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There's Another Way

In the United States, the focus of much business management activity is on profit maximization and increasing shareholders’ share values, but this thinking is dead wrong, according to Swiss-based university professor and management expert Dr. Fredmund Malik.

Malik teaches economics at St. Gallen University in Switzerland and at Innsbruck University in Austria. He has been the president of the St. Gallen Management Center since 1984 and regularly lectures to audiences interested in management and economics and consults for large corporations, especially in the German-speaking countries of Europe. He writes for and publishes the M.o.M., Malik on Management Letters and contributes articles to business newspapers and other periodicals in the region. He is quoted worldwide on economic and management issues.

Malik visited Beijing in early June to lecture and to promote his ideas about management, which are expressed in his newest book Managing Performing Living: Effective Management for a New Era, as a guest of Dr. Dana Schuppert, founder and chairperson of Sino European Investment Management Limited, a banking advisory group with offices in Beijing and Hong Kong. The book is available in the German, English and Chinese languages (see end of story for purchasing details).

But, perhaps surprisingly, the new book did not seem to be the most important thing on Malik’s mind during his recent visit. Instead, he urged mixed Chinese and foreign audiences he addressed to seriously consider whether the traditional practices of corporate capitalism as practiced in German-speaking countries of Europe might not better serve the interests of China’s economic development than the US models they now appear to be relying upon.

Often, his riveting first question is: “What is the purpose of a business?”

Caught off guard, the questioned is likely to stammer and stutter before uttering, “To maximize share values” or “to maximize profits” or “to care for the interests of all stakeholders in a company,” but Malik counters, “In whose interest should a company be managed?”

Then he answers, “The purpose of a company is to create a customer, a satisfied customer. Whoever has customers will always have happy shareholders, but recent experience shows us that happy shareholders do not always guarantee customers. Just look at WorldCom or Enron.”

In a presentation at the Capital Club in Beijing on June 2, entitled “To Learn Management from Europe: An Invitation to China to Re-think Management,” Malik lambasted US management techniques and their effect on an increasingly globalized business community, especially the narrow-minded concentration on profit maximization and shareholder value.

“Much of the American management practices are proving to be wrong, both outside and within the USA.”

He said that because of the upsurge in and export of American management practices, especially US master’s in business administration (MBA) programmes, “globalization has been almost Americanization.” He urged his audience, many of whom came from European corporations and distinguished business schools in Beijing, to study all management systems, but he also urged them to consider continental European practices.

“Seek suggestions and recommendations for decisions, then, you can go away with full knowledge of the available options.”

He said his main concern is not the proliferation of US products and services such as Coca-Cola or McDonald’s restaurants, but the proliferation of US management methods.

He said business activity results in a “transformation of resources into results and values, but results for whom? Values for whom?”

He asserted that the logic behind European or Asian companies copying of the US management style emphasizing profit maximization and shareholder or stakeholder values is the perception that the United States is “rich and strong,” but although the US economy is strong in certain aspects, Malik said the perception is largely false.

He cited a list of factors that he said masks “serious structural weaknesses that are obscured by misleading statistics and wrong figures.”

Among those factors he said the US fiscal deficit figures are “about half what it really is. This is not looked into by journalists. It [the United States] is overly leveraged.”

He said the use of so-called “Hedonic statistics and prices” are used without opposition and lead to growth statements such as the US 8.3 percent growth rate announced in the third quarter of 2003, which Malik dismissed as “hot air.”

“We must correct all the American figures; even the unemployment figures are boosted, not reality. I would not trust any economic statistics issued in Washington or New York.”

Because of US mismanagement, Malik said, “There’s practically nothing to invest in in the United States. They now have the lowest net investment rate since World War II. US workers must work harder to produce output value. Today, even Germany is more productive than the United States, and Europe has surpluses while the US is deeply in debt. Practically everything except the Wall Street industry is in a negative situation, and their energy imbalance is getting more negative by the hour.

“The US economy is a large one, but weak.”

