How misunderstandings of risk, measurement and success put us where we are today
 

We live in world of pressure to conform: to believe what others tell us is true, to toe the line, to accept the values of those in positions of power and to follow conventional, approved paths. That’s the way to get on in life and business, we are told. You need to ‘fit in’, ‘play the game’, and ‘avoid rocking any boats’.

That may produce a quiet life, but it won’t help anyone speak out when it becomes clear that things are going badly wrong. Heresy—questioning beliefs that are approved today—seems to me to be essential to human progress. Nearly every advance in human thought is loudly denounced as a heresy at the start—only later does it become the new orthodoxy. That is true of politics, religion, and matters of social justice. It is doubly true of the world of work. Corporations often claim they want creative, smart and independent people; but those they actually favor (and promote) are usually obedient to the approved corporate line.

We’ve never needed heresy more in the lifetime of anyone here today. Our orthodoxies—most of them in place since the 1930s—have failed on a massive scale. We didn’t see it coming either, mostly because to do so (and speak about it) was seen to be a heresy. As a result, we have brought down the roof on our own heads by misreading risk, putting more faith in numbers than reality, and equating the wealth of a few with success for all.

Misunderstanding risk

Mitigating—or, better still, avoiding—risk was the mantra of most financial corporations in the last few years. They thought they knew how to do it, using a combination of fancy number-crunching and the much-vaunted ‘business sense’ of the guys at the top. The orthodoxy demanded that key decisions be restricted to a few people at senior levels. Middle managers—the group most likely to know what is really going on—were shut out of important decisions. It was inconceivable to allow middle or junior ranks to use their judgment to question executive strategy.

Now we know how mistaken the orthodoxy was. The top guys were too remote from the real world to grasp what was brewing; the pointy-headed types too wrapped up in their theoretical models. Meanwhile, those in contact with reality were incentivized to ignore it and concentrate on churning out loans to obviously doubtful risks. A system originally built on relationships was turned into a system built on abstractions. To suggest anything might be wrong with that was heresy.

Leadership by numbers

The temptation to reduce the functioning of a massive corporation to one or two headline figures is too much of an attraction for some—but that doesn’t make it right or sensible; especially when it comes with a orthodoxy that concentrates attention on spurious, short-term goals at the expense of the long-term health and viability of the business.

We now know that the ‘achievements’ so avidly reported were rarely based on sensible uses of corporate time, attention, or money. Instead, the messy, complex, demanding, and fascinating process of running a successful business was ‘simplified’ to meeting a few simple, numerical goals—as if they accurately represented the business as a whole. Such “indicators” and “key ratios” are no more than numbers dreamed up by accountants and financial markets, often for some entirely different purpose. The figures are not the business. They are, at best, inaccurate and blurred pictures of the business as it was at one fixed time, and given a number of (often dubious) assumptions.

Wealth is not always a sign of success

Why didn’t we all question the most basic tenet of business thinking: that a good life means earning a great deal of money? It seems so plain now that executives had their judgment twisted out of joint by obvious conflicts between self-interest (and huge personal rewards), the insatiable demands of greedy Wall Street types, and the real interests of their businesses and the country at large. Why didn’t we see it?

Orthodoxy held that economic prosperity is based on persuading a majority of people to consume more and more of whatever corporations want to produce. That demands the consumer has access to money, and lots of it. The result was a lifestyle composed of equal parts of getting and spending, with nothing else considered. When the real sources of money ran out, they were simply replaced by credit—and more and more of that too. Credit couldn’t be made hard to obtain, since that would slow down ‘economic activity’ and limit profits.

So, for several decades, anything that produced wealth was approved, regardless of much else. The economy was ‘high’ on the addictive drug of executive stock options, double-digit growth in paper profits and deregulation. Now the ‘high’ has ended and we have to face the ‘cold turkey’.

Conventional thinking won’t show us the way out of the mess it has caused. Such progress as we can make will only come from embracing heresy on a grand scale. It is time to make a start.

Three men were trying to claim precedence for their own profession. The surgeon said his was the most important job, since God had been a surgeon at the start of human life: he had extracted one of Adam’s ribs to make Eve. The architect objected on the grounds that first God had drawn up the blueprints for constructing the universe and supervised its building. “Before that,” he said, “there was only chaos.” The economist smiled and simply said: “Who do you think produced the chaos?”

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