Best Practice

Management Consulting And The Ethics Of Financialization In China

Duke University Press

Contents

HIGH PERFORMERS

The Making of Financialized Subjects

BEFORE I INTERVIEWED CONSULTANTS, observed them at work, or participated in their training, I read Systeo's "thought leadership." It was my first day in the Beijing office, and I was sitting on a cream leather chair in reception. Brightly colored reports adorn the shelves, their glossy covers inviting you to leaf through their pages while you wait. Eager to find out what management consultants do, I picked up a copy of each one. Five hours later I had more questions than answers, for these documents do not tell you what management consulting is, nor do they provide details of what Systeo sells. They tell you what Systeo knows. The "flagship" titles focus on their expertise around Chinese businesses, that Systeo understands what characterizes a successful business in China, what distinguishes "the best from the rest," what makes a "high performer."

Over the last thirty years the number of publications dedicated to the topic of high performance has exploded, with titles such as High Commitment, High Performance: How to Build a Resilient Organization for Sustained Advantage and Managing the Mist: How to Develop Winning Mind-Sets and Create High Performing Teams. Creating a high-performing organization is not just desirable; it has become the raison d'être of business strategy. But what is a high performer? How is such a performer defined? Since the shareholder revolution of the 1980s, the financial performance of companies has become paramount. The use of financial metrics has proliferated, being used to evaluate not only the value of companies, but also the worthiness of labor. Systeo's thought leadership publications make repeated references to the importance of creating shareholder value, even for Chinese state-owned enterprises that are half owned by the Chinese state. It would seem that performance is couched in terms of financial value. However, this definition is destabilized by the making of high performance, which draws on the ambiguity surrounding what performance is.

Performance is rarely defined in absolute terms. Instead, consultants emphasize what distinguishes a high performer from low or average performers. Apparently, it is their "performance anatomy." The use of a biological metaphor is striking. The term anatomy suggests that performance is akin to an organism with predetermined characteristics. Like world-class sprinters, high performers are blessed with an anatomy that ordinary folk do not possess. However, consulting is predicated on the opposing claim that a company's performance anatomy is not fixed. Value can be engineered. It can be optimized through "hard" and "soft" means. A high-performing company needs IT systems to measure and manage employee performance according to financial metrics, a topic I discuss in the next chapter. A high-performing company is also one where employees are "developed" to have "the right mind-sets." The idea that there is an underlying anatomical basis to high performers suggests that making performance is a science, one that consultants understand.

But Systeo's Chinese employees were not yet fully schooled in this science. In my first few weeks in Beijing I met a number of Western expatriates. They had been transferred from Europe, North America, and Australia — offices where consulting to deliver high performance was well established — hence they were well equipped to teach their Chinese colleagues how to cook up this "secret sauce" of organizational excellence which had now thoroughly permeated "their DNA." One such expatriate was Melissa Johnson, an American consultant with over eight years' experience of helping clients "to promote and incentivize employee performance," and who describes her job as being concerned with "developing and implementing performance management" for large organizations, typically public companies. Our paths crossed because she had taken up a new role. Melissa had been asked to lead Systeo's Greater China Human Capital Strategy (HCS) Program. She was no longer tasked with improving the performance anatomy of clients. Instead, she was responsible for making Systeo's China practice a high-performance unit.

The widespread adoption of high-performance work practices, which can be found in the public sector as well as for-profit companies, reflects the rise of human resource management (HRM), a field of management that emerged in the 1980s. Continuing from the humanistic approaches that displaced scientific management, HRM stresses the importance of employees' well-being and motivations. It bears close affinity with personnel management in its substance and content; however, the objectives of HRM go beyond improving employees' welfare and working conditions. Starting from the central belief that people are an organization's greatest asset, HRM positions human resources as the key to obtaining a competitive advantage. The optimization of employees' performance becomes an objective of corporate strategy, rather than being merely a personnel matter. Perhaps unsurprisingly then, HRM — which has been described as a rhetoric of management practice rather than a coherent management theory — has been heavily championed by management consultants. Through their thought leadership — one early and now famous example is the McKinsey paper, "The War for Talent" — management consultants have highlighted the importance of employees for competitiveness, in particular for knowledge-intensive organizations. Management consultants have also actively promoted and implemented universal templates of HRM known as "best practice" HRM, also referred to as "high-performance work systems" or "high-commitment practices."

