Fredmund Malik has become the leading analyst of, and expert on, management in Europe (). He is the most important voice - in theory as well as in the practice of Management Peter DruckerLong before everybody else, Malik uncovered the false logic on which conventional corporate governance is grounded, using his comprehensive general management framework. He unmasked neo-liberalism's false and destructive teachings, and the errors caused by the mechanical application of financial management. In this book he reveals why manager scandals, company disintegrations and the collapse of the financial system result from false corporate governance. Malik then contrasts this against his cutting edge solutions to organizing and controlling the complex systems of the 21st century. A healthy economy in a functioning society requires companies to strive for customer value not shareholder value, competitiveness not size, real engineering solutions not financial engineering solutions."Many practitioners hang on his every word and appreciate his candid language." Wirtschaft und Weiterbildung"Malik is listened to because management knowledge has never been more important." Süddeutsche Zeitung
Prof. Dr. Fredmund Malik is habilitated Professor of Corporate Governance and an internationally renowned management expert. He is founder and chairman of Malik Management, the world's leading knowledge organization for integrated management systems based on the science of cybernetics. Based in St. Gallen, Malik Management has around 300 employees, offices in six countries, and a network of partner organizations in the fields of cybernetics and bionics. It is the biggest provider of reliably functioning solutions to interconnected problems of organizational complexity and control. Malik Management helps thousands of managers to integrate and improve their knowledge of general management systems via training and intervention.Malik is the author of more than ten award-winning bestsellers including the classic Managing, Performing, Living. He pens regular columns in opinion-forming media. He is among the most cited and profiled management thinkers of our time. His numerous awards include the Cross of Honor for Science and Art of the Republic of Austria (2009) and the Heinz von Foerster Award for Organizational Cybernetics of the German Association for Cybernetics (2010).
Preface
This book was written for practitioners, in particular those in charge of the overall governance of organizations, who are determined to carry out their task with diligence and to manage correctly and well. These can be practitioners in any function: members of administrative and supervisory boards or executive officers and their shareholders. It is intended, above all, for those who will not content themselves with fulfilling legal diligence duties, but who strive for entrepreneurial success, nothing less.
Current corporate governance practices are far from achieving that. In my view, virtually all business failures since the mid-1990s have been caused in one way or another by the kind of corporate governance that emerged at that time. Owing to the current corporate governance theory, wrong corporate management has been legitimized as "best practice" and disseminated through negligent consulting practices, executive searches, governance ratings, as well as through Wall Street marketing, MBA programs, and a host of business media. I use the term "negligent" because, contrary to widespread opinion, it is very well possible to define what right corporate management is. My understanding of it is laid out in this as well as my other books.
Successful companies are successful because in essential points - and without violating any rules - the way they are managed is altogether at odds to what today's corporate governance standards suggest. Therefore, a right and sustainable way of doing business requires radical reforms: the present corporate governance theory needs to be turned around by 180 degrees, specifically when the interests of real shareholders - not those of investor-type shareholders - are to be protected and high returns are to be achieved.
I would not venture such statements were I not able to base them on many years of personal experience as a member and chairman of several top management and governance bodies, where I have been able to see what right approaches and what wrong ones are, what is feasible and what is not. From an outsider's point of view, it is impossible to make a reasonable judgment of the professionalism and effectiveness of such panels; much less is it possible to form an accurate opinion based on the numbers in published accounts. External ratings are therefore presumptuous. But even supposedly scientific surveys, though they may be based on interviews with experienced individuals, do not permit an objective, fact-based judgment.
It is my contention that, in the absence of any personal experience, it is impossible to acquire a sound knowledge of how top management bodies and corporate governance function and that, consequently, it is just as impossible to judge them or make workable suggestions for improvement. The information required in order to do so - not to mention the necessary theoretical knowledge - can only be gained in many years of active participation in such bodies in a responsible function, preferably not only in good times but also in periods of crisis. I have repeatedly experienced such crises, and there have even been cases where the problems were beyond solution because earlier mistakes and failures had done too much damage.
