By Sue LaChance Porter
December 18, 2009
I. Introduction
One of the most amazing things about studying Peter Drucker’s body of work is that the more one reads the more one can see how his management philosophies and ideas apply across many contexts of human existence. Drucker is said to have called himself a social ecologist. He received a degree in law but took on roles in journalism and accounting in his early career. He was an insatiable student of history, literature and art and this directly contributed to his focused awareness of the human context of organizations. Drucker believed that people organize around activities and that these organizations make up the core elements of society. He was the first to characterize management as a discipline that can be used to make organizations operate more effectively and by extension, form a functioning society. Corporations, as organizations have a vital role to play in the health of society as a whole. The government and social sector are also critical entities. The common theme among all three is that they are part of an ecosystem of people, resources and activity systems. In all cases they need effective management to realize their purpose and to achieve results. In this paper I will explore how Drucker’s perspective as a social ecologist has provided a powerful context for business leaders as they consider how their roles contribute not just to their organization’s bottom line, but to a higher purpose which includes creating a positive influence on individuals, institutions and on society as a whole.
II. Management in a Knowledge Economy
In 1988 Drucker said that “it’s important to think of business as an organized activity and not just as buying cheap and selling high”[1]. Human beings in organizations are not simply cogs in the wheel of production. When Drucker introduced the concept of the knowledge worker, it represented a change in thinking from the industrial age, where Frederick Winslow Taylor’s time-motion studies of assembly line production workers ruled the day. People working in factories had undifferentiated jobs from one another and their management usually applied the “carrot and stick” approach to drive more “productivity” out of them. One could argue that this command-and-control type of management was effective in these situations, albeit unpleasant. In his work entitled The Age of Discontinuity, Drucker described revolutionary economic events that have created a shift to what we now know as the Knowledge Economy. One of the key drivers of this shift, Drucker notes was the G.I. Bill which was enacted in 1949 and gave veterans returning to the states after WWII, a right to a free college education. By the mid 1950s, the growth of the number of highly educated workers created a new type of capital. Knowledge became the critical raw material in producing innovative products and services for consumers in the new economy. Unlike unskilled factory workers, knowledge workers tend to be more personally invested in their work. They are not likely to be motivated by a command and control culture. With their skills and knowledge in demand, the knowledge worker has more options to choose from and is more likely to work for organizations that are aligned with their own ideals.[2]
Learning how to effectively manage knowledge workers is a critical skill for business leaders. The shift to a knowledge economy has had profound implications on the field of management and how managers should function in order to achieve positive business outcomes. In is 1988 work entitled The New Realities, Drucker states that “Management is about human beings. Its task is to make people capable of joint performance, to make their strengths effective and their weaknesses irrelevant. This is what the organization is about, and it’s the reason that management is the critical determining factor.” [3] Drucker clearly articulated that in today’s knowledge economy results occur when leaders have clarity of purpose and value employees as assets and not liabilities. It is the emphasis on the person at the center of the organization where the field of Management becomes a liberal art, as Drucker explains:
…“liberal” because it deals with the fundamentals of knowledge, self-knowledge, wisdom and leadership; “art” because it is also concerned with practice and application. Managers draw on all the knowledge and insights of the humanities and social sciences– on psychology and philosophy, on– economics and history, on ethics— as well as on the physical sciences. But they have to focus this knowledge and effectiveness on results. [4]
III. Long Term Purpose vs. Short Term Profits
It is simply too limiting and cynical to hold the belief that maximizing shareholder value as the only reason for a business to exist. In Drucker’s view “A business’s purpose must lie outside of the business itself. In fact, it must lie in society since business enterprise is an organ of society. There is only one valid definition of business purpose: to create a customer. It is the customer who determines what a business is”.[5] This customer-driven perspective of business purpose has had a profound impact on the practice of management. Effective companies truly understand customer needs and adapt their products and service offerings to satisfy them.
