Everything that’s wrong with modern management

When you’re interested in the history of management and organisations, Jack Welch’s name comes up often. I even showed videos of him in my classes and used him repeatedly as the perfect illustration of 1980s management. So the news of his death in March did not go unnoticed to me. The CEO of General Electric between 1981 and 2001 was a business legend and an iconic figure of modern management and all its woes.

This piece is a repost from Laetitia Vitaud’s newsletter Laetitia@Work

He embodied the 1980s (and 1990s), together with Ronald Reagan and Wall Street’s Gordon Gekko. “Greed is good”, Gekko’s most memorable cue, could have come from Welch. His legacy is enormous. We owe him a ton of management concepts, as well as inspirational quotes and HR principles, a lot of bad things, and some good things too. Indeed Welch must have been a genuinely nice guy (but, hey, a lot of people with a dubious legacy were actually nice guys).

So I will dedicate this piece to some of Welch’s legacy and share a few thoughts on what’s wrong with modern management. Read along.

A mechanistic view of the corporation where people are cogs

In many ways Jack Welch’s GE is the embodiment of the large corporation that really invented modern management. It’s the quintessential illustration of the “visible hand” at work! The Visible Hand: The Managerial Revolution in American Business is probably the single most interesting book ever written about management (I’m biased! It’s certainly because it was written by a historian). This 1977 must-read by Alfred D. Chandler deals with the “revolution” brought about by large-scale business enterprise and its managers.

The main idea of the book is that after 1850 (and the railroad revolution), the visible hand of managers replaced what Adam Smith called the “invisible hand” of market forces. “Managerial capitalism” saw the rise of a new class of professional managers in charge of running industrial empires that spanned several geographies and sectors. The first management schools were created at the peak of the railroad revolution, but management really became a respected academic discipline later, in the mid-twentieth century with the likes of Peter Ferdinand Drucker. Welch did not study management (he was a chemical engineer) but his career as a manager represents the peak of managerial capitalism.

His view of the corporation—and that’s what GE was under his CEO-ship—was mechanistic (after all it’s no coincidence he was first an engineer): organisations are machines designed to conquer markets and generate profits. Humans are resources that must be carefully aligned on the chart (like cogs). Competition drives innovation. And meritocracy reigns supreme. (Yes, there are only men at the top, but according to the Welch worldview, it’s not because women are discriminated against, it’s because women won’t be as fully devoted to their jobs as men).

To understand how this worldview and type of organisation is different from others, there is no better grid than the one provided by Frédéric Laloux in his book Reinventing Organizations (for a summary, see my article here). Laloux explained how organisations evolved from a very primitive form, “Red” (small organisations based on arbitrary violence like packs of wolves), to more sophisticated bureaucracies that could pursue long-term projects, “Amber”, to a third model he calls “Orange”.

Achievement Orange, the third paradigm, is based on efficiency, materialism, and science. Its main advantages are innovation, an objective-based management that leaves more freedom in the means to achieve the objectives, and meritocracy. As Laloux wrote, “The transition to Orange brought a new prevailing metaphor. A good organization is not a wolf pack or army, but a machine. Corporate leaders adopted engineering terms to describe their work: they designed the company, using inputs and outputs, information flows, and bottlenecks; they downsized the staff and reengineered their companies. Most large, mainstream publicly listed companies operate with Orange management practices.”

But Welch’s Orange paradigm (which is still dominant in many organisations) has so many limits. It doesn’t take human bias into account, sociological phenomena, externalities, psychology, higher purpose, spirituality… nor anything else that truly matters. The Orange corporation doesn’t take the impact of production into account—pollution and inequality, for example. It fails to produce individual and collective meaning to those who belong to them. “As the Orange paradigm grew dominant, it also encouraged short-term thinking, corporate greed, overconsumption, and the reckless exploitation of the planet’s resources and ecosystems. Increasingly, whether we are powerful leaders or low-ranking employees, we feel that this paradigm isn’t sustainable. The heartless and soulless rat race of Orange organizations has us yearning for more.” (Laloux)

Paradoxically enough, although Jack Welch embodied the “visible hand” of management (which is incompatible with the “invisible hand” of market forces), he fundamentally believed in market forces and meritocracy. The “best people” at the top of the organisation were paid X times more than their predecessors not because of the visible hand (i.e. they had the power to compensate themselves more than ever before) but because of the invisible hand (of the free market). Executive compensation should continue to increase faster than the compensation of the working class because 1. the system is fully meritocratic and top managers are the best of the best ; 2. the free market says so.

Understandably Welch was criticised for his lack of compassion for workers. When he was asked about his excessive CEO pay compared to the pay of ordinary workers, he would grow mad and argue that his pay was dictated by the “free market”, and that no one should interfere with that. As far as executive pay is concerned, Welch was soon followed by a large clique of top managers, many of whom would manage to have the “free market” pay them even more. He was not alone.

