Management

1 Introduction

Intangible assets are now the dominant means by which organisations create and preserve value, and human capital is one of the most important of those intangible assets. Leadership is the crucial means by which the performance of people is managed – and, in a digital world, it is the part of management least susceptible to automation. Machines are steadily taking over the routine work of collecting and processing information; getting the best out of people remains a human job.

This chapter surveys the main theories of management and leadership: what management is, the classical and human relations schools, the style theories, and the contingency theories – which conclude that the right way to lead depends on the situation. It then brings the story up to date with topics the syllabus names explicitly: situational leadership, transactional and transformational leadership, empowerment, leadership of virtual teams, and leadership and ethics.

2 The purpose and process of management

There are many possible definitions of ‘management’ and here are two:

“Getting things done through other people”.

Management implies that you are in some way organising what other people are doing, and indeed the idea of organising should make us consider what’s meant by an organisation.

“A social arrangement with a controlled performance of collective goals”.

The important words here are “social,” “controlled,” and “collective.”

The word “social” recognises that we are not machines, that we are people, that we have an important social or human aspect to our characters. We will see that in the early theories of management, the social dimension was often rather understated.

The idea of “controlled” is important. Basically, one of the roles of management will be to set some sort of goals or targets and then to try to ensure that people achieve that.

Finally, “collective”; the idea that in an organisation we should all be working together.

3 Trait theory

Much of the discussion of management concerns what makes a good manager and what activities good managers should actually undertake.

Early trait theory tried to identify stable personal characteristics associated with effective leaders, such as intelligence, self-confidence, integrity and sociability. It was criticised because different studies produced different lists, traits alone did not predict effectiveness consistently across situations, and the approach understated the importance of followers and context. Modern evidence suggests that some traits can help leadership emerge or succeed, but no checklist by itself identifies a universally effective leader.

4 Henri Fayol - Classical Management

One of the earliest management theorists was Henri Fayol who was active in the early 1900s. He believed that the management theories could be developed, then that management could be taught. He said that managers have five functions:

• Planning

• Organising

• Commanding

• Coordinating

• Controlling.

There are perhaps two things to note here. First of all, he really said nothing about inspiring or leading or motivating; much of the social aspects of management were missing. Secondly, although none of us is likely to deny that planning, organising, commanding, coordinating, and controlling are important aspects of management, dividing the management tasks into these five functions doesn’t necessarily help us to be better managers. We are unlikely to set our diaries saying that from 9:00 to 10:00 in the morning we will do a bit of planning, from 10:00 to 11:00 perhaps a bit of commanding and so on. Knowing what you should do is very different from being able to do it at appropriate times.

Fayol’s work comes under the heading of “classical management” and classical management theories hold a view that there is a correct way of managing, just as classical architecture put forward the idea that there are proper proportions of buildings which please the eye and which are therefore correct.

Classical management held a view that there was a set of golden rules and if you obeyed these you would be a good manager.

In general, classical management theory is not believed, or at least not naively believed, any more.

5 Taylor – scientific management

Frederick Taylor was an American who developed his theories of scientific management in the late 1800s. He was the first man who deemed work deserving of systematic observation and study. You must remember that really until the late 1800s most businesses had been relatively small, often consisting of one or two people, perhaps within a family, making use of individual crafts and skills. As businesses grew in size, until Taylor came along, no one thought that employees should be told how to do something. That was simply not thought to be a function of management.

Taylor said that it is a function of management to study work, to develop a science of work, and from that to work out how jobs could be designed so that they could be carried out efficiently. This could allow employees to earn more. Rule of thumb methods should be replaced by methods based on scientific study of the tasks. Scientifically select, train, and develop each employee rather than letting them train themselves; provide detailed instructions and supervision of each worker; divide work nearly equally between managers and workers so that the managers apply scientific management principles to planning the work that the workers have to actually carry out.

Inevitably this led to task specialisation, which is basically the classic production line, because it was discovered that one of the most efficient ways of carrying out work was to do a relatively simple task over and over again. In later life Taylor was criticised for dehumanising work. But it’s important to remember that his ambition was not to do this - his ambition was to enable workers to earn more through working in a more efficient environment.

