Foundations of management

PROLOGUE

Juan Antonio Pérez López and Corporate Leadership

¹

Marta López-Jurado

Esther Jiménez

Nuria Chinchilla

The mission of a business school is to train people for the practice of management, understood as a profession, and to develop new knowledge in the service of people, firms, and society as a whole.

Juan Antonio Pérez López was a professor at IESE Business School, University of Navarre, from 1962 until his death on June 2, 1996, as well as its dean from 1978 to 1984. His profound philosophical, scientific, and mathematical knowledge led him to pour his concern for personal formation into a theory of action in organizations, which has been a major and significant step forward for scientific research.

He wrote his doctoral dissertation at Harvard on control mechanisms in business. He explored general systems theory, the laws of cybernetics, and other subjects that supplied valuable knowledge by introducing a systemic paradigm for organisms, viewing the relationship between them as an essential element. Thanks to his interdisciplinary knowledge, Pérez López questioned the approach to the resolution of human problems on which the paradigm of scientists in these fields was founded.

If pressed to summarize Pérez López’s contribution, we would say that, from a holistic understanding of the person, he examined the human dimension of problems in decision-making in an objective manner. How did he arrive at this humanist synthesis? By designing a complete rule for decision-making, which both anticipates and analyzes the consequences that will arise as the problems faced by managers are resolved, neglecting none of the variables, and clearing the way for the discovery of new solutions.

His model is laid out—with all the complexity its logic entails—in his first book, Teoría de la acción humana en las organizaciones: La acción personal [The Theory of Human Action in Organizations: Personal Action] (1991). He later wrote Fundamentos de la dirección de empresas [Foundations of Management] (1993)². See the posthumously published book Pérez López (1998), Liderazgo y ética en la dirección de empresas. La nueva empresa del siglo XXI [Leadership and Ethics in Business Management: The New Company of the 21st Century] Deusto, Bilbao. Why publish an English-language edition of the latter book two decades later? Because Pérez López’s anthropological theory is both timeless and very significant for a comprehensive understanding of decision-making.

Pérez López sought a scientific explanation of reality. He produced a positive science with the goal of helping people to make the right decisions. His theory is not simply one step further in a field of knowledge developed over the centuries, nor one more variation on some recent trend. His theory amounts to a radical transformation in how human actions and organizations are understood. Bibliographical references to other authors and to many of the problems they discuss, such as in organizational theory, may be noticeable by their absence. Such a catalog was not his aim. The decision-making process he developed corresponds to a fundamental anthropological idea on human development within organizations, one that moves beyond previous theories and is more crucial than ever for resolving the great challenges that we confront as a society today.

What does Pérez López’s theory contribute to human organizations?

A November 2013 report by the World Economic Forum points to the loss of values in leadership as one of 10 dangerous tendencies on a global level. Immediately afterward, the report authors ask: How can leaders develop a global and integral vision, uncontaminated by their own interests? In the interviews on which the report is based, a majority of interviewees indicate their lack of trust in leaders. It is precisely this crisis of confidence that threatens the legitimacy of the institutions of the capitalist system.

The analysis of these data, to which we might add numerous other interviews indicating a similar trend, shows that mistrust arises when someone suspects leaders of acting only in their own interests or interests that fail to take into account the people affected by the leaders’ decisions.

Pérez López’s theory provides the keys needed to develop leadership that inspires confidence, leadership that emanates from a person capable of combining self-interest with the satisfaction of the needs of others. In contrast, the opportunistic behavior of people who work solely to their own advantage generates distrust and creates uncertainty all around them. If such people also enjoy positions of power, the negative impact on trust-based relationships is even greater.

Pérez López was able to discern that trust and mistrust do not depend merely on the structures, systems, cultures, and/or shared values crucial to any organization. Trust arises, grows, diminishes or is lost through the interactions between two individuals, hinging on the motives, intentions, and aims of the decision-maker.

Pérez López shows that any action implies a process that necessarily involves three elements:

1. The interaction (action-reaction) between the agent and the person affected by the agent’s decision.

2. The agent, who—as we shall see further on—learns positive or negative lessons, depending on the action’s consistency.

3. The person affected by the decision, who also learns positive or negative lessons.

Due to the dynamism of the action, which entails the interrelation of these three elements, the decision itself yields consequences not only for the person to whom the action is directed but also for the decision-maker. This impact on the people interacting leads to lessons being learned that modify their approaches to future decisions, both personal and professional, according to the experience being acquired. This is why the static paradigm—which acknowledges a very broad but closed array of definite and limited statements, of the type if AX, then BY—fails to do justice to the reality of business.

