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What is this all about

For this essay I want to drop a wall or two and take a different perspective. But first things first and to the second title. Let me answer the question as straight forward as I can. This is a series of essays about business. To be more exact: management theory is the most commonly used term for it, meaning not really economics, more the inner workings of organizations, not the whole shenanigans. Although I tend to often overstep boundaries, so, sorry.

The Board Room Version: For fifteen essays we went “Down the Rabbit Hole”. The first part is complete. Here is the summary which show the problems are known, the tools exits, the gap between knowledge and implementation is the subject. “Conversations with the caterpillar” – the second part – begins with the constructive question: not what is wrong, but what do we need for it to become right. Let’s have a puff.

The first title is of course a reference to Lewis Carroll’s wonderful book “Alice in Wonderland”. Alice’s journey is a coming-of-age story in which growing up does not mean just taking over established rules. It means that the language, logic and knowledge we adopt from others – the grown-ups – may fail us. It is only through learning, trying out, experimenting that we can sharpen our judgement in a world where language and identity have become unstable. I am reminded of this every time I dive into a topic and discover that it is like an adventure, with a castle filled with wisdom but also traps. Going down the rabbit hole as Alice did means leaving the comfort of your normalized knowledge and entering a bizarre new land. It’s thrilling but at the same time a bit frightening. This possibility of discovering something wonderful and new has always been my main motivation to read and write.

These first fifteen essays follow the classical form of critique. Meaning seeing an issue and trying to get to the bottom of it, showing where the traditional view has cracks or even breaks down. And I hope I already showed you some hints at alternatives. But this is the first part called “Down the Rabbit Hole”. So if there is a first, there has to be at least a second part. But more on that later, sort of at the end, well not quite the real end. Ah, you are all intelligent people, you’ll see it when it comes.

On how you can help me: If you read this, please also interact with it in some way. Like it, hate it, share it, but please do so by clicking a button or writing a comment on LinkedIn, Substack, Instagram or Facebook. If you don’t, the stupid algorithms prevent it from being seen by other people. I’m really depending on and thankful for each reaction – doesn’t have to be positive. I can really take the disagreement. Believe me, it’s part of my whole thing.

So where has the journey taken us so far? Good time to give you a bit of a treasure map. But please be aware, the map is not the territory, so I included links for you to check out the different essays.

The gunslinger manager takes decisions without a method other than his gut. But we have 2500 years of scientific reasoning which should give us a blueprint for decision making. We saw that intuition has limits, as well as our own rationality. What we need is a more fundamental framework for decision making. And we bookmarked Deming’s Profound Knowledge as something interesting.

The problem of middle management is being trapped between seeing problems but being unable to solve them. Data analysis showed us that the most important issues in a company are due to common causes, which can only be solved by changing the system. Senior management is responsible for the system but KPIs and bonuses are rewarding the wrong things. If not Performance Management then Systems Thinking could be a better approach.

Then we started to look at entire companies and how they do during periods of change. Change management fails often because it confuses culture with communication. Loss aversion, organizational inertia and superficial communication hinder change in organizations. Schein explained to us that culture happens on three levels. Only if you work with the most fundamental level, the basic assumptions, can lasting change happen. Problem is that these can only be experienced. So the whole thing would need to grow from within, not by a newsletter from the top.

I then took you on a trip to the sky to look at a more abstract concept. Thanks for trusting me, because it was important that we look at how reality is perceived in society. Both Boorstin and Goffman see a separation of the ideal of things and the image of things, or the stage and the backstage. And the images and the play are replacing what the idea behind it originally was. The same thing happens in business when slogans become more important than the methods or improvements. Eventually we saw that the image eats reality.

Back at work, we looked at its history. We saw that it developed for as long as there have been humans. From hunter/gatherer to farmer to craftsman to factory worker to salary man: Work was gradually separated from life and became a biography. The home/office separation is only 150 years old. Work and who we are, our identity, are closely linked together, and in today’s business reality that is a problem because work is not stable anymore. Gig work, part-time, changing jobs every three years. Does that mean our identity becomes unstable?

I then forced you to look at the uncomfortable topic of control at work. Sorry, but hey, not all things are nice. Control in the office is a topic since Taylorism. RTO is only the newest version of a game that is based on the same unverified assumptions. We saw that controlling management style is not a way to cope with passive employees – it actually produces them. Visibility of employees at work can be used as a control tool to internalize control because we feel like we are constantly watched. But most importantly the question of what kind of work we are creating these environments for has never been answered.

Then it got really heavy because we had to look at mental health at work and why it is a problem of the organization and not only the person. We saw that burnout is by definition a mismatch between people and their work environment. We saw that high demand and low autonomy jobs where you get no support are the worst for your health. Autonomy, competence and connectedness are central to our wellbeing. There is a blueprint for how companies can act, but the most important part – reshaping work environments and content – is never implemented.

I then introduced you to the big problem of applying simple behaviorism to humans at work. What might work well with rats in a maze can easily backfire with employees. Reward systems can become forms of punishment, destroy teamwork and ignore root causes. Most importantly, rewards destroy intrinsic motivation for work. Which is essential, because so-called hygiene factors like salary and bonuses can only demotivate if missing. True motivation comes from work itself, if work is well designed. Employees need to be understood as more than tools or resources. Kant has shown us that people are always ends, not just means.

All of this brings us to the people in charge: the managers. The job is an invention of the industrial age. But the content of the job is a big enigma. Sure, there is the reality that has been studied, but it’s chaotic and overloaded. Plus there is a large gap to what some people have taught it should be. Follett and Drucker have positive visions of broad societal roles but see the structural problems holding the manager back. We see a job that has accumulated but did not have the time to develop into a real profession.

We took a slight detour and enjoyed some high quality time with quality management. I made sure that all of you saw that customers define quality, not some internal specification. But we also had to see that this can easily become a superficial commitment. The implementation is the problem, and it is a choice, not a knowledge problem. Quality is really value creation, because it shifts the view from internal to external reference. And most important is that the customer has to be inside the value creation process, not at the end of it. And it is also here where all the good and the bad a company produces affects the customer. Bad decision making, structure, culture, control, mental health, evaluation — the customer experiences all of it.

And of course I had to add another history lesson. This time it was the history of corporations, which began in Ancient Rome. The beginning already showed a pattern that would repeat itself across history: Corporations took over some public function, generated wealth, produced fraud and required periodic corrections. The same pattern held true 2200 years ago as it did during industrialization. The source of the issue is that ownership and control were separated as a founding condition of the corporation. A study of the law shows us why it is hard to be healed. The idea was that corporations would get rights and duties by law, but law is mainly used to protect the rights, not enforce the duties. Accountability has never been resolved in a public discussion.

Until 1970, when a short essay seemingly changed everything. Friedman claimed that managers’ sole responsibility is to maximize profits for shareholders. He was backed up by scholars who invented agency theory and promoted ownership and incentives as an alignment tool for managers. The media and Wall Street jumped on the bandwagon. But the whole idea was wrong from the beginning. A corporation cannot be reduced to contracts serving shareholders. The facts were wrong: managers did not systematically destroy shareholder returns, and stock-based incentives did not improve long-term operating performance. It was legally wrong: shareholders own shares, not corporations. And the outcome was wrong: exuberant executive pay, short-termism and inequality rose while shareholders received no promised golden age. There were always alternatives, but the ideology that had formed produced worse outcomes than the system it replaced.

Going so far down into the rabbit hole, I needed to take a quick breath of logic. So I introduced you to the world of sustainability. Because sustainability is not only an ethical discussion, it is also a principle of resource management. The distinction matters because one requires value alignment, the other just arithmetic. Every resource your business needs has a regeneration rate: workforce, customers, suppliers, natural inputs. The regeneration cycle of almost every resource that matters is longer than your management time horizon. Carlowitz coined the term in 1713 and created a three-step program: use what you have more efficiently, find alternatives where the resource is being depleted, invest in regenerating the supply before you need it. This makes sustainability into a straightforward business practice.

With some fresh air, we needed to tackle the heaviest topics, and it all starts with standards. Clause 5.1 (leadership & commitment) is the key to any management system, because the clause asks a moral question – do you take responsibility for this system. We saw that morality – what you claim to follow – and ethics – the discussion on why it is important – is something most companies avoid. And the people within claim neutral technical positions while quietly deciding, without any moral reasoning, what the right thing to do is. This gives you moral stances that were never actually tested. Yet the ethical discussion — whether they still hold up — never happens.

Throughout this journey we have seen a lot of ways organizations, ways businesses, can fail. Relatively smaller stuff, like having bad decision-making frameworks and bad structures and an underdeveloped leadership job, to the heavy stuff of not treating employees like human beings and avoiding moral reasoning. Which brings us to the question of why we choose to fail. It is not a knowledge problem. All the stuff we found on the journey has been known for a long time. Something else is stopping us from doing the right thing. We also saw that the problem is not just some bad people at the top. The system is making it easy to go along and hard to resist. And doing the right thing always involves some effort against the flow. Things such as ideology and policy create rituals that make it easy to show compliance. Acts of compliance create an atmosphere where it becomes compulsory for everyone. Everyone does it, everyone is both oppressed and oppressor at the same time. The mechanism is real, but this does not relieve us of individual responsibility. Psychologically there are additional reasons why we tend to follow the mass. Inside large groups, people start treating themselves and others as interchangeable roles rather than individuals. The problem is that this also means they stop reasoning morally as individuals, which leads to a group without morals. The only way an organization has any moral reasoning at all is if the individuals inside it keep doing it themselves. Staying an individual requires that we speak with each other and also disagree. This only works among people who are different enough to have something to say, and equal enough to understand each other. Only then can we have organizations that are meaningful, that can generate value. Because organizations don’t have consciences, people do. We need to participate and reason and discuss, or we and our organizations will fail.

It is this reasoning and discussing that is central to the second set of essays, which I named – if just for myself – “Conversations with the Caterpillar”. You know the wise, always puffing insect sitting on a large mushroom, talking with Alice, helping her make some sense of it all by constantly challenging her. The caterpillar is not one person, it is more than a dozen very smart people, and we haven’t even met most of them yet.

So I hope you are as excited as I am to have a good puff and talk with them.

On the process and use of AI: Strangely enough, this project started out with me wanting to exercise my writing skills in English for another bigger project, because I always wanted to switch from German to English as my writing language. Well, turns out this one has grown quite big itself. The main reason for that was that – as I always like to question myself and my motivation and my abilities – I started to wonder if that whole business thingy really interested me enough to spend a couple more years doing it. And if I can contribute anything I consider worthwhile. I think after more than 50’000 words I can say it does both. So I won’t be moving to Venice and re-training as a gondolier, or becoming a vegetarian hunter/gatherer in British Columbia any time soon. Sorry, Max.

Since this is now a thing with writers, I want to disclose what kind of technology I use, specifically if and how I use AI. But first let me say that I am a firm believer in the magical concept of the book, and that I think books are more wonderful in physical form. That being said, as a professional reader I also have to be efficient, and digital books are more so. Nowadays I read only about every fifth book in hardcopy, the rest is digital. I find authors and books usually via other authors and via suggestions from friends and AI. And yes I do still read them myself. When it comes to AI, I use it very heavily, and the best summary of my use can be found in the first instruction that all of the AI models I use get: Act as editor, corrector, intellectual sparring partner, hostile reader and structure keeper — never produce any actual essay or book content or text. And oddly enough translations back to my first language — German —  are heavily assisted by AI just out of time reason.

The Czech writer and statesman Václav Havel tells the story of a superior he once had in his essay “The Power of the Powerless.” Brewmaster Š was passionate about his job — he wanted to brew good beer, and worked hard to find ways to improve a brewery that wasn’t doing well. He spent most of his time at work. And he continually pushed his fellow employees in the state-owned company simply because he assumed that all of them were as passionate about making good beer as he was. Which, as Havel admits, they were not — not in the atmosphere of 1970s socialism-induced indifference to work. Š often suggested his improvement ideas to the manager of the brewery. But this man had no passion for the art of beer brewing. He did not know the feeling of bliss when creating something truly remarkable. So the manager always dismissed Š, and grew increasingly hostile toward him. He started to fight Š’s efforts. Š saw no other way than to write to his manager’s superior. He tried to explain why the brewery was doing so badly. His improvements would have helped everybody. The customer would have enjoyed the beer more, the manager would have been seen as more successful, and the employees, including Š, would have been more motivated. Yet nothing changed. The manager was better connected in the system. Š’s letter was seen as an attack on the brewery, the management, and the system. He was called a saboteur for telling the truth. So eventually he was sent to another brewery and demoted, labeled a dissident. The beer stayed bad. And everybody — at least the people working there — knew why.

The Board Room Version: Organizational failure is not a knowledge problem. There are people who see it. Something else stops us from acting. Failure isn’t caused by bad individuals at the top. It’s facilitated by systems that make going along easy and resisting feel hard – regardless of how obviously right the alternative is. Havel shows how ideology and policy become rituals to be performed. The meaning behind it becomes irrelevant, displaying compliance makes it feel compulsory for everyone else. So everybody becomes oppressor and oppressed at the same time. When everyone participates and everyone is shaped by the system, it seems like nobody is to blame. This is a trap, not a conclusion. Thompson rejects both blaming only the top and blaming the system. Responsibility should be traced person by person: what did they do, what did they know, did they have real alternatives. Jung explains that inside large groups people start treating themselves and others as interchangeable roles rather than individuals. A group of people who’ve stopped reasoning as individuals has zero collective moral capacity — a “million zeros.” The only way an organization has any moral reasoning at all is if individuals inside it keep doing it themselves. Arendt shows how people stay individuals: by continuing to speak and disagree genuinely, not just signaling agreement. This only works among people who are different enough to have something to say, and equal enough to understand each other — what she calls plurality. In her study of Eichmann, she shows what happens when this stops entirely: a man who could only speak in stock phrases, and therefore could no longer think from another person’s standpoint at all. Not a monster — someone who had simply stopped reasoning. Organizations don’t have consciences. People do. No system, however much pressure it applies, removes individual responsibility. It’s still a choice — to participate and reason together, or to fail.

