How business can regain legitimacy

A generation of leaders in a number of sectors have been publicly discredited and questions raised about their competence. They were caught up in a cycle of debt-fuelled growth and while many have now disappeared, the organisations they leave behind are facing issues of survival, recovery and renewal.

It is vital to learn the lessons from this period so that we do not make the same mistakes again. But there is always a tendency to push out the culprits - or scapegoats – and to gloss over the past, rather than to genuinely learn from it.

Memory is dissipated as the people involved are disposed of, and a new generation of leaders come to the fore, who were not closely involved in the experience. Organisational memory is easily lost – sometimes deliberately lost.

If huge problems are left behind it begs the question of whether the people involved in the culture that contributed to the problems can genuinely change or will the cycle repeat itself in some form? Attitudes and behaviour must change.

Many of the problems our economies are facing now are the product of executive conduct. Many of these executives operated in a culture focused almost exclusively on growth.

They were expected to grow fast, to learn fast and they wanted to earn fast. In this environment, there was no time for reflection or to question. This was not encouraged, not even tolerated in many situations.

The business model was all about growth. We need to explore how we can dismantle this growth model in a productive way.

Professional service firms such as advertising agencies or consultancies are based on the growth model. Talent is recruited at the bottom and promised the opportunity to learn fast and earn fast. They are hungry for both, and this drive from the bottom fuels the entire organisation and helps give the partners the huge salaries they expect. They themselves want both interesting work and financially rewarding work. So the pressure is on the organisation to maintain the growth, to maintain the flow of interesting work and to maintain their earning power.

When the growth stopped, many leaders realised they had no experience of other business conditions and that the organisation was organised around growth that has evaporated.

Now many organisations need to dismantle this model of heady growth and to do so in a productive way. In the short term this is necessary for their very survival – then for recovery and renewal.

It is a good time to study the leadership of complex organisations. People want answers fast as their companies are floundering, but knee jerk responses and quick fixes are not the answer.

Many people are asking if academics should have seen the crisis coming and spoken up sooner and more compellingly. The fixation on growth and on high risk if necessary to achieve it, was such a powerful ethic that the voices which did speak up were overlooked.

We needed strong consistent voices to act as a counterweight to that. This illustrates clearly the need for business schools not just to reflect practice but to challenge it – and to have an impact upon it. Business schools want to be a stronger architect of challenge – and change – in the future.

So what should we be looking for in our leaders of tomorrow?

Leaders need to engage in a process of personal learning – particularly if growth is the only thing they know. They need to cultivate a more open culture in their organisations for greater transparency within them and with external stakeholders.

They need to be prepared for a more intervention by the various policy-makers and government authorities who will now judiciously intervene in the affairs of large corporations more readily. Leaders will need to be more adroit at managing the relationship with the state.

The relationship between business and society is changing. This was happening anyway, but now the pace will accelerate. The key words are:

Responsibility
More than ever, the responsibilities of firms are in the spotlight – their responsibilities to all stakeholders, including employees, supply chain partners and others whose fates are inextricably linked to the particular organisation. Issues of irresponsible risk-taking will not go away.

It is clear that the aspirations of senior management in terms of corporate responsibility must be shaped by operational realities and must be implementable if the initiatives are to have any meaning or impact.

Power
We know more about the power within organisations than we about how organisations wield their power externally. It is clear that the largest of firms exercise a significant power around the world, particularly in developing countries, where the threat of withdrawing investment is a serious one. It is clear that the leaders of such organisations need to have a well-developed sense of the power of their organisation and to deploy it with due circumspection. We want the power of the modern corporation to be matched by its sense of responsibility.

Legitimacy
The financial scandals we are seeing – and there will be more – have focused our minds on questions of legitimacy. The possession of legitimacy can insulate an organisation from certain kinds of external pressures. Equally, a loss of legitimacy in the eyes of the market can severely impair an organisation's ability to operate, and can limit access to resources and stakeholder support – indeed can affect the organisation's very survival. Organisations who value their reputation will be concerned to engage in the discussion of legitimacy which is emerging from the current crisis.

Governance
Especially in the financial sector we have seen the failure of non-executive directors to curb the power of over-confident directors. More governance is required within the organisation – not just in response to pressure from external regulators. A wider discussion is emerging about the purpose, conduct and effectiveness of boards. Is the board's key function to protect shareholder interests, or does it have a wider remit and set of responsibilities? The most thoughtful leaders will be engaging with this debate.

Regulation
More regulation is inevitable. What exactly the role of the state will be in corporate life will now be explored. The old laissez faire model has been found inadequate to the task. There are fundamental issues at stake here. Regulation is normally seen as the legislative concern of the state, and the extent to which states choose to regulate varies significantly (compare the USA's response to scandals such as Enron and World Com which resulted in the Sarbanes Oxley legislation, with the UK's preponderance to use codes of practice rather than legislation).

But we should not imagine that firms are passive in response to regulation. Consider the many political lobbyists and internal regulatory specialists employed by firms to affect the legislative actions of states and those employed to engage directly with the regulators once the legislation is in place. Firms are directly influencing regulation and greater scrutiny of this process and its implications is warranted.

We are now getting a sense of the scale of the challenges, not just facing individuals and organisations, but sectors – and indeed facing the system as a whole.

Some of the issues are still unknowable and there is deep uncertainty. No one knows how long the downturn will last at this point, but we do know that the impact of the decisions we take now, will be felt long after we come out of this recession. The direct and knock-on effects will have long lasting significance for our economies.

Governments are looking for private sector collaboration and support to get out of this mess and no single lever is sufficient. It this new territory, organisations and managers, if they want to regain their legitimacy in the public mind, will have to begin to focus on developing co-operative strategies to begin to move forward again.