There is a before and an after in any relationship’s quality, which depends on the intentions—the kinds of motives—that drive a person to action.

1. With extrinsic motives, we seek some benefit from the external environment. The most appropriate verbs here are have, obtain, achieve, and acquire (incentives, compensation, awards, status, recognition, or prestige).

2. With intrinsic motives, we seek to learn or to acquire operational knowledge (skills, techniques, etc.). The verbs here are know, learn, enjoy, and overcome a challenge.

3. With transcendent motives, we seek the usefulness or benefit the action will have for other people. The verb here is serve: to satisfy people’s real needs—whether material needs, the need for knowledge, or the need for human development.

The first type of motive is common to all decision-making theories. The second is also frequently found under the label intrinsic motivation, although Pérez López has a broader meaning in mind. The third type is dealt with occasionally as altruism: other-motivation, with a meaning very different from the one Pérez López gave it. Faced with an isolated, static notion of each of these motives, Pérez López provides a dynamic explanation of the workings among all three, as well as the necessary conditions for their transformation into an inner strength that leads to decision-making.

Pérez López helps us understand that any business decision (acquiring resources, production, consumption, etc.) entails an implicit ethical meaning. He was concerned with the development of human thought as an instrument for solving real problems: problems that require thought, analysis, and awareness of context, so as to identify alternatives that will be effective as well as just, thus opening up an immense panorama for business ethics.

For example, managers motivated solely by the money they will make by selling a product, by the challenge of that sale, and/or by what they can learn, with no concern for the customers’ real needs, have not progressed beyond self-interest. This way of acting, whether managers realize it or not, will influence them in their future decisions and in the future relationships they will—or will not—be able to build with particular customers and with other people.

Real problems—the kind that arise in any company’s day-to-day operations—are not only matters of knowledge, of how to do things or how to maintain the capacity to do them, but are much deeper. It is relatively easy for a manager to find out whether an employee is doing his or her job efficiently but still be unsure of the employee’s trustworthiness. An employee might have the same sort of doubt about a supervisor. How can we know whether somebody is trustworthy or not?

Pérez López would respond that a person can certainly become increasingly motivated to cooperate in carrying out an action plan due to desirable economic results. But at the same time trust may be destroyed—and with it any opportunities to pursue that relationship in the future—if that person discovers that the decision-maker is concerned only with his or her own advantage.

Trustworthiness is achieved when people are driven by transcendent motives. Trust is therefore a personal matter. The relationship of trust is established when the intentions of those involved in the interaction seek a mutual benefit, if this is confirmed over time. Without this premise, trust is lost and this is an extremely serious consequence since the market, by itself, cannot entirely fulfill its own economic purpose. It requires relations of trust and solidarity but these are external factors as far as the economy is concerned, since they are not bought or sold. Trust is therefore the main asset in any human organization.

One essential contribution of Pérez López’s theory is the analysis of action that occurs within the individual himself or herself. Pérez López indicates that, in any interaction, two levels of learning arise simultaneously:

• Operational learning: the acquisition of knowledge, skills, competencies, and abilities

• Evaluative learning: the value we confer upon another person, which may be positive or negative, depending on whether we consider that person as:

– A value in himself or herself, and thus we treat that person with respect and dignity, or

– An instrument to be used, and thus we subject that person to manipulation, deception or harm in order to obtain some advantage.

How positive evaluative knowledge be gained: that is, how can an evaluative capacity be developed? Pérez López affirmed that it is essential for each person to learn to evaluate his or her actions a priori, so that his or her decisions become more and more correct, and to treat other people according to their real value. To do this, the following criteria or motives must be taken into account:

• Effectiveness: the extrinsic results desired

• Efficiency: the intrinsic impact the decision will have on the decision-maker, and

• Consistency: the impact the decision will have on the people affected

At this point, it must be clarified that mutual trust between two people who enjoy freedom does not arise from a spontaneous motivation that aims only for effectiveness: that is, the achievement of particular extrinsic results. Instead:

• It is necessary to be moved by transcendent motives: by the real value that others possess from a practical point of view—that is, to respect the dignity they possess by virtue of being people.