When we see organizations fail, it is not a knowledge problem. There are always enough people in an organization who know it. We have seen that the right course is often logical or backed by evidence or even plain obvious. And sometimes it is just the right thing to do based on moral reasoning. Yet going against the established order feels like hitting a wall, or somehow illegal, or dangerous. So the question isn’t why people don’t know better. It’s why, knowing better, they still fail to act — and why the system makes that failure seem unremarkable, even necessary. And why does trying to do the right thing, trying to prevent failure, become the wrong way to act in an organization?

You may say that Havel’s example was life in a communist dictatorship, and that this was just a repressive political environment, fundamentally unlike an ordinary company. What if that is the wrong perception altogether? What if it is not about dictatorship at all, but something more structural that can be found in other places, too? Havel analyzes this quite well and comes to a better description of what the system he fought against actually was. He calls it post-totalitarian automatism. Any dictatorship starts the same way: one person or group at the top gives orders, enforced by violence or fear. But this is just the beginning. With time, people learn what is expected of them. We heard of that idea before, when Foucault explained how controls get internalized over time — same basic principle. How this works in dictatorships is ideology. Ideology gives people behaviors or rituals they are told to perform that ensure they can show their compliance.

This is Havel’s famous example of the greengrocer who — as he is told — always puts a sign in his shop window: “Workers of the world, unite!” Very important: the greengrocer is no hardcore socialist. He doesn’t believe the words on the sign, but they are not important anyway. What is important is that he displays it. This act says: I know the rules. I will behave. Leave me in peace. And of course he is not alone doing this. Everybody does it. The kiosk lady, the policeman, the brewery manager. All put up the signs. They create a panorama of compliance. And devilishly, that creates a system where compliance is compulsory. So by the act of public compliance, everybody is at the same time acting compliant and enforcing compliance. And that automatism replaces the traditional idea of dictatorship. The system does not require leaders to believe the ideology — only that everyone performs it. The performance is self-sustaining.

This is very important when determining who acts in a system and who bears responsibility. Systems always need agents to form and operate them. There is no system without agents — and yes, if you want to be really exact, a system can still produce output for a while on inertia, but it cannot be formed, changed, or sustained without agents. In post-totalitarian automatism, we have seen that everybody becomes both object and subject, both oppressor and oppressed — they are all the agents needed to run the system. Now, that would mean that nobody is actually responsible anymore, because everybody is both victim and perpetrator. That, and the fact that this is an automatism, makes the system look like a metaphysical order — power that appears as fact or necessity. Nobody has a choice, nobody is responsible. Does this remind you of something? I certainly think of Shareholder Primacy — the way it is accepted until today as a fact — the market has decided. Roger Martin’s Fixing the Game shows exactly this: the way it is used as an excuse for any kind of business decision. And we already established, due to missing empirical proof and inner logic, that it is not a valid business strategy but an ideology. But total irresponsibility is a trap, and we will see later why — first we continue with Havel, because there is more. The system cannot correct itself through the same rituals that reproduce it. Correction requires contestability: someone able to challenge its language, evidence, and assumptions from a position not governed by the demand to confirm them. And self-assessment most of the time fails because it tends to confirm the system’s own view. We have all seen this in practical applications in businesses, where teams or individuals are sometimes asked to do exactly that. Self-assessment works best among those already capable of doubt — and worst exactly where doubt is most urgently needed.

When somebody actually does act up in this system of automatism, like the brewmaster, reactions are usually quite harsh. He doesn’t just get a warning. He gets fired — at least the communist regime equivalent of it. He loses friends and social standing. So not an individual punishment, and not by just one person. It is — as we have seen above — multiple people, the system, lashing out at him. A bit much for just proposing a couple of improvements and blaming management, don’t you think? The thing is, his act was not just this individual offense — the same way the sign of the greengrocer is not just a sign. He was in fact exposing the failure of the whole system itself, not just the process of making beer. That is why the whole system reacts. Now, his act was a real thing. It is something everybody can do, and it means living within the truth. Ordinary, achievable, normal, if viewed as just the action itself. But as we have seen, the significance is more than that — and so are the consequences. On top of that, it does not mean that the system changes, or that you get anything out of it if you speak or act up. More likely, you would suffer the same as Havel’s brewmaster. He lived within the truth, but there was no gain. Do right and suffer the consequence. Shit, right?

Well, let’s get back to our other riddle of thought: total irresponsibility. Havel leaves us hanging there, and we have to find the solution elsewhere. Dennis Thompson, an American philosopher, dissected the problem of moral responsibility when decisions appear to be made by systems or organizations rather than by individuals, in his famous article “The Moral Responsibility of Public Officials: The Problem of Many Hands.” And yes Thompson wrote about public officials but the structural conditions are the same as in companies, so it applies just as well. The question is still: if everyone is complicit, is anybody actually responsible? His one-second answer would probably be “No” — but let’s give him some more seconds to give us a better answer. He rejects both obvious possibilities: hierarchical responsibility — blame the top — or collective responsibility — blame everybody together as a group, so basically the system.

The hierarchical model has several problems. Leaders are not the only people taking actions in organizations. Lower-level people make choices too, even when faced with an order from the top. There is also the problem that everybody below the top would get an automatic carte blanche: “I was just doing my job.” And it would mean that leadership responsibility turns into a ritualistic sacrifice — the leader essentially becomes a paid scapegoat. Which is bad, because the result would be that only the top person is replaced in a failure case, while all the other people, and the system itself, remain untouched.

The collective model is not doing any better. The main problem is that a collective or a group, a system or an organization, does not know, choose, and act the way only a person can. Members contribute very differently. One person might design a policy, another approves it, somebody acts on it, another objects, and some were not involved at all. Calling all equally responsible does not reflect reality and is unfair. Plus, the moment we talk about groups or organizations, we take away responsibility from the individuals who then don’t have to answer for their decisions or actions. And a distinction between the ones who made the choices and the ones who might have resisted or were not involved becomes impossible in collective responsibility.

Thompson’s answer is something like a well-investigated personal responsibility — or rather, responsibilities. Because you have to trace decisions through the organization and identify what each individual actually did. Based on this, you can assign responsibility in different degrees. Not simple or sexy, but a real solution to the problem. Actually, what you would have to do is come up with some questions that would have to be answered for each person individually. What did this person do in that case? Did their actions or omissions contribute to the harmful outcome? What did they know, or what should they reasonably have known? Did they act freely, or were they under constraint? And could they reasonably have acted differently — objected, warned, refused, resigned? Eventually you do not get an answer of yes or no, but responsibility in degrees.

Thompson tells us how to assign responsibility after organizational failure. But he does not yet explain why individuals so often surrender the judgement for which they remain responsible. For that, we need psychology and this time to one of the pioneers of modern analytical psychology: C.G. Jung. OK, some remember him for some of his stranger ideas — archetypes like the shadow and the wise old man, and his interest in paranormal experiences. But he was a truly great interpreter of the psyche. And his essay “Gegenwart und Zukunft” is a great analysis of why the individual stops reasoning in a system. When we talk about the individual, we need a different perspective than usual — because normally, we talk scientifically: we look for averages, general rules, recurring patterns. The problem with that, according to Jung, is that this is actually what the individual is not. The individual is not the abstraction. It is, in a sense, the statistical exception — but all of us are the exception. Strange? Let me give you a simple example: the average man is 178 cm tall. The individual called Markus is 197 cm tall. The average height describes a population — it simply cannot tell us how tall Markus is. So if we want to look at the individual, we have to look at the exception as well as the theory — please be aware that it is Jung calling it theory, not me.

Just a small correction to Jung when he speaks of theory and statistics and averages as the subject of science, and a reason behind this mass formation. Theory, as I understand it, is a means to explain reality, not an abstraction. Statistical analysis is more than just an average. Deming pointed out that the most important figures in statistics are actually the differences from the average: the variations. I think what Jung saw was more an abstraction in the sense of a simplification of the social being. Theory is not bad — it gives you orientation. But real knowledge about the individual, which he also calls self-knowledge, can only come from experiencing the individual.

This perspective is important because when people enter into a large organization — or mass movement, as he calls it — they lose that perspective, that way of thinking of people as distinct individuals, including of themselves. They become interchangeable members of groups — like employees, or consumers, or voters. You might say, “Yeah, well, that is the case. We are those things.” The problem is connected to something we have already seen. If joining a group also means giving up your individual choices or your own moral reasoning, the group cannot take that over, because as a group it does not have this ability. This means that in this mass formation, you end up with what Jung calls a million zeros — a group made of morally passive parts. We all know that a million zeros still adds up to zero. So no matter how many people you have, it’s a moral vacuum — something bad actors then often misuse. The only possibility for a group or organization to still have moral reasoning is for the individuals to continue to do that on their own. The other case, when a leader takes over the apparent thinking, is often doomed. This is called ego-inflation. The mass projects its needs onto the leader. That in turn enlarges him into a superhuman figure. The leader internalizes this projection and becomes exactly that — a projected greatness, not true greatness — and he becomes a captive of it. Imagine the crowd creates a god, and the god-leader becomes imprisoned by the role of being a god.

Is this god-leader the only thing that can replace individual morality? No. What happens far more commonly is that a policy of the organization replaces it, according to Jung. Remember something: what did Havel say is used to control the masses? Ideology, right. A policy becomes ideological when it stops guiding judgement and instead replaces it — when ‘the policy says so’ is treated as the end of moral reasoning. Ideology tells the citizen what must be true; dysfunctional policy tells the employee what no longer needs to be thought about. I see no difference whether it is a state, a social group, or a company. The principles are always the same.

What, then, according to Jung, is the contrasting movement to mass formation, since it is a rather strong force? That would be organized individuality. But please be aware, this does not mean the individual has to act all alone — it means the individual needs to be inwardly organized. Know yourself, understand your fears and weaknesses, be stable, and act consistently rather than react.

Jung explains how individuality is lost. But what is lost with it — and what must individuals do together if they are to recover it? Our last author for today might be able to answer this. Hannah Arendt is one of the most important political philosophers of the last century. She wrote a lot about totalitarian regimes and how they work, but in her most foundational work, “The Human Condition,” she analyzed how human beings act within society. And she found three different ways: labour, work, and action.

Labour is what we do to keep life going. It is there to satisfy our biological needs — things like growing food and preparing it, cleaning and caring for ourselves, even earning what is needed to survive. The basics, so to speak. Labour must be repeated endlessly, because whatever it produces is quickly consumed — in this, it’s no different from what any animal does. Every creature must continually maintain life. Most importantly, this constant repetition happens because the result is consumed and the need is permanent. In a company, for example, that would be permanent production steps or answering customer requests.

Work creates the lasting things — it creates the human-made world. Building a house, writing a book, designing a machine, constructing a legal framework. Work therefore has a beginning and an end, and it leaves behind something relatively permanent. In a corporate environment, this is things like designing a new product or developing software.

The last activity is action. According to Arendt, this happens when people speak and act together, but as distinct individuals. It does not necessarily produce an object. This is the way people begin something new, shape the political world, and reveal who they are as individuals — for example, when you speak publicly, resist injustice, make a promise, or deliberate publicly with others about a shared course of action. In a company, that is the discussion of a challenging problem or the making of a strategy. All of this involves the sharing of individuals’ ideas and thoughts.

Arendt’s categories were shaped by the ancient distinction between the private household, the world of fabrication and the public political realm. In the Greek polis, these activities were distributed very unequally among social groups — slaves labored, craftsmen worked, citizens acted. But labour, work, and action are not simply three modern occupational classes. They are different modes of activity, and a single working day can contain all three. Han van Diest and Ben Dankbaar have used exactly this feature to apply Arendt’s distinctions within organizations — everybody does a certain amount of labour and work and action, in different degrees, and that is closer to our reality. Even in the city-states, the political elite did some basic labour, like washing themselves and preparing food. Nobody is entirely free of repetitive tasks.

What I take from this is that a balance of all three is most important — and, since this is the biggest risk, that action is not neglected. Action is not simply an employee or a group finding the best way to achieve a given goal or number. Remember, action is reasoning and the sharing of ideas. So it is not like a project to become a leaner company. That would be simple addition, and we have seen in various examples that this is often systematically impossible to achieve. Arendt means action in the sense of deliberation. So it is discussing the question of what “leaner” means, for whom, what the trade-offs are, and whether this is the future we want to go toward collectively. Again, for Arendt, this is the exclusive form that is worthy. But many authors have applied these three forms of activity — labour, work, and action — as coexisting forms, especially when it comes to their use in management theory. In an Arendt-inspired organizational reading, action can be redeeming labour from mere necessity and work from purely instrumental reasoning. Action does not abolish labour or work — it brings their purposes back into a space where people can judge them together.

Activity should not be reduced to fabrication — a controlled process for producing a predetermined result. Fabrication begins with an end, selects the necessary means, and treats material according to the plan. Applied to human beings, this turns people into instruments. And we have seen with Kant that this is not acceptable, however normal it may appear to us nowadays. For Arendt, plurality is displaced by the attempt to fabricate predictable human behavior — sorry, we’ll get to plurality in a moment. Havel describes the same structure from another side: personal judgment is replaced by ritual performance until the system reproduces itself automatically. Jung describes its psychological condition: individuality dissolves into mass identity. These are not competing explanations. They are connected stages of one mechanism. The person ceases to be an origin of judgment and becomes a functioning part of one big machine.