Companies that believe that they are in the business to simply sell a product or service at a profit are likely to be missing opportunities to innovate and thrive. When profits (especially short-term profits), are seen as the only goal, the enterprise is likely to lose sight of what really matters to customers and fall behind in the marketplace. It is also difficult to keep employees engaged and motivated to work in an enterprise that asserts that generating profits as their raison d’être. Clearly profits do not mean as much to staff as they do to senior executives since they are disproportionally allocated. Without a clear customer-driven mission, employees often substitute their own cynical views of corporate purpose such as “Our purpose is to make our senior team wealthy by exploiting the talents of our knowledge workers”. This mission statement would not be a good inspiration for employees to create a thriving enterprise, nor would it positively contribute to a functioning society. Sadly many businesses today operate as such. Their leaders have profited immensely while concurrently laying off workers, a practice which Drucker called “morally unforgivable”.[6]
Many businesses have been able to profit from unethical behaviors that “happen to be legal” such as in the recent sub-prime mortgage meltdown. Some have argued that no one forced the consumers to sign up for expensive home loans that they could not afford. However, qualifying people to obtain them was not in the best interest of the consumer. The banking industry created a moral hazard because they knew that the odds were that the customers would lose their homes (and their credit) once balloon payments came due. The lenders had more knowledge than the consumers but didn’t act in their best interest because they were motivated by short term profit. It is clear that lenders did not organize their activities around creating long term customers, and this is a failure of purpose. And as we have seen this failure has created deleterious effects throughout society.
IV. Leadership and Accountability
In recent years, companies such as Enron and Global Crossing have executives that have profited through blatant criminal fraud. I daresay these individuals have tainted the field of Business Management and cause many to distrust the value of private enterprise. Businesses are looked upon as greedy, corrupt and exploitive.
Consolidation of wealth at the top is an insidious problem in today’s society because when the middle class shrinks, there is less political stability. A recent paper from the Center for Economic and Policy research, a Washington DC think-tank, reveals that in 1979 the top one percent of wage earners received ten percent of national income from salary and stock options, and thirty years later the top one percent’s share had increase to 23%[7].
One of the contributing factors in wealth consolidation has been the growing and powerful influence of pension fund managers on corporations. This economic change was driven by the shift of companies away from employee pensions, to individual retirement accounts and 401k plans. These tax exempt plans replaced pensions in most companies, and also shifted the risk of investing to individual investors. Most 401K plans offered by employers provide a limited selection of mutual funds, and the investments are controlled by institutional managers from the large brokerage houses. By 2002, a whopping 58% of all publicly traded shares were managed by institutional owners, up from 35% in 1981. The point is that these fund managers are in a position to greatly influence capital allocations to companies.[8]
Another disturbing trend is that corporate leadership is turning into a revolving door. A Spencer Stuart study conducted in the year 2000 showed that the average tenure of top Fortune 700 CEOs to be only five years and that less than 5% of top CEOs had worked for the same company for more than 20 years.[9] Both of these facts suggest that operating for the long view may be a difficult challenge as many top execs have less tenure with the company compared to their top investors. Managing for results effectively means that the company operates in such a manner that considers the best outcomes of all the stakeholders effectively. The CEO’s bonus structures may be aligned with short term profitability goals. They may be more interested in earning “golden parachutes” than they are in creating customer value. With CEO pay topping 400 times that of the average entry level worker, it’s no wonder that there is rampant cynicism regarding our capitalist economic model.
V. The Role of Government
The government has not been an effective regulator of industry as we have seen in the economic meltdown of 2008. Our political leaders suffer from the same undue influence from corporate lobbyists which have favored short term profits, over the creation of long term value. Corporations spend billions of dollars lobbying our elected officials to persuade them to curtail regulation or to provide corporate welfare. Such measures tilt competition and are not beneficial to society as a whole.
