Complexity and Organizational Reality

Uncertainty and the Need to Rethink Management after the Collapse of Investment Capitalism

Ralph D. Stacey

• Publisher: Routledge
• Year: 2009
• Print ISBN: 9780415556460
• eBook ISBN: 9781135188665
• Topic: Business
• Subtopic: Business General
• Index: Business

Approaches to leadership and management are still dominated by prescriptions – usually claimed as scientific – for top executives to choose the future direction of their organization. The global financial recession and the collapse of investment capitalism (surely not planned by anyone) make it quite clear that top executives are simply not able to choose future directions. Despite this, current management literature mostly continues to avoid the obvious – management's inability to predict or control what will happen in the future. The key question now must be how we are to think about management if we take the uncertainty of organizational life seriously.

Ralph Stacey has turned to the sciences of uncertainty and complexity to develop an understanding of leadership and management as the ordinary politics of daily organizational life. In presenting organizations as a series of complex responsive processes, Stacey's new book helps us to see organizational reality for what it actually is – human beings engaged in many, many local conversational interactions and power relations in which they negotiate their ideologically based choices. Organizational continuity and change emerge unpredictably, rather than as a result of any overall plan. This is a radically different picture from the one painted by most of the management literature, which explains "organizational continuity and change" as the realization of the global plans and choices of a few powerful executives within an organization.

Providing a new foundation for understanding complexity and management, this important book is required reading for managers and leaders wanting to understand the reality of complexity in organizations, including those engaged in postgraduate studies in leadership, organizational behaviour and change management.

1
Contradiction

Experiencing the reality of uncertainty but still believing that executives choose an organization’s ‘direction’

Recent economic events of credit crunch and recession must surely be making it very difficult for all but the most willfully blind to avoid questioning whether senior executives in organizations really can do what the dominant management prescriptions call for. The vast majority of textbooks, business school programs and research projects around the world, most professional management and leadership development programs in organizations, management consultancies and people in organizations, including executives, all talk about how organizations should be governed, all making the same taken-for-granted assumptions. There is a dominant discourse in which it is assumed, without much questioning, that small groups of powerful executives are able to choose the ‘direction’ their organization will move in, realize a ‘vision’ for it, create the conditions in which its members will be innovative and entrepreneurial, and select the ‘structures’ and ‘conditions’ which will enable them to be in control and so ensure success. The problem is that to be at all effective, these activities rely to a significant extent upon the ability of powerful executives to know enough about what has been, is now and will be happening around them. Executives are supposed to know what is going on, because they are supposed to be avoiding emotion and personal politicking so that they can make roughly rational decisions on the basis of the ‘facts’. If they cannot do this, then, on the basis of dominant thinking, they must simply be pursuing only their own interests and gambling with society’s resources. However, recent and current economic developments are making it more than usually clear that executives of large corporations and their management consultants, as well as politicians and their advisors, are far from sure of what has been happening and they simply do not know what is now happening, let alone what will happen in the future as a consequence of the actions they are taking. However, surely there has to be more to what they are all doing than gambling. Despite not being able to know what the outcomes of actions will be as required by the prescriptions of the dominant discourse for choosing the ‘big picture’ over ‘the long term’, executives and others doing their jobs in organizations are, nevertheless, sustaining some kind of stability and change, producing growth and decline while generating all manner of technological innovations. If none of them knows enough to choose outcomes as prescribed, then how are they doing all this? It becomes a question of importance to ask what it is that they, and the rest of us, are all actually doing which the dominant discourse is making us rationally blind to.

Despite what is so obvious, a great many people simply refuse to seriously consider the consequence of not knowing what is happening, which is that there is a major contradiction between the organizational reality of uncertainty and the beliefs that we have about the capacity of executives to know what is going on and be in control. Perhaps to contemplate that no one ‘up there’ is in control is too anxiety-producing for most of us and, also, perhaps the justification for the fact that huge executive rewards would disappear if we acknowledged the contradiction. However, we surely have now to conclude, contrary to management and organizational orthodoxy, that no one is choosing what is happening. This applies to the executives of banks and other companies around the world, the executives running regulatory bodies, the government ministers and officials responsible for economic policies, the trade unions, consumers and taxpayers. What is happening is somehow being cocreated by all of us, although some play much more influential roles than others. But no one, no matter how powerful, can be choosing what is now happening around the Globe. If anyone is choosing what is happening at the present time then they must be virtually omnipotent and either psychotic or evil.