Malik urged Chinese policy-makers and thinkers to turn away from the US style and instead to foster small- and medium-sized companies, many of which will be privately owned [as with many family owned corporations in the German-speaking countries].

Malik said, “These companies don’t even think of the shareholder approach; they do not exist for financial capitalism only.”

He contrasted “investors” with “entrepreneurs.”

Where an investor is only interested in buying and selling shares, an entrepreneur cares for a company and its customers; an investor is interested for a limited time, but an entrepreneur is in for the “duration.” Investors are profit maximizers, but the entrepreneur maximizes market position. An investor focuses solely on money, but the entrepreneur is concerned with resources, money, the best workers, machines and materials.

“The investor looks to Bloomberg, CNN and CNBC, while the entrepreneur looks to the marketplace.”

In contrast to stockholders, Malik said entrepreneurs are “all-weather types” who create value in bear markets and who operate in the best interests of their companies.

He said that throughout history, the best and longest-lasting companies in the world are those that separate the interests of the companies from the interests of their owners.

“Those who haven’t have gone bankrupt.”

Revisiting the question, Malik asked, “What is the purpose of a business? Is it money?

“No, it is to make shoes or mineral water or computers or whatever. In these cases, there will be a profit and in many cases more profit [than profit maximizers can provide]. A company with customers will always be in a position to pay dividends to stockholders, but not vice-versa.

“This is very objective. A company that does that can meet the needs of all stakeholders.”

Turning his attention more toward technical management issues, Malik said managers have to think about doing the right things in the marketplace.

He dismisses many of the vogue ideas of management such as the need for vision – “there’s right ones and wrong ones” – and the leadership of “great men” or “ideal managers,” which are in any case few and far between. Instead, he urged managers to exploit and develop the talents of the people in their organizations down to the rank and file.

He urged questioning such as: “What is a customer really paying for? What does the non-customer buy? What is our strength? What can our company do better than anyone else?”

He continued, “What do we believe in? What energy needs to be mobilized? Values, marketing, self-respect…none of these show on a balance sheet. You cannot run a company from a balance sheet.’

And, Malik said, relying on profit reports in trying to manage a company is like trying to drive a car by looking into the rearview mirror.

"Give meaning and people will mobilize.”

In contrast, he said, “US practice has led to more corruption and more absurd regulation that adds unproductive regulatory costs.”

Malik said successful companies must open their own paths.

“No one gets better by copying another company [or educational experience, as with US MBAs]; they get better and improve because of their differences.

Returning to the theme expressed in the title of his book on management, Malik said that in Europe, “Business is just another part of society. We ask: What do we need to do to stay in business longer?” Certainly, profit is necessary to any organizational or business enterprise, but short-term thinking, as in the United States, is leading to ruin.

“I would not be at all surprised if GM bankrupts; Ford is already a shadow of its former self, and Chrysler owes its existence to a government bailout.”

Malik said he believes China will need an additional 20–30 million managerial staffers in the coming years. More staff-level managers will also be needed, but he added, “MBAs are not enough. We must think well beyond business management.

“Almost every person involved in an organization must understand their management role and how to respond to it. Then, sustainability can lead to viability.”

Managing Performing Living: Effective Management for a New Era, by Dr. Fredmund Malik, translated and reviewed by Peter Franklin and Sebastian Hetzler, Deutsche Verlags-Anstalt (DVA) GmbH, Stuttgart and Munich, 2003, is available via www.amazon.de. It was originally published in German as Führen Leisten Leben. Wirksames Management für eine neue Zeit, Deutsche Verlags-Anstalt (DVA) GmbH, Stuttgart and Munich, 2003, and is available at www.amazon.de.

The Chinese version of the book is available at local bookstores under the title 《如何做一个有效的管理者》，弗罗蒙德·马立克著，民主与建设出版社, 2002.

For more information about Malik Management Zentrum St. Gallen Consulting and Education, see: http://www.malik-mzsg.ch.