Drucker believed in a strong government; however he was quick to point out that what we have today is a government that “is fat and flabby rather than powerful; … it costs a great deal but does not achieve much.”[10] Drucker’s critique extends across all geopolitical boundaries and there are many examples on how government has overreached in its efforts to fix the ills of society. In 1965 the “War on Poverty” gave financial support to poor families with children and provided public housing to those who couldn’t afford to pay rent. However, these programs were not effective in getting people out of poverty. Instead they provided financial incentives for recipients to stay unmarried, resulting in more children born in to single parent households and perpetuating the problem of poverty.[11]
More recently, the 2001 No Child Left Behind Act (or NCLB) provided funding incentives for schools to improve their students’ math and science test scores. The law has been criticized as prescriptive and harmful to the state of education in the United States. The argument is that program’s myopic focus on test scores causes school administrators to narrow the scope of subjects taught. While the school district’s objectives are to obtain essential government funding, these policies hurt students in the long run. The policy has inadvertently created incentives to move poorly performing students out before graduation. Students that drop out of school (or opt out by taking the GED) do not have test scores that factor in overall ratings. A New York Times article published in 2008 shows that many states have reported inflated graduation rates to the NCLB program. By counting students who’d passed the GED equivalency exam as having graduated high school, they have obfuscated the dropout trend.[12] The fact remains that high school graduation rates have dropped significantly since the passage of NCLB and this is a quintessential example of how the government’s best intentions can result in unhelpful unintended consequences.
There is a common opinion that government is bureaucratic, slow and inefficient when compared to that of the private sector. When the private sector fails, it makes the public suspicious of their profit motives (sometimes justifiably so), and people call upon government to intervene. Our current healthcare situation is a case in point. I believe if Drucker were still living, he would argue that just because today’s health insurance companies have done a poor job providing essential healthcare services to everyone, it doesn’t mean that government would be better at healthcare delivery.
Drucker believed that government should do what it does best and that is to make decisions and focus the political energies of society in ways that address the greater good. Its role is to govern; not to do. Drucker characterizes the tasks of governing as fundamentally incompatible with “doing”. It is appropriate for government to take a position on society’s need to advance education and the health and welfare of its citizens. However, because government programs tend to be enacted as laws that define a certain task or program and not a purpose; it cannot adapt in ways that efficiently address that purpose. Government can’t innovate because it cannot change what it sets out to do as defined by the literal language of the laws it creates. Government is especially poor at abandoning programs that have outlived their purpose. It is only human nature for people in government to be motivated to keep their jobs, or in other words, to seek re-election. So a fundamental flaw is that they may make trade offs to seek the support of groups that can influence their ability to get re-elected even though these actions may not serve the greater good. Governments, unlike businesses, do not have the profit motive to drive them toward efficiency. They do not have the same inherent motivation to innovate or abandon programs.
VI. The Social Sector and Corporate Social Responsibility
Drucker spent the latter part of his career focusing on the social sector. These are enterprises that exist to fulfill a specific mission that benefits the public good. Instead of receiving funding from capital markets, these institutions receive donations and are largely staffed by volunteers. He felt that businesses could learn a lot about the management of knowledge workers from non-profit organizations because their leaders knew how to effectively engage their volunteer workforce. Today, hundreds of thousands of volunteer workers donate their time and energy to the help serve the others as defined by the organizations purpose. They are intrinsically motivated to share their knowledge and expertise when their values are aligned with the organization as a whole. Like knowledge workers in the private sector, they are free to leave at any time. However, in the private sector management practices may not be as effective at tapping into the inner passions of their knowledge workers. In many companies, many workers “show up” simply because they need a paycheck, not because they want to be there. Drucker believed that well-run non profit organizations such as the Girl Scouts of America and the Salvation Army were the most effective at mobilizing their people because they knew how to tap into their intrinsic motivations.
Recently, we’ve seen many Non-governmental organizations (or NGOs) rise to the challenge of addressing huge social issues that were formally in the domain of government. Many of them seek to address causes that cross international boundaries. For example, the Rotary Foundation set out to eradicate polio worldwide, and twenty years hence they are on the verge of accomplishing this task. It is important to note that individual governments would have had a difficult time effectively addressing this issue because of the politics at hand. In many cases NGOs can bypass the political issues that sometimes come into play when governments try to effect change beyond their borders. An NGO, with a clearly defined purpose is not often accused of having ulterior motives and may be met with less skepticism or resistance to change.