So what are we doing with this contradiction? I think that executives and politicians simply continue to ignore it and propose fiscal and monetary policies, bailouts and regulatory reforms, while the public and the media look for someone to blame and scapegoat bankers and politicians. I think that the situation which we are now in calls for a deeper response, namely, that of seriously reflecting upon the contradiction between our belief in control and our experience of uncertainty because, if we do, we may find, in addition to taking the kind of measures just outlined, that we will need to accept that currently dominant ways of thinking about organizations and their management are serving us very badly indeed and that what is called for is the development of alternative ways of thinking. The alternatives should avoid what seem to me to be omnipotent fantasies about what leaders and managers can and should do and instead reflect carefully on what we all together are actually doing in organizations in the ordinary, daily course of doing our work. In other words, we need to move from fantasizing about what organizations should be like and seriously explore the reality of organizational life in our experience and the way we might think about what we already do. After all, the world economy may be going through a tough time at present but most of it continues to function in a more or less ‘good enough’ way. Executives are clearly not choosing what happens to their organizations, but they are doing something and often that something is creative and innovative, while, of course, at other times, it is distressingly repetitive and destructive and it all could be, and usually is, both creative and destructive at the same time. For these reasons, we need to explore what is now happening around us, what role executives and others might be playing in this, and how we might think more usefully about the reality of organizational life in the aftermath of the collapse of investment capitalism. In other words, given that we do not know with any certainty what is happening, we can certainly know about what we are doing to enable us to live in uncertainty.

This chapter will first cover a rather brief review of some key economic events over the past few years in order to highlight the experience of organizational reality and raise questions about how we are thinking. The underlying justification for currently dominant ways of thinking and talking about organizations is that of rationality, ultimately that of science. One would therefore expect management prescriptions to be subjected to some ‘scientific’ examination of the evidence on whether they work or not. This chapter will review the evidence and conclude that the dominant discourse is not supported by reliable evidence. The chapter will end by considering what this lack of evidence might mean and how we might approach the task of developing ways of thinking which are closer to organizational reality.

Uncertainty and the actions of organizational executives over the past few years

Reflection on a brief account of key events over the past few years can provide some idea of the organizational reality within which executives of organizations find that they have to make decisions and take action. As with all stories, a beginning is somewhat arbitrary but I am going to start with newspaper reports nearly three years ago in mid 2006. At that time, some concern was being expressed about the state of global financial markets.¹ Housing demand was high in many countries, stock prices were rising rapidly on most markets, raw material prices were increasing rapidly and inflation generally was rising faster than expected. Fears were expressed that very high oil prices would soon create a crisis, imposing limits on economic growth. Commentators were saying that the Federal Reserve would continue raising interest rates, bringing the era of cheap money to an end. What a different set of concerns to those that came to pre-occupy us only a few months later. However, at the time, some commentators did recognize that it was almost impossible to predict whether cracks would appear in the global financial system or not. Some expressed some concern about the role of hedge funds which had more than $1.25 trillion in assets, largely in the form of derivatives and exotic securities. The number of hedge funds had been growing rapidly and no one knew how big the danger of hedge funds experiencing difficulties was. Trouble for the hedge funds could quickly spread to the whole global finance system. This rapid growth and the innovation in financial products made it difficult for the Federal Reserve to intervene. Others said that there would be no bust and that everything would soon settle down. The point is that at this time, less than three years ago, no one knew that there would be a global credit crunch and recession. Indeed, at the time, there was nothing particularly important about the newspaper article I have selected – it is only with hindsight that it becomes interesting, just as it is only with hindsight that we can know anything about what was then happening. The organizational reality of uncertainty means more than an inability to reliably predict the future; it also means that it is not at all clear what is currently going on and even what happened some time ago is open to many interpretations. However, we all continue to function in our organizations in these conditions of not knowing and while uncertainty means that we are not able to know in advance what the outcome of our actions will be, we can, nevertheless, know more about what we are doing in a world of uncertainty. We do cope with it, usually rather successfully, without being able to choose ‘the big picture’.

