There has been a lot of hype these past months on ESG as the road to capitalist nirvana, but it might be, as Texans allegedly say those who would be taken for cowboys and cowgirls: “All hat and no cattle.”
A recent commentary by Rob Wiesenthal in the Wall Street Journal teaches a playground lesson about corporate governance – beware the second law of thermodynamics.
Authority structures which use power and rules to isolate themselves from a surrounding ecosystem succumb to entropy. Entropy then opens the way to a slow death – to atrophy. Self-absorption and decadence are two peas from the same pod.
Wiesenthal wrote about Twitter and the beneficial impact on its governance made by its new owner, Elon Musk. His point is that Musk is anti-entropic. Musk seeks maximum work output from the system (overcoming entropy) by linking it directly to the ecology in which it lives in ways that will promote a flow of productive energy from the outside to the inside.
Wiesenthal writes:
Minutes after closing his purchase of the company, he started a process that reduced the workforce from 7,500 to 2,500 in 10 days. …
Mr. Musk is trying to cure a degenerative corporate disease: systemic paralysis. Symptoms include cobwebs of corporate hierarchies with unclear reporting lines and unwieldy teams, along with work groups and positions that have opaque or nonsensical mandates. Paralyzed companies are often led by a career CEO who builds or maintains a level of bureaucracy that leads to declines in innovation, competitive stature and shareholder value. …
Redundant managers, along with managers who have opaque responsibilities, are in essence professional critics. Kenneth Tynan said, “A critic is a man who knows the way, but can’t drive the car.” While corporate execs typically can’t drive the car, they do have a time-tested path to success at big companies: Don’t do anything. Simply critique others’ attempts to do something. Don’t initiate any projects that have any risk of failure or embarrassment. And always stay close enough for credit, but far enough from blame. That’s the road map for job security, but not for innovation.
And innovation in its various manifestations – tangible and intangible – is the death of entropy and the road to sustainability. Innovation brings energy to a firm’s stocks of human and social capitals.