Even in domestic situations, such as in the hurricane Katrina disaster in New Orleans, one could see that the Red Cross was far more organized and effective in delivering aid to the victims than the legions of federal bickering bureaucrats. A bipartisan committee investigating the Katrina disaster acknowledged that the government’s response to it was failure of initiative.[13]
In recent years there has been tremendous growth in the number of tax exempt institutions that are focused on social causes. But not all of this growth can be attributed to filling the void of ineffective government. Drucker believed that the social sector provides a new center for meaningful citizenship and that
“Without citizenship, there cannot be that responsible commitment that creates the citizen and that in the last analysis holds together the body politic. Nor can there be the sense of satisfaction and pride that comes from making a difference. [14]
Drucker recognized that non profit organizations serve critical needs in society on both the giving and receiving side. Helping other people is not only a way to address the needs of the poor it also enables the donors and volunteers to become more connected with their communities. Whenever there is a natural disaster people organize around helping others. Events like the Asian Tsunami (2004), the China earthquake (2008) and the LA Fires (2009) are a rallying cry for armies of volunteers that step up to help. These events are clear examples of how social sector institutions are extremely important entities in a functioning society. Without them, victims would have to live without the support they need or wait for the drawn out process of government to help them. A social sector institution’s singularity of purpose helps it focus and delivery of service in a way that governments simply can’t.
The growth in the number of social action groups can also be explained by looking at economic shifts. In the past forty years a lot of new wealth that was created through the information technology boom. A new class of social entrepreneurs has come on the scene, and as savvy business people, tend to be results-driven. After having achieved a level of success in their working careers, many are searching for ways to find meaning and spend time on activities that are fulfilling.
The same shifts that have created a lot of wealth for people at the top of the economic pyramid have also put pressure on the middle class. In the 1950s most families were able to sustain a middle class lifestyle with a single income. By comparison, today two incomes are needed to maintain a middle class lifestyle. People today at more at risk of financial hardship should they experience a setback because most of their income goes toward making ends meet. Middle class people are saving less for a rainy day. In fact the personal saving rate for American households changed from 9% in 1985 to negative 0.04% in 2005! In other words, American families were on average spending more than they earn.[15]
Social Responsibility is not limited to individuals. Businesses today are becoming more socially conscious for several reasons. First, there is backlash against companies that have engaged in practices which exploit people, such as unsafe working conditions for outsourced employees in developing nations. On paper, ideas such as outsourcing labor to third world countries can a profit-maximizing maneuver. However, companies like Nike and Gap suffered from poor media coverage when news broke about their exploitive labor practices in Southeast Asian factories. Second, they suffer huge hits to their brand image if they are found to have engaged in practices that are known to harm the environment, as was seen in the Exxon Valdez oil spill tragedy. Businesses leaders are more aware today that giving back to the community is good for business. This does not mean that it is business’s role to abandon their core mission and purpose, and ignore the need to generating profits. Drucker’s commented on the tension between the profit motive and the seemingly conflicting requirements of social responsibility.
A business that does not show a profit at least equal to its cost of capital is socially irresponsible; it wastes society’s resources. Economic profit performance is the base without which business cannot discharge any other responsibilities, cannot be a good employer, a good citizen, a good neighbor.
But economic performance is not the only responsibility of a business … Every organization must assume responsibility for its impact on employees, the environment, customers, and whomever and whatever it touches. That is social responsibility[16].
Drucker reiterates how business’s role is different from that of the social sector and government. It was not that Drucker was opposed to company’s doing business in a socially responsible way, it was that he expected it. While most business leaders may not be as evolved in their thinking on social responsibility as Drucker was, it is still hopeful to see company leaders taking a position on how to be better citizens of the communities they reside in by taking stock of the consequences of their business practices locally, nationally and globally. The externalities or consequences that occur outside a business’s P&L statements need to be accounted for one way or another. Companies that continue to exploit labor and the engage in practices that blatantly harm the environment will not be able to sustain customers in the long run. Public awareness on these issues due to the availability of information through the Internet has forced companies to be more accountable to the public good. However, there still a long way to go before truly accountable businesses becomes the norm.
