How Big Does the Elephant Have to Get?
Immunity to change at a national and international level
Do you ever find yourself agreeing with DH Lawrence when he said “The world of men is dreaming, it has gone mad in its sleep, and a snake is strangling it, but it can’t wake up”?
In 2018 the construction giant Carillion collapsed in the UK leaving its suppliers owed billions of pounds. There was a public outcry yet nothing material has been done to prevent a recurrence. Over the years there have been plenty of reports on the UK construction industry — Latham (1994), Egan (1998), Wolstenholme (2009) etc — and virtually all of them conclude, inter alia, that suppliers should be paid on time. Why has legislation never been forthcoming?
For a clue I am going to refer to Immunity to Change, a 2009 book by Robert Kegan and Lisa Laskow Lacey, prominent Harvard academics and coaching practitioners. They observed that individuals and teams often had commitments to achieve a perfectly sensible goal, say creating a culture of mutual trust and support in a business. But that instead of working towards the goal the individuals concerned preferred to interrupt one another, talk behind each other’s backs and hoard information.
The group had competing commitments such as preserving the pleasure of harshly criticizing and judging one another. And behind those hidden competing commitments was a number of big assumptions, such as “There is an inherent conflict between entrepreneurship and collective collaboration.”
In the case of Carillion the competing commitment never received a mention in the prolific hand-wringing that followed its collapse. The commitment is to keep the main contractors in business at all costs, and the underlying assumption (which happens to be true in the short run) is that if suppliers had to be paid at 30 days then the majority of the UK’s main contractors would immediately run out of cash: suppose you turn over $12 billion and you pay your creditors at 60 days. If next month you needed to pay them at 30 days you would need an additional $1 billion in cash.
This competing commitment is so strong it has never been tackled, yet if you consider the underlying assumption it could be: the government could legislate so that in 2020 it becomes illegal to pay your suppliers at 90 days. Then in 2021, 85 days, 2022, 80 days and so forth. In this way the underlying assumption could be progressively addressed and in time the whole industry would be so much healthier for it: main contractors would be more careful about their tendering practices (as the option of using their suppliers as a banking facility would not be available), the barriers to entry for suppliers would be lower, main contractors would manage their reserves more prudently.
If we want to go bigger then how about the world financial system?
Whilst the instruments developed by the financial market — mortgage backed securities and credit default swaps — played their part in the financial crisis of 2008, at the root of the problem was irresponsible lending to people who couldn’t afford to pay the money back. This lending that was based on the fallacy of real estate values increasing indefinitely.
Today global non-financial debt stock has increased by 50% relative to 2007 according to the World Economic Forum. In particular government debt has expanded as states have attempted to stimulate their economies and non-financial corporates have increased their debt by 63%, largely in emerging markets.
Many commentators believe we are on the brink of another financial abyss.
What is behind the seeming helplessness of, say, the G7 in the face of this? Well, the competing commitment is to growth and consumerism. And underlying that is the assumption that if we stop growing the world economy will collapse. Just like my construction industry example, there is an element of truth in this in the short term: the whole edifice relies on confidence in expanding asset values, whether those are real estate assets or Chinese commodity stocks.
Another assumption is that political unpopularity if not instability will follow any fall in living standards. And a further one is that the banks will be bailed out when the collapse eventually does occur.
Once we and our leaders own these assumptions and talk about them openly we can start to unpick them. Which, like my example of the UK construction industry, may be a delicate and long-term endeavour, but needs to start somewhere. Perhaps Kegan and Lacey could make a guest appearance at the next Davos.
