Management From Hell: How Financial Investor Logic Hijacked Firm Governance
By Robert R. Locke (firstname.lastname@example.org)
Paris: Boostzone Editions, 2012
57, ebook, ASIN: B007MOYC56 (RRP €5.50 – £4.42)
Abstract – Corporate governance now is strongly controlled by a «caste» of financial investors that forgets employees and other stakeholders as well as society at large. This control is a major cause of our current crisis and of a growing disbelief in modern capitalism. Why and how did this happen? A renowned American historian of management, Robert R. Locke, develops a well-argued and powerful point of view about the limits of financial investor capitalism and shows that more balanced models should be explored, like family business as well as Geman and/or Japanese corporate governance.
Review by H. Thomas Johnson
(Professor of Business Administration at Portland State University in Oregon and Distinguished Consulting Professor of Sustainable Business at Bainbridge Graduate Institute in Washington)
In Management From Hell, Robert Locke offers an alternative to the belief that the purpose of a business is to enrich a small elite caste of investor-capitalists who use financial markets and business institutions to trade the future of humanity and non-human life for unlimited personal financial gain. That alternative is the entity view of business in which the purpose of a business is to flourish for the indefinite future and serve the well-being of society as a whole by providing gainful employment to people (employees and suppliers) whose job is to sustainably supply the economic needs of other people (customers). The book begins by examining the impact on large corporations since the late 1970s of “investor capitalism,” a “proprietary” view of business that sees the activities and the capital of a corporation as controlled by its owner-investors and managed by their hired agents, all for the purpose of maximizing its financial returns, to which they – the investor-owners – claim exclusive rights. Locke draws on extensive historical research to show how advocates of investor capitalism used modern academic theories of economics and finance to justify the morally dubious claim that a corporation’s sole concern is to maximize the financial returns to its investor-owners and their delegated agents, without regard for how its activities affect other constituencies such as employees, customers, suppliers and non-human members of Earth’s life-sustaining biosystem.
During the 1980s and 1990s top corporate managers, despite their role as the investor-owners’ agents, gained effective control over corporate boards of directors and, implicitly, the power to set their own personal compensation. The spectacular rise in corporate CEO, CFO and other C-level compensation in the last 20 or so years (from salaries, bonuses and stock options) relative to the compensation of lower-level managers, employees and even investor-owners is well known and does not require further documentation here. Locke shows in Management From Hell and at greater length in his co-authored book with J.-C. Spender, Confronting Managerialism (Zedbooks, 2011) that top managers accomplished this change by gradually shifting strategic decision-making power to themselves and away from owners. They achieved that shift largely by promoting the claim that their special post-graduate business education (especially in MBA programs of elite U.S. business schools) put them in exclusive possession of special knowledge and expertise needed to efficiently run today’s complex, global corporations.
As a consequence of successfully marketing their supposedly unique management expertise gained from exclusive access to the nation’s most elite graduate business schools, top managers in the last generation ran large American corporations with impunity. Almost never were they held accountable for the social