Review of Why Managers Matter: The Perils of the Bossless Company

Nicolai J. Foss and Peter G. Klein. Why Managers Matter: The Perils of the Bossless Company (New York: Hachette Group, 2022).

Why Managers Matter is a response to the excessive and sometimes gush celebration of flattened hierarchies among management faddists like 90s management fad Tom Peters and his successors. Ironically, this book reminds me of much of Peters’ work (most egregious example here) despite his opposing position from the authors, in that even its good points are largely irrelevant to the structural context its authors assume as their starting point. The theoretical issue of what mixture of horizontal and vertical decision-making structures should prevail within the organization has, in my opinion, become pretty passé. Even among the most zealous advocates of workplace democracy and P2P culture, those who completely reject the need for some standing coordinating authority are few and far between.

A far more interesting question, to me, is to whom this coordinating authority should be accountable. Likewise interesting is the nature of the so-called “entrepreneurial” function of senior management, and its relation to both the outside world and the internal activities of the organization. Once these questions are resolved, things like the relative mix of vertical and horizontal, and the respective roles of what Klein and Foss call “Mark 1” and “Mark 2” management, become far more fruitful matters for discussion.

The nature of the larger system within which the institution operates and its relations to outside power structures, and the real nature of the organization’s goals, are primary. Until these primary power issues are addressed, theoretical discussion of what form the organization’s internal structure should take amount to little more than bikeshedding — or, in Marx’s phrase, writing “recipes for the cook shops of the future.”

Indeed the concepts in popular works on bossless organizations, “humanocracy,” “holocracy,” etc., to which the authors refer at the outset, and which serve as the foil for their book, are just a warmed-over version of the “revolutionary” trends Tom Peters hyperbolically celebrated thirty years ago. And, what with “Enterprise 2.0” and the “Wikified firm” and whatnot, such fads never ended. Then and now, such talk is silly for precisely the reason that, until actual power structures and interests — both external and internal — are addressed, all this stuff amounts (to paraphrase Mises’s remark about market socialism) to playing at “networks” and “democracy” within authoritarian hierarchies.

Things like “worker autonomy, self-organizing teams,” etc., are doomed from the start, so long as they’re introduced within a framework that presupposes a firm whose central purpose is to make money for absentee owners and senior management. All such experiments will be sabotaged from within, because genuine discretion on a large scale is incompatible with the conflicts of interest built into the system. 

Foss and Klein observe, regarding the “permanent startup culture” supposedly prevailing in Silicon Valley firms: “Still, most people recognize that these companies are often headed by autocratic leaders who can come across as almost as compulsive about control as the late Steve Jobs.” At Valve, despite its ostensible leaderlessness, “there [was] actually a hidden layer of powerful management structure within the company.” 

This is a theme the authors repeatedly come back to throughout the book:  the dependence of ostensibly “bossless” organizations on a managerial hierarchy in fact, if not in name.

When someone like Frederic Laloux gushes that “the CEOs of very large organizations… are really getting the ideas of the book and are inviting their organizations to move in this direction,” it’s obvious that he’s as much a ninny as was Peters with his faux-revolutionary rhetoric in the 90s (as I argued elsewhere, he was “radical,” “revolutionary” and “extreme” only in the sense that Poochie had “attitude”). 

There’s good reason for this. But it’s not primarily some deep-seated human need for hierarchy, or any such theoretical consideration. The hidden hand exists because, despite all the egalitarian and horizontalist talk, internal democracy is incompatible with the specific power structures these firms serve. They are, at their core, vehicles for serving the interests of their major shareholders and/or senior management. And their internal control is reinforced by their nature as walled gardens, with boundaries enforced by intellectual property and other legal barriers.

It should not come as a surprise that, so long as authority flows downward and those at the top are not accountable to those at the bottom, delayering and flattening will further increase the power of senior management. Until the fundamental issues of power are addressed — until the Board and C-suite are actually accountable, in real terms, to workers and other stakeholders and the latter determine the strategic mission of the institution — “democratic” forms of organization like self-managed teams will be co-opted and turned into conveyor belts for senior management policy. That’s exactly what happened to the soviets and the factory workers’ committees after the Bolsheviks consolidated their power over the Russian state.