You may counter that this is exaggerated, since this applies only to work — just the eight or nine hours I’m in the office or the factory — and that this is the compromise you have to accept in modern life: you give up some freedom, let management make the decisions, and in return you get wages, security, and a life outside work. The first problem with this: the so-called Great Compromise has long since collapsed. It was an idea from industrialization, when the common view was that work and private life could be cleanly separated — sort of like, at work I am a wheel in a machine, and in my private life I am the really human being. But in today’s organizations, the demand for what workers have to invest of themselves into work has greatly expanded. Knowledge workers are asked to be creative and insightful, tapping into areas that are part of their personality. Service workers have to connect with customers. Workers have to motivate themselves. This collapse is of course most visible where the demand on the self has expanded furthest, but the trend exists everywhere. In addition, we have seen when we looked at the history of work that there was never a separation between work and the self. The idea was a myth from the beginning. Work was always directly connected to who we are — not just because eight hours are half of our waking hours, but also because activity, what we do, defines us. Last, I have to add that although I apply Arendt, Jung, and Havel to work and companies, this does not mean it would be limited to the eight hours you are in the office. You are part of a system also when you buy things, or eat, or do pretty much anything — even when you sleep. Havel had political systems in mind, Jung was referring to the psyche in modern society, and for Arendt it was the complete human condition. The different aspects of human life cannot be cleanly separated.

Now, according to Arendt, action, as mentioned before, needs plurality. Action, in her sense, only exists among different people who can interact with one another. Through speech and acts, you and I reveal our distinct points of view and help shape a shared reality. Discussion is important because nobody owns the final outcome. Our agreements and disagreements, our interpretations, and truly new things that might come of our exchange — together, they form what is. For this exchange to happen, we need two things: equality and distinction. Huh? Sounds odd, but it’s true. We have to be equal enough to be able to speak together — equal enough that we understand each other’s reasoning. Not agree, just understand. At the same time, we have to be different enough to actually have different experiences, opinions, and views, so that we have something to say to each other. If everybody were exactly the same, there would be no need to talk. This enables us not just to define or be ourselves, but also to form a shared or collective reality. So for Arendt, mass formation, as Jung sees it, is not a final state — it can be overcome, but only if self-disclosure through speech continues. So this active state of plurality is key for action to be the way out of the instrumentalisation of the human being.

Arendt wrote another book that is important for this mechanism in society. And it is about what happens when it fails in the worst way possible. “Eichmann in Jerusalem” is Arendt’s observation of the trial of Adolf Eichmann in 1961. Eichmann was one of the principal organizers of the deportation of European Jews to ghettos, concentration camps, and extermination centers. It is also a book about the terminal case — what happens when a person has been reduced entirely to a formula, with no action or plurality left. Let me be clear: Arendt never doubted the guilt of Eichmann, or that he was fully responsible for his terrible crimes. What Arendt observed during the trial, and what she contested, was the way Eichmann was portrayed as a monstrous individual. She understands why this happens — it is very easy to blame a monster, a twisted, abnormal individual, when trying to understand why anybody could do such horrible things. She challenged the comforting expectation that deeds of monstrous evil must be committed by a visibly monstrous personality. But what Arendt found when she watched the trial and read the interrogation transcripts was a man filled with clichés, who could not speak outside empty, ready-made formulas, and who was unable to think from another’s standpoint. That’s revealing: his stock phrases — duty, obedience, orders, official necessity — weren’t covering deeper thought. There was no deeper thought. He used ready-made formulas to interpret reality and to make moral judgments alike, because no real reasoning was happening at all. And the moment a person loses the ability to view another person’s standpoint, it results in an insulation from reality — his own and others’, at the same time. This makes it possible to follow orders that result in evil crimes as if they were harmless bureaucratic acts. This makes committing evil acts become normal, or banal. So it does not need a monster to commit them. It just needs an individual, or many individuals, who fail — or refuse — to exercise their capacity for judgment. The fact that this still is a choice makes each one fully responsible. And remember: the system cannot be blamed, because systems and organizations do not have morals or conscience. Only people have this ability. Whether Arendt underestimated Eichmann’s ideological conviction remains disputed — later historians have argued he was a more committed antisemite than her portrait suggests. What matters for her argument is that ideological commitment and bureaucratic thoughtlessness can coexist. Eichmann was the extreme example of something happening all the time, when people choose not to use their ability to be human. 

The negation of our specifically human capacities begins when we allow ourselves to be absorbed into the mass, the organization, the system, the totalitarian regime. It happens when personal judgment is replaced by ideology, when we let ourselves become an abstraction, void of the exceptional traits that make us individuals, and by stopping speaking to and understanding each other.

There is no easy recipe to avoid this. Nor is it a simple path to take. Nor is there a guarantee of success. But what is certain is that giving up what makes us human will lead to the failure of the system we live in, and to the failure of ourselves. But most importantly, with all systemic pressure, the individual responsibility remains. It cannot be constructed away. It is still for us to make a choice. We can either participate, discuss, resist, share, create, and work together. Or we can choose to fail.

Don’t just take it from me, here is some good stuff to read:

Havel, Václav. The Power of the Powerless. London: Vintage Classics, 2018 (essay originally written 1978).

Thompson, Dennis F. “The Moral Responsibility of Public Officials: The Problem of Many Hands.” American Political Science Review 74, no. 4 (December 1980): 905–916.

Jung, C. G. The Undiscovered Self: With Symbols and the Interpretation of Dreams. Translated by R. F. C. Hull. Originally published as Gegenwart und Zukunft (Zurich: Rascher, 1957).

Arendt, Hannah. The Human Condition. Second Edition. Chicago: University of Chicago Press, 1998 (originally published 1958).

Arendt, Hannah. Eichmann in Jerusalem: A Report on the Banality of Evil. New York: Viking Press, 1963.

van Diest, Han, and Ben Dankbaar. “Managing Freely Acting People: Hannah Arendt’s Theory of Action and Modern Management and Organisation Theory.” Radboud University repository.

Martin, Roger L. Fixing the Game: How Runaway Expectations Broke the Economy, and How to Get Back to Reality. Boston: Harvard Business Review Press, 2011.

My knees start to shake uncontrollably. It’s been only one minute that he has mumbled incoherent nothingness, but I already know that it’s going really bad. Luckily the meeting room table is covering my shakes of terror. But then he — the big boss — is asked another question by the auditor and doesn’t answer it at all. I mean his mouth is moving and words are coming out, they just don’t make any kind of sense. Some of you will know the situation. Certification audits — management systems — CEO interview. The auditor is supposed to check clause 5.1 Leadership and Commitment — top management takes accountability for the effectiveness of the management system. Yeah, well for that he should have a fricking clue what it’s about, which based on his responses he is obviously not. And that after being briefed before. Which I know isn’t the point but we all do it. And then the auditor gives his verdict, my knees freeze and then I’m shocked even more. “OK, all fine. We are done here.” Wait, what? Turns out that little scene is a pretty good place to start talking about ethics.

The Board Room Version: Clause 5.1 (leadership & commitment) is the key to any management system – the rest of the standard builds on it, yet it’s the one requirement that rarely gets audited with rigor. Commitment isn’t what is said in the room – it’s what an organization actually rewards. Morality is what you claim to follow. Ethics is stepping back and asking why this is important and how to resolve value conflicts. Most companies never get past the first one. MacIntyre’s diagnosis: we still use the words but we have lost the framework that lets us settle that argument. The manager has become a modern archetype: claims neutral technical position while quietly deciding, without any moral reasoning, what the right thing to do is. That is not the absence of a moral stance. That is a moral stance that never had to defend itself. Clause 5.1 asks a moral question –  do you take responsibility for this system – dressed as technical requirement. That disguise is exactly why it’s so easy to fake. Ethics isn’t a decorative statement on a wall. It’s the ongoing, uncomfortable work of examining whether your stated rules still hold up — and most organizations are built to avoid ever doing that work.

The Leadership and Commitment clause is not unique to ISO management systems standards. You find the same requirements in many safety, security, sustainability and quality standards. Somewhere in there you will find a reference that the whole thing has to come from the top and get full support from leaders. That came about because the systems were viewed as specialist topics, but authors of these standards realized that leadership needs to set the tone otherwise the whole rest of the standard is pretty much useless. If leadership does not support implementation, provide resources and walk the talk, why should the rest of the organization care? The problem is that it is rarely checked thoroughly. It’s often like a courtesy visit between auditor and CEO and no matter what the old man says, he gets a passing grade.

The interesting thing is that this is not just a technical point in a standard. This is fundamental in how companies deal with values. See, if the big boss does not declare this to be important it does not count in businesses and all the rest of the clauses build on that commitment. Because standards are like… Ha, got you, we will get to that later. But seriously this one is really important for what we do in companies, why and how, the means and ends. And it has to do with the topic of this essay, the big word, too big for most of us to get our heads around it: Ethics, specifically business ethics, you know the thing that every Hollywood movie about corporate life tells you is treated like shit.

As usual we need to go back a bit, but not too far, just the early 1900s and my favorite lawyer turned economist and sociologist Max Weber. He analyzed where what we today would call work ethics actually came from. You know the whole work hard and no pain, no gain thinking. Don’t be shocked but a good part of it comes from religion, early Protestantism to be exact. Now, religion was always a strange topic for me, I try to approach it Bernard Shaw style, meaning I don’t believe it but I try to really understand it. See, in protestantism, especially Calvinism, people were taught that they could not be certain whether God would give them salvation. There was no direct way to earn salvation through confession and absolution or participating in any other ritual. That made them of course quite anxious. So they tried to show that they were good people through disciplined and orderly and productive lives. So work became more than a way to make money. It became a moral test. And since there is no end to this — as in the end of a specific ritual — there was no moment when you could say, “I have done enough good.” So the test became a permanent one.

OK, but that is not us anymore, even if you were raised Protestant — which I was. Right, over time the religious belief faded, but the habit remained and it even crossed religious borders. Modern organizations — not just companies, but also schools, for example — used the habit, the discipline, the efficiency, the idea of constant work even after the spiritual purpose had long disappeared. That’s what Weber called the iron cage: Following a system of work and discipline that was once filled with religious meaning, but now often feels empty.

But that vacuum was actually filled with what we see today. And for that analysis we can look at Robert Jackall’s “Moral Mazes: The World of Corporate Managers”. And as a good sociologist he combined historical analysis and empirical study. Let’s start with the historical one. He continues where Weber left us and explains the first instance when official moral authority and modern business logic diverged but still used the same language. The Puritans in New England in the mid 1600s split into a city-based merchant group and the land-based Covenant guardians. The latter still very much saw the colony as a religious community bounded by the belief in God. Their economic activity had to remain subordinate to the religious mission. In city centers such as Boston, another class developed. Much more focused on the booming trade business they started to operate more on a modern economic logic — you know, prices according to supply and demand, doing business with the outside world. They didn’t scream forget God and praise capitalism, they still used their Puritan words but used it to describe commercial success as evidence of God’s blessing and their diligent work.

This has carried over into today’s corporate life which is a constant test of whether you are considered a good, reliable and promotable person. And since your beliefs cannot be tested or observed, it has become about what you say, the loyalty you show, what you deliver, the way you behave towards your superiors. So eventually the vacuum mentioned before has been replaced by the boss. The boss replaced god — but unlike God, the boss follows no fixed commandments and gets replaced every other year.

Furthermore this constant proving your worth is something that eventually found its way into the activity of auditing. Audits are nothing else than a recurring check of what you did, but also a test of what kind of person or for companies what kind of an organization you are. At least that last bit is my interpretation, so don’t complain to Jackall on this.

OK, this is much, I know. Let’s follow Jackall a bit further and leave the Puritans for now. He looks at corporate hierarchy and discovers that it is working also a bit like feudal loyalty systems. Your boss and the lord of the castle have similar roles. He protects you when something goes wrong, gives you access to resources, promotes you and covers you against criticism from the king — sorry, his superior. In return you provide him with information, defend his position and do not challenge him or go over his head. Yeah, well that’s how it works, you might say. True, but the crucial point here is what gets lost. This is behavior that only respects the chain of loyalty; factual truth or moral correctness gets dropped.

So authority is not about an abstract institution, it’s about a personal relationship with your immediate boss. So it is less about loyalty to a company or system much more to a person.

See Jackall actually studied companies — interviewed managers and observed cases. So he is not just grasping these things out of thin air. He has this one case where something really bad happened in a company. The employee who discovered it, tells his boss about it. But the boss refuses to act. The employee then reports it directly to his boss’s superior. Top management has officially praised the openness, integrity and escalation. But the employee mainly gets to experience the informal reaction. He is not promoted anymore and eventually gets under so much pressure that he has to leave the company. The reasoning of management is that the employee has shown he cannot be trusted to work within the loyalty structure.

Another interesting area is information and command flow. Superiors tend to be vague in their commands downwards. Instructions are rarely concrete, especially if it’s uncomfortable actions, like firing people. Jackall even found instances where top management only had to make a side comment on overstaffing and middle management reacted with widespread layoffs. More common are cases when top management gives general instructions and leave the execution to their subordinates. Of course if the outcome of an action is successful, management will take it as an example of their leadership success.

Bad news filtering is another important phenomenon and it connects to the aforementioned example. What happens in companies is that problems that are usually discovered by workers get reported, the supervisor then calls it manageable, middle management describes the situation as a temporary difficulty and once it gets to management the project is still on track. This is due to every level in the hierarchy protecting himself, the people above and below. So negative information gets softened so it cannot reflect badly on anybody.

