September 5, 2010 at 7:09pm
In order to reinvent management, we have to replace the root cause of its current function. One of these root causes is the fact that manager's job is to create wealth for shareholders. Shareholders like it this way and enforce the system by hiring boards of directors who oversee the system. It's time we fix this root cause by doing the unthinkable to the board!
Management is a function of human behaviors, mostly based on a system of rewards and punishments. Today these rewards and punishments are created by top managers whose own rewards and punishments are tied to the company profitability. These rewards and punishments are administered by the board of directors, appointed by shareholders. The board's own rewards and punishments are tied to shareholder wealth creation.
This system creates several problems/barriers:
1. Because many shareholders want immediate profits, many companies focus on the short term and therefore don't survive long term. In fact, research shows that a negligible number of companies can survive or sustain growth over an extended period of time.
2. One of the main reasons companies don't survive over the long term is because customers don't buy their products (or stop buying them at some point in time). This can happen for a number of reasons. Today's management system takes this fact for granted and simply associates this concept with competition and capitalism. In its current form, it can't do much about it.
In addition, it's hard to innovate management if it's based on these rules.
This solution consists of three parts.
Part 1. Directors on the board make decisions out of context and have no idea what customers want. Their best knowledge is based on a biased guess of wishful thinking of the CEO or top executives. The first thing companies should do is replace the Board of Directors with Board of Customers. Customers know what they want. If you let customers run the firm, they will tell the firm what it should do in order for the customers to continue to buy the firm's products. Although this does not guarantee long term survival of the firm, it greatly increases its chances. In addition, the firm will lose its focus of shareholder value creation and will create a system of rewards and punishments based on customers needs, which will significantly change the frame and allow for all kinds of management innovation.
Part 2. A lot of customers don't really know what they want. For example, customers didn't know they wanted cars, Coke, cell phones, and iPods before they appeared in the marketplace. So, the board of customers by itself isn't perfect. In order to solve this problem, the firm should also have a "company of the future team". This team should be separate from everyone else in the firm in order to remove any conflicts of interest. The point behind this team is to imagine the future of the firm's products and services from the futuristic perspective. This team would present its bold ideas to the Board of Customers. If the board gives the idea a go ahead, the firm must implement it.
Part 3. If you allow customers to run the firm, customers will reduce the amount of money they are willing to pay for products and services and shareholders will never make money. This part can be fixed in one of the three ways:
Option A - Set a reasonable profit margin (let's say 10%) and require customers to pay prices that generate this prefixed ROI.
Option B - Allow customers to set their own prices but send them an invoice for a reasonable "management fee", which will be distributed to shareholders directly. This fee will be paid to shareholders as a thank you for taking the risk and supporting a firm that created customer value.
Option C (best option) - Make customers your shareholders. In fact, in the perfect world, your customers should be your only shareholders. This way you never have to worry about any profitability.
A number of things will occur as a result. Here are some examples:
1. The Board (the top governing body) will be more aware of the market and customer needs and will make decisions that will more likely result in customers buying the firm's products.
2. The firm is more likely to survive over a long period of time.
3. The system of rewards and punishments will be so different that it will allow for [more] innovation to take place.
4. Managers will be more customer and not shareholder focused. Decisions will no longer be made based on short term profitability.
5. The firm will become transparent to customers. This will get customers to trust the firm more. It will also get employees to trust some of their top managers more, because top managers will be governed by customers whose interest lies in making sure every employee performs.
6. Leaders will reinvent the system of rewards and punishments. For example, the [commissioned] sales team will be replaced with customer service. After all, why do you need to pay commissions if sales people no longer have to hunt for business? Customers don't want hungry sales people who are interested in making a sale (personal gain). They want someone who is interested in the customer well-being.
There will be lots of other things that can occur within such a firm.
1. Remove your board of directors. This will, of course, be challenging if you are a public firm and you have to have a board by law.
2. Determine the make up of your customers. If your firm only has a few customers, put them all on the board. If you have many customers, develop a representative sample based on buying behavior.
3. Create the board of customers.
4. Create a team of innovators to advise customers on what their solutions "may" look like in the future.
You may also have to sell this idea to your shareholders first. The reason they may be interested is because you will allow this firm to survive longer, reduce their risk, and almost guarantee financial returns.
If you are starting a new firm, consider giving 90% (or 100%) of it to your customers so you never have to worry about shareholder value. Your customers will view profits as rebates for excessive payments.