The HCS Program is one such example. Melissa stressed that the HCS Program was not just an internal initiative, but also an example of how Systeo recycled best practices — an idea gleaned from its clients that would be tried out and refined inside Systeo before being repackaged as a standardized knowledge product. The HCS Program is run with the aim of making the China practice a high performer; it is also a testing ground for high-performance management practices that can be sold to clients. This chapter explores the operation of the HCS Program, providing a rare insight into how HRM actually works in practice. As a management theory, HRM has been criticized for its internal contradictions, lack of reflexivity, and for assuming a narrow conceptualization of performance; it has been claimed that high-performance work practices can improve financial performance (Huselid 1995, emphasis added). By analyzing the practices through which high performance is performed and how claims about performance are staked, this chapter seeks to reconcile the rhetoric around employee well-being and investment with the predominant concern with financial value. In doing so, I shed light on the relations between organizational forms, labor, and new forms of valuation under financialization. Specifically, I look at how the social reality of high performers is created through forms of valuation that measure labor in terms of financial value and how this produces a particular ontology of labor. I analyze how, and with what graphical artifacts, labor can be reconceptualized as a form of financial capital. Management techniques concerning "human capital" aim to produce what I term financialized subjects.

Financialization, Shareholder Value, and Labor

There is nothing automatic or predetermined about [the] process of converting the potential of labor, including the contribution of managers, into value for shareholders.

— Ezzamel, Willmott, and Worthington, "Manufacturing Shareholder Value"

Described variously as a theory of corporate performance (Van der Zwan 2014) and an ideology of financialization (Froud et al. 2000; Lazonick and O'Sullivan 2000), shareholder value "generates much of its authenticity and persuasive force by claiming itself as the original state of economic life, and by extension, entrepreneurial, free-market capitalism as the true nature of human society" (Ho 2009, 169). Justified as a means of reconciling the principal–agent problem presented by the separation of ownership and control in modern corporations (Berle and Means 1932), shareholder value suggests that shareholders should be prioritized over other constituents, including workers. Corporate efficiency has become redefined as "the ability to maximize dividends and keep stock prices high" (Van der Zwan 2014, 107), realized through the cooperation of managers whose interests are aligned with shareholders through stock options. As a consequence, we have seen changes to business strategies and organizational forms, with significant implications for labor. In addition to mergers and hostile takeovers, the increased rationalization and standardization of work processes, as evidenced through downsizing, offshoring, and layoffs, has been attributed to the drive for shareholder value. Salary differentials between the highest and lowest strata of companies have increased dramatically, with those at the bottom experiencing rising intensification of work and precarity of employment. In short, the mission to create value for shareholders has led to fundamental changes in the ways in which labor is managed, organized, and rewarded.

But while the link between corporate restructuring and shareholder value is well established, the mechanisms by which the pursuit of higher share prices is articulated through organizational changes remain largely neglected in accounts of corporate financialization. An exception, though, is an in-depth study that examines the accounting measures that translate shareholder value creation into internal changes (such as cost cutting) by Mahmoud Ezzamel and his coauthors. In their case study of Conglom, a high-tech multinational, they describe not only the intense pressures placed on workers and managers alike through financial performance measures, but also how accounting metrics such as EVA (economic value added) and TSR (total shareholder return) act as a means of visualizing operational activities to financial markets and thus impel certain kinds of corporate strategy. Specifically, they argue that "accounting metrics can offer a persuasive reassurance to investors that a company is committed to the incorporation of value-adding, cost-squeezing disciplines into its everyday operations" (Ezzamel, Willmott, and Worthington 2008, 109). Their analysis of how operational decisions are couched in terms of their impact on investor approval or investor expectations highlights the temporal politics of share valuation. Managers in financialized companies are pressured into finding ways of demonstrating — representing — future profitability to investors. Whether or not the actions they implement actually deliver profitability, and evidence suggests they often fail in this regard (Fligstein and Shin 2007), does not necessarily matter.

