Too big to manage

Following the collapse of Carillion, LSCA president Malcolm Bacchus revisits a theory from the financial crisis and asks whether some conglomerates are just too big to run.

March 2018

The recent demise of Carillion, coupled with the woes of Capita, has made me revisit an unthinkable thought I had during the banking crisis: are some companies just too big to manage?

The human brain, for all its wonderful achievements, has many limitations. We are bad at understanding probability, our memories are notoriously unreliable, we prioritise the short term over the long term and, however much we like to think otherwise, we are often illogical.

Businesses grow large. Walmart employs 2.3m people, Volkswagen 600,000 and Amazon 550,000. Carillion employed a mere 43,000, but it is still not possible for one person to manage all these people directly.

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HSBC’s chief executive, Stuart Gulliver, famously said: “Can I know what every one of 257,000 people are doing? Clearly I can’t.” And, I suspect, almost every chief executive would say the same.

Management have had an answer to that for centuries: people report to other people, who report on up the chain of command. In theory it works. But, in practice, human fallibility and personal desire creeps in at every stage.

Management get to hear what their employees think they want to hear, even if done unintentionally. And even if the reporting is unbiased, it will inevitably be condensed and therefore lose its finer detail. Evidence, however, suggests that in complex systems, just like the butterfly effect, it may be the finer detail that is actually the most critical.

Where a business is a single concept – think, maybe, Walmart or Microsoft - aggregated information may be as meaningful as detail and, with teams working to identical goals, some complexity can be reliably reduced. But as companies become conglomerates, simplification may no longer hold true. Carillion started as a construction company but finished up managing military homes and part of the NHS, providing schools meals and maintaining British prisons.

Traditional solutions to this problem involve separate divisions with at least some degree of autonomy, but none is ever wholly autonomous: they will be constrained both by central resources and by overall demands, such as shareholder expectations, which mean that, once again, central management needs to know what is going on throughout the whole structure in order to make those decisions correctly.

We will await the results of the various investigations into Carillion and doubtless they will throw some interesting light on management practices, but will we dare to consider the unthinkable: that some businesses may be just too big to manage?

Malcolm Bacchus is President of the London Society of Chartered Accountants

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