For the authors, even given the need for hierarchy, the proper functions of leaders are largely strategic or “entrepreneurial”:  

Smart bosses spend less time on day-to-day supervision of employees and more time thinking about the key strategic issues and designing the company by specifying the rules of the game: Who can do what with company resources? What are the overall goals each unit should meet? How are incentives best tailored to suit the organization? Good bosses also spend time managing uncertainty and adapting the company’s strategy and structure by handling overall coordination between employees and units.

But the question isn’t whether some degree of internal hierarchy within the firm, for strategic coordination purposes, is necessary for making “entrepreneurial” decisions. It’s whether a managerial hierarchy representing the interests of outside owners (and of itself) against those of other internal stakeholders is the best way of organizing this function. The actual purpose of such hierarchies in the real world is a lot closer to overcoming the internal conflicts of interest and information problems discussed by institutionalists like Oliver Williamson — irrationalities resulting from absentee ownership and hierarchical power relations themselves — than to “entrepreneurial” adaptation to outside change. 

The very concept of “entrepreneurial management” is itself suspect. Adaptation and response to changing customer preferences and other forms of “change outside the firm” is not — to put it kindly — the first thing that comes to my mind in observing the actual corporate economy. Far more visible, at least, is collusive behavior by market actors with structural power advantages to impose their will on the external environment. If there’s anything on the outside to which “entrepreneurial” managers respond, it’s signals from the senior managers of other organizations in an ecology of oligopoly firms. It’s an environment in which the managers all absorbed the same orthodoxies at B school, and the organizations all share essentially the same internal culture. “Best practices” spread among firms in a market in a manner comparable to the price leader system — but much less tacit.

I’m hard-pressed to identify the “customer preferences” to which  the near-universal proliferation of automated customer service lines since the 90s or the radical downsizing of nursing staff to dangerous levels in the hospital industry were a response. That’s especially true, given the likelihood that most of the alleged cost savings were passed on to senior management in the form of increased compensation rather than to customers.

The major change in the outside environment to which senior managers respond is opportunities for rent extraction. Rather than “entrepreneurs” leaping at the opportunity to meet unmet needs and create value, the economy is characterized far more by the destruction of value — commonly referred to as “vulture” or “strip shop” capitalism — by hedge funds and private equity.

On the whole, despite the alleged rise of the “hyper-competitive global marketplace” and cowboy CEOs from the 1980s on, the actual relationship between the large corporation and the surrounding economy is still closer in practice to the model described by Galbraith and Chandler in the heyday of mass production capitalism.

The stakeholder cooperative model, in which the community’s consumers are actually represented in management, is at least worth considering as an alternative source of outside information. And internally, worker representation in management is a way both to overcome conflicts of interest and to incorporate distributed knowledge in the decision-making process without the distortions of information flow that result from power.

Where Foss and Klein go wrong is in assuming that the existing capitalist institutional framework and property distribution are largely spontaneous, voluntary, and “normal,” and then discussing the proper mix of organizational forms for maximizing performance under these conditions. Even in the course of defending some degree of decentralization and self-management within the hierarchical firm, they frame it as senior management “delegating” authority to those below and “empowering” their subordinates. But the conditions of a top-down hierarchy, responsible only to outside owners or to itself and unaccountable to those it manages, rule out rationality from the start.

It should go without saying that any organization of significant scale requires “well-defined roles and responsibilities,” and standing procedures, to avoid the transaction costs of completely ad hoc activity. The question is who defines the responsibilities and makes the rules, and who they’re accountable to. Vesting this authority in the wrong people, and the resulting perverse incentives and knowledge problems, is the source of most irrationality and inefficiency. But Foss and Klein devote most of their book to accepting the existing gross distribution of power at face value and instead devote their attention to determining the most efficient way — as Drucker put it — of doing that which should not be done at all. 