To understand the relationship between the internal management and organization of public companies and their share price, it is useful to discuss briefly how investors carry out share valuation. Although sociological and anthropological accounts have tended to focus on speculative approaches, in fact most fund managers and financial analysts practice what is termed fundamental valuation — that is, they attempt to decipher the intrinsic or "fundamental" value of a company. In this approach, the value of a company is seen as the actualized sum of its future return. As anthropologist Horacio Ortiz explains, "fundamental valuation is considered to be an act of 'authenticity' and 'conviction' about the 'fundamentals,' based on informed wagers about the future" (Ortiz 2013, 66). But the problem is there are no known fundamentals. That is to say, investors cannot say with certainty, ex ante, what factors will determine the performance of a company's shares. Rather, investors are engaged in a constant process of interpreting information about companies and the broader economic conditions, under conditions of radical uncertainty. In order to impel themselves to commit to action — to choose to buy or hold a stock at any given point in time — "financial agents therefore must be convinced about the profitability of the uncertain opportunities for future gain they hypothesize to exist" (Chong and Tuckett 2015, 310). To do so, they develop what can be termed "conviction narratives" — stories about an investment target through which they can resolve the psychological and emotional conflicts engendered in committing to an object that could lead to significant loss as well as gain. This is an argument I have made, together with psychoanalyst David Tuckett, in a research project on fund managers and their investment decision making.

To develop conviction narratives, fund managers look for particular themes, or heuristics of future profitability. For example, many managers described their investment process as including the search for "good" or "strong" companies. Although various accounting models can be used to calculate measures of company strength, fund managers are well aware that these models engender specific assumptions about the future that may not hold over time. Hence, many look for proxies of company strength — "a 'strong balance sheet,' those which were 'cash rich' or with a 'good cash flow'" (Chong and Tuckett 2015, 321), for example. However, investors did not always agree upon their interpretations. Further, their interpretations could change over time, as new information about the company came to light or if the political-economic context altered. Conviction narratives are inherently fragile and unstable. Hence, it is not possible for the management of publicly listed companies to say with certainty what will please investors. This is a point emphasized in one of Systeo's white papers, entitled "Do Investors Have an Accurate Picture of Your Company's Value?" which states: "There are no standard metrics to track investors' future expectations for a company, which reflect what they believe about the company's strategies." The role of management consultancies lies in bridging the gap between investors' wagers and managers' wagers. Consultancies claim they have knowledge of, and can control, the uncertain process of share valuation. This is a claim made in this white paper where the following question is directed to prospective clients: "Is your company's strategy appropriately valued by the market?" The rest of the paper is a short-sell in Systeo's expertise of managing this process of share valuation, that Systeo can control the subjective act of interpretation undertaken by fund managers, pension funds, and other institutional investors. Put differently, the craft of consulting is the trafficking of signals between investors and (the management of) companies. This is achieved through the production of representations that reference the financial health of the company. In particular, we see the emphasis on two heuristics of potential profitability — the generation of revenue, or the reduction of costs — as will become apparent over the next two chapters. Further, I show how the production of these financial representations in the name of creating shareholder value leads to the promotion of certain actions among employees and also legitimizes certain forms of organization and reorganization. Practices of visualization aim to create a favorable indication of the company's "fundamentals" and feed into investors' conviction narratives.

The Human Factor

I first heard about the HCS Program after two months of fieldwork inside Systeo's back office, its shared service center in Dalian. The center's director, Christina Teoh, asked me if I was interested in carrying out research in Beijing or Shanghai, where the consulting practice is based. It was approaching the end of Systeo's fiscal year, and the HCS Program committee was making preparations to carry out the final review of the program's initiatives that had been running that year. They would welcome an extra pair of hands to help out with the analysis. I moved to Beijing in May 2008. Together with Melissa, the HCS Program lead, and her two Chinese subordinates, Natalie and Amber, I spent over a month analyzing data sets that were used to evaluate the success of the 2008 HCS Program. The design of the 2009 HCS Program would reflect our findings, with new subprograms introduced to target the areas of improvement that we had identified.

As I scanned one PowerPoint presentation after another, I realized the HCS Program was not one initiative, but a set of initiatives. The names of these subprograms — "Valuing Our People," "Talent Powered Organization," "New Generation Talent Acquisition," "Flexibility and Diversity" — make explicit the focus on labor. One might think, then, that the HCS Program would fall fall under HR's responsibility. However, Christina stated unequivocally that "human capital [strategy] is not human resources." The fact that each subprogram had a "task force" consisting of consultants as well as HRstaff seemed to corroborate her assertion. A number of senior executives were also involved. Typically, they were the "leads" of the subprograms. Moreover, the most senior member of the HCScommittee was not the HR director, but Liu Xing, the chairman of the China practice, who reported directly to the chief executive, John Scott. The inclusion of such senior employees communicated the prestige and importance of this initiative. In HRM the management of employees is deemed to be a core strategic activity, that is, one that contributes to the achievement of organizational goals, and hence it should be presided over by the highest levels of management and not left to personnel specialists.