All of these examples have the same goal. They are used to maintain plausible deniability up and down the chain.

A similar phenomenon is that of target setting. People in companies have to regularly commit on a number they will have to deliver — like a budget number or a performance indicator. Problem is that this commitment does not mean a moral dedication to a factual number but an agreement that came out of a discussion or process. It’s basically a deal. And in this discussion all participants will pad the numbers or try to make them work in their own interests — senior management wants an ambitious number — lower management wants a survivable number. Both sides know assumptions are being adjusted. Everyone later presents the result as a firm commitment. So the organization publicly treats the number as hard fact, even though insiders know it emerged from political negotiation. To be clear if the negotiations of targets would be open and clear to everybody it would not be dishonest. The dishonesty starts the moment the negotiated number gets presented as an honest forecast rather than a political compromise.

And this is the moment when we have to bring out the big gun again. The German philosopher Immanuel Kant’s moral test asks whether you could universalize your behaviour — that is, whether you could will everyone to act as you do. Yes, I’m using Kant before I’ve properly introduced him, bear with me, definitions come in a minute. Now if all the parties quietly build reserves and interests into the numbers and do not treat the number as an honest forecast, nobody would treat these commitments as reliable, as anything but a fake. The process would only work if people assume such promises to be sincere and factual. This practice eventually hurts all those who still believe that commitments to numbers are sincere. They draw the short straw. And that is Kant’s actual point: a lying promise only works on the shoulders of the ones who make promises that are still trusted.

Now I promised you that this was about ethics and that means we need to agree on what this actually means. And permit me to keep this relatively simple and spare you any long philosophical discussion on terminology. Because it is not the same as morals or morality which is a set of rules, duties and values people claim to follow — “I do not lie” — “I treat people fairly”. We also call this first-order stated content. It is what it is, plain and simple. Ethics is when we take one step back from the rules — also called second-order reflection. It examines and justifies morals — why is it important not to lie or what do we do when value conflicts. So if you would have to lie to protect your friend from being murdered. You lie, right? Well go and discuss that with Kant. Now there is also something called moral reasoning and that means reasoning about what one should do because it is right, not only because it is useful. So not “what will benefit me?” or “what is safe?” but “what is right, even when it costs me?”. For hardcore Kantians like myself these questions are not in the same ballpark. Only the last is the true moral reasoning, the others do not count as an argument.

OK, this is complicated enough, you might think. Sorry, for this discussion I have to add one and it comes from the philosopher Alasdair MacIntyre: Emotivism. His argument is that in our society today we still use moral words — like justice and duty and rights and responsibility — but what we have lost is the philosophical framework that once allowed people to justify the meaning of these words. What we miss is the language to justify justice, so to speak. As a side note Kantians would say that every rational person has equal moral worth and must never be treated merely as a tool for someone else. From there, a Kantian would derive a demand for equal respect and consistently applicable rules. With Aristotle it would be something like justice is part of human flourishing and a well-ordered community and with the Utilitarians it would be justice is justified by its consequence for overall well-being. Sorry to the philosophy crowd for the ridiculous compression of the three schools.

Problem is that we miss those frameworks today according to MacIntyre. We still reason, sort of, but with fragments — which means we often lack the shared standard to actually settle an argument. Or only like some philosophical dummies: “This is unjust.” — “No, it isn’t” — “Well, I strongly disapprove.” That is not a discussion or a reasoning, it is just two people stating their preferences or feelings. And MacIntyre sees this as a main reason we have such big issues with ethical questions today.

One of the places this shows up most clearly is in a figure we all recognize: the manager. For him the manager is one of the three modern archetypes — alongside the aesthete and the therapist. The manager claims neutral technical efficiency — nothing personal, it’s just business. But with that he actually hides a moral stance about the ends — what his actions result in or the goals. These ends are treated as already decided, as a predetermined fact — increase profit, reduce costs, hit the target. Of course this is not true. It is his implied moral point that these are the right goals. Although — just to make that clear — he never reasoned them. There was never a discussion on these goals, not even with himself. He fooled himself in believing that he had no choice.

Same goes for the difference between internal goods and external goods. In a practice — auditing or leadership or medicine — there are internal goods, accessible only by actually doing the thing and getting good at it: finding a system working, making sound judgement, curing a sick person. External goods — money, reputation, power — are different. They are not necessarily evil, but you can get those from all kinds of activities. Problem is that especially in companies there is the tendency to concentrate on external goods and therefore shape the practice around getting these and forgetting what the internal good is. In an audit for example there is always the conflict between independent verification — the internal good — and keeping the client, earning fees and such — the external good. Classical conflict of interest.

This is where we get a bit more into craftsmanship. The internal goods are not just one thing but come out of a tradition, a long-running argument about what actually works in any practice. Take quality management for example. You have Shewhart developing statistical control and variations. Deming expanding this into management, systems and responsibility. Then come all the quality thinkers who added customer focus and process thinking and continuous improvement. Eventually ISO turns part of it into a formal standard. This is a rich tradition. Lots of opinions and discussions have made it into a treasure chest of internal good — or better, a long argument over what works best across generations. The danger is obvious that once it becomes a fixed standard and is never changed that tradition cannot grow anymore. And secondly if the focus is on the external good — passing the certification for that standard, the internal goods get forgotten.

Extending this a bit — and I’m sure organizational psychologists have a proper name for this already — I just call these decorative and practiced virtues. Decorative virtues are things that the organization says it values. On the other hand practiced virtues are the things that it actually supports. So to take certification as an example. Internal good is the auditor truthfully assessing whether leadership is effective. External good is the certification company actually keeping the client. The decorative virtue would then be that the auditing company displays commitment and integrity during the audit. Whereas the practiced virtue is revealed by what the audit company’s incentive structure actually rewards — auditors who avoid conflict, keep clients happy, don’t cause trouble — regardless of what the company’s stated values claim.

Now this is all very high and mighty stuff. Does this really matter in everyday corporate life? Agree, I sometimes have that feeling too. We work for our boss, not our company, because he can fire us. Targets are often political stuff that don’t reflect reality and seem to be the result of =RAND(). And yeah we seem to have lost the ability to talk about morals or ethics or reason any of it. And when it comes to values and the tradition of our craft, well, profit is just more important, everybody knows that. Does that mean we have just become a bunch of business cynics?

Actually it is more normal than that, less cynical and flashy. Best case study for this is Diane Vaughan’s study of the Space Shuttle “Challenger” accident in 1986 and what happened at NASA and its subcontractors before the launch. What happened technically is not disputed: a seal in one of the booster rockets failed to hold because of low temperature, and hot gas escaped where it shouldn’t have. This kind of seal erosion had been seen before, and its seriousness had been debated inside NASA and the responsible subcontractor many times, including on the evening before the launch. But the Challenger launch went ahead and 73 seconds after launch the vehicle broke apart, killing all seven crew members. Now there were numerous hearings and investigations done on the decision to launch. These as well as the media and the public all came to the conclusion that it must have been managers, responsible people making a bad, an immoral call. Keep the schedule, avoid additional costs, launch although there was a known risk of failure. There is even a famous conversation that took place in one of the meetings — an internal one of the subcontractor company — before the launch. One senior manager confronted the engineering head who had opposed the launch: “Take off your engineering hat and put on your management hat.” See, clear immoral corporate behavior.

Problem is that was not the issue. Vaughan studied the case in great detail and eventually found no smoking gun, no violation of internal rules that would explain it. No bad guy manager. They largely conformed to the internal rules. Problem was that what counted as acceptable had quietly shifted.

The Space Shuttle program had been under cost and time pressure ever since it was founded in 1972. A gap between declared commitment and actual resources provided from the beginning. This created a culture of constant friction between safety and time- and resource-pressure. This might explain the normalization of deviance as Vaughan called it. What she observed was a pattern of issues — like the material weakness that led to the accident — being reported, it then was officially acknowledged, reviewed based on internal standards, often it then got officially accepted — let’s call it the first normalization — then there was a shuttle launch, nothing happened and the success becomes evidence for the next cycle. Call that the second one, if you like — Vaughan doesn’t number it that way, but the pattern repeats. Repeat this enough times and a lot of issues just disappear into normality, because each time there is no catastrophe, no bad case, the organization is not just confirmed in the belief that the individual issue was acceptable, but the pattern, the modus operandi is reconfirmed. This is not the only mechanism she found at NASA, but it was the most fundamental. Others were a concept of inverted burden of proof — it had to be proven that something was unsafe, not that it was safe —, redundancy was seen as an excuse to keep flying, not as a warning that the design itself was failing and there was something that has been often identified as an issue in organizations experiencing major accidents: structural secrecy. In these cases information flow is set up in a way that it only exists in fragments and the whole picture is lost. In Chernov & Sornette there are more examples of this. It can be unintentional/structural as in the case of NASA or deliberate as an active concealment strategy.

For Vaughan the issues causing the Challenger accident were organizational and cultural. And it links to internal good and external good. If the launch was the default outcome of safety processes and documentation, the internal good was forgotten. The moral intention of it was dropped.

I have to add two points here because I think they are important lessons for common business practices. First regarding audits: It is crucial in my opinion as an auditor to find and analyze the failure instances in organizations. What does an organization do when a safety system fails, what does it do when it produces bad quality. If and only if an organization can react and adapt to the negative case, it has the system and the culture that it needs. Perfection does not exist, the important thing is can you admit and react to failure. The second which becomes apparent at this example is also the connection back to ethics. It is about risk management and specifically the scales used in assessing risk and risk-appetite in an organization. I often have argued for more intensive and continuous revisions of these parameters in companies. Because this is not just a number game but a practical application of ethical discussion within companies. Do we accept injuries in our activities, do we accept emissions, if yes to what degree and why?

As we started with standards and certifications we will also close with it and Lawrence Busch’s analysis in “Standards: Recipes for Reality”. He describes it best already in the title: Standards are not just a description of reality, they help to shape it, they are an instruction. And more importantly for our discussion: they may look all neutral and fact-based but actually carry social values. They are a fusion of the technical and the ethical. And the clause 5.1 is the perfect example of it. Top management takes accountability for the effectiveness of the management system sounds technical but is in fact the question: Do you believe in this stuff and do you practice it. It is a question of commitment in a moral sense.

Why do standards hide this? Part is the history of standards. They do come from a fairly technical background. In short: a lot of craftsmanship rules made their way into modern standards. So we still find standards for weld seams and similar things. No moral reasoning in them. The other reason is that standards tend to want to project the appearance of checkable category and try to hide anything that is not easily provable. Busch describes the whole phenomenon as commensurability. For a standard to be workable it needs standardization — well, stating the obvious — that makes it comparable. Because in order to compare things they have to be first made comparable, put into the same category, so to speak. That is what a standard does. And comparability is needed in order to allow a ranking, a judgement, eventually a certification. Because that is the other key characteristic of standards. The verification and the checking and the certification. We saw that before that certifications are external good — again this is not evil but it diverts from the internal good. I am certified on an environmental standard is not the same thing as I am green. And even worse when the external good, the certification overshadows the internal good. When companies start to chase certificates and not the real goal of a standard. The “are we doing it well” becomes the “can we pass the audit”. And this is, every practitioner in the field would agree, too often the case.

Let me add some points to Busch’s analysis: This danger of standard corruption is worse with the methodical type — as in a quality management standard — compared to pure technical ones. Clause 5.1 for example can be corrupted without changing any number or backdating any document. The way it is audited today in most cases the CEO just needs to do a good acting job. This is something that needs to change. Factual proof of commitment can be resource allocation, follow up on action items from a review meeting — not perfect but better.

Second, Busch sees conflicting standards as an issue. Different standards have different stakeholders in mind, hence there can be contrary interests — Health & Safety vs. Quality vs. Environment. Take AC units in Europe. Bad because of higher energy consumption, good because it brings the heat in buildings down to a bearable level for employees. I think these conflicts are a good thing and to be expected. It requires us to have a discussion on values and this if done correctly is not just enabling us to find new solutions for problems but is also improving the application of standards.

This is also connected to my third point: standards do not just need a fixed revision machinery — as ISO standards, for example, already have — they also need to include more and more diverse stakeholder groups, in order to reopen the underlying moral and political assumptions of the standard. This would also better enable standards to develop and adapt to changes in society, economics and science.

My last point is to remember that standards and organizational structures — also similar to laws — do never replace individual reasoning. Standards can be many things, an instruction, a guide, a boundary for our activities, but eventually decisions are made within these limits and by individuals. And the moral reasoning has to always be done for each case by a person or a group and also on all levels.

What happens often in organizations is that at lower levels only the factual possibility is discussed. It’s called functional rationality — “How can a target be achieved?”. Substantive rationality — “Is this the right, sensible, worthy, ethical target?” — is only discussed at the top level. But even there the discussion is mostly thin. Main reason for that is probably that the top level is missing the detailed information only the lower levels would have but are not permitted to have such discussions. So the setup is a systemic trap.

But this is just a functional issue of ethics in business, the broader problem is not even apparent to most authors. It’s the fact that most moral reasoning in business and our modern society has been replaced by reflections on wants and needs. “What brings me something?” — “What is safe?” And that both on an individual and on an organizational level. “What is good for the company?” That means that ethics has been hollowed out and replaced by something that only psychology and sociology can name. MacIntyre sees this but in my opinion comes to the wrong conclusion. For him this was already caused by the stripping away of moral frameworks by the Enlightenment, when only reason was left. I do not agree. Kant has demonstrated that with reason alone you can have a very fruitful ethical discussion. But we can discuss that over a lager and a Guinness.