Potential benefits arising from Taylorism are:

• Increases in productivity,

• Fair and higher wage allocation based on output, and

• Workforce care programs because if you didn’t care for your work force, you have to waste money through additional recruitment, training, and inefficiencies.

On the downside it had a great capacity for dehumanising work.

6 Human relations school

Around 1935, Elton Mayo carried out a very important series of experiments at the Hawthorne plant of the Western Electric company. In one of these experiments he divided a department into two. Half of the workers were the control group, but for the other half he varied the lighting, sometimes making it better, sometimes worse. He then asked those workers what lighting they preferred and what suggestions they might have for improving it. Much to his surprise he discovered that whether or not the lighting was increased or decreased, the productivity of the people in the experimental group went up.

The conclusion from this experiment was that by making these people feel special, by asking their opinions, by asking for suggestions, they were motivated. They enjoyed being treated as individuals, as people, rather than simply being told what to do. This led to what was called a “human relations school” in recognition that there is more to good management than simply planning, organising, controlling, coordinating, and communicating.

The second part of these studies dealt with groups. Management had tried to increase productivity by offering people higher wages, and was surprised to discover that productivity did not increase.

What Mayo discovered was that there was a sophisticated but informal system whereby people agreed what the proper level of productivity actually was. These people formed what’s now known as a group: a number of individuals who develop group norms, in other words, an accepted standard of behaviour. If you don’t comply with the norms of the group, you are likely to be excluded from that group. Note that management did not deliberately form groups; these were formed by people just because they worked together or relied on each other or they became friends. People inevitably liked being part of the group and being associated with other people. These groups have a very profound influence on how people are likely to behave.

7 Style theories

We have already said that trait theory has been discredited. We now come on to what are known as “style theories”, in other words, a good manager becomes a good manager because of his style of management. Whether or not this information helps to be a good manager is another matter but you have to know the names and the key terms that they were associated with.

First, Peter Drucker who stated that management has five categories of activity:

• setting objectives,

• organising the group,

• motivating and communicating,

• measuring performance, and

• developing people.

There are two important additions here to what Fayol suggested.

First, Drucker said that motivation is a very important part of management, and secondly, developing people is also important, so they feel fulfilled, that they are growing, that they are gaining new skills, that they are achieving their maximum potential.

Really the rest of the list isn’t very much new on what Fayol suggested about planning, organising, controlling, coordinating, and communicating.

8 Mintzberg – managerial roles

Mintzberg divided up managerial functions in a slightly different way:

Interpersonal roles arising from formal authority and status and supporting the information and decision activities:

• figurehead

• liaison

• leader

Information processing roles. For example, they monitor information maybe by looking at management accounts and they distribute information:

• monitor

• disseminator

• spokesperson

Decisional roles making significant decisions, perhaps about how resources should be allocated, negotiating with suppliers or with members of staff, and dealing with disputes; in other words, the disturbance handling role.

• improver/changer

• disturbance handler

• resource allocator

• negotiator

Once again, perhaps knowing that management might have these three sets of roles - interpersonal, information processing and decisional - doesn’t necessarily help one be a better manager.

9 Ashridge Management College model

This model identified four types of leadership style, but remember these are only points in the continuum of management styles.

First and the most autocratic or dictatorial is “tells.” The manager simply tells the staff what to do. The manager does not even feel a need to have to explain why that’s what has to be done.

A slightly more liberal approach is “sells.” Here the manager tells people what to do but then sells that idea to them, convinces or persuades them, or explains why it has to be done that way.

Next, there is the “consults” style. Here the manager will ask staff what they think ought to be done, but then the manager will make the final decision. However, this is quite a participative style.

Finally there is “joins” or joins with. This can be entirely democratic where the manager actually abandons management and asks people to vote on what should be done. This might be the sort of style adopted for deciding things like where should the summer outing be. However, many people regard this extremely democratic style of leadership as abandoning one of the important functions of management which is to direct and control.

