Taking Management Back to the Future

by: Issues: July/August 2018. Tags: IBJ Insights. Categories: Leadership and Strategy.
Image of a serious looking man standing at the head of a table conducting a business meeting

As capitalism enters a new tech-driven age, managers are being bombarded with advice on how to handle disruptive forces that threaten the economic stability of every nation on the planet. And yet, at a time when corporate leaders need to focus on cash flow like never before, the ability of managers to function properly is routinely disrupted by something that garners relatively little attention.

The failures of socialist economies have been attributed to a wide range of complex and interrelated factors, but the negative impact that socialism has on the management profession itself needs to be more widely considered in the so-called Age of Disruption—especially in Canada, where Ottawa is showing a renewed taste for entering the oil business, not to mention complicating trade negotiations with our largest trading partner by introducing a host of non-trade-related issues such as gender, equity, labour, the environment, and indigenous rights.

In its most basic form, the role of professional management is disarmingly simple: wealth creation via beating competition at developing resources and focusing them on market opportunities and problems. This involves developing and managing a complex range of resources (financial, human, technical, physical, material, etc.) that must be connected to their impact on creating wealth and cash flows. This is not simply a free-enterprise ideological choice; it is a matter of corporate survival. If corporations go bankrupt, all other corporate objectives become irrelevant.

The most critical aspect of management is market focus—choosing which opportunities to compete for and commit resources to. Every corporate strategy represents a set of focused choices that are often complex and large in number. Integrating factors such as technologies, customer markets, products, and services in a focused strategy requires managers to clearly understand their capacity to create future wealth and cash flow. Management must clearly and rigorously demonstrate that every one of the many projects explored (investment, innovation, spending, etc.) will make a positive long-term cash flow contribution (the importance of this can be seen in accounting’s emerging cash flow measurement and tracking methodologies). This is tough. For every strategic choice and opportunity pursued, corporate managers must ask, “Will pursuing this opportunity earn more long-term cash flow than it will burn?” And if cash flows turn negative part-way through a project, management must not just be willing to respond—it must be willing and able to cut losses by terminating failing projects.

The birth of management as a profession was one of the greatest breakthroughs of the 20th century.

When the private sector remains unfettered, professional managers can focus their talents on performing this role. But when hindered by politicization, government bureaucratization, regulations, and external control of business decision-making processes and strategic choices, corporate leaders are often rendered impotent as wealth creation is subverted in favour of other ideological and politicized objectives such as social justice, income equality, sustainability, gender equity, diversity, environmental protection, and other amorphous, often unmeasurable objectives whose perceived success or failure relies on activist political positions, media spin, contrived and artificial metrics, and optics. The merits of these other objectives are moot to the argument of this article. Socialist agendas have no place in the boardroom because they limit wealth creation and therefore undermine prosperous societies.

In other words, private-sector corporations do have a corporate social responsibility role to play, but it should stop at legally generating profits. As anyone familiar with Canada’s record of corporate bankruptcies can attest, wealth creation isn’t easy. And without it, people in government have no resources to pursue legitimate social objectives.

The history of Canada’s oil sands clearly shows the negative impact that socialism has on professional management. Oil company executives must be free to explore, discover, and focus on new crude oil reserves that have optimum crude properties, recovery rates, investment and cost parameters, and long-term cash flow potential. But in Alberta, a series of new and growing government restrictions on oil sands extraction sites, expansion rates, and land access and lease terms have greatly distorted this critical area of management decisions, forcing many companies to pursue inferior wells, locations, and processes. In addition, some indigenous minorities have been given expanded power and control rights in this crucial management area. Many lower-cost oil recovery technologies have also been taken off the table by government regulation, driving up cash burn per barrel. The same is true for some lower-cost air, water, and land waste technologies that could speed up production and recovery rates and improve cash flows.

Furthermore, as the United States moves forward with the Keystone Pipeline, desperately needed Canadian projects stand defeated or stalled by governments in Alberta, British Columbia, and Quebec. Ottawa’s acquisition of the Kinder Morgan project provided a great exit for the company, but it didn’t serve the long-term economic interests of Canadians because it put politics above professional project management. Meanwhile, rising Canadian gasoline taxes along with taxpayer-funded consumer incentives supporting electric cars continue to distort the market, putting further pressure on the ability of oil companies to make strategic decisions, both upstream and downstream.

The birth of management as a profession was one of the greatest breakthroughs of the 20th century. And we need to remember that business education and management consulting emerged from the success of freeenterprise capitalism. The word “free” is particularly important to remember. Simply put, to successfully compete in the global marketplace, businesses need to be free of political agendas when deciding where to focus corporate resources and cash flows.

The last thing Canadians need in the so-called Age of Disruption is the heavy hand of empowered government politicians and public servants watering down the traditional role of professional management and politicizing critical corporate decisions. And yet, as managers in the Canadian energy sector struggle with increasing political interference, American oil executives are being freed to function as they should, focusing on competing for global market opportunities to drive cash flow (some evidence of this is found in dramatically lower pump prices for gasoline in the United States). The U.S. government has opened offshore oil drilling and eased restrictions on domestic oil fracking operations. Meanwhile, U.S. corporate tax rates have dramatically dropped, and many punitive regulatory and environmental constraints have been eased. These changes greatly enhance the capacity of U.S. oil company managers to function effectively, while Canadian counterparts are being increasingly hampered by socialist policies.

The economic collapse of oil-rich Venezuela is yet another tragic example of how socialist decision-making kills professional management. Unfortunately, parallel economic disasters are unfolding in Alberta, Ontario, and British Columbia thanks to government intervention, restrictive labour laws, increases in minimum wages, ballooning debt, increased taxation, and the rising influence of activist groups, anti-business rhetoric and media coverage, and declining corporate investment.

About the Author

Roger More is an Ivey Business School Professor Emeritus and a former Harvard Business School professor. He can be reached at rmore@ivey.ca.

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