Predictability and Organisations

Ralph Stacey Posted by Ralph Stacey.

Ralph Stacey is a professor of management at the Business School of the University Hertfordshire and also a visiting lecturer at universities in Sweden, the Netherlands, and Malta. He is an active consultant to top management teams in major companies and the author of a several books on management and organization.


Yesterday, I was struck by an article in the Business Section of the Sunday Times with this heading: Directors told to predict future under new code.

Yesterday, I was struck by an article in the Business Section of the Sunday Times with this heading: Directors told to predict future under new code. That I should be struck by such a heading is, of course, hardly surprising since I have been publishing books and papers for the last 24 years arguing that it is impossible to predict the outcomes of the actions  people undertake in organisations. Indeed, the paradox of predictable unpredictability of human actions is central to the theory of complex responsive processes. The fundamental reason for this paradox is that that we are interdependent individuals, not autonomous individuals. This means that every choice any one of us makes, any intention any one of us forms and every action any one of us undertakes cannot produce some direct outcome all on its own because everyone around us, indeed many at some distance from us, are also choosing, intending and acting so that what happens is the consequence of the interplay of all our choices, intentions and actions. The models of the complexity sciences also display the unpredictability of outcomes because nonlinear relationship can escalate tiny changes to produce completely unpredictable long term outcomes. Indeed, some of the models, for example, those of far-from-equilibrium thermodynamics, lead to the conclusion that the universe is fundamentally unpredictable. And, in fact, our own experience confirms these conclusions about unpredictability.

 

In view of all of this it is amazing how prominent leaders in the organisational world carry any giving out predictions which, of course, are never realised. Take for example the Governor of the Bank of England. A year ago now, Mark Carney took up his post as Governor of the Bank of England after some years as Governor of the Bank of Canada. The first really headline-grabbing action he took was to provide what he called ‘forward guidance’ to the financial markets. He would only raise interest rates if the unemployment rate fell below 7% and he said that this would not happen before 2016. The market did not believe him and began to price in an interest rate increase in 2015. Only a few months later it became clear that unemployment was falling much faster than expected and would probably reach that target by the end of 2013. So the Governor hastily abandoned this target and proposed to use a number of indicators of economic ‘slack’. Just as well because the unemployment rate in May this year fell to 6.6%. What is interesting is how, after it became crystal clear that neither he nor anyone else could predict any economic indicator, he rushed from one failed prediction to others just as likely to fail. He does not seem to have reached the sensible conclusion, which is to abandon all of these useless attempts to predict. Then in his most recent speech he let slip that the interest rate rise could well come in a few months’ time. Why do senior people keep making claims for the future which experience would tell them are futile?

 

Now back to the newspaper article which tells a similar story. The Financial Reporting Council (FRC) commissioned the Liberal Democrat peer and former chairman of the insurer Aviva, Lord Sharman, to lead an expert panel to revamp the going concern test for organisations since the current test had failed to pick up the vulnerability of the banks in 2008. After months of deliberation and a number of rounds of consultation they produced their recommendation of a new corporate governance code for one last round of consultation. They will recommend that Directors be required to tell investors how long they think their company will remain viable: they must declare that their companies are viable for the foreseeable future and the foreseeable future has to exceed 12 months. So a group of eminent people spend months, and no doubt a lot of money, to come up with a recommendation which simplistically assumes that the future is predictable when in our experience it clearly is not. Even more interesting is the response of investors and trade bodies. For example, John Moulton, the veteran venture capitalist who runs Better Capital, said: ‘It is madness. No company will be able to come up with the right answer’. The panel says they will consider this point. So the great and the good continue to formulate policies on the basis of some very dodgy assumptions, which they never reflect upon, while those they are trying to protect make clear their knowledge that such protection is impossible. It looks like some who make a great deal of money do not operate on outdated assumptions.

 

Why are we so caught in a way of thinking that denies our experience? I think it is because the great and the good constitute a ‘thought collective’ in the terms of Ludwik Flek. In a previous blog I talked about Flek’s conclusion that we all belong to some thought collective and each of these collectives is characterised by a thought style. To question such a thought style is to risk exclusion from the thought collective. And it is not just policy makers and leaders of large organisations who are trapped in a ‘thought collective’. Some of the most effectively policed thought collectives are to found in academia where journals control what can be published and business schools continue to teach students all kinds of misleading ideas about predictability and the use of tools and techniques.