals and teams it is credible to report tangible progress, at the organisational level the terms of reference continue to be dehumanised: market share, quarterly reports, assets, corporate structure, capital, outsourcing, cost base. Company reporting remains dominated by historic financial results.
A common response to this disparity is to divide the company and the managerial task into the ‘hard’ matters of finance and structure and the soft matters of culture, trust, and relationships. Is this dualism, and the assumptions it rests on, soundly based? Is it affected by unconscious biases?
For example, many of the common terms of reference in business management that support such dualism, such as corporate structure and human resources, are actually metaphorical – something that is rarely, if ever, acknowledged. The concept of the firm in the standard MBA curriculum is taken to be both singular and inanimate, which is not how any firm actually operates in the real world.
The dualism is most starkly visible in the somewhat stymied efforts to represent the value of human capital. For many, especially in the investment community, it has been a source of frustration that a large and growing part of decision-making rests upon guesswork. Financial information dominates analysis, but in the past 20 years the proportion of a company’s market value that consists of quantifiable, tangible assets on the balance sheet has shrunk, while the proportion of intangible assets – reputation, skills, human capital – has grown.
Early in 2015, the latest official UK report summarising progress on methods to quantify intangible assets described limited progress since a similar publication, the 2003 Kingsmill Report, attributing the limited uptake to lack of consistency, credibility and clarity in reporting. It stated:
“The value of intangible assets within organisations, such as human and intellectual capital, has increased significantly in recent years as the global economy has become more knowledge-intensive… Given the value of such [human capital] data in illustrating the potential for future poor performance, it is surprising that uptake of improved human capital reporting standards has been so slow.”iiibr
Now is the time to ask questions not only of the metrics, but also of the narratives – the a priori beliefs and any possible cognitive biases.
This leads to the intriguing idea that we may have been seeking a technical solution to a conceptual problem. In approaches to human capital, the inert, mechanistic metaphors conventionally applied for business analysis and reporting have been accepted uncritically. It is assumed that ‘the company’ is a static set of assets, one of which is people. It is further assumed that the financial accounts both can, and should, capture all of the value represented by these assets.
A further significant assumption is that assets that can be owned should be classed as tangible while others are categorised as intangible. This is based on the accounting convention that seeks to represent the market price of an owned asset (tangible) versus the fluctuating approximate value of the hired, people-related assets (intangible). Yet the everyday world that confronts a business manager is quite the opposite. It is the accounts and the company that are conceptual. The company is a set of legal concepts. People, on the other hand, do exist.
This leads to a bigger revelation still: that the company does not simply feature behaviour and psychology, but that it is behavioural. The human asset is not only the most important one, it creates all the others. A company creates and deploys resources, it doesn’t consist of them. A usable business asset is invariably a by-product of behaviour; of decisions and the application of skills.
This is a Copernican shift, with profound implications for strategic management and company reporting, as well as personal qualities and the organisation of teams. It would mean, for example, that company accounts become an appendix to the People Report, a rich blend of quantitative and qualitative reports on the strengths and weaknesses of the real business, instead of the current practice to add a mistitled summary of intangible assets onto the financial report.
The concept of the company that emerges from this deeper inquiry is one that is behavioural all the time; not just when a manager is thinking about employee engagement or emotional intelligence, but also when he or she is considering outsourcing or introducing new technology. With this analysis, the dualism discussed above into hard and soft is not merely unhelpful, but conceptually flawed.
This dualism causes the wealth of literature on empowering leadership to be placed into the category soft. Such categorisation inhibits the application of research by ring-fencing the findings, preventing their dissemination across all managerial endeavours. The evidence ought to be permitted to influence strategic thinking, business organisation and reporting, as well as policies for personal leadership development and employee engagement.
The bias inherent in the metaphor hard implies a greater strength, rigour and relevance, causing them to crowd out soft matters. This results in psychologically naive organisational design, often not conducive for human development and performance. The metaphor of a human resource relegates the individual to being a mere means to an end, accompanied by reification of concepts of the company or ‘maximising shareholder value’
A consistent understanding of the company as a thoroughly behavioural entity can assist a radical shift, and lasting improvement, in strategic management, especially of people and of risk. It is a shift from people serving organisations to organisations serving people, yet counter-intuitively assists organisational stewardship by offering a more accurate, less metaphorical guide.
If operating cost, for example, is understood as being behavioural, rather than the aggregate sum of items on the balance sheet, managers are better placed to make wise decisions and avoid false economies. A major contributory factor in the banking crisis was the creation of large financial incentives to meet annual targets on the profit/loss statement. But this crude measure hid all manner of operational risk, and it created incentives to maximise profits through unsustainable trades in unsafe derivatives that ultimately led to institutional failure and government bail-outs . A behavioural understanding would have helped prevent this.
Our understanding of how to use information technology is also transformed by this behavioural understanding. In many modernisation programmes, the investment decision is based on what the technology can do, with people expected to work around it, and with an operational assumption that maximising automation always improves efficiency. This can result in poor judgement on which aspects of service to automate, driving away potential custom. It has also led to a downplaying of the importance of technical training, and aspects of service that can only be delivered by human beings, such as intervening to correct unexpected errors or accidents.
Belief in the static inanimate company of assets and human resources also encourages the assumption that companies are essentially alike and must benchmark and out-compete one another. The emerging consensus on strategy formation is that firms should seek to be unique and should think differently . Again, a thoroughly behavioural understanding would accelerate this learning.
The revelation that a psychological understanding is of central importance to business management is having perhaps a bigger impact than some cognitive psychologists themselves might expect. It is breaking down the arbitrary barriers between hard and soft business disciplines, with profound implications for both management and company reporting. Adjusting our view of management to one orientated around an understanding of human behaviour creates an agenda that is at once more realistic and more humane.
iThinking, Fast and Slow, Daniel Kahneman, Penguin 2012, provides a summary of several decades of academic research into cognitive biases – for which Kahneman won the Nobel Prize for Economics in 2002
iiPrimal Leadership: The Hidden Driver of Great Performance, Daniel Goleman, Richard Boyatzis, Annie McKee, Harvard Business Review, December 2001. For insight on ‘patience’, see Patience and Finance, Andrew Haldane, Executive Director Financial Stability Bank of England, September 2010 https://www.bankofengland.co.uk/speech/2015/stuck
iiiHuman Capital Reporting: Investing for Sustainable Growth, Research Report January 2015 by Valuing your Talent
ivStrategic Risk & Reward: Integrating Reward Systems and Business Strategies After the Credit Crisis, ed Philip Whiteley, International Financing Review 2008
vUncommon Sense, Common Nonsense: Why Some Organisations Consistently Outperform Others, Jules Goddard & Tony Eccles, Profile Books 2013
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