Change management – a financial perspective

A number of threads on the Cognitive Edge blog highlight the frustration and difficulty in getting companies to use new tools and methods from the world of complex systems. I thought I would offer a narrow financial perspective on why companies are failing to engage with these new ways of thinking. My personal view is that one of the major reasons for the resistance to change in a company is the financial constraints on the company. For the sake of brevity and simplicity I will only consider large UK companies and how simple finance based decision making constrains change management and investment in such techniques as “Probe-Sense-Respond”. All decision making within a company is made within the constrained framework of finance and the following are the top four constraints:

1.The “free market” framework
2.Fiduciary duties of company directors
3.Motivation and decision making of senior management
4.Motivation of middle management

There are many more constraints however these four are the key financial constraints and drive much of the change or lack of change in a company. Considering each in turn:

“Free market” framework

I am using “free market” as short hand for the UK economic system as it is clear that there is no such thing as a free market here or anywhere else. The owners of large UK companies are pension funds, insurance companies, institutional investors and wealthy individuals with share portfolios. The clients, and therefore key stakeholders, of pension funds and insurance companies are varied but skewed towards the wealthy therefore I will call the owners and controllers of large UK companies the wealth owning class. The wealth owning class expect a return on capital to meet their needs in terms of pensions, income, consumption etc. Basically pensioners expect their pension funds to continue to be able to pay their pension every month and insurance companies to meet claims etc. This means the wealth owning class expect and demand companies to maximise profits as they are dependent on them for their lifestyle.

Fiduciary duties of company directors

The Companies Act 2006 section 172 states that; “A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole” (italics are mine). This means a director must act to promote the success of the company which means they must maximise shareholder returns. The Act goes on to say the director should give “regard” to other factors but giving regard is subsidiary to the imperative “must” which means they can effectively ignore all matters, such as the environment, which would reduce shareholder returns.

Motivation and decision making of senior management

Given that the wealth owning class of society demand companies provide a good rate of return and company directors have a legal obligation to maximise shareholder returns it is not surprising that senior management make decisions based primarily on financial considerations. This simple obvious point has substantial consequences for any decision to invest in a project which does not directly generate financial returns. Probe-Sense-Respond requires an investment in multiple experiments to test a hypothesis. If these experiments require cash then they do not meet the simple financial constraint of having to maximise financial returns, they are a cost with no clear simple path to a financial return. There are many other issues in trying to implement change with senior management ranging from being risk averse (it will damage their career) to being short sighted (they are paid bonuses annually therefore the financial target for the next 12 months is the most important) however I will not explore these issues here. The last point to note is that senior management are the budget holders of the company and so no financial investment can be made without their consent.

Motivation of middle management

Middle managers have no control over budgets but they are the doers in any organisation. As they have no control over budgets they are motivated to look busy doing their day job and find interesting things to do where possible. Therefore middle management are able to invest time but not money in looking at new projects and ways of working and hence complex systems thinking is likely to attract substantial interest at this level. This is an unfortunate situation as the initial response to a new way of thinking is likely to be very positive from a large number of middle managers however progress will falter as soon as senior managers get involved and consider only the short term financial impact

To return to where we started; companies are likely to be very bad at investing in tools from complex systems theory because of the financial constraints on shareholders, directors and senior managers. In addition a lot of time is probably wasted with enthusiastic middle managers who get the ideas and think they are good but have no influence on budgets. This is not an issue with the validity or value of complex systems thinking but it is a failing in the corporate culture of western capitalism. The challenge is to develop methods and business models which will meet the needs of shareholders, directors and senior managers and allow investment in complex systems methods.

Blog by Andrew Hutt