10 Blake and Mouton’s managerial grid

The final style theory is Blake and Mouton’s managerial grid. These researchers measured two elements of management or leadership. First, the leader’s concern for people, and second their concern for the task that had to be accomplished.

The grid was initially devised as a way of analysing a manager’s approach through a series of questionnaires and their position would then be plotted on the grid. This would give them some indication of where improvement was needed.

First, go to the top left of the grid - someone who has a very high concern for people but relatively low concern for accomplishing the task. This manager adopted a country club style. In a way they weren’t really very interested in accomplishing tasks at all as long as people had a pleasant time. Hence their name “country club”: everything was fine as long as people were happy.

The other extreme is at the bottom right of the grid, the authoritarian or task-oriented style. Here the leader puts all their energies into getting the task done but couldn’t care less about the people. These managers wouldn’t be easy or reasonable to work for: they will put you under a lot of pressure, they certainly wouldn’t be interested in dealing with any personal issues that you might have which stood in the way of getting the task done.

The best style is presumably at the top right, someone who has great concern for people and also great concern for the task. This is regarded as the team leadership style: someone who will be a very good leader simultaneously getting tasks accomplished as required but also making their staff feel wanted and needed, and having time for them.

Most ordinary managers are probably going to be near the middle, the 5,5 position, the middle of the road style. Reasonably good with people, reasonably good with the task, but of course what we want to do is to try and shift people up towards the 9,9 position. There will be some managers at the 1,1 position, the impoverished style: not much good at anything. One really has to ask: Why are they managers? Is there any way their performance can be improved at all?

11 Contingency theories

We now come to a group of theories known as “contingency theories.” These are the most modern theories and are miles away from the original classical theories. If you remember, the idea behind classical theories was that they presented a set of golden rules which promised that if you manage like this, then you will manage successfully. Contingency theories say that there aren’t any golden rules. There is no single, proper way of managing. If you ask someone, “How should I manage?” the appropriate reply is, “Well, it depends.” It might depend for example on the people you are managing, the urgency of the task and the resources you have available. Contingency theories mean that style of management is contingent or dependent on the situation. You will probably find some of these more interesting and more helpful than others.

12 Adair – action-centred leadership

Adair is associated with action-centred leadership.

• Concern for individuals

• Concern for the task

• Concern for the group

We know that Blake and Mouton plotted people’s approach to leadership by looking at their concern for individuals and the concern for the task. Adair added a third variable - a recognition that there should be a concern for the group. How shall we manage? Well, according to Adair, it depends. On some occasions there may be a very urgent task and we have to reduce our concern for individuals and the group and concentrate on the task. Sometimes there may be crisis within a group; perhaps their leader has left, perhaps there is disagreement within it, and then the manager or leader should pay more attention to making sure that the group operates properly. Of course, sometimes the proper approach to leadership will mean concentrating on an individual and seeing to their needs, perhaps like giving advice or training.

13 Handy’s best fit theory

Handy’s best-fit theory identified four variables:

• Leader

• Subordinates

• Task

• Environment.

Handy said that each of these variables could be what he described as ‘loose’ or ‘tight’.

A tight leader is very autocratic. Tight subordinates like being told what to do and want to avoid risk. They want repetitive tasks; tighter tasks are routine and well understood, relatively simple. And a tight environment would be one where, perhaps, time is short or there isn’t much resource to go around.

‘Loose’ would mean that the leader is very participative or democratic; subordinates want to participate and contribute to solutions. The tasks are novel, complex, high risk; the environment is one which is more generous in time and resources to allow complex tasks to be dealt with.

Handy said that provided all four variables line up, either all loose or all tight, things will work fairly well. So an autocratic manager in charge of staff who want to be told what to do, doing routine, repetitive tasks in an environment which is rather constrained will tend to work. However, he said that once you get a crossover you are in trouble. If you put an autocratic leader in charge of highly trained subordinates who are used to contributing towards solutions or problems, and who are used to participation, and these people are given routine tasks with not much time to do them in, then it’s not going to work very well. The subordinates will not get on with their leader; the subordinates will not enjoy the task.