VII. Management and Social Ecology
Each sector, including private, social and government, has its purpose and its challenges. The one thing they have in common is that they are all comprised of people and organized around activities that are intended to generate results. How they are organized, what activities they engage in and what results they achieve are all fall in the purview of Management. Drucker is credited as being the founder of the field of modern Management through his decades of writing and consulting. Drucker was the first to declare that the field of Management is about people. The role of leaders is to provide an environment where people can achieve results that serve the purpose of their organization no matter which sector. Dysfunction can occur when organizations lose site of their way and stray from their mission. Managers fail when they fail to lead.
Governments by their very nature are challenged by having to be accountable to constituencies with competing values. Drucker’s view was that government should outsource programs to organizations that are more effective in execution, in other words he believed in privatization. Private and social sector organizations are more adept at abandoning efforts that have outlived their usefulness. Most of the time non-governmental organizations (NGOs) are more effective at addressing the needs of their constituents than government ever could be because by their nature they have clarity of purpose, which drives their execution strategies.
Businesses also have a valuable role in a functioning society. They provide a venue for collective action which could not be accomplished by individuals alone. Businesses create value to society through product innovation and can raise the population’s standard of living. The need to make a profit is the quintessential challenge of any business. Businesses contribute to society when they provide product innovation which drives commerce. As a “commerce engine” it generates capital and in turn creates jobs which lift the living conditions of people everywhere. It also funds the tax base from which governments can operate. Drucker has stated that the purpose of any business is to create a customer and this is a very important concept to understand as it is clearly differentiated from government and social sector purposes.
A simple way of stating the purpose of management is to achieve results. But results can take two forms, results you want, and results you don’t want. Traditionally business leaders have characterized the former as the fruits of their labor and the latter as externalities, or effects that take place because of their actions, but that fall outside the narrowly defined scope of financial profits. Industrial pollution, layoffs and exploitation of third world labor have been some of the negative externalities resulting from organizations that focus exclusively on profits. As a social ecologist however, Drucker would argue that in a functioning social ecosystem there can be no externalities.
VIII. Knowledge Workers Creating the Future
Peter Drucker found his calling as a writer, teacher and a student of humanity. He was able to see things that others could not see precisely because he studied all aspects of humanity.
“Knowledge society must have at its core the concept of the educated person… the knowledge society needs …a universally educated person.”[17]
To Drucker, knowledge wasn’t something that resided only in history books or scientific literature. An educated person needs the ability to apply an understanding of the traditions of the past toward perceiving the new realities of the present. In a globalized world, Western traditions which may be dominant in religion, economics, science and technology must be appreciated with the context of the philosophies art and religions of the East.
Drucker saw organizations as the cornerstones of functioning society with human beings as the heart. Many management best practices such as “management by objectives” and strategies for effective decision making were introduced by him. It is important to note that while an author and educator, Drucker also maintained an active management consulting practice throughout his career. His regular contact with executive business leaders gave him a first-hand perspective for the challenges of executive management across many industries. His advice to business leaders on how to manage oneself is not limited to senior executives however as he suggests that today’s knowledge worker must act as CEOs of their own careers.[18] Drucker felt that it was important for knowledge workers to continue to educate themselves or risk becoming stale. A 2008 edition of the Drucker Insights video captures an interview with a ninety something year old Drucker explaining his own experience of lifelong learning. “Every few years I need to have a … systematical focus on an area where I’d like to learn enough to understand. The last two years– and I’m about oh halfway through—I’m re-reading all of Shakespeare.[19] It’s clear that Drucker did not believe in retirement in the traditional sense. His education was broad and deep and his curiosity, insatiable. In fact the older he got the more productive he became. His writing accelerated in his last twenty years. In fact, more than half of the 39 books he wrote were published when he was over the age of 70! This alone is pretty strong evidence in the value of lifelong learning.
