"Business Leaders of Today are Not Capitalists"
Via Mark Thoma comes this thinking on the nature of our economic system and by John Kay at the Financial Times in Business Leaders of Today are Not Capitalists.
John Kay says that the term “capitalism” is misleading in modern economies:
..So the business leaders of today are not capitalists in the sense in which Arkwright and Rockefeller were capitalists. Modern titans derive their authority and influence from their position in a hierarchy, not their ownership of capital. They have obtained these positions through their skills in organizational politics, in the traditional ways bishops and generals acquired positions in an ecclesiastical or military hierarchy. …
And Mark comments on the article:
This is an important point, and it relates directly to the claim by many that inequality is needed in capitalist economies as an engine of growth. I think small businesses still operate in something resembling old fashioned capitalism — owners putting their own resources at risk to open a new business — but big business is another story (and in some cases, such as the finncial industry, too big too fail considerations reduce risk considerably for high level executives making arguments that this type of risks motivates innovation, etc. hard to swallow).
Indded correct in that most companies are led by hired types, not owners. The exception in some cases is the founder(s) while still on board, if they are able to have a significant block of stock after the company goes public. Then you have situations like Ford where the family used tricks to control the company (two classes of stock one with 10x the votes of the other). HP was a great company while Hewlett and Packard led it but has gone downhill with hired guns at the helm.
Our current managerial ‘capitalists’ and their peers in Putin’s Russia have quite similar skillsets.
It’s not just about the skills necessary to succeed being different in corporate culture vs. small business. It’s also about the impact of consequences and conscience. I worked for a decade for a small management consulting firm that was still run by the two owners.
Like any other business, we’d hit rough patches. Like any set of owners, they wanted things to be run as tightly as possible. However, as the sole owners AND day-to-day managers, they could not hide behind anything when defening their decisions. They bent themselves over backwards trying to balance the financial needs of the firm with their own financtial desired with the personal needs of their employees.
During these years I saw public consulting companies conduct massive layoffs. Did the executives at these companies stand to benefit as much personally as the owners of my firm if they shored up profits? Of course! Plus they enjoyed the added benefit of it being a REQUIRED activity, DEMANDED by the SHAREHOLDERS thanks to shareholder-value-driven management. The same reward system was basically in place, however, these executives have the benefit of not having to live entirelyt with their decisions. It wasn’t in their control.
On the flip side, another reason why the owners at my old firm were so hesistant to lay people off was that they were focused on the long-term value of their business. They knew that everything they had was reliant on their human capital, and if they lost it, either directly (layoffs) or indirently (people walking away because they are demoralized) then their long-term business value would suffer horribly. They had long-term incentives, as oppossed to the shareholder-value-driven incentives of corporate executives, which are entirely short-term.
Erik, your comments are better than the original article.
i think that in general it is safe to say that “original owners” are smarter than “managers.” an owner tends to have the whole picture in mind, while the manager has the tricks he learned in business school… which work, sort of, even when he doesn’t know what he’s doing… for a while.
i was wondering if he “competitive” model is really accurate. businesses don’t so much compete against each other as they attempt to meet the desires of their (potential) customers. the “competition” model seems to depend on the idea that each company struggles to find a way to “do it cheaper” than the other guys. but the successful businesses i can think of “do it better.” of course they can’t do it at unlimited cost. but you (the customer) go back to the place where they treated you right, not the place where you got it ten cents cheaper.
A key point is the difference between focusing on this quarter’s bottom line vs. the long term success of the entity.
I a sense, I wonder if focusing on shareholder value – as determined by a partly informed and partly ratinal marketplace – is really a good business strategy.
And, since you can temporarlity (or apparantly) increase “shareholder value” by eating the seed corn, I wonder if giving executive bonuses as stock or options (unless they have a long minimum time horizon) doesn’t offer a perverse incentive.
So much of advertising these days is based on “economy” and “value” rather than features, performance, and quality. I wonder if this is the zeitgeist reaction to an economy where the average person’s slice of the pie is shrinking, and pie growth is stunted.
Is there any way to get quantitative data on advertising content over time?
A while ago one of my first themes was that we had changed the way we make money. I noted that something had changed in the tax code besides just the rates. One was stock options in 1988. It was at the time part of the quick route to managerial stardom because now the new idea person could be paid in such a way that did not effect the bottom line of the business (not seen as an expense per say).
So, go in gut the labor costs, pay me in stock and take that off the books: suddenly a profitable business. Stock rises, 3 yr plan works, cashout. On to the next business.
Rockefeller wasn’t a capitalist by my definition of the term, not after ~1870 at any rate.
Capitalists need to actually create new wealth, not merely own existing wealth.