• The motivation must be rational, generating various alternatives that acknowledge the extrinsic, intrinsic, and transcendent effects that will foreseeably be brought about by the action, rather than being carried along by whatever is most appealing.

Thus, for positive lessons to be learned, three things are required:

• Rationality must select the alternative, which should be not only effective but also always consistent.

• The implicit intention must always be to treat the other as another me, appealing to that person’s freedom and good will.³

• There must be a presumption that the other is trustworthy and so that person must be given the opportunity to demonstrate this.

It is clear that this type of decision is very different from the kind that arises spontaneously without previous rational consideration. It is not a matter of gaining experience but of creating it, of making possible those experiences that strengthen the relationship through acquaintance with the other: that person’s motivations, intentions, or desires. As a result of this interpersonal relationship, the internalization of the other allows the decision-maker to discover by experience—to sense—profound satisfaction upon finding that his or her actions are reciprocated.

This point opens up an immense panorama for ecology—both environmental and human—as well as for every field in which, in one way or another, the person plays a part. Environmental ecology demonstrates that human beings indulge in excessive consumption and upset the order of natural resources without considering the impact of their actions. If we cut down a tree to obtain its fruit, our action is clearly effective. We have got the fruit that we sought, but we have also eliminated the possibility of doing so in the future.

As simple as this example is, it reflects just how effective an action may be in the short term and yet be inefficient with regard to future decisions. Taking into account the reality, the inner dynamic of the things with which we interact and the people with whom we interact—consistency—is of vital importance for foreseeing an action’s external consequences. From this point of view, Pérez López’s theory explains and predicts what will happen when we make inconsistent decisions because, regardless of whether the decision-maker wishes it or not, the changes will have an influence on both effectiveness and efficiency.

Decisions made with consistency, along with the acquisition of positive evaluative learning, require the decision-maker to come out of himself/herself and take an interest in the other person: asking, confirming, finding out what that person’s real needs are—and they require an appropriate response to those needs. Both things are equally necessary: to attain knowledge, and to act accordingly.

When we treat the other according to his or her needs and not according to our own momentary advantage, we demonstrate a true interest in that person. When we stop short of learning what his or her needs are, out of eagerness to achieve certain effectiveness targets for ourselves or for the company, then, whether we intend to do so or not, we are treating that person as a means to those objectives, whose value depends on his or her usefulness. That is, we are treating the person as a resource.

The image that emerges of such a manager is that of a strategist or executive who, under the guise of being helpful, thinks only of him- or herself: an egotist. And this tendency will manifest itself every time the manager needs to make a decision in which his or her extrinsic and/or intrinsic motives are set against the good of another person.

The person treated in this way will have less and less interest in cooperating with such a manager. And this can happen even if the manager’s actions lead to desirable financial results. Each action will have been effective but the actions’ inconsistency will reduce the range of feasible options in future decisions.

As we go about evaluating the consistency of our actions, we will discover whether others are more or less willing to interact with us again. If the other responds to this personal treatment, the value of unity will begin to arise between them in successive interactions: a value through which all possible actions will come to be feasible,⁴ regardless of the feelings we may have toward a particular person. It is a question of each one receiving the treatment he or she deserves simply by virtue of being a person.

The manager has to value a consistent option—moved by transcendent motives—based on the hypothesis that the other will also be moved (to some degree) by transcendent motivation, while being aware that this hypothesis may not be confirmed. This is the necessary risk entailed in building the relationship of trust that is indispensable for the development of the manager’s collaborators, a responsibility that goes beyond the achievement of other objectives.

When managers are moved by transcendent motives, they are perfected as subjects because their actions leave a mark which, like it or not,⁵ will alter their future trajectory. And this is true even if managers discover that particular collaborators are untrustworthy, since the managers will have helped the collaborators to the extent possible and this too will leave its mark on the others.

The inner strength that the consequences of the decision or action will generate in the subject him- or herself make it easier for the manager to make correct decisions again. When next faced with a decision that is very appealing from an economic perspective but is unjust, the manager will be better able to reject it, since his or her rational motivation will have acquired the facility of spontaneous motivation. The manager will be capable of assessing other options that are advantageous—perhaps not as much as the first one or perhaps more—and that are also ethical (consistent) and thus do not destroy mutual trust.