Going back to August 2006, as it continued to increase interest rates,² the Federal Reserve announced that there was a 40 percent chance of the USA economy slipping into recession over the following twelve months and The New York Times suggested that the recession might already be occurring.³ However, at the same time, others claimed that there would be a pause but not a recession, because the economy was still recovering from the 2001 recession and companies were still reporting positive earnings surprises.⁴ Moody’s gave a triple A credit rating to banks in Iceland on the grounds that they had been making high-quality investments and were unlikely to face a crisis, although, of course, two years later, they were to collapse in a dramatic fashion.⁵ In February 2007, Alan Greenspan, former Federal Reserve chairman, said that a recession was a possibility by the end of the year⁶ but not all agreed and later in the year, his warnings were dismissed on the grounds of his poor forecasting record, as were those of other gloomy economists.⁷ However, after two years of rising interest rates, the US housing market experienced falling housing prices while numbers of homeowners defaulting on their mortgages rose. Some 20 percent of mortgages were subprime loans to borrowers with poor or no credit histories, colloquially known as Ninja (no income, no jobs or assets) loans. These loans were ‘repackaged’ into a great array of often sophisticated and difficult to understand financial securities and derivatives and then sold on by the mortgage companies to other financial institutions. It became possible to make huge profits from repackaging and passing on the risk to others in the belief that this was a high profit but very low risk activity. Incentives were provided for executives to sell as many products as possible, bonuses often being tied to targets set for numbers of deals without concern for quality. However, while one section of a financial institution might be passing on the risk to others, another part of the same institution might well be buying repackaged financial products from other financial institutions. So if any setback was experienced it would rapidly affect all institutions holding any of the high risk assets. With hindsight, it is possible to see how the problem could spread throughout the global financial system. This is another fundamentally important organizational reality, namely, interdependence.⁸ Human beings are fundamentally dependent on each other and in the modern world, the web of interdependence stretches across the Globe. This fundamental reality must surely form the basis of how we think about life in organizations, but it features little in the dominant discourse, which focuses on the autonomy of individual organizations. In the dominant discourse, it is thus easy to miss seeing the possibility of knock on effects.

What later became the well known problem of subprime loans now began to feature in the press which expressed different opinions on what it might all mean. In March 2007, some were optimistically claiming that subprime problems would spread pain but probably not cause a recession.⁹ However, by April 2007, subprime specialist New Century Financial went bankrupt. In July, the investment bank Bear Stearns informed its investors that they would get nothing from two of its hedge funds because of the collapse of the subprime market and the refusal of other banks to help bail them out. In Europe, by August, BNP Paribas also announced that investors could not take funds out of two of its hedge funds, but it offered to buy its clients’ investments in subprime funds. The European Central Bank pumped over 200 billion Euros into banking markets and the US Federal Reserve cut interest rates to help restore liquidity. By now, everyone was talking about the ‘credit crunch’. In September 2007, Northern Rock in the UK sought emergency financial support from the Bank of England and the next day there was a run on the bank with depositors withdrawing £1 billion. Northern Rock executives had pursued a strategy of relying on the interbank lending market for very short-term loans which it lent on as long-term mortgages to house buyers – these loans often exceeded the value of the house and the payment capacity of the borrowers. The spreading subprime crisis meant that nervous banks were refusing to lend to each other – the interbank market had dried up and Northern Rock was left without funding as well as increasing difficulty in mortgage repayments. Although buyers were sought for the bank, no satisfactory buyer emerged and by February 2008, Northern Rock became the first British bank to be nationalized. Even as late as August 2007, no...

Table of contents

• Contents
• Preface
• 1 Contradiction
• 2 How we came to believe that leaders and managers choose an organization’s direction
• 3 Complexity and the sciences of uncertainty
• 4 Complexity and what writers on organizations do with it
• 5 Understanding organizations as games we are pre-occupied in
• 6 Understanding organizations as social processes
• 7 Managers accomplish whatever they accomplish in processes of communication
• 8 Turning the dominant discourse on its head
• 9 Local and population-wide patterns of power relations and ideology
• 10 Implications of a theory of complex responsive processes for policy making, consultancy, leadership, management, organizational research and management education
• References
• Author index
• Subject index