I know this has been a tough one to follow. Ethics was never an easy topic, it wasn’t meant to be. But eventually it is what gives our actions a reason, an end. Without it we only have means and tools and we ourselves end up being just that, a tool. And it is also not something complicated. Ethics is basically just reflection — Auseinandersetzung, really — with knowledge. Easy, right?

Well, I guess there is more to explore.

Are you a means and an end? LinkedIn

Don’t just take it from me, here is some good stuff to read:

Jackall, Robert. Moral Mazes: The World of Corporate Managers. Oxford University Press, 1988 (20th-anniversary edition with new closing essay, 2010).

MacIntyre, Alasdair. After Virtue: A Study in Moral Theory. University of Notre Dame Press, 1981.

Vaughan, Diane. The Challenger Launch Decision: Risky Technology, Culture, and Deviance at NASA. University of Chicago Press, 1996 (enlarged edition).

Busch, Lawrence. Standards: Recipes for Reality. MIT Press, 2011.

Porter, Theodore. Trust in Numbers: The Pursuit of Objectivity in Science and Public Life. Princeton University Press, 1995. One-sentence citation only.

Robison, Peter. Flying Blind: The 737 MAX Tragedy and the Fall of Boeing. Doubleday, 2021.

Chernov, Dmitry, and Didier Sornette. Man-Made Catastrophes and Risk Information Concealment: Case Studies of Major Disasters and Human Fallibility. Springer, 2016.

Farber, Henry S., Daniel Herbst, Ilyana Kuziemko, and Suresh Naidu. “Unions and Inequality over the Twentieth Century.” Quarterly Journal of Economics, 2021 (NBER Working Paper 24587).

OECD. OECD Principles of Corporate Governance. OECD Publishing, Paris, 1999.

He was packing his belongings, closing the hut. The sacks with the corn were still on the table along with the dust from the soil outside. At least that’s what it had been before the absence of rain had turned the ground into concrete. The last drop of water it had touched had been the tears of his children. They didn’t want to leave, but they had to. In the city there would at least be work, there was certainly none here. That’s why he was closing up the hut. He was leaving too, to find work. But the corn sacks were still on the table. Everything else was stored away. These needed a special place, way back, safe and secure. With all the hunger, these could not be touched. All belongings had been sold for food, the livestock was gone. But the sacks with the seed, they were sacred. Without them there would be no next year, no future.

It may sound like it, but this is not supposed to be a teary-eyed story. It shows what sustainability is all about. I do seminars on its current business acronym ESG twice a year. When we do the introduction round, I ask participants what’s in it for them when it comes to sustainability. I usually get one of two reactions. Half of the room is laser-focused on ESG reporting standards and regulations. The other half cringes at the word “sustainability” — it’s too Greenpeacey, too political, too soft, not a real business topic. Both are missing the point of what it’s all about. The same thing the farmer already knew.

The Board Room Version: Sustainability is not an ethical discussion. It’s a principle of resource management. The distinction matters because one requires value alignment, the other just arithmetic. Every resource your business needs has a regeneration rate: workforce, customers, suppliers, natural inputs. Your management time horizon is probably shorter than most of those regeneration cycles. The historical response to resource depletion has almost always been displacement — find another source — rather than management. Displacement works if the new resource has a higher or comparable regeneration rate. If it doesn’t, displacement becomes liquidation of stock. 79% of executives surveyed by McKinsey and CPPIB said they felt pressured to demonstrate strong financial performance within two years or less. The regeneration cycle of almost every resource that matters is longer than that. Carlowitz coined the term in 1713 and created the three-step program. He was a German mining administrator trying to solve wood shortages. His program applies to this day: use what you have more efficiently, find alternatives where the resource is being depleted, invest in regenerating the supply before you need it. Your job as a manager is not to save the planet. Your job is to make the math work for the resources you are working with. Sustainability is not hugging trees, it’s good business practice.

One early strand of the idea appears with Quesnay and the Physiocrats — no, that’s not a punk band. It was a movement active roughly from the 1750s onward in France. François Quesnay, a royal physician, published the Tableau Économique in which he described an early model of economy as a circular flow. In it the source of wealth is nature — land, soil, harvest, and so on. The economy is then understood as an activity that is not just concerned with producing stuff out of nature, but also has to circulate in a way that it can go on year after year. All surplus — especially the financial one — in the economy comes from the land itself. So in order to continue growth, nature has to be preserved. Although that was an extreme view since it rejected all value coming from production, it was the first attempt to create an economic model that was not above nature but thought of it as a basis.

At about the same time, both in England and Germany, forestry had a more practical problem. Wood had been the main construction material for centuries — as well as source for heating and cooking. By the late 1600s the large ship construction efforts in England and mining operations in Germany were showing signs that the natural stocks of wood were running low — meaning they went full Saruman on the forests. Both countries independently needed to solve the problem. Two people and two books are important here. In England it was John Evelyn and his “Sylva; or, A Discourse of Forest-Trees and the Propagation of Timber in His Majesty’s Dominions” in 1664, and in Germany it was Hans Carl von Carlowitz and the “Sylvicultura oeconomica” in 1713. Both solved the problem intellectually, but we will concentrate on Carlowitz because his ideas had a lot more impact — until this day, actually. 

While Evelyn was a scientist working for the Royal Society, Carlowitz was a mining administrator in Saxony. He had a good education, studied law and public administration, and — quite common for a young nobleman — a Grand Tour, a kind of study journey taking him to London, Paris, Rome and many more. He had not trained in forestry but came from a family of foresters. In 1708 he was given a crisis mandate: Saxony’s mining was running out of local wood and prices at the time were rising. He was supposed to find a solution. So he wrote a book. And that is the birth of the term sustainable — Nachhaltigkeit — as we know it today: «… daß es eine continuirliche beständige und nachhaltende Nutzung gebe / weil es eine unentbehrliche Sache ist / ohne welche das Land in seinem Esse nicht bleiben mag.» — that there be a continuous, constant and sustainable use, because it is an indispensable thing, without which the land may not remain in its being. 

Carlowitz designed a three-step practical program that is not unlike what we still use today. Efficiency first — use the resource better, meaning use less to achieve the same effect. Substitution second — find alternatives to the resource if possible. And third, regenerate — invest in the future of the resource. In the case of wood that was reforesting, and there is a lot of that in the book. But more generally he had not just the core sustainability idea, he had the full program. He realized that sustainability had to do with three topics: resource management, social equity — he named food and sustenance for all, and that the common good was more important than the prince’s treasure — and also intergenerational responsibility. He even criticized short-term thinking in the book. The book is quite amazing as a historical source — don’t try to read it though, the German with way too much Latin influence is a real pain to read. Go find some secondary text — Grober’s “Die Entdeckung der Nachhaltigkeit” for example. 

What makes this so amazing is that Carlowitz has the full sustainability definition in his book on forestry 250 years before the Brundtland Report from 1987, which is today considered to be the definitive one: “Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” But the idea was from 1713.

Since then, the idea has expanded, most of the time without thinkers even knowing of Carlowitz. Adam Smith in 1776 used sustainable thinking writing about economics in general. Productive labor must reproduce the capital it used plus a surplus, or next year’s output shrinks. This year’s output must fund next year’s activity at the same or greater level, or the system is not sustainable. 

Marx applied it to labour in 1867. Labor power — you know, people working — must be reproduced. The workforce has a regeneration rate as every natural resource does — meaning there need to be new humans born and grow up to eventually become workers. He criticized the factory system because it was depleting that resource by pulling women and children into production, cannibalizing the household function that reproduced the next generation of workers. That sounds very anti-feminist — and it is, but that was the time — and a very cold observation — and it is too. Look, whatever you think of his politics, that whole passage in “Capital” does not contain any political or ethical argument, it is pure resource logic, backed by factory inspector data.

Hicks in 1939, in his famous formal definition of income, wrote that it is maximum consumption during a period while remaining as well off at the end as at the beginning. That means you cannot consume your capital base and call it income. That is not income. That is liquidation. This is exactly what was happening in the big shareholder maximization movement from the 1970s until today. And it was Hicks applying the principle of sustainability to capital and income.

Hobfoll in 1989 used it in psychology in his conservation of resources theory. People try to obtain, protect and rebuild the resources they need to function. Stress occurs when these resources are threatened, lost, or invested without return — you know, in the case of a culture that consistently asks more than it gives back. These resources have a renewal cycle — breathing, meditation, time off work. But too much or too intense work can overwhelm the cycle. A company that burns through attention, trust, competence, and customer goodwill is not sustainable. It is liquidating its own future. That is Hobfoll’s individual framework — the organisational application is mine, but the logic holds.

The same logic applies to customer relationships. Drèze and Bonfrer showed in 2009 that maximising value from individual customers — extracting as much as possible now — produces a smaller and less profitable customer base than treating the customer pool as a renewable resource to be cultivated.

The basic idea can be found everywhere. But why is it then such a problem today to apply it? One of the reasons is that there was something called the Marginal Revolution in the 1870s that did not attack sustainability directly but attacked what value is in economics. Independently from each other, some writers came up with the brilliant idea that the objective value of a product — based on resources and labour — is not really important in economics. The only important thing is the price that somebody is willing to pay for it. So if the resource or the labour is not important anymore, the question “is the resource actually still here next year?” became unimportant. Price detached from the source of the product was the only measure. This is one reason the principle of sustainability went underground: once price becomes the only visible signal, the resource base can disappear from view.

Until politics and ecologists — and even companies — rediscovered it in the second half of the last century. Since the 1960s the worsening state of the environment has become more apparent. The Club of Rome, the UN in the Brundtland Report, the environmental conferences, and eventually the Sustainable Development Goals acted on a clear need. Sustainability became an environmental idea. A multitude of NGOs were founded and do great and important work in that area. Eventually the word also appeared in other areas. We saw it appear in marketing as something meaning durable or of good quality — a sustainable jacket — or products having some sort of connection with recycling or with the practice of offsetting environmental impact. The misuse of terms is of course not new. Humpty Dumpty has already said: «When I use a word it means just what I choose it to mean.» Alice replies: «The question is whether you can make words mean so many different things.» To which Humpty Dumpty counters: «The question is which is to be master — that’s all.» Whoever controls a word controls its meaning. The problem is that almost everything that fellow says is totally stupid. 

Words do have meaning and they are important. Sustainability comes from the Latin sustinere — to hold up from below — structural support if you want. The German Nachhalt means what you hold onto when everything else gives way. And that’s from one of the first dictionaries — Campe’s Wörterbuch der deutschen Sprache, published between 1807 and 1811. Two languages, different images, same concept: load-bearing capacity under pressure. And we discover something which should also be clear from the development of the concept. The core logic is not first of all political, ecological or ethical. Those layers can be added, and often should be. But the basic principle does not need them. It only needs arithmetic: do not consume a resource faster than it can regenerate. Sustainability has always been rooted in business and resource management. Carlowitz was a mining administrator. Evelyn was responding to a naval supply crisis. The physiocrats were analysing agricultural productivity. Smith and Marx were writing about industrial production systems. Hicks was defining capital accounting. Hobfoll was writing about occupational psychology. And there are many more — like Drèze & Bonfrer who wrote about customer relationship management. Every serious formulation of the concept comes from someone trying to solve a resource problem in a production system. The ethical and political versions came later — often for good reasons. But they also made managers forget that the basic version was much simpler. So you have been sold a version of the concept that obscures its original meaning and, more importantly, complicates its application and use. Brundtland requires an ethical commitment to future generations. The sustainability triangle requires political balancing of three domains. Religious stewardship requires a theological premise. Only the forestry definition — don’t cut more than grows back — requires no ethical premise. Just arithmetic and a time horizon longer than this year’s harvest.

It’s always been about adding up the numbers. Like in one of the most important sustainability tools, the displacement strategy. The historical response to resource depletion has almost always been displacement — exchanging one resource with another — rather than management of consumption. When Venice depleted its forests and imported Hungarian timber it was displacing local wood with foreign wood. England replaced timber with coal as a heating source. The problem with displacement is that it depends on the regeneration timescale of the substitute. Wood to coal: negative swap — you replace a resource with a decades-long regeneration cycle — wood — with one that takes millions of years — coal. Coal to solar: positive swap — you replace a non-renewable stock with a flow whose regeneration rate exceeds any conceivable consumption rate. Displacement works until the regeneration timescale of the substitute exceeds the human planning horizon — as with coal or oil. At that point you have stopped managing a resource and started liquidating a stock.

This can also be applied to other business areas: replacing skilled workforce with cheap outsourced labor, squeezing suppliers past their resilience threshold, maximizing short-term customer extraction — these are all displacement strategies. They work until the stock has been used up because you have not taken into account the regeneration rate. And when they stop working, the infrastructure to do it differently has usually been dismantled. The numbers do not add up. It’s not just unsustainable, it’s not logical.

The reason why this is so important is the application part I referred to earlier. By taking sustainability to a global level — with the Club of Rome, Brundtland, and the climate conferences — it has made the application of sustainability as a business practice harder in the heads of company managers. Don’t get me wrong, the global discussion on sustainable or environmentally friendly development is real and necessary. Some issues have to be — also, and really importantly, also not exclusively — tackled on an international or national level. But the scope shift from the individual forest to the planetary system broke the connection between sustainability and the company-level decision. Companies look at global targets and boundaries and think: nothing to do with my quarterly numbers. And that is not true and it is also not complicated. The connection is simpler than the global framing suggests.