Take, for example, the authors’ reference to “roadblocks to profitability and growth.” This assumes as the norm a firm driven by the imperatives of accumulation and expansion, and the delivery of profit to absentee owners, rather than a community enterprise established as a cooperative effort by producers and consumers to meet their own needs.

One of their biggest unexamined assumptions lies in their framing as “natural” of the larger environment within which the decisive leader operates. The need for “strong, charismatic leaders with authoritative styles” results from a corporate ecosystem dominated by other large organizations with similarly cowboyish leaders. What goes unexamined is the possibility that the ecosystem itself is not structurally neutral: that it selects for dominant institutional forms that maximize the efficiency of rent extraction and control, but are suboptimal from the standpoint of material efficiency. 

A good example of this is the way they describe Valve. Foss and Klein quote a journalist’s criticism to the effect that the company “mutated from a game developer into a ruthless financial middleman through its platform Steam, which has become the largest platform for digital game distribution — allowing them to make huge amounts of money while creating virtually nothing original themselves.” In response, they argue that 

developing and maintaining a distribution platform is just as ‘creative’ as making the products distributed on that platform. (Would anybody say that Amazon is not a creative, innovative, outside-the-box company?)

The authors accept proprietary walled gardens like Amazon, Uber, Airbnb, Twitter, and so on — what Bill Johnson calls “death star platforms” — as the normal organizational model, and the system which has structurally favored the predominance of that model as neutral. But Cory Doctorow and others have described, in great detail, the ways in which this model depends upon intellectual property laws and other monopolies to enforce the walls around the garden, and prohibit “adversarial interoperability” from turning proprietary platforms into de facto open ones.

Similarly, they treat the startup as a transitional phase which, in the normal course of things, should “scale up” into a large firm. But the extent to which the scaling of productive activity takes the form of scaling up, rather than scaling out (i.e., horizontal proliferation of modular units) arguably reflects an artificial result of the structural constraints of corporate capitalism — most notably the existence of intellectual property, and the fact that both the credit and venture capital functions are limited to the owners of previously accumulated wealth. If credit could be organized and capital mobilized as a system of horizontal flows, through institutions like (for example) cooperative banks run by regional federations of cooperatives, and intellectual property did not serve as a wall of corporate enclosure, the development path taken by successful startups might be considerably different.

This tendency — the tendency to accept the broad outlines of the existing economy as “natural,” despite an ideology that ostensibly positions itself as a radical structural critique — is a major failing among right-libertarians. The possibility that a fundamentally different, more libertarian ruleset would result in a phase transition in the overall structure of the system, with concomitant changes in its component units and their relations with each other, never enters the picture. It’s reminiscent of a scene from The Honeymooners in which Ralph imagines life after the success of one of his get-rich-quick schemes: “Norton, when I’m a rich man, I’ll put in a phone on the fire escape so I can discuss my big business deals when I’m sleeping out there in the summer.”

But even stipulating to their assumptions, there are problems with their development of the argument. In the course of the book, for example, their response to critics of management is sometimes unthinkingly reactive. Consider:

The lesson of the pandemic, according to the tech writer Ed Zifron, is that “America has too many managers.” He thinks that the United States, more than anywhere  else in the world, is addicted to the concept of management,” that management is a “title rather than a discipline,” and that it “is more focused on taking credit and placing blame than actually managing people.” This view of management as a drain on productivity is increasingly common. But it is wrong. Management is essential for coordinating people, resources, and tasks, especially during unprecedented disruptions like the pandemic, when decisions had to be made about moving to remote work, delegating decisions, and reconfiguring supply chains (a point that Zitron, paradoxically, admits).

It’s odd that they see the last point as an “admission,” let alone as “paradoxical.” There’s nothing in Zitron’s argument, at least as paraphrased and snippeted by the authors, that inherently contradicts the essential functions Foss and Klein assign to management. And there’s nothing in their description of its coordinating functions, even if true, that’s incompatible with the claim that there’s too much management or that too much management drains productivity. On the following page, they imply that not only do they object to pronouncements of “the death of hierarchy,” but bristle even at suggestions of “scaling [it] back.” 