The strength that moves the manager to act in this way is given by an intelligent heart, one that knows how to discover the most suitable course in every scenario: the manager has learned how to integrate his or her wants and duty, and not merely by use of the Kantian ought or by equating the ethical with the economically profitable. This strength will also help the manager to avoid inconsistent actions, since he or she chooses to be ethical from a place of freedom and not because of any imposition from outside: the manager knows and values the deeper satisfaction that comes from establishing a relationship of trust, rather than the gratification that other goods produce.

Pérez López highlights the fact that ethics is based on the reality of the decision itself and not on abstract rational principles employed by ethical theories, nor on particular extrinsic effects. If rationality (the wanting) and will (the doing) increase in a consistent action plan, the affection for the other (the feeling) in the act itself will increase at the same time. A manager can only grasp what a person is doing for him or her—what an action costs that person—to the extent that the manager has been capable of doing the same for that person or for another. This means entering into the circle of affectivity and of gratitude for these actions, rather than remaining locked within the game of opportunistic interests.

Alongside the comprehensive rationality of Pérez López’s model, the use of rationality in other theories is instrumental: rationalism ignores affective human realities; voluntarism disregards or impedes the unity of the person, conceiving freedom as independence incapable of commitment; and sentimentalism replaces value with sentiment or affective response, viewing human action as a simple product of sentimental impulses.⁶ Pérez López insisted that the worst that can happen to a person is to go on a path of experience that produces satisfactions—addictions—that damage and isolate that person. The one who seeks opportunistic effectiveness, or efficiency without consistency, sets out on a course of negative evaluative learning—the result of spontaneous motivation—due to extrinsic or intrinsic motives.

In contrast, positive evaluative learning arises to the degree that we are able to know the needs of others and bear them in mind in our decision-making. This is why Pérez López constantly speaks of the importance of how we make decisions, not only the results obtained, since motivational or evaluative lessons continue to be learned throughout a person’s life.

Nothing is so eloquent as when the truth appears in someone who personifies it. We talk colloquially about people being good if they are concerned about others and being selfish if they act only in their own interests. As we saw at the beginning, egotism is corrosive for life as a society: such as the businessman who only chases profits, the politician who only pursues power, the scientist who only seeks to overcome a challenge or build his or her own reputation, etc.

Pérez López highlights the difference between motives (ends, values, goods) and motivations (evaluations). And we can appreciate why he insists on this distinction: values exist in reality, which is valuable: to the extent that I possess it, I enjoy the corresponding satisfaction. Evaluations, on the other hand, exist within each subject: they vary according to the lessons learned. A failure to develop evaluative knowledge amounts, in practice, to growing incapable of seeing the damage we are causing ourselves and others with our way of acting, as well as to thwarting our own future ability to maintain quality relationships.

The unified treatment of decision-making opens up an approach to conducting science in a way that integrates criteria of ethical rationality, psychosociological rationality, and economic rationality—since human beings do not perform one action to become good, another to develop their cognitive and operational capacities, and yet another to increase profits. Pérez López integrates anthropology into decision-making and demonstrates that this is the route to achieving technical, scientific, or economic results.

The purpose of this e book edition is to open up new avenues for research and the resolution of problems—especially in business organizations, institutions with the greatest impact on people’s everyday lives and where it is easiest to observe the relations among effectiveness, efficiency, and consistency. For many years, both this book and Pérez López’s theories themselves have been a font of inspiration and a stimulus for many. To mention only IESE Business School, we have seen prolific research based on his theories from Antonio Argandoña, Josep Rosanas, and Miguel Ángel Ariño, among others, not to mention the countless alumni who have enriched their managerial work through their acquaintance with his theories in this book, his technical notes, and their application in the discussion of countless cases. Now it is the reader’s turn to immerse yourself in this book and make the most of the treasure that Pérez López has placed in your hands.

1 Prologue to the e book version of Juan Antonio Pérez López (2014), Foundations of Management, Rialp, Madrid.

2 See the posthumously published book Pérez López (1998), Liderazgo y ética en la dirección de empresas. La nueva empresa del siglo XXI [Leadership and Ethics in Business Management: The New Company of the 21st Century, Deusto, Bilbao.

