Peter Drucker’s revolutionary teachings decades old but still fresh

His philosophy on business management and the corporation’s role in society need to be relearned by company leaders every few years.

By Michael Hiltzik

12/31/2009

The mark of a truly revolutionary thinker is that his revolution has to be fought anew in every generation.

That’s the case with Peter F. Drucker, whose teachings on business management retain their startling wisdom four years after his death at the age of 95 and seven decades after the publication of his first book — the first of 39.

This year was the centenary of Peter Drucker’s birth. It wouldn’t be right to let the year expire without reviewing how his ideas apply to business today.

As is true with every revolutionary thinker, Drucker’s most enduring ideas contradict conventional wisdom. That’s why business leaders need to relearn his lessons every few years, and that’s why his insights seem perennially fresh.

Forbes put its finger on the phenomenon with its headline on a 1997 cover story about Drucker: “Still the youngest mind.” Drucker was then 87.

Born in Vienna on Nov. 19, 1909, Drucker joined a London investment firm upon Hitler’s rise to power, then immigrated to the United States in 1937. After teaching politics and philosophy at Bennington College, he moved to the graduate business school of New York University, where he stayed 20 years, and subsequently to Claremont Graduate University, where he held a professorship from 1971 nearly until his death.

Drucker’s most important insight concerned the role of the corporation in society. “The business enterprise is a creature of a society and an economy, and society or economy can put any business out of existence overnight,” he wrote in 1974. “The enterprise exists on sufferance and exists only as long as the society and the economy believe that it does a necessary, useful, and productive job.”

From that simple observation sprung a wealth of further insights. It placed the corporation’s social responsibility in perspective by establishing its breadth and its limitations.

Drucker showed that there is no “inherent contradiction between profit and a company’s need to make a social contribution,” but that the former is indispensable to achieve the latter. He also warned that an enterprise that fails to “think through its impacts and its responsibilities” exposes itself to justified attack from social forces. Consumerism and environmentalism, he taught, are not enemies to be vanquished, but symptoms of business’ failure to understand its broad social role.

“Peter was talking about this in the 1950s,” or long before corporate social responsibility became a formalized management principle, says Rick Wartzman, a former Times colleaguewho is executive director of the Drucker Institute at Claremont Graduate University.

His views placed him in conflict with classical economists of the Milton Friedman stripe, who considered profit maximization the be-all and end-all of corporate behavior.

Profit may be the motivating force of the businessman, Drucker wrote, but it fails as “an explanation of his behavior or his guide to right action.” Worse, this narrow view of the corporation’s role inspires the hostility toward profit that is “among the most dangerous diseases of an industrial society.”

He held that the purpose of a business is to serve the customer by providing a good or service useful in both personal and social terms. Businesses that took their eyes off that objective in favor of pursuing profit as a paramount goal could not succeed. Such subtle distinctions eluded classical economists.

Of course, Drucker could not have maintained his position as one of the world’s most sought-after management consultants had he limited his work to social philosophy. Few people could match his crystalline understanding of what it took to be an effective manager of enterprises or people. Credit the years he spent observing business organizations up close, starting with a consulting assignment at General Motors in the 1940s.

His targets included the celebrity chief executive and excessive compensation at the top. “Every CEO, it seems, has to be made to look like a dashing Confederate cavalry general or a boardroom Elvis Presley,” he wrote in 1988. But real leadership “has little to do with ‘leadership qualities’; and even less to do with ‘charisma.’ It is mundane, unromantic, and boring. Its essence is performance.”

Are there real-world examples of this? Think Hewlett-Packard, which almost tore itself apart under its dazzlingly glamorous CEO Carly Fiorina yet has become one of high-tech’s most successful companies under her resolutely colorless successor, Mark Hurd.

Real leaders, Drucker observed, are leaders of teams showing respect for people and their work. Nothing destroys that as efficiently as excessive CEO compensation. He maintained that the appropriate pay range was 20 to 25 times what the rank and file earned — it’s now in the hundreds. That level of inequality foments disillusionment among mid-level managers, as he said in a 2004 Fortune interview, and corrodes mutual trust between the enterprise and society.

Excessive compensation, he wrote in 1974, is designed to create status rather than income. “It can only lead to political measures that, while doing no one any good, can seriously harm society, economy, and the manager as well.”

And when a financial benefit accrues to managers who lay people off, he stated in 1996, “there is no excuse for it. No justification. This is morally and socially unforgivable, and we will pay a heavy price for it.”

Drucker was not the first management guru. Among the pioneers he acknowledges in his work are Frederick Winslow Taylor, who died in 1915 and is regarded as the father of scientific management, and Chester Barnard, who wrote classic textbooks on executive leadership before his death in 1961.

Drucker eclipsed these forerunners, in part by his more lasting influence. Indeed, it’s not unusual upon reading the work of the latest generation of management experts to come across a rule or finding articulated by Drucker decades before. Consider “Good to Great,” the 2001 bestseller by Jim Collins, an acknowledged Drucker disciple. Collins employed a platoon of researchers to help him determine the common factors in the emergence of superperforming companies like Walgreens, Gillette and Kimberly-Clark from the pack.

Here’s the first factor: a humble, self-effacing CEO most often selected from within the company — a plow horse rather than a show horse, as Collins puts it. Drucker made the same point years earlier, without the help of a team.

That’s not to say he reached his conclusions by pure ratiocination. “One of the things that drives a lot of analysts crazy about Peter is that he’s not empirically based,” Wartzman told me. “But he was around so long that he was able to create his own statistical sampling from his own observations.”

Shareholders, customers and society at large would be better served if Drucker’s precepts became ingrained in business management. That’s unlikely: Greed and the short-term mind-set are powerful forces pushing the other way. But at least Drucker’s writings will always be around to point us in the right direction.

Michael Hiltzik’s columns appear Mondays and Thursdays. Reach him at michael.hiltzik@latimes.com, read previous columns at http://www.latimes.com/hiltzik, and follow @latimeshiltzik on Twitter.
Copyright Los Angeles Times

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