Apparently the authors have trouble remembering whether they’re defending the need for some hierarchy for certain functions, or simply defending hierarchy as such against all criticism. They have trouble, likewise, in remembering whether they’re defending management as a function or a position. In response to proposals that “embracing flatness without regard to the circumstances” and “bosslessness is always best,” they sometimes seem to take a diametrically opposing position out of sheer reflex.

Despite all this, some of the analysis in the book is fairly unexceptionable — so long as we take into account the near total lack of background context. 

Their basic conceptual distinction between forms of management is one example of this. Foss and Klein argue for a shift in emphasis away from authority based on constant surveillance and micromanagement to a more platformlike approach. 

Managers need to move away from specifying methods and processes, in favor of defining the principles they want people to apply or the goals they want people to meet. In other words, they can design the rules of the game without specifying the actions of the players.

This is true so far as it goes, and there’s nothing wrong with it (with the caveat that in a genuinely libertarian society the goals of the organization would be defined by workers, customers and other stakeholders rather than Moses-like lawgivers). It’s just not very significant when divorced from the background power context.  

Most of the argument is beside the point. Of course large corporations that experiment with holocracy and the like are just playing at horizontalism. But so what? They’re operating within a system whose basic logic is hierarchical and authoritarian. Foss and Klein accept that logic as normal. So they devote the book in effect to debating the most optimal way of organizing a firm internally to operate within a fundamentally suboptimal, irrational environment.

And even the superficially good stuff they propose, like defining general principles and goals, will ultimately fail for the same reasons as bossless organizations: they conflict with the interests of the power structure. Senior management will find itself co-opting and sabotaging even the limited autonomy they “delegate” over the how of doing things, because the fundamental conflict of interest built into capitalist ownership and top-down hierarchy makes it impossible to trust workers with even tactical discretion. 

Even discretion in the practical matters of day-to-day work, based on the tacit knowledge of the workforce, is a source of power. The bargaining power that results from control over the how can be used as base from which to exert leverage over the what and the why. The industrial philosophies of Andrew Ure and Frederick Taylor were intended to minimize reliance on workers’ distributed knowledge and remove all discretion over the work process, even at the cost of reduced efficiency, because they recognized this [1]. Despite the superior efficiency of production processes that rely on the distributed knowledge of the workforce, management cannot afford to trust workers with this degree of freedom. Authoritarian hierarchy, for all its inefficiencies, is adopted because it’s the least inefficient alternative to entrusting discretion to people whose fundamental interests are at odds with those of management.

So in practice, the sort of discretion Klein proposes will have one of two outcomes. Either it will be increasingly circumscribed and subverted by de facto managerial hierarchies jealous over potential loss of control; or it will be the beginning of a long chain of dominos. Whatever limited degree of discretion is allowed, whatever encouragement workers are given to contribute their distributed knowledge to the production process, will have to be accompanied by some form of profit sharing or other assurance that workers’ contribution to increased productivity will not be used against them in the form of speedups or downsizings. And each domino in the chain will increase the power of workers to bargain for further “non-reformist reforms,” and so on.  The overall process will be one by which the enterprise becomes less hierarchical and extractive — i.e. less capitalist.

Perhaps the lowest point of the book is when the authors, in defending workplace hierarchy, resort to the boilerplate right-libertarian distinction between the coercive state and the “voluntary” “private” employer. Unlike the government’s ability to collect taxes or enforce laws,

The employee can quit and work for someone else or start his own company (or team up with other workers to start a worker-owned cooperative). The customers can shop somewhere else or find a substitute product.