3 As distinct from other ways of influencing others: coercion and manipulation.

4 The error of deriving moral relativism from sociological relativism, or of deducing what is good and evil from the most widely accepted customs or ways of life of a certain people or epoch, is to believe that if P is a sufficient condition of Q, it is also a necessary condition. For instance, It’s raining: the ground is wet (it cannot be inferred that the ground is wet because it is raining); The car has no gasoline: it’s not running (it cannot be inferred that the car is not running because it has no gasoline). This is where the psychosociological paradigm breaks down.

5 Our freedom is not independent: it can select the beginning of a path but not its consequences. If I choose an aim, I am bound to follow the path that leads me to it. We are conditioned by our own nature and by the lessons that we are continually learning, both positive and negative.

6 For further development of this subject, see: Marta López-Jurado (2010), La decision correcta [The Correct Decision], Desclée De Brouwer, Bilbao.

FIRST PART

THE COMPANY:

A HUMAN ORGANIZATION

CHAPTER 1

BUSINESS ORGANIZATIONS AS HUMAN REALITIES

Introduction

A business firm is a human organization, composed of persons who work with some kind of coordination to achieve certain goals or results. In fact, all human organizations are no more than this: groups of people who coordinate their actions to achieve goals that everyone has an interest in achieving, although this interest may be due to very different motives.

Business organizations thus resemble families, sports clubs, city councils, the army and many other organizations precisely in the fact that they are all human organizations. Of course, all these organizations, and others that we might have mentioned, also include many aspects that distinguish them from each other.

Perhaps the most obvious way to define what distinguishes them is to look at what it is that each of them normally does. Thus, it would be reasonable to say: I acknowledge that a business is just as much a human organization as a club where a few friends meet to play chess, but it doesn't seem to me that what they have in common-being human organizations— is more important than what makes them different—manufacturing, buying and selling something on the one hand, playing chess on the other.

No doubt someone could point out that what is important is not this difference in what they do. after all, a business could be created whose aim was to operate a social club where people could go to play chess. The important thing is that in a business all these things— manufacturing and selling cars, or running a club for chess players—are done for a different reason than the club run by a group of friends: a business seeks to earn money; friends only seek to have fun.

Viewed from this perspective, an organization composed of a group of friends who want to have fun building cars will more closely resemble the organization formed by another group of friends to play chess than the latter would resemble a chess club run as a business, or the former a car manufacturer.

In fact, we could go on multiplying perspectives in order to define differences between various types of human organizations. No doubt, for a particular case, we would find that a particular perspective provides useful insights to account for differences which, in that particular case, are very important; but that same perspective might have little bearing on many other cases.

The aim of scientific analysis is to explain in an orderly manner the various aspects which determine whether something is or is not a particular kind of thing. Therefore, one begins by studying very general aspects or properties and then goes on to consider others which define more particular cases.

Thus, if we say that businesses are human organizations, then everything that can be said in general terms about human organizations will also be applicable to them. Of course, there will be other things that are only applicable to businesses (a particular kind of human organization) and not to other kinds of organizations.

When the human side of a business is not working smoothly, the fault should not be sought in those other aspects of the business that make it a particular type of organization, such as its size, type of activity or the nature of its production and distribution processes. For this reason, the analysis of businesses as human organizations will be very useful, since it is this analysis that seeks to explain the influence of what is happening to the human side of a business organization on the behavior of the enterprise as a whole.

What is an organization?

We have already said that a human organization is a group of people whose efforts— actions—are coordinated to achieve a certain objective in which everybody has an interest, although their interests may be due to very different factors.

For an organization to exist, the mere existence of a group of people is not sufficient; it is not even sufficient that they all have a common purpose. The truly decisive factor is that these people organize themselves—coordinate their activity—by ordering joint action towards the achievement of certain results which, although perhaps for different reasons, they all consider it in their interest to achieve.

For example: the group of people on a street at a particular moment is a well-defined group—a set of specific persons—, but they do not constitute an organization. It is even likely that at least some of these people have a common purpose: to get to the other side of the city as quickly as possible. But this does not suffice for them to be considered an organization. However, if, while waiting for the bus, they start to talk about their problem and decide to share a taxi so