Your job as a manager is not to save the planet. Your job is to make the math work for your own resources. Every resource your business depends on has a regeneration rate. Your workforce: how long does it take to develop genuine capability? Your customer base: what is the natural renewal rate if you stop actively depleting loyalty? Your supplier relationships: how long to rebuild after you’ve squeezed them past their limit? Your natural resource inputs: what happens when the supply chain can no longer deliver at current extraction rates? The management time horizon of most organizations — two years, per 79% of executives in Barton & Wiseman 2014 — is shorter than the regeneration cycle of almost every resource that matters.

Carlowitz’s three-step needs to be applied to any resource: first use what you have more efficiently. Then find alternatives where the original resource is being depleted. Then invest in regenerating the supply before you need it. That’s not environmental strategy. That’s resource management. Without it you’ll be out of business in the long run. And although Carlowitz was writing about forestry, sustainability is not about hugging trees, it’s just good business practice, baby.

It’s really not that complicated or hard. The work just needs to be done. Best without somebody forcing you to do it. Because this is what responsible people do. We think about the consequences of our actions. So sustainability is really what business will look like when it finally grows up.

On this one there is no more to explore, just to do it.

Are you part of the problem or part of the solution? — LinkedIn

Don’t just take it from me, here is some good stuff to read:

Grober, Ulrich. “Die Entdeckung der Nachhaltigkeit”. Kunstmann Verlag, 2010.

King, Andrew A., and Michael J. Lenox. “Does It Really Pay to Be Green? An Empirical Study of Firm Environmental and Financial Performance.” Journal of Industrial Ecology 5, no. 1 (2001): 105–116.

Porter, Michael E., and Claas van der Linde. “Toward a New Conception of the Environment-Competitiveness Relationship.” Journal of Economic Perspectives 9, no. 4 (1995): 97–118.

Mazzucato, Mariana. The Value of Everything: Making and Taking in the Global Economy. PublicAffairs, 2018.

Power, Michael. The Audit Society: Rituals of Verification. Oxford University Press, 1997.

Drèze, Xavier, and André Bonfrer. “Moving from Customer Lifetime Value to Customer Equity.” Quantitative Marketing and Economics 7, no. 3 (2009): 289–320. https://escholarship.org/uc/item/70t6b7r8

Barton, Dominic, and Mark Wiseman. “Focusing Capital on the Long Term.” Harvard Business Review, January–February 2014.

Hobfoll, Stevan E. “Conservation of Resources: A New Attempt at Conceptualizing Stress.” American Psychologist 44, no. 3 (1989): 513–524. 

Lewis Carroll, Alice’s Adventures in Wonderland, 1865

Whenever I go into serious thinking mode I tousle my hair, scratch my beard, adjust my glasses because I hope I get better focus — it’s actually true, my eye doctor explained it to me — it’s physics, look it up. Then I turn to my blackboard and start to scribble like a mad scientist. Eleven posts in and the list keeps growing — create institutional decision-making frameworks, solve systemic and structural issues in organizations, enable cultural change through organizational learning, work on ideals not on pretty pictures, design workplaces that give identity not just employment, experiment and find enabling ways of working not cheap prisons, ensure healthy and safe workplaces, understand that motivation comes from meaningful work and not money, invest in the managerial profession, design processes that include customers, build companies that fulfill their economic and social role simultaneously.

White chalk, smeared a bit here and there. But it looks right, reasonable, no utopia. This comes from practical observation and some intelligent books. I can nod at this. I bet a lot of you can, too. So why is this not happening at scale? Because — at least in my experience — things like this often land on the cutting floor of the corpo movie. Or you run into some invisible wall when trying to implement it. The movie, the wall have a name. And a date. And of course since it is a movie also an author.

The Board Room Version: In 1970 an economist wrote a 3,500-word editorial. It had no legal foundation, no empirical support, and failed on its own terms. It restructured global capitalism anyway. Friedman claimed that managers’ sole responsibility is to maximize profits for shareholders. Six years later Jensen and Meckling argued that managers may pursue their own interests at investors’ expense, so they should be aligned with shareholders through ownership and incentives. In 1999 this was all institutionalized by the OECD and made into a global corporate governance principle. The whole thing was wrong from the beginning. A corporation cannot be reduced to contracts serving shareholders. The facts were wrong: managers did not systematically destroy shareholder returns, and stock-based incentives did not improve long-term operating performance. It is legally wrong: shareholders own shares, not corporations. And the outcome was wrong: exuberant executive pay, short-termism and inequality rose while shareholders received no promised golden age. Between 1933 and 1976 the S&P 500 returned 7.5 percent annually. After shareholder primacy became doctrine, it returned 6.5 percent. The alternative was always there: stakeholder hierarchy with a decision rule. In good business, shareholder value is a consequence, not an objective. The doctrine that claimed to answer the question of corporate purpose was never legally required and produced worse outcomes than the system it replaced.

September 13, 1970. Milton Friedman. New York Times Magazine.

The movie is called Shareholder Primacy, just in case you were wondering. Friedman was not the big bad villain. He was part of what is called the Chicago School of economics. His ideas influenced heads of state like Ronald Reagan and Margaret Thatcher. And it’s all about the idea of shareholder value being the most important thing in business. Ah, I see some shoulders dropping in the room. Yeah, the reason your team was reduced by 10% last year. The reason your project had to be finished in six months instead of the planned nine.

In 1970 Friedman wrote an essay ‘The Social Responsibility of Business Is to Increase Its Profits.’ It basically said top management are agents of shareholders, sort of the employees of shareholders. Sounds right? We will see. Friedman explained that spending shareholder money on social goals is taxation without representation. So top management is not allowed to just spend company, sorry shareholder money in any way they see fit. The only social responsibility of business is to increase its profits. It’s a short editorial — 3,500 words — that tried to fight against unnecessary spending by top management. Problem is that at the time the corporate payout ratio to shareholders was in an absolutely stable era, had been for years. So, what was he on about? Be patient.

Six years later economists Michael Jensen and William Meckling published a paper ‘Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure’ in the Journal of Financial Economics and it was the foundation for what is called agency theory. First of all, companies are something that is basically made out of a nexus of contracts. That’s what they are. And shareholders are on the receiving end of these contracts. They are the head honchos. They hire directors as agents. And then there is something called agency costs. And that comes from managers not serving the shareholders’ interest. Wait, what? Yes, sometimes top management does other stuff than working for the profit of the shareholder like buying private jets or expensive offices or also when they just run a business sometimes. This costs money and that is a problem to the shareholder because it cuts into his profits. How to make all that bothersome spending of money go away? Stock-based compensation is the answer because this aligns management with shareholders’ interests. Jensen and Meckling’s paper gave Friedman’s initial idea the mathematical and academic legitimacy.

After that, the idea kind of exploded and the confetti of shareholder value landed everywhere and I mean everywhere — business, academia, media and politics. Even the voice of reason in international business, the OECD, made it clear in 1999: it had placed shareholder rights at the centre of its global governance principles, although it still explicitly recognised employees, creditors, suppliers and other stakeholders. The little idea out of a short op-ed in a Sunday newspaper had become the global governance consensus. Why? There must have been tons of studies done on the subject with a lot of evidence supporting the idea. Funnily enough, not. It just became the dominant idea. Academia said it made sense and we all know that scientists just have to say so, no proof needed. The media found a simple story to tell. You know, the poor shareholder gets robbed by overspending CEOs. Consultants could easily sell the idea and product: returns to shareholder maximization — cut costs, hype companies. And the major stock exchanges had a trading machine that needed to make stocks the center of the business world. It was the perfect combo of a simple idea and all the institutional actors that had something to gain from it. 

In 2001 two leading corporate-law scholars from Yale and Harvard announced “The End of History for Corporate Law”, beating the same drum. The debate was permanently settled. For eleven months. Then Enron happened.

Of course Friedman didn’t cause Enron directly, he didn’t tell Enron’s top management to commit the fraud that caused the bankruptcy. Friedman only supplied the moral argument: managers have to work for the shareholders. Jensen and Meckling supplied the machinery behind it. Managers are agents whose interests must be aligned with those of shareholders. So give managers shares to connect them to shareholders. Managers will then drive up the share price. 

Well, at least that’s good for shareholders — and managers. Even on its own promised outcome, the record was hardly impressive. Between 1933 and 1976 the annual return of the S&P 500 had been 7.5 percent; after 1976 until 2011 it was 6.5 percent. So shareholders got less. What we got was Enron, WorldCom, Xerox, HealthSouth, Lehman Brothers, Wirecard, Wells Fargo — financial fraud cases because managing the stock price became more important than running the real business. But it’s not all accounting stuff. Volkswagen engineered software to fake emissions tests to avoid the cost of genuine regulatory compliance. And one of the most tragic cases was Deepwater Horizon. When engineering and process safety were ignored to reduce schedule and cost — a pattern the National Commission on the BP Deepwater Horizon Oil Spill documented in detail, finding that the industry’s knowledge and experience in deep-water safety had been decreasing for years — causing a disaster that killed 11 workers and released 134 million gallons of oil into the Gulf of Mexico. These disasters had different immediate causes, but they shared a dangerous governing logic: measurable financial performance and stock price repeatedly outranked the health of the underlying system.

It all comes back to Deming: when you impose a numerical target, people will try to improve only that specific number, not the system behind it.

And it’s not as if any of these failures ended the doctrine. Laws passed did little to prevent the next crash. If anything, each crash produced more of the same over more than 25 years. That is not a theory being tested but an ideology being administered.

So if it turned out so catastrophically, at least the initial idea must have been brainy and great. Actually not. The discussion Friedman reopened had already been settled. In 1954 the leading corporate law scholar Adolf Berle had conceded the debate — in favor of the other side. It always amazes me that shareholder primacy is one of those theories where you see the cracks immediately. 

Friedman had that whole spiel about how managers, if not laser focused on shareholders and profit, were spending the company’s money on other stuff, like corporate social responsibility. That would be like a tax the company and shareholders would have to pay. And Friedman said that would be taxation without representation, without legitimization — like in some communist dictatorship. He did say that, but you know, 1970 and cold war. The thing is that in a company managers always had very direct legitimization. If you want to use Friedman’s metaphor for the company as a political system — which is odd because he was the deregulation guy — then the actual legitimization is there without any changes needed. The shareholders elect the board, the board hires or fires the managers. Perfect. What Friedman was asking for was already there.

But he goes on about all this social spending and says these are only things not demanded by law and things that do not make sense for the business. But what about everything companies already do because the law requires it — social security contributions, safety standards, labor protections — or because it simply makes business sense, like paying decent wages so people don’t quit on you? Eventually most things a manager could do would fall into either of these categories. So what is left? The 100 dollar donation to WWF?

So what was Friedman on about? Maybe it was the time — maybe managers during that time were ruining shareholders. We already saw that they were not. William Lazonick and Mary O’Sullivan’s empirical analysis of US corporate governance documents what Friedman chose not to examine. Real returns were stable. The payout ratio had been consistent for the last three decades: 40-45 percent. Lazonick and O’Sullivan’s 2000 paper ‘Maximizing Shareholder Value: A New Ideology for Corporate Governance’ is the empirical source for most of the numbers in this essay. Friedman described a solution to a problem that did not exist.

But then Jensen and Meckling had to be on to something. They came up with agency theory that is still recognized today. And it’s true — nothing to complain about here: when managers control resources they don’t fully own, costs occur. Well done. Actually, if anything, they didn’t go far enough. Because it’s not just costs that have to be paid by the shareholders. Managers or shareholders can also create costs for employees — reduce staffing, freeze wages —, customers — overselling —, suppliers — extending payment terms —, communities — tax concessions —, the state — bailout costs — or the environment — pollution. But their agency theory just named the shareholder as the only possible victim — sorry, principal. 

Even beside this little oversight, the whole idea doesn’t have a firm grounding. The principal-agent model rests on three factual claims that are all wrong. Firstly, it says that shareholders own corporations. But companies are in a legal sense a person. Nobody owns one like an asset — shareholders have rights and duties — but that is not the same as owning it. Jensen and Meckling described the corporation as a nexus of contracts. That is like saying a person is just a collection of organs and bones and muscle and whatever. The corporation is not what its contracts say it is. It is what the law says it is — a legal person with rights and duties that exist independently of any agreement between shareholders, managers, employees or anyone else. Those rights and duties were given by law, not negotiated. You cannot contract your way out of them. Jensen and Meckling looked through the legal person and saw only the contracts underneath. What disappeared from view was everything the law put there that no contract could replace.

Well, that is all legal talk — what about the real world? Good question. The answer is, it’s exactly the same. In the real world the company is still a legal person, since its only reason for existing is that a legal system has given it its founding status. It is in the real world a person. Funny? Yeah, but that was the whole idea of the corporation. What Jensen and Meckling describe is not a corporation but a simple ownership or partnership. And they should know better — they are the experts. In my first year of private law I learned that shareholders are not the only group that has obligation towards the corporation. Employees have deferred compensation claims, career-specific investments, pension promises. Suppliers have relationship-specific investments. Communities have infrastructure built around the company. All have a stake in the corporate game. That’s why we call them stakeholders. The workers who lost jobs and pensions in the 2008 financial crisis were residual risk-bearers. The shareholders who got bailed out were arguably less residual than them.

Plus, it is also not really true that shareholders hire the board. A board is elected through a governance process established and secured by law. The board is then supposed to exercise independent fiduciary judgment. They are the voice of reason in the game — the White Council, so to speak, although we know how that turned out. But they are not there to just execute shareholders’ instructions.