It is only in situations like those that one will truly experience the reality of corporate governance, and that the true nature of those in charge, their skills, character traits and personalities will be revealed. This is where courage and cowardice, competence and failure come to light - and where it is made very clear what true leadership is, as opposed to the naïve and deluded theories that have become fashionable; for it takes a crisis to prove true leadership. It will become evident what works and what doesn't when there is maximum complexity, dynamics, and risk. In circumstances like these, people learn to appreciate the value of knowing the laws of science, which reliably help us to master complexity and to find solutions even where others have long given up trying. With existing corporate governance and the constraints it imposes on management bodies, it is possible neither to master a crisis nor to take advantage of entrepreneurial opportunities - which is just as important.
This book was written at the time when the general corporate governance debate was beginning to intensify. Back then I already had plenty of hands-on top management experience, which I had gained by closely working with companies and corporate leaders, actively participating in top-level management boards, and pursuing my own entrepreneurial activities. Its substance is still valid today.Some of my key suggestions have been taken up by practitioners, for instance with regard to the size and composition, workings, and management of supervisory boards. Another thing that has largely been implemented is the much-needed two-tier structure of corporate governance, which has been fully established in the UK but not in the United States. In other crucial points, such as the substance of right and good management, current corporate governance practice is still off the track or has not found the courage to formulate clear statements.
I have added a new introduction to this book in chapter 1. It should help readers to get an overview of the major developments that have taken place since the book was first published, and what developments have been missed.
Apart from this book's practical relevance, the reason it remains valid and relevant is that the issues it deals with differ greatly from those generally addressed in the general corporate governance debate. The central question here is: what is right and good corporate governance? In other words, this book is about what top managers need to do to ensure proper corporate governance.
That is in stark contrast to the prevalent view of governance, which chiefly focuses on legal and financial aspects. My aim is not to remind readers of the formal rules of the Stock Corporation Act; rather, I am getting deep into the question of how companies, and thus the business world as a whole, can function properly in a society and a world that are increasingly complex.
Needless to say, good corporate governance will always occur within the boundaries of the relevant legal framework, and will always have to involve financial considerations. Both, however, must be derived from a concept of right governance, not the other way round. After all, the success of corporations is a result of their standing the test of the world market - with globalized business, science, and technology changing at an unprecedented pace, combined with the realities of a radically transforming society. Business success is never a result of a company's abiding by the law, the basic principles of which (despite numerous amendments) go back to as far as the early 20th and even the 19th century.
In other words: the provisions of the law and the corporate governance codes will have to be adapted to the functional principles of institutions that form parts of highly complex global systems, not vice versa. The functional principles of mastering complexity are governed by the laws of nature, just like the functional principles of technology. And the laws of nature cannot be changed with legal provisions and codes.
Wherever this simple fact is not accepted, there will soon be no business sector at all, nor a functioning society, because other countries are able to shape their rules with a view to the future and to align their institutions with the complex circumstances of the 21st century, not with the past.
This book, and my entire work for right and good management, have been influenced by my day-to-day work with practitioners - top managers, entrepreneurs, and those working with them most closely - as well as by my own activities as an entrepreneur and as the owner of the largest and leading Swiss firm in the field of top management consulting and education.
In over 30 years I have probably met more executives than most other people ever will, working with them, giving them advice, and training them in all matters of corporate general management, corporate policy and strategy, structural and organizational issues, corporate culture, and in building top management teams as well as functioning governance bodies. The positions I espouse in this book have proven their worth in hundreds of cases, having been applied in cooperation with managers and entrepreneurs. As for the scientific basis for these views, I provided them in my 1976 professorial thesis entitled Strategie des Managements komplexer Systeme ("Strategy of the Management of Complex Systems"). In the same thesis, I also explained and provided my reasoning for why cybernetics, as a science of control, regulation and steering, is the only valid foundation for functioning management and why the economic sciences fail to provide that foundation.