So when it comes to “How shall we manage?” Handy is saying it depends on the situation and the variables. The best way of managing is to make sure the leader, subordinates, task, and environments all match. Note that this is quite different from saying that tight is better than loose or loose is better than tight. What we are saying is that either will work provided the four variables match.

14 Fiedler

Fiedler suggested that leadership effectiveness depends on:

• The leader’s style — primarily task-oriented or relationship-oriented, commonly assessed using the least-preferred co-worker (LPC) measure; Fiedler treated this style as relatively stable.

• Situational favourableness — the degree of control the situation gives the leader, determined by leader–member relations, task structure and the leader’s position power.

A task-oriented leader concentrates on completing the job; a relationship-oriented leader concentrates on trust and working relationships. A situation is very favourable when relations are good, the task is highly structured and position power is strong; it is very unfavourable when the reverse is true.

Fiedler found task-oriented leadership most effective at the two extremes — very favourable and very unfavourable situations — while relationship-oriented leadership worked best in moderately favourable situations.

Because the model treats leadership style as difficult to change, its practical prescription is to match the leader to the situation or alter the situation — for example by clarifying the task, improving leader–member relations or changing formal authority.

15 Hersey and Blanchard – situational leadership

The contingency model most closely tied to the syllabus phrase ‘situational leadership’ is that of Hersey and Blanchard. Their starting point is the same ‘it depends’ insight as Handy and Fiedler, but the variable they focus on is the readiness (sometimes called the maturity) of the followers: how able the people being led are to do a particular task (competence – skills, knowledge, experience) and how willing they are to do it (commitment – confidence and motivation).

Hersey and Blanchard describe what a leader does in two dimensions: task behaviour (giving direction – telling people what to do, how and by when) and relationship behaviour (giving support – listening, encouraging and involving). Combining high and low levels of each gives four leadership styles, each matched to a level of follower readiness:

The practical message is that the leader should move along the sequence as followers develop: a new trainee needs telling; as competence and confidence grow, the leader moves through selling and participating until an experienced, motivated professional can simply be delegated to. Using the wrong style for the readiness level causes predictable problems – delegating to a beginner is abandonment, while telling an experienced expert is micro-management.

16 Bennis

Bennis makes a distinction between the term “manager” and the term “leader.” A manager is primarily concerned with administering the status quo. In other words, primarily looking after the existing business somewhat in the short term, keeps an eye on the profit for the coming year. That’s not to say it’s not an important activity. But best to think of a manager as having a time horizon of about a year.

A leader is more concerned with innovation, will be looking at the long-term future of the organisation, will not be so concerned with matters of detailed control, but will be focusing on people, inspiring trust, asking “How can we improve, where should the business go, what should the business do?”.

Bennis summarised the contrast as: managers do things right, while leaders do the right thing. Take care not to confuse this manager–leader distinction with transactional and transformational leadership (next section). The ideas rhyme – transactional leadership has a managerial flavour, and transformational leadership is leadership at its most inspirational – but they are separate frameworks: Bennis contrasts two different roles, whereas Burns and Bass contrast two styles of leading, and the same leader can (and should) use both styles.

Bennis suggested that great leaders have certain qualities. You might like to compare this list with the qualities of good managers you have known or good world leaders and politicians you know about.

• Integrity – that really means honesty;

• Dedication;

• Magnanimity - magnanimity is like generosity, particularly when you have won a battle; humility;

• Openness, so that people can trust you;

• Creativity, so that you can think of novel solutions to difficult problems.

17 Transactional and transformational leadership

The distinction between transactional and transformational leadership was introduced by James MacGregor Burns and developed by Bernard Bass. It is a named syllabus topic, so learn both styles and their components.

17.1 Transactional leadership

Transactional leadership treats leading as a series of transactions, or exchanges: the leader clarifies what is required, and followers deliver it in return for reward (or to avoid sanction). Bass identified two main components:

• Contingent reward – targets, standards and rewards are agreed in advance, and the reward (pay, bonus, promotion, recognition) follows when the target is met.

• Management by exception – the leader intervenes only when performance deviates from standard. In its active form the leader monitors performance and corrects deviations as they arise; in its passive form the leader waits until problems become serious before acting.