The next thing is just a practical thinking trap — the compensation problem. Stock options were supposed to align management with shareholders, to make real good-old business decisions. Problem is, stock prices became the metric and that is not about good business performance. It is what people are willing to pay for a stock on a market. Therefore what is considered is the expectation. Now, managing a company for real performance and for expectations are different things. Legendary economist Keynes called it almost a hundred years ago a beauty contest. And he saw that it is not only about expectations — it’s about what you think other people are expecting. And you have just taken one more step away from the real business. 

Researchers have never established that the enormous expansion of stock-based compensation reliably improves long-term operating performance. What it unquestionably improved was executive compensation. Their compensation doubled in the 80s and quadrupled in the 90s. In 1965 a CEO earned 44 times the average factory worker’s salary. By 1998 it was 419 times. Wait — but that means those agency costs were rising. Yes, they were. The agency problem was real. The implemented solution made it worse.

But the best is yet to come: the people the whole thing was designed for — the shareholders. They didn’t even exist. Friedman, Jensen and Meckling all assumed the shareholder was an opportunistic, selfish actor indifferent to others’ wellbeing — sort of the lowest human denominator elevated as the governance body of business. OK, so who is the typical shareholder then? He doesn’t exist. Approximately half of them are institutional investors, everything from hedge funds to pension funds. So there are people somewhere behind it, but they are so removed from the actual share ownership they are invisible and powerless. Like me — I am part of a pension fund but I have no idea nor any real control over what that fund owns. But there is a fund manager somewhere who has some control, but he doesn’t own it either. In addition there are some very wealthy people directly owning stocks. And it is not just the diverse nature of shareholders — it’s also the length of time shares are held. In 1960 average shareholders of companies at the NYSE stayed with an investment for more than 8 years calculated from trading activity. By 2010 the average shareholder was gone in four months. Meaning each quarter you are faced with a new set of shareholders. Different shareholders have completely incompatible interests — the hedge fund and the pension fund own the same shares and want opposite things. Maximizing shareholder value means privileging the most aggressive, most short-term, least diversified shareholders over the long-term interests of most real investors.

Managing shareholder value means playing the expectations game — not creating actual value. If you beat the analyst estimate the stock goes up; miss it and the stock goes down. In 1983 US companies met earnings expectations about 50 percent of the time — that is what you would expect from a random system. By 1997 they beat it 70 percent of the time. Management didn’t get better at running businesses in that time — they just got better at playing a game.

You may say that this all sounds like business black magic, but what did it mean in reality? You know it already. What happens when companies are streamlined and made to look pretty? People are fired, even when companies are doing well. 1983 to 1987 were boom years. 4.6 million US workers lost their jobs. 35 percent remained unemployed two years later, with permanent wage reductions for those who found work. And more and more profits were going out the door of companies in the form of dividends and share buybacks — 81 percent by 1989. That is money that used to be reinvested in the business. Now it disappeared. But wait — that was the rise of Silicon Valley. All that new technology must have come from R&D. Yes, from the investments that had been made decades before, not at the time. You know, minor stuff like the internet and GPS. The new doctrine just harvested. The only thing that was rising was management compensation — 419 times a worker’s salary. 

But still, accepting the shareholder as the top dog sounds right somehow, doesn’t it? This is how it is supposed to work. It’s the way the system was set up. If you mean the law by system, that is not true. Corporate law generally does not require managers to maximize today’s share price — not US, not UK, not EU, not CH. Even in Asia where corporate law is very different, you will not find it. If the different national laws state anything on the purpose of a firm it is a very diverse range of things: growing the company, creating quality products, protecting employees, serving the public interest. As long as the board and management do not abuse their power to enrich themselves they can take any direction.

Maximizing shareholder value is not an obligation for management. It is one of several options. Friedman made it a must. And it was further developed into a de facto law by people who benefited from it. The costs are paid by the people who could not write an op-ed in the New York Times.

Alternatives had already existed for decades. Drucker had it in 1942. Deming in the 1950s. Japan went another way. Their most important principles had always been company continuity and long-term relationships with employees, suppliers and customers. Continental Europe had the tradition of both shareholders and employees having participatory power. Both regions slowly shifted towards shareholder primacy through privatization, institutional investors, executive share incentives, financialization and pressure for higher returns. The voices and examples for alternatives have always been there. The problem was never a lack of knowledge.

Shareholders are of course very important to business. But they are not the only important group. The needs of all stakeholders have to be considered, because without their input the business cannot grow. Yeah, yeah, all are important. We have all of them in our strategy, they are on our posters, sometimes even in our slogans. But it’s not that simple. As long as you just list all of the groups, it will not tell anybody how to make decisions. Because superficially stakeholders have contradictory demands: I want more profit, I want more salary, I want more taxes. So how do you solve the issue? Well, the concept is easy — it’s called stakeholder hierarchy.  It gives managers a decision rule when stakeholder interests conflict. Customer first means when resources are scarce you know where they go. Employee second means you know what comes next. Shareholder last doesn’t mean shareholder unimportant — it means shareholder as consequence of doing the other things well. The hierarchy matters — without it you have organizational personality disorder, competing goals with no decision rule. With it you have a governing principle that produces better shareholder returns than shareholder primacy did.

A word of caution: stakeholder hierarchy has been misused before. Trickle-down economics claimed that enriching corporations and the wealthy would eventually benefit everyone. There is no convincing empirical evidence that it does. Stakeholder hierarchy has to be founded on real performance, not on promises.

The real market — actual business performance — should be the ultimate objective of corporations. The real market creates value through products, services and relationships. The stock market translates expectations about that value into prices. The danger begins when management starts producing expectations for the stock market instead of value for the real market. Seems like reality is the better game to play. Who would have thought?

But why does shareholder value remain the dominant idea? We have seen what harm it can do. There is a known and tested alternative. And it’s no secret. Even the big promoters of shareholder primacy have distanced themselves from their claims. Jensen retreated from short-term, share-price-driven shareholder primacy — co-authoring ‘Just Say No to Wall Street’ in 2002. More damning still — the poster child of shareholder primacy, GE’s Jack Welch, said in an interview with the Financial Times in 2009, after his retirement: ‘Shareholder value is a result, not a strategy. Your main constituencies are your employees, your customers and your products.’

I guess there is more to explore.

What should have the highest value in business? LinkedIn

Don’t just take it from me, here is some good stuff to read:

Friedman, Milton. “The Social Responsibility of Business Is to Increase Its Profits.” New York Times Magazine, September 13, 1970. 

Jensen, Michael C., and William H. Meckling. “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.” Journal of Financial Economics, vol. 3, no. 4, October 1976.

Lazonick, William, and Mary O’Sullivan. “Maximizing Shareholder Value: A New Ideology for Corporate Governance.” Economy and Society, vol. 29, no. 1, February 2000.

Stout, Lynn. The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public. Berrett-Koehler Publishers, 2012.

Martin, Roger L. Fixing the Game: Bubbles, Crashes, and What Capitalism Can Do. Harvard Business Review Press, 2011.

Welch, Jack. Quoted in Guerrera, Francesco. “Welch Condemns Share Price Focus.” Financial Times, March 12, 2009.

Keynes, John Maynard. The General Theory of Employment, Interest and Money. 1936.

I always get a headache when I enter the temple and the chattering hits my senses. Like a party with too many people and not enough music. I know they saved the city from those wine drinking, cigarette smoking existentialists. They – the geese – woke up the city. The mean guard dogs slept through it all. But man, the headache I get each time I enter Juno’s temple. Anyway it’s a contract. I just have to feed them once a day and the senate pays me. A good deal. 

Yes, Mr Publicani, it was a good deal, probably one of Rome’s earliest documented public contracts. No, tax collection came later, probably. E. Badian has the details in his wonderful book “Publicans and Sinners” – mainly on that it is kind of hard to know exactly, different sources, not always the best, still he tries his best and does lots of ancient business case calculations.

The Board Room Version: The corporation began in Ancient Rome. The state contracting private capital to perform state functions it could not handle. The deal was good, generated wealth, produced fraud and required periodic correction. The pattern repeated across history: charter companies granted sovereign power to push ocean trade and national control outside of Europe. Then they overreached. Free incorporation in the 1850s democratized the institution while any public purpose was forgotten. Standard Oil showed what unrestrained incorporation produced. Roosevelt named the problem and tried to contain it. The pattern was always the same: necessity created the form, legitimacy is granted, overreach follows, the state needed to correct. Then Berle and Means in 1932 documented what the pattern had been producing: ownership and control separated as the founding condition of the modern corporation, not a corruption of it. Then Pistor showing why the renegotiation never happened: capital rules by law and is protected by it. The corporation remains collectively indispensable and individually unpredictable – and the question to whom it is accountable has never been resolved.

We know for certain that these contracts start to involve serious money once the Hannibalic Wars start – 218 BCE. And that’s also when the societates publicanorum become important. And this, ladies and gentlemen, is the birth of what will eventually become the modern company, the subject of this essay. OK, it’s called proto-corporate, so not quite it, but sort of the first alpha version. I know there are those who dispute any kind of connection between societates publicanorum and the modern corporation, well I happy to introduce you to my roman law professor from back in the days and you can discuss this with him. 

See, our geese feeder was a single person with a state contract – sometimes it was also several people but they didn’t pool resources to fulfill their contractual duties. Importantly, these were not state employees, it was more like an outsourced job. But feeding geese is a relatively simple thing to do. When Rome was faced with Hannibal marching over the Alps it had to send sixteen legions – something like 72’000 soldiers – into the field. To supply these proved too much for the administrators of Rome at the time. The complexity of the logistics and a strained Roman treasury led it to contract the private sector. And even then this could not be done by one wealthy person – or family – alone but several needed to pull resources together to be able to supply all the tunics and helmets and food and whatever nonsense is needed in war. So the state had to go into contract with a group, unified with the purpose of fulfilling state contracts, a public purpose. These societates did a lot of what modern companies would do. They pooled capital, even fronting the investment – and the state likely paid interest although, you know, sketchy sources. They had grouped together before the contract, so were not just one-hit bands. And by 200 BCE these contracts were also substantial, before that they appeared to be more of a side hustle for wealthy families. War supplying stayed one of the major activities, although tax collection, mining, construction and salt harvesting also became important.

But we talk corpo here and that means then as it does now there were some bad apples. During the Hannibalic Wars the ship lanes were guaranteed by the state. So there is the story of some fine gentlemen loading worthless goods onto unseaworthy ships. When they sank, the businessmen would collect the loss of the expensive contracted goods from the state. Especially immoral since the state was under attack at the time. Some sources turn this into a corpo-political thriller — the Senate bought off, hired mobs storming the courts, total impunity for the fine gentlemen. Badian, ever the careful historian, complicates the story. The fraud probably happened. But the Senate likely just delayed dealing with it — wartime was bad timing for prosecuting your own war suppliers — and the Senate wasn’t really a court in our sense anyway. The mob that tried to break things up was probably small, and got punished for it. Less Netflix, more bureaucratic mess. Which is somehow more believable, and more familiar. Eventually some accountability arrived, if messily and incompletely.

Another interesting point comes from the fact that there was no specialization in these proto-companies. The same groups would bid for contracts in mining and war supplying. If a contract went from one group to the other, equipment and infrastructure and people were often just sold to the new one. This shows that these groups had assets and an organizational setup that could be sold and transferred.  

By 150 BCE the elite class of Rome, members of the Senate, had linked together with the publicani, not in person but within the same network. There was no active lobbying for business interests because it was not needed, the important political and business people were all linked together. There were some control mechanisms on the state’s side but they were rarely used. The state and the proto-corporations seemed to have found a good collaboration, until the story with the Gracchi brothers.

Tiberius and Gaius Gracchus were Roman aristocrats in the second century BCE. Tiberius first attempted to enforce land reforms to benefit poorer citizens. This went against the Senate which had converted public land into effectively private wealth for the political class. Gaius Gracchus went further. He wanted to reform taxation and provincial administration. Both were aimed at breaking the Senate’s grip on power — not by attacking it directly, but by building alternative bases of support. Gaius gave the equestrian (commercial) class controlling power over the governors in the new Asian provinces. Basically giving the publicani power to check the very government that should have kept them in check. That created a strange reverse accountability situation. What sounds like your everyday stupid political move – just some politician giving his wealthy friends some more power – ended in both of them being killed in political violence. These were the first political murders in centuries. Later this would become a lot more common. Rome became an epicenter of power struggles. It took another 100 years but then (and after Caesar and all that) Augustus effectively killed the republic and turned it into a monarchy in disguise. That also closed a lot of the doors for private activities. Tax collection for example was folded back into direct state administration.

That was the end of the first big corporations. Afterwards there were brief glimpses of corpo. The guilds in medieval societies were a bit more than just professional associations but no real companies. Also the Hanseatic League, the Italian banking houses and city-states were all significant, but they never quite reached the importance of Roman publicani. They were smaller in scale, mostly local and not pooling dispersed capital into a continuing entrepreneurial effort. Now some of them – as the Italian banks – were quite complex in setup but nothing comparable in scale. The reason was quite simple. It wasn’t needed. Europe after Rome had broken up again into smaller regions, their significance far less than Rome’s had been. So this Roman invention went dormant for about 1400 years until states had regained enough grandeur. But not just states had gotten larger, also the world had.

In 1492 Columbus crossed the Atlantic and maybe even more importantly Vasco da Gama reached India in 1498 by sailing around Africa. The birth of ocean trade. The south of Europe had much experience with trade by sea. Mediterranean trade routes date back to before ancient Rome. But the ocean trade was a different animal. Voyages took years not weeks. Capital – for ships and trade goods – was locked up for that time. The first voyages were indeed financed by the southern European monarchies Spain and Portugal, but we know how that played out. It took another century and two northern powerhouses to build structures that were better suited for these endeavors. In 1600 the English East India Company and in 1602 the Dutch East India Company were founded. The first Charter Companies.

