Back in the mid- to late-1990s, when I was writing a lot about participatory management and employee involvement, the business section of every bookstore overflowed with books on how to manage corporate employees. Management consultants proliferated, as they still do. Scarcely a day went by without the appearance of some new management theory that was going to restore US competitiveness, while solving any number of social ills on the side.
Participatory management in one form or another was among the most common themes in this burgeoning industry. Some books and consultants recommended TQM, while others pushed quality circles. Some urged managers to go “lean,” while others urged them to go “team.” Some even urged managers to go back to traditional command and control models.
Did participatory management make sense? For some firms, you bet, but not for all. Lots of firms adopted participatory management not because it fit well with their corporate culture, but just because it was the current flavor of the month.
Just as some consumers have to have the latest product fads, some managers seem to have to have the latest industrial relations fad. As a result, some firms repeatedly make radical shifts in the way their firms make decisions.
The proliferation of management fads is hardly surprising from the supply side. Like the fashion industry, the management consultant industry always has to have something new to sell. There must be continuous churning of ideas if the consultants are going to have continuous work. After all, you don't become a management guru with lucrative consultancies, huge speaking fees, a bestseller if all you can say is "everything's great." But whence comes the demand for these new fashions?
Is it possible that rational managers would chase fads? Herd behavior, which refers to the tendency to imitate the actions of others, ignoring one’s own information and judgment with regard to the merits of the underlying decision, provides an answer. Corporate managers are scarcely immune to herd behavior; to the contrary, the faddish aspects of participatory management suggest the possibility that herd behavior is relevant to the demand side of the equation. An American Society for Training and Development report, for example, observed that many companies adopt team-based management structures, inter alia, “in response to success stories from other companies.” Another study reported: “In a number of cases we studied, the CEO of the company had seen a TV program or read a magazine article praising quality circles and decided to give them a try.” I love that one.
Herd behavior is partly attributable to cognitive biases, especially the conformity effect. When one’s decisions are publicly observable by peers, conformity has a positive psychic pay off, whose existence has been experimentally demonstrated. But there is also an agency cost phenomenon at work. Following the crowd may have a pay off even if the chosen course of action fails. Because even a good agent can make decisions resulting in a bad outcome, the market evaluates the agent by looking at both the outcome and the action before forming a judgment about the agent. If a bad outcome occurs, but the action was consistent with approved conventional wisdom, the hit to the manager’s reputation is reduced. This phenomenon explains both the tendency to follow fashion and the growing importance of management consultants. When a manager follows a management consultant’s advice in selecting a human relations system, he is buying insurance against a bad outcome. Hence, the observation that U.S. managers “have abdicated their responsibility to a burgeoning industry” of consultants.