IX. Summary
In this age where greed, corruption and corporate malfeasance dominate the media headlines, it is refreshing to take a step back and recognize that the problems that we see in our headlines today are the result of failures of purpose, aberrations of behavior, rather than manifest destiny. Western capitalism in its current form may by like a gangly teenager learning to be more humane and responsible through trial and error. The more unethical behavior is recognized as being bad for business, the more corporate leaders should evolve to innovate to embrace the reality that there are truly no “externalities”. Until that time, scandals, consumer revolts and government intervention is likely to continue. We will also see more jail terms for corrupt politicians and executives until we get to a society of organizations that exist in harmony, a functioning society. Drucker summed it up well in his 1993 book entitled Post Capitalist Society:
… Ours is a transition period. What the future society will look like, let alone whether it will indeed be the “knowledge society” some of us dare hope for, depends on how the developed countries respond to the challenges of this transition period, the post-capitalist period– their intellectual leaders, their business leaders, their political leaders, but above all each of us in our own work and life. Yet surely this is a time to make the future – precisely because everything is in flux. This is at time for action.[20]
We may never “fix” society,
however as we are willing participants and contributors to the social order we
better understand the task at hand and the responsibility that we have as
individuals, managers and leaders. Fortunately,
we have Drucker’s legacy to guide us.
[1]The Drucker School., Drucker Insights Volume 3. http://www.youtube.com/watch?v=HNc3X-9CNhI
[2] Drucker, Peter F. The Age of Discontinuity: Guidelines to Our Changing Society. New York: Harper and Row, 1969. Chapter 13.
[3] Drucker, Peter F. The Essential Drucker. New York: Harper Collins, 2001. p.10.
[4] Ditto, p.12.
[5] Drucker, Peter F.1964 Managing for Results. Pan Books Ltd: London p.6.
[6] Drucker, Peter F. Managing in the Next Society. New York: St. Martin’s Press. 2002. p. 150.
[7] Schmidt, John, “Inequality as Policy: The United States Since 1979” Center for Economic and Policy Research, Washington, DC, Oct, 2009. http://www.cepr.net/index.php/publications/reports/inequality-policy/
[8] Binay, Murat. “A Closer Look at Pension Funds”. The Drucker Difference, Ed. Craig Pierce. New York: McGraw Hill. 2009. p. 270.
[9] Tom Neff, “Anatomy of a CEO” Chief Executive Feb, 2001 Spencer Stuart
[10] Drucker, Peter F. The Age of Discontinuity. New York: Harper and Row, 1969. p.212.
[11] Rector, Robert et al. “The Effect of Marriage on Child Poverty” A Report of the Heritage Center for Data Analysis (CDA 2002). April 15, 2002.
[12]Dillon, Sam “States Obscure Data How Few Finish High School” New York Times. 20 Mar 2008. http://www.nytimes.com/2008/03/20/education/20graduation.html
[13] “A Failure of Initiative: Final report of the select bipartisan committee to investigate the preparation for and Response to Hurricane Katrina. 16 Feb 2006.
[14] Drucker, Peter F. “Citizenship through the Social Sector” The Essential Drucker. New York: Harper Collins, 2001. p. 331.
[15] Reinsdorf, Marshall B. “Alternative Measures to Personal Savings” Survey of Current Business. Feb. 2007 Table 1. p.13.
[16] Drucker, Peter F. Managing in a Time of Great Change. New York: Truman Talley Books/Dutton, 1984 p. 84.
[17] Drucker, Peter F. The Essential Drucker. New York: Harper Collins. p. 289
[18] Drucker, Peter F. “Managing Oneself” Best of HBR 1999 Harvard Business School Publishing Corp. January 2005, Reprint RO501K
[19] Drucker Insights Vol. 8 http://www.youtube.com/watch?v=kEKC5zUd_PU&feature=related
[20] Drucker, Peter F. Post Capitalist Society. New York: Harper Business. 1993 p. 16.
© Sue LaChance Porter
Sue LaChance Porter 