Ever since then, building on the foundations laid in my thesis, I have developed and tested a comprehensive, universal, and modular general management system, published it in several books, and created the organization required for its implementation, with the world's largest staff of general management experts operating from an international office network.
The rapidly increasing complexity of all societal systems calls for professionalism in the management profession, applying technical and conceptual standards of the kind that has long been known for all sophisticated professions. There should be no room for wrong theories, for fashions, and for rotten compromises. Functioning reliably under the conditions of high and increasing complexity should be the maxim for the 21st century: this is how we can prevent evolution from being destroyed by stagnation or revolution.
June 2008, Fredmund Malik
ContentsIntroduction to the English Edition 9Preface to the English Edition 13Terminology Aspects 21Preface 231. New Introduction 2008: A Drastic Cure to Ensure a Functioning Corporate Governance 29Corporate Governance Must Transform Into Functioning Management 29Twelve Propositions for Reforming Corporate Governance 31Why Today's Corporate Governance Cannot Meet its Purpose 34"Best Practice" - The Road to Bankruptcy? 38When Corporate Governance Is Confused With Good Management 41What Is a Shareholder, Anyway? 43Logic and Rhetoric of the Market 45The Best Companies Are Overlooked 46Missed Opportunities 48Two Functions and Two Management Bodies 512. Fundamental Reorientation 53What Is Corporate Governance? Consequences of a Question Wrongly Posed 55Grave Management Misunderstandings and Their Consequences 58Corporate Governance in the Best Interest of the Company 61Illusions Instead of Practical Management 66Entertainment Instead of Information 68The Delusion of a Superior US Economy 70Part I1. Should Supervisory Bodies Manage? 752. Functional Deficiencies of Current Systems 81Corporate Supervision - a Fiction? 81Is Criticism Justified? 87Classic yet Avoidable Management Mistakes 893. Is Management Ready for the Future? or: The Great Transformation 99Misinterpretation of the last two decades 99Almost Everything Will Change 104Management: The Most Important Societal Function 1164. Corporate Governance 125The Significance of an Effective Corporate Supervision 125Profit Maximization Destroys a Business 130Three Models of Corporate Governance - and a Fourth 1355. What Is a Healthy Business? Assessing Corporate Performance 149Market Position 150Innovation Performance 152Productivities 153Attractiveness to Good People 158Liquidity and Cash Flow 159Profitability 160Precision of Measuring Variables 162Having the Right Discussions 163Biological Thinking in Management Is the Future 164Part II1. The Architecture of Top Management 1712. Designing the Supervisory Body 176Tasks of the Supervisory Body 177Size and Internal Organization of the Supervisory Body 183Composition 187Compensation of the Supervisory Body and the Principal Agent Theory 198Management of the Supervisory Body 200Evaluation of the Supervisory Body 209Management Audit 210The Chairman of the Supervisory Body 2123. Design of the Executive Body 218Tasks of the Executive Body 219Effectiveness of the Executive Body 227Term of Office 230The Executive Body as a Team 233Executive Pay 239Pseudo-Justification by the Market 240A New Beginning for Managerial Income 2414. Management or Leadership 245Errors and Misconceptions 245Mystification by Attributing Characteristics 249From Manager to Leader 251Charisma 2605. Power, Responsibility, and Liability 262Duty of Care Is Not Enough 263The Issue of Liability in an Employee Organization 265Groundbreaking Examples for Liability Regulation 2666. Selecting Candidates and Filling Top Positions 269Four Risks in Top-Level Personnel Decisions 269Seven Principles for Good Personnel Decisions 272Methodology of Personnel Selection 275Succession Decisions at the Top 281Personnel Decision Outside the Executive Body 283Recruitment From Inside or Outside? 284Epilog 287Appendix: Appearance and Reality 289Appendix 2008: Germany - Healthier than People Think 301Bibliography 315Index 317