You know what I think of people who constantly speak of meritocracy (in a previous piece I mentioned Daniel Markovits’s The Meritocracy Trap): the places where people speak the most about meritocracy are the places where there is the least meritocracy. Welch based GE’s HR management entirely on the meritocracy fallacy, and it had deleterious consequences on people, and women in particular. One of the HR legacies that best illustrated that (and that has since been abandoned at GE) is the concept of the vitality curve.

Why the vitality curve illustrates what’s wrong with the managerial revolution

The vitality curve, also known as stack ranking, was introduced by Jack Welch at GE in the 1980s. It is an employee evaluation method whereby the managers of a company are asked to rank all their employees on a bell curve. The model assumes a “normal” distribution of the employees in which, typically, 10 percent are ranked as “top performers,” 80 percent as “satisfactory,” and 10 percent as “underperformers” who are detrimental to the company (and must be fired). When evaluating the staff, managers must assign each individual to a category so that the percentages remain constant. In other words, even if every single employee does his or her job perfectly well, there must always be 10 percent of “unsatisfactory” employees. Jack Welch argued that it motivates mid-range employees to do their best to become “top performers.”

Welch was adamant that top performers should be rewarded and that “slackers” shouldn’t get paid for harming company results. His beloved meritocracy principle could translate to an evaluation system that would effectively motivate the best and brightest and make it possible to let go of the worst underperformers. So he implemented a three-step scale with 15 percent of “1s,” 75 percent of “2s” and 10 percent of “3s,” who had to be fired if they didn’t improve. The model was referred to as “Rank and Yank” and became popular with many managers in the following decades. Microsoft, IBM, and Yahoo are some of the companies that adopted it.

Initially the approach seemed to work quite well for GE, but after decades of “Rank and Yank”, managers were forced to become intellectually dishonest. To conform to the model’s requirements, they had to categorise as “bottom 10 percent” excellent employees who had not spent enough time promoting themselves to their managers. The result was that employees started spending more time worrying about being seen by their managers as top employees than actually being top employees. And of course there were so many biases at every stage.

Eventually GE, and other companies like Microsoft, abandoned stack ranking. It became harder to use “meritocracy” as a shield to defend every management decision. Today the model is more and more controversial, and fewer companies use it than did twenty years ago. A few, like Facebook and Amazon, still do.

The vitality curve is now known to discourage cooperation and encourage unethical behaviour. In this evaluation model, only individual performance is rated. But in fact very few employees succeed on their own. Why create a zero-sum game that prevents teamwork? In a Darwinian “survival of the fittest” model, employees are pitted against one another, which also makes them extremely unhappy (and less productive).

Why Welch’s worldview was detrimental to women

Jack Welch may not have been the most obvious, virulent kind of male-chauvinist, but his legacy can’t exactly be said to have helped women break the glass-ceiling and gain more equality. Whenever somebody mentioned the gender gap or asked him about his policies to empower women, he would brandish his meritocracy shield and say “let the best man win”. Why should one group of people be supported if you think you have an environment where the best man can always win? He was probably sincerely convinced that he wasn’t a sexist. (As Yes Minister’s Sir Humphrey would say, “We must always promote the best man for the job, regardless of sex”.)

Yet his view of talent was heavily biased against women. It valued “strong” leaders who did their best to be seen by others as the best and put their own interests forward. Most women were raised to put the interest of the group first and not brag about their individual successes. Most women were educated in a way that prevents them from thriving in such managerial environments.

There’s a concept used in psychology known as locus of control which is relevant here. It is a person’s belief system regarding the causes of their success or failure. Somebody who has an internal locus of control attributes their success to their own efforts and abilities. By contrast, someone who has an external locus of control attributes his or her success to luck or fate (and the support of others). There is no right and wrong here: obviously success and failure depend both on internal and external factors. But people with an internal locus of control tend to be rewarded more in individualistic Orange organisations, in particular in vitality curve systems. And there is evidence that, when it comes to academic and corporate achievement, men tend to have a more internal locus of control than women. The silver-back gorillas who thump their chests and act tough tend to win in such environments. (A few years ago I wrote this piece about the “gorilla-take-all society”).

Last but not least, when it comes to work-life balance, Jack Welch once said, “there’s no such thing as work-life balance. There are work-life choices, and you make them, and they have consequences.” The question of “choice” was precisely the subject of my newsletter last week whose conclusion was that you can’t keep ignoring the architecture of choice that pushes women to make some “choices”, like working part-time, staying at home, saving less, moving into badly paid professions, looking after the kids, and so on and so forth.

Many women must have struggled under Welch’s widely praised management. Obviously he had a strong internal locus of control and probably died convinced that he was the agent of GE’s extraordinary performance under his CEO-ship. But the truth is he was just a man of his time and only excelled at complying with what the business paradigm expected of leaders in the 1980s and 1990s: submitting the management of people to maximising shareholder value. Good timing begets success indeed, but we need something different today. I like to call it craftsmanship, or empowerment. Can management be replaced by something else that nurtures autonomy, responsibility and creativity, as well as a sense of community and purpose?