Transactional leadership is effective for routine, well-understood work in stable conditions – it is essentially good management of the status quo, and it clearly echoes the classical view of management. Its weakness is that it buys compliance rather than commitment: followers have little reason to do more than the deal requires, and no particular reason to embrace change.

17.2 Transformational leadership

Transformational leaders aim to change – to transform – the attitudes, beliefs and ambitions of their followers, so that people commit to a vision and perform beyond what any purely transactional deal would produce. Bass identified four components, often called the four I’s:

Transformational leadership matters most where an organisation needs commitment and change – a turnaround, a restructuring, a digital transformation – rather than steady delivery of the familiar. The styles are not mutually exclusive: Bass’s research concluded that the most effective leaders use both. Transactional leadership keeps today’s performance on track; transformational leadership creates tomorrow’s.

18 Power, authority, responsibility, delegation and empowerment

There are five important, related terms regarding management. The first four are long-standing; the fifth – empowerment – is emphasised by the current syllabus.

18.1 Power

Power is the ability to influence people or events. What gives people power?

• Legitimate power — influence arising from a formal organisational role and the recognised right to give instructions within it.

• Coercive power — influence based on the ability to impose sanctions or other adverse consequences.

• Reward power — influence based on the ability to provide pay, promotion, recognition or other valued outcomes.

• Expert power — influence arising from valued specialist knowledge, skill or experience.

• Referent power — influence arising because others identify with, respect or admire the person; charisma can be one source of it.

18.2 Authority

Of course having power doesn’t mean you have a right to exercise that power. If you have the right to exercise power then you have what’s known as authority. So for example, you will be well aware of the term “authority limits” where people may be able to buy fixed assets up to $1,000 but not beyond that. Having power without authority is poor but so is having authority without power. We probably all remember some school teachers who have the authority, the right to tell the class to sit down and be quiet, but when they try to exercise that authority, they had a complete lack of power over the class.

18.3 Responsibility

This is the same as accountability. If you are made responsible or accountable for something then as the saying goes “the buck stops with you”.

18.4 Delegation

This is the transfer of authority. Note that it is the transfer of authority: you cannot transfer responsibility. Inevitably, if authority is transferred so must power as authority is the legitimate exercise of power. If your manager asks you to do something and you delegate that task to one of your staff members, and that staff member messes it up, when your manager reprimands you, you can’t blame that staff member. The task was yours and either you have to do it yourself or ensure that you delegated it properly to a staff member who had the time and skills, and whom you could supervise to make sure that the task was actually completed.

18.5 Empowerment

Delegation transfers the authority to carry out a defined task. Empowerment goes further: it pushes genuine decision-making power down the organisation, giving people discretion over how – and often what – work is done within agreed boundaries, without having to refer upwards for approval – a permanent feature of the job, not a task-by-task favour. An empowered customer-service assistant does not just follow the refunds procedure; they are trusted to decide, up to a limit, whatever will put the customer’s problem right.

Empowerment only works when it is real, which requires certain enabling conditions:

• People have the information, skills and tools to make good decisions

• The boundaries are clear – everyone knows what may be decided without referral

• Honest mistakes are treated as learning, not punished – empowerment dies the first time someone is punished for a reasonable decision that went wrong

• Managers behave as coaches and supporters rather than controllers

Done well, empowerment produces faster decisions taken closer to the customer, richer and more motivating jobs, and it frees managers for higher-value work while developing the next generation of decision-makers. But there are risks: decisions may become inconsistent; control is weakened if the boundaries are vague; and staff who lack the skills – or the desire – for extra discretion may feel dumped on rather than empowered, particularly where ‘empowerment’ is really a cost-cutting exercise in removing supervisors. And exactly as with delegation, management remains accountable for the results.

Empowerment is one of the strongest drivers of employee engagement – how engagement is created, measured and used in managing performance is covered with motivation in Chapter 4.

