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Karl Moore: This is Karl Moore of the Desautels Faculty of Management at McGill University, talking management for The Globe and Mail. Today, I am delighted to speak with Ed Lawler, who is a professor at the Marshall School [of Business]at USC [University of Southern California]and the director of the Center for Effective Organizations. Good morning, Ed.

Ed Lawler: Good morning.

KM: Ed, you told me earlier that you are thinking about a book on Management 3.0. What do you mean by Management 3.0?

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EL: Fundamentally, we need to think of a whole new approach to managing complex, large organizations. We certainly have the "command and control" era, which started way back with scientific management, and progressed over decades, really, to greater and greater levels of sophistication and expertise in how to make it run. That seemed to fit a certain kind of production-driven economy.

Clearly, starting in the 1950s, we began to say it has its limits, we have to use our workers differently, our employees differently, and I think that generated Management 2.0, which was around employee involvement, participation and moving more knowledge and information and power downward in the organization so people could add more value. And I think generally, it did impact the way most corporations operate.

The problem, of course, is that I think we are yet in another era. The economy has changed radically since then, the work force has changed radically since the sixties and seventies, and of course the economy has changed … globally, and everybody knows all those points.

So it's kind of surprising, in many ways, that Management 1.0: command and control, or Management 2.0: high involvement or high performance, and various names for it, were [still considered]suitable.

I think we do need a Management 3.0, which recognizes the impact of information technology, different work forces, diversity in the workplace, and so forth. So what I have been trying to do in a new book is say what that looks like, and yes, I have incorporated certainly some of the things that we did in Management 1.0 and Management 2.0. I think it really has to have a different philosophy and a different orientation with respect to both organizational design, how we treat the work force, how we think about the work force and basically how we lead in this kind of economy and in this kind of competitive environment.

KM: Ed, that is very interesting, but I need to know more about 3.0. What is it? Tell us about it so that we can begin thinking about it as managers.

EL: In many ways, to zero in on it, you can pick particular areas on how you would do that differently, or how you would manage, or general philosophy. Let me just pick one and carry it out: leadership, for example.

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With the movement away from command and control management to high involvement management, we became fascinated with leaders and ascribed a lot of the effectiveness of organizations to the behaviour of leaders and so forth, and I think that has gone way too far.

We have lost a lot of the managerial blocking and tackling that people in supervisory positions have to do in order to make organizations effective. It seems to me that, if you are going to have a valid, viable 3.0, it has to include the right blend of leadership behaviours. Yes, where you inspire people by a sense of mission, sustainability, accountability - but also have a valid management approach which deals with fundamentals like goal setting and work specifications and product evaluation produced by employees. So we do not want to lose some of the key managerial skills as we have, I think, in searching for these magical leaders who are going to inspire and direct people.

KM: It is kind of a balance between leadership and management in these people: You have to be a leader but also, if you are not a manager at the same time, I think it's Henry Mintzberg who talks about it, it's dispiriting.

EL: Yes, I think that is exactly right, it is the balance. We have spent a lot of time training people on leadership, which some people learn and some people don't, to be frank, and we have lost a lot of the fundamental manager skills or [they]were never developed. We still see managers doing terrible basic management - like performance reviews are done just awfully and the answer seems to be, "Well, let's just eliminate them." Well, to me, that is just insane. How are you going to direct and control behaviour if you do not have some kind of accountability and some sort of reviews that look at people and give them feedback and give them a sense of direction?

Just knowing that we are going to [have]sustainability as a major thrust of the company does not translate into day-to-day behaviour very easily. You need to be able to make that translation from the sense of vision and mission and so forth, to actual behaviours, and that is the managerial part of being an effective manager and leader.

KM: How about how we design organizations? How would that be different under 3.0?

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EL: I think it depends substantially on what business you are in, how sophisticated the business is, and how complex it is, but I see much more self organizing, much more use of information technology, social networks, and perhaps even internal markets to create the forum and allocate financial resources within organizations, and that's an area where there would be enormous differences.

In a book that Chris Worley and I did called Built to Change , we emphasized very strongly structures that would give people external interface with the market so that nobody is more than 2 or 3 degrees separate from the external market. I think that's the right emphasis and we need to build on that kind of thinking because touching the market, being interfaced with the market, helps direct peoples' behaviour internally and gives them a sense of how the business is doing and certainly motivates them to perform well.