Both were extremely successful in their enterprise. The English East India Company had over 100’000 employees at its peak and that excludes the more than 200’000 soldiers in its service. Oh, and it basically occupied the whole Indian subcontinent. The Dutch East India Company was economically even more impressive. It sent almost 5’000 ships to Asia and brought back more than 2.5 million tonnes of goods.

And they were actual companies, they had a multitude of owners, legal personality and operated separately from the state they originated from. Although separated economically, their respective states granted them a monopoly and quasi-sovereign power – like waging wars and minting coins – in exchange for a public purpose written into their charters – expanding their nations’ trade and presence.

The English East India Company as mentioned was basically a privately founded occupying force. And the Dutch version was also not innocent. They violently enforced their trade monopoly on the different spice islands. And these were just the two most prominent examples of charter companies. There were many more and they were all just in the hands of shareholders. One was the South Sea Company which had received trading privileges with Spanish South America in return for taking on a part of Britain’s national debt. Now, these opportunities were quite limited since Britain did not control these territories. But despite starting with a huge negative in the books and a bad business plan, the market’s expectations were enormous. In 1720, shares started at £100 and rose to £1,000. But confidence quickly collapsed again and thousands of investors were ruined.

Whereas in Rome there had been bad apples exploiting a system, these newer companies were built to exploit, either through overreaching power granted or by the first forms of financial speculation. In the case of the latter the state realized the danger and reacted with prohibition. Britain passed the Bubble Act banning new joint-stock companies without royal charter for the next hundred years.

But a total ban couldn’t last, the need for private enterprises didn’t go away. On the contrary, the Industrial Revolution demanded it even more. The machinery, the mills, the infrastructure — the required capital at a scale made the partnership form genuinely inadequate. By the 1850s new legislation was needed. Enter the Limited Liability Acts in the UK and similar state laws in the US. The main twist was that everybody could become a corporation and more importantly for the first time there was no public purpose required – other than making money of course. Nobody voted to abandon public purpose — it just stopped being a precondition once anyone could incorporate by filing paperwork. The publicani only existed because of state contract. The charter company had to justify itself to the state. The free incorporation didn’t have to justify anything to anyone. And it caught on like a wildfire – in the UK alone nearly 5’000 limited-liability companies were established by 1866.

One big business of the time was railroads and large companies like the London and North Western Railway with around 20’000 employees. This was also the birth of a new kind of profession: the manager – moving freight without trains colliding required coordination, oversight and administration on a scale nothing before had been known. But where to get people who had some idea of command and control activities. Well, you take them from the army – retired officers. So by 1850 50 to 60 managers had been hired by railroad companies, hundreds more would follow. Just if you were wondering where what McGregor would later call Theory X management originated, here is your answer.

These new incorporations were largely free of governmental checks. They also had no public purpose. They just developed on their own and of course grew. Let’s take Standard Oil as an example in the US. In its first form incorporated in 1870 it grew in just ten years to control roughly 95% of US oil refining. It was then organized in a trust, coordinating 40 companies worth 70 million dollars. John D. Rockefeller – the principal owner of Standard Oil – had amassed a fortune of 900 million dollars by 1913, roughly 2.3% of US GDP held by one man. Free incorporation did not make Standard Oil dominant. But it allowed companies to grow without having to prove that they served a public purpose. Weak regulation and the economics of oil did the rest.

The government had to react and did so first with a law in 1890 – the Sherman Antitrust Act – and then with the so-called trust-busting under two US presidents – Roosevelt and Taft. In his first message to Congress in 1901 Roosevelt gave a clear description of the situation: “They are indispensable instruments of our modern civilization; but I believe that they should be so supervised and so regulated that they shall act for the interests of the community as a whole.” More and more people realized why these new companies posed a problem for societies and again Roosevelt put it into the right words in 1902: “We have a great, powerful, artificial creation which has no creator to which it is responsible.” The law had created an artificial, a legal persona, but it had no soul. Standard Oil was eventually split into 34 separate companies by 1911 by the courts.

Academia became more interested in corporate business at the turn of the century. Not just in establishing education for the new profession of the manager, but also as a study object. Adam Smith had been an early outlier in 1776, most literature came around in the early 1900s. But few got as much practical insight as the Austrian immigrant Peter Drucker. After writing his social analysis “The Future of Industrial Man” in 1942, he was invited by GM to study the company. Drucker was fascinated by the decentralized M-form of the company. The different car brands – like Chevrolet, Pontiac, Cadillac – were organized as largely autonomous operating divisions and GM had only a coordinating control function. This solved the issue that top management in large organizations cannot make operational decisions. Smaller divisions keep decision making at a lower level where it is still feasible. This was very much in line with what Drucker had propagated for companies and he further developed the idea in his book “Concept of the Corporation.” He also pleaded with GM to treat workers less as a resource or cost element and to take seriously their social role in creating function and status for them. GM implemented Drucker’s structural recommendation. But when it came to the human and social argument their response was to start an employee essay competition: “My Job and Why I Like It.” This shows the gap between one of the most sophisticated corporations of its era and the most important management thinker of the era. Social responsibility had become a gimmick, not a central aim of the corporation. 

After World War II companies changed mainly in how they were financed and owned. The original model of companies being mostly financed by outside sources started to shift to internal – two-thirds of capital raised by non-financial companies between 1945 and 1970 came from internal sources. At the same time numbers of shareholders grew in the US from 6 million in 1952 to 25 million by 1965. The old small club of owners started to be replaced by a large – mostly passive – population of owners. Top management was free to invest long-term without needing shareholder approval. This financial architecture is what made Drucker’s vision of the corporation as social institution briefly look real. And there were signs of it – P&G’s guaranteed employment, Heinz’s citizenship education. But there was also the risk of the old saying “Everybody’s business is nobody’s business.” Dispersed share ownership threatened to turn everybody’s company into nobody’s responsibility.

And by the 1970s something else happened, accelerating dramatically in the 1980s. The patient internal financing started to be replaced by external pressure from shareholders to see returns. We are entering the period of hostile takeovers and leveraged buyouts. The golden age of the big old companies was dismantled and with it also the stability and the – although always limited – social purpose corporations had given themselves. By 1993 Manpower – a temporary staffing agency – had replaced GM as the largest employer in the US.

Besides Drucker’s early social theory, there were other voices that looked at the corporation critically. In 1932 Adolf Berle and Gardiner Means wrote “The Modern Corporation and Private Property” to point out some systemic weak points. They saw that if you concentrate the wealth of many people, the control over this wealth needs to be surrendered to a unified direction. Somebody needs to take charge of the business. That somebody is not the owner of the wealth anymore. It’s what came to be known as top management. That creates two questions: what is the motivating force driving the person – or persons – in charge? It’s not their money that is on the line. The second is how is wealth, more specifically profit, distributed. The person in charge is doing the work, but it’s the wealth-owner’s money. That leads to a funny symmetry between owner – or better investor – and worker. Both become wage recipients. The worker for labor and the investor for capital. Both are just resources in the company’s process. Neither of them is really owning or controlling anything. The manager is somewhere in the middle – not middle management in this case, but between capital and labor – but who can actually name them as the person in charge? Their legitimacy is unclear. So does the old proverb really come true: everybody’s business truly is nobody’s. And the stakes – as already mentioned with GM – were very high in the 1930s. AT&T is another example. By 1930 its wealth was bigger than that of 20 US states, but it was “owned” by 10 million shareholders. 10 million people don’t own any one thing. That would be chaos. Have you ever tried to co-own a car with somebody?

Berle and Means tried to solve the problem from different angles. Traditional logic of property would mean that control stays with the owner/investor. But that would mean management has no control and is therefore impotent to act. Management cannot negate that logic either because they used it to get capital from investors in the first place. Give me money and then you own part of our great gummy bear company!

Traditional logic of profit isn’t doing much better. It says that profit should reward effort put into an endeavor. Meaning profit would have to follow control. If management is the controlling force it would get all the profit, not the passive owner. Obviously that is not satisfying either. 

That results in the traditional concepts not being of any use anymore. There was a split between active ownership – the actual enterprise – and passive ownership – the shares. And since motivation of management could not be profit it had to be newly defined as a combination of salary, prestige, power and empire-building. Making the new top executive more like an Alexander the Great figure. Well, that didn’t solve the problem of who was to be in control. 

According to Berle and Means there were three possible answers. One – give shareholders more control — but Berle and Means saw this only as an interim safeguard against management stealing from investors, not as a description of what the corporation is actually for. Two – give management unrestricted control over companies. Well, that could leave them to wreak havoc with other people’s money. The third option was to create corporate power as a community or public trust. Neither shareholder nor management can claim corporations exclusively. Companies have also grown beyond just two parties because they affect workers, consumers and communities. That power needs to be directed toward broader social interests as well as financial interests. So it becomes a complicated construct of balancing different interests. It actually becomes more like the state, juggling different stakeholders and accountabilities. Not an easy thing to accomplish and it never has been. Instead, by the mid-1970s one economist called Milton Friedman simply declared the first option – the interim safeguard – to be the right and only answer.

Why capital’s privilege was never really renegotiated needs an explanation and it was my introduction to this discussion — because it comes from a legal scholar. Katharina Pistor wrote in 2019 her analysis “The Code of Capital: How the Law Creates Wealth and Inequality” and for non-legal people this might be quite eye-opening. See, capital rules because of the law. We see effects of this in times of economic crises – the US banking rescue of 2008-09, when the state rescued banks whose legal architecture had privatized gains and socialized losses – or the Covid-19 crisis or the Great Depression and on and on. But we also see this further back in history when the state gave feudal status or colonial race hierarchy that had direct influence on ownership. Max Weber already saw at the beginning of the 1900s that feudal society had given different groups privileges. Modern capitalism replaced these with laws that were supposed to be equal. But businesses quickly learned to use increasingly complex laws to gain new advantages, all under the motto of efficiency and what benefits business is good for everyone. 

But Pistor found that asset holders did not want the rule of law, they just wanted legal protection for themselves. That leads to absurd situations. Take English landlords in the seventeenth and eighteenth centuries. They fought for land titles to be legally recognized, then they took out debts on them. But when the creditors enforced the mortgage they cried foul. They had lawyers build trusts to shield their wealth from the creditors. The courts defended the shield and the creditors lost their money and ownership rights. Big creditors later learned the same game and fought for bankruptcy law placing their claims ahead of those of employees and customers.

Yet the real funny bit – at least for legal people – is that all these capitalist games require the law to constitute ownership in the first place. See, having possession of something and owning it is not the same thing. Possession is more or less an actual thing. I have an apple in my hand, I possess it. Now, the apple might come from my apple tree or I might have bought it at the supermarket and then I also own it. But what if I picked it from somebody else’s apple tree. I still possess it but I don’t own it. Ownership is having the right to something. Now rights are given by law – at least in modern states. So without law there would be no ownership. But why then do we have all these funny business shenanigans. Why can’t law do a better job at regulating all of this. The problem is that law is necessarily a generalization – it tries to cover all activities, not a detailed few – and it always suffers from incompleteness – it cannot anticipate every future case. So there is always the possibility of it being exploited before the system can close the gap. What makes this stranger still: the legal protection capital enjoys is never called a subsidy, while welfare payments always are — “it is legal” ends the conversation before anyone asks whose interests the law is actually serving. The exploiting of law is even more absurd since it works against a system that is required to constitute wealth. Or as Pistor says: “law is the cloth from which capital is cut.”

Corporations are an interesting thing because they are artificial entities, but they contain so many useful activities without which modern society would not be possible. But as with all things that need definition, a lot of things are forgotten. The social scientist and systems thinker Gregory Bateson explained what the semanticist Alfred Korzybski meant when he said that the map is not the territory. The reality is not drawn onto paper. It is only the differences – the lake, the mountain, the path. If there was nothing special about a piece of land all you would see on a map would be the boundaries. Same with corporations, what was drawn were only the specificities: the ownership and liabilities and contractual relationships. That’s what got coded. Everything uniform – work, communities, effect on the ecosystem did not appear. So we have only a fragmented picture of what corporations are.

Drucker said it was the first autonomous institution, a power center within society yet independent of the national state. An indispensable instrument as Roosevelt described it. Or as the Economist writers Micklethwait and Wooldridge described it: “collectively indispensable, yet individually unpredictable.” There are many questions that have never been resolved. Yet that does not make the corporation something to abandon but something to be worked on.

I guess there is more to explore.

Is the corporation a flawed necessity or an alpha version of something truly great? LinkedIn

Don’t just take it from me, here is some good stuff to read:

Badian, E. Publicans and Sinners: Private Enterprise in the Service of the Roman Republic. Cornell University Press, 1972. (Available on Internet Archive.)

Micklethwait, John and Wooldridge, Adrian. The Company: A Short History of a Revolutionary Idea. Modern Library, 2003.

Berle, Adolf and Means, Gardiner. The Modern Corporation and Private Property. Macmillan, 1932 (revised edition 1967). Book I, Chapter 1 and Book IV, Chapters I and II only.

Bateson, Gregory. “Form, Substance and Difference.” 1970 Korzybski Memorial Lecture. In Steps to an Ecology of Mind. Chandler, 1972.

Drucker, Peter F. The Future of Industrial Man. John Day, 1942.

Drucker, Peter F. Concept of the Corporation. John Day, 1946.

Pistor, Katharina. The Code of Capital: How the Law Creates Wealth and Inequality. Princeton University Press, 2019. Last chapter.

Roosevelt, Theodore. First Annual Message to Congress, December 3, 1901.