19 Leadership of virtual teams

All of the theories above were developed when a manager and their team shared a building. Today many teams – finance teams very much included – are virtual (members work remotely and rarely, if ever, meet in person) or hybrid (some members in the office, some remote, on any given day). The syllabus singles out leadership of virtual teams because leading people you seldom see is now a core leadership skill, not a special case – and because in a digital world it is exactly this human side of management that technology cannot automate.

Virtual working changes the leadership problem in predictable ways: trust and cohesion no longer grow by themselves; communication is thinner – mostly written or in scheduled calls – so tone is easily misread; time zones force asynchronous working; a struggling or disengaging team member is far less visible; and in hybrid teams proximity bias – the unconscious tendency to favour the people physically present – can quietly punish those who work remotely. The team-working side of all this – building trust deliberately, explicit asynchronous norms, channel choice, isolation and video-call fatigue, and the day-to-day mechanics of virtual and hybrid teams – is covered with groups and teams in Chapter 6. What belongs here is how the leader responds.

The leadership behaviours that work in virtual and hybrid teams follow directly from those challenges:

• Absolute clarity of goals, roles and deadlines – manage by output, since you cannot (and should not) manage by presence.

• Deliberate communication norms – agree which channel is used for what, expected response times, and core hours when everyone overlaps.

• A structured rhythm of regular one-to-ones and team check-ins – scheduled contact must replace the corridor contact that no longer happens.

• Deliberate inclusion – in hybrid meetings invite remote members to contribute first, and record decisions in writing where everyone can see them, so that remote workers are not second-class citizens.

• Investment in relationships – occasional face-to-face gatherings and informal channels build the trust and cohesion that co-location used to provide free.

• Trust by default – judge results, not visible activity; surveillance of remote staff destroys the trust the team depends on (and raises the ethical issues discussed in the next section).

• Attention to wellbeing – watch workloads and respect people’s right to switch off across time zones.

The digital communication and collaboration tools themselves – and their effect on the communication process – are covered with communication in Chapter 7.

20 Leadership and ethics

‘Leadership and ethics’ appears twice in the syllabus – under types of leadership and again under managing relationships – which tells you how seriously the examiner takes it. Ethical leadership means two things: leading in a way that is itself consistent with ethical principles, and creating a climate in which everyone else behaves ethically too.

The second of these is often summarised as the tone from the top. People copy what leaders do, not what they say: a code of conduct on the intranet counts for little if leaders cut corners, shade the numbers or bully staff when under pressure. Equally, what leaders reward is what they will get – if promotion visibly goes to those who hit targets by any means, the organisation has, in effect, announced its real values.

A leader owes ethical duties in two directions: to their own staff – fair and honest treatment, a safe and respectful working environment, honest appraisal, and no exploitation of their position or of what they know about people – and to the organisation’s wider stakeholders – honest reporting of performance and keeping the commitments the organisation has made.

Managing performance creates specific ethical pressure points that every leader – and every finance professional – should recognise:

• Target pressure. Stretching targets motivate, but excessive pressure combined with weak controls invites gaming: recognising revenue early, mis-selling to hit sales targets, ‘managing’ the figures. Leaders are responsible for the pressure they create as well as for the results it produces.

• Reward design. Rewards signal what really matters. Rewarding pure output invites corner-cutting on quality, safety and ethics; well-designed schemes balance what was achieved with how it was achieved.

• Monitoring and surveillance. Technology makes it easy to track remote workers’ keystrokes, screens and locations. Monitoring must be proportionate to a genuine business need, transparent to those monitored, and weighed against the trust it destroys – wherever possible, monitor outputs, not people.

• Algorithmic and AI-assisted decisions about people. Systems now screen job applicants and score performance. The leader remains accountable for those decisions: the data may carry bias, the reasoning may be unexplainable, and ‘the algorithm decided’ is never an acceptable answer to an employee.

For CIMA members none of this is optional. The CIMA Code of Ethics rests on five fundamental principles – integrity, objectivity, professional competence and due care, confidentiality and professional behaviour – and a finance leader is expected both to observe them personally and to set a climate in which their team can do the same.

21 Test your knowledge

Two quick checks before you move on: run the flashcards to fix this chapter’s definitions and frameworks in mind, then attempt the ten objective questions to see whether you can apply them.