So, I think that piece of the design is critical. What I don't think we did enough with, in the Build to Change book, is to emphasize how organizations can be built out [using]social networks and how money can be allocated to innovations and start-up operations and how they can be converted from ideas to actual operating businesses.

KM: Is that something like the Wikipedia-tion, the LinkedIn, the Facebook-ization, if you would, of the world?

EL: Yes, I think it is, and that certainly relates to why I think it's viable now and has not been in the past, and it has to do with a lot of people coming into organizations, partly the younger group, of course, but also more senior people are now much more familiar with those technologies and it is much more viable to use those technologies to organize.

So you are starting to see large companies, like the Ciscos and the IBMs, trying to take that technology which they have sold to consumers and say "How do we use it internally to create a more adaptable and flexible organization?" The one thing we clearly know is that Management 3.0 has to leave room for very adaptable and flexible organizations so that yesterday's competitive advantage is ready to be today's, yesterday's business model is going to have to be pretty radically changed quickly, in order to keep up with the rate of change that exists today in the environment.

If there is a new normal coming out of the recession, I think it is one of change and one of innovation that companies have to be able to do that. Particularly if they are in knowledge work or situations where intellectual property and technology is the key to their business.

KM: A third element might well be corporate governance. What is the impact of how we can change corporate governance under Management 3.0?

EL: It's an area that needs dramatic revision, and I happen to be in the country of the United States that probably needs the most dramatic revision, and part of it certainly is creating a corporate board that's more sensitive to social issues and sustainability issues and so forth, which U.S. boards have lagged on mightily.

But more than that, I think boards need to develop competencies that they haven't in the past. They have basically been shareholder-oriented - worried about financial results and not very aware of how those financial results are generated. For example: One of my favourite areas, obviously, is human capital management, [and that]is rarely represented in the competencies of the board members. It became very obvious during the recession because, basically, boards were non-players. They did not know what to do.

They knew the costs were there, they knew labour was the most expensive thing in most of their corporations, but they did not know how to handle that. They had not prepared for it, they did not have employment deals with employees that let them reduce costs sensibly and in essence, they were non-players. They do not know who the critical players were. They did not know what the impact of the different alternative methods of cost reductions would be on the work force and its morale and so forth.

I think that really pointed to needing on boards at least one or two people who have some deep expertise in human capital management. That is the major cost on most corporations, that is the major source of competitive advantage and they look at the board and they are usually CEOs of other companies, or finance people, or maybe technology experts if it is a technology firm. So we have boards that are badly staffed from the challenges in terms of the competencies that they need, and we also have boards, of course, in the United States in particular, that are lead by the CEO, so the objective oversight of the CEO behaviour, or executive behaviour, is almost totally absent.

That, of course, has led to enormous numbers of compensation problems. … It has really hurt the corporate world in the United States in terms of how it is viewed by key politicians and the public in general. That takes a toll on corporations. They have looked very out of touch with where the American public is, partly because of how the boards have behaved when it comes to management and executive compensation.

KM: You mentioned the idea that boards have to take on corporate social responsibility more. Are we moving from a shareholder model typically more North American to a stakeholder [model] more kind of the European model and approach?

EL: I think we are. We did a survey about six months ago of corporate board members of major corporations, and I was quite surprised actually with the favourable views towards focusing more on sustainability amongst board members. If it had been a European study I would not have been surprised, but American board members, large corporations, were saying with pretty good vigour, it is an important issue, we think it can be a source of competitive advantage for us if we do it better, it can help us profit wise, it can helps us relate to the public.

So it is not like, it does not seem like they are saying it is a good thing to do, in the sense of social good, but it is good from a business point of view. At least with America, as you probably know, that is the key lever in getting something to go from getting it done, and going from "nice to do" to "there is a competitive advantage there" is really key.

So boards and senior management are beginning to recognize that certain parts of sustainability, at least, can help the bottom line and can help public regulation, [and help companies to]avoid things that they do not want to have happen, in terms of dictates from Congress and so forth. So it is definitely an area that I think we'll see a lot of change in the next 10 years.

KARL MOORE: This has been Karl Moore of the Desautels Faculty of Management at McGill University, talking management for The Globe and Mail. Today I've been speaking to Ed Lawler who is a senior professor at the Marshall School at the University of Southern California.

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