Sunday, January 15, 2012

How management consulting and equity funds breed inequality

Reading a nice article about Romney and his past as management consultant and leader of an investment fund finally made me understand what causes increasing inequality.

The point is that both management consulting and equity funds introduce top-down change. But many of the ideas they introduce are nothing new for people in the lower ranks. The consultants may have an MBA and use advanced statistical methods, but many opportunities for improvement are well visible for anyone with a bit of common sense. The only thing that management needs to do is to create a culture where such improvements are rewarded and not crushed by those whose personal interest might be hurt. The Japanese kaizen management technique is a good example how bottom up improvement works.

At first sight it may seem that it makes no difference whether a change is initiated from the top or from the bottom. But in fact it does. The first effect is on rewards: those who are credited with the improvements also get the rewards. And if the top is credited with them it will see its remuneration increase at the expense of the lower ranks. The second effect has to do with continuity. As long as mr. genius is leading the company results may be good. But inevitably he will sometimes be succeeded by a weak leader without much initiative. And then all improvement will stop. If, on the other hand, change is coming from below improvements may continue even under a weak leader.

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