A birthday guest once showed up with an inflated clown. You could punch it and watch it pop back up. A lot of us feel like that clown. We took the right with Arthur Andersen, the left with Enron. Dozens of headlines later, we find that much of the mutual-fund industry is a game rigged for insiders. Just when you think it's over, there's more.
Step back from the details and a pattern emerges. I call it "organizational narcissism": Men chosen to oversee immense assets are inward-focused and oblivious to the constituencies they are supposed to serve. This injures shareholders (got Enron stock?) and investors (about $35 billion in fees to mutual funds last year). It sets managers against customers (bank mergers make some top guys rich but leave no one to correct your statement). It feeds employee resentment—ask the folks at American Airlines about those secret pension trusts.
Organizational narcissism is about culture, not individuals. Today's scandals have their share of megalomaniacs, but with so many people complicit at so many companies, you can't explain it all as individual greed. Organizational narcissism expresses the managerial culture that evolved over the past 80 years of "managerial capitalism." It ensnares millions of managers. Prosecutors want to prosecute and regulators want to regulate, but the pattern won't quit until a new culture develops. That means understanding the sources of organizational narcissism. Here are four.
First, managers believed economic value was created inside organizations, embodied in products. Modern managers "created" value by overseeing the new complexities of mass production. In the auto industry, cars were once made by hand to the specifications of each customer. The assembly line changed all that. The focus shifted inward, from customers to products, and stayed there.
A second source was the managerial hierarchy. It developed as a cheaper alternative to transactions between smaller individually owned firms. It grew throughout the century, despite now appearing to cost more than it saves. Here, groups of mostly men arrayed themselves according to status and power. Getting ahead required keeping an eye on the other guy, while planning your own moves. This took a lot of concentration, all directed inside. That's why Andrew Fastow blamed criticism of his partnership deals on "a rival's efforts to get his job."
Third, managers defined themselves as separate from consumers. They identified with elites, not wanting to rub elbows with the masses. Managers used advertising firms and marketing departments to do the dirty work of talking to customers, freeing them for the really important work inside. It's why you're talking to a call center in New Delhi when you call your bank, not to your branch manager.
The fourth source is sex. Male managers didn't want to serve female customers. From the time men left home for offices and factories, buying stuff was redefined as the wife's job. But managers did not want to serve in public the women they dominated in private. They retreated to their inner sanctum, defining managerial culture as male culture, though it cost them a front-row seat to the market. It still does.
Hard news for prosecutors and regulators: Cultures don't change by fiat. Throwing some guys in jail won't change what really counts. The settlements forged by New York's attorney general or the SEC represent a historic opportunity. Like the new cancer treatments that cut off a tumor's blood supply, they should aim to choke off the sources of organizational narcissism, not just treat its symptoms.
Here are two places to start. First, insist on new practices that radically increase transparency. The privacy of the managerial hierarchy must be displaced by distributed information flows that are visible, accessible, and comprehensible to all. When everybody knows everything you're doing, it's just not possible to remain insulated and self-serving. Second, require new practices that radically increase community. This means taking on the male cronyism that dominates Wall Street and corporate America and feeds the us-versus-them mentality. It means eliminating boundaries between inside and outside, men and women, producers and consumers. This will require new forms of shared governance that provide real voice and influence for individual investors, consumers, and employees. (See eBay or Linux for what transparency and community look like.) Ironically, if the settlements drive firms in this new direction, it will strengthen their ability to compete in an emerging economy in which economic value is no longer created inside organizations.
Shoshana Zuboff (firstname.lastname@example.org) is a professor at Harvard Business School and the coauthor of The Support Economy (Viking, 2002).
A version of this article appeared in the February 2004 issue of Fast Company magazine.