The employer’s influence over your life “is not the same as having coercive power.” They also — of course — appeal to Alchian and Demsetz on the firm as a “nexus of contracts with the employee and employer as equal parties, because “the terms ‘hiring’ and ‘firing’ make these transactions sound one-sided, as if companies unilaterally decide who agrees to provide labor….” Or as they quote from the classic article itself, the firm “has no power of fiat, no authority, no disciplinary action any different in the slightest degree from ordinary market contracting between any two people.” On this basis, the authors accuse Elizabeth Anderson (the scholar who coined the term “contract feudalism” to describe workplace relations) of “simply gloss[ing] over” the “fairly fundamental facts” that the employer “has no power of compulsion or coercion over the employee” and “cannot tax, imprison, draft into military conflict, or execute an employee, as a government can do to its citizens!”

At this point, when it comes to perceiving the actual structural power differentials under capitalism and the role of background violence in maintaining them, we’ve reached the level of sophistication of the several thousand (at least it feels that way) ancap/Voluntaryists I’ve encountered on social media — or perhaps of a Thomas Sowell column. 

Implicit in such analysis is the assumption that the existing distribution of property and structure of economic decision-making are the result of voluntary processes — an assumption that ignores both the entire history of capitalism, and the role of ongoing state violence in the dominant profit model. As I’ve argued elsewhere, the primary tendency of orthodox capitalist economic theory — and in particular marginalist economics — is to conceal actual power relations behind the facade of “neutral” laws of exchange.

Closely related to this failure of critical thinking is the assumption that a dominant position in the existing capitalist economy necessarily represents superior efficiency.

Paradoxically, it is exactly their superior efficiency that makes some economists, lawyers, activists, and politicians uneasy about “superstar” firms such as Microsoft and Google. These companies are thought to have too much economic and even social and cultural power precisely because they have such a massive footprint. . . . That they have been able to grow to such proportions and stay on top is testament to the efficiency with which their hierarchies handle the basic challenges of coordination and cooperation while supplying new goods and services that the market wants. Hierarchy has demonstrated survival value.

This is a tendency Foss has displayed in earlier work. For example, in his 2000 article “Misesian Ownership and Coasean Authority in Hayekian Settings: The Case of the Knowledge Economy,”  he takes “the very fact that firms exist” as “prima facie evidence that they can somehow cope with the problems implied by Hayekian settings” (i.e. cases in which firms are especially characterized by conditions of dispersed knowledge). Imagine someone treating the ubiquity of landlord ownership and manorial organization in feudal Europe, or of state-owned enterprises in the Soviet Union, as “prima facie evidence” of their ability to “cope with… problems.”

Aside from all the above, I have a number of other minor quibbles:

For example, the authors seem to misunderstand the emphasis of Robert Michels’ Iron Law of Oligarchy. The argument was not so much that hierarchy is inevitable, as that in any organization large enough that hierarchy is necessary it would be permanently captured by insiders and harnessed for their own ends despite any formal mechanism for democratic representation. As presented by Michels, it’s a very real and dangerous tendency. But it’s not absolute; the tendency is a matter of degree, varying with specific institutional designs. (And, as a side note, the clear implication of Michels’ actual Iron Law is something like the “managerial corporation” thesis of Berle and Means.)

Along the same lines, their observation that “even” Galbraith admitted the efficiency of the large corporation raised my eyebrows. Galbraith didn’t admit it, he celebrated it. His entire analysis of the technostructure in The New Industrial State centered on its necessity, given the technical prerequisites of mass production capitalism. He was as enthusiastic a partisan of the superior efficiency of the large, managerial corporation as Chandler was — he simply wished to harness its efficiencies to pro-social objectives, and reallocate some of the wealth it generated to progressive activities, within some sort of social democratic system. 

So while Klein and Foss point out some of the unexamined problems of the sillier hierarchy-flattening gurus, they do so from the standpoint of unexamined — and equally untenable — assumptions of their own.

  1. At one point Foss and Klein refer obliquely to theories of deskilling in leftist industrial historiography (without mentioning Braverman, Marglin, Noble or anyone else by name), but quickly dismiss it as “smack[ing] of conspiracy thinking” and contradicted by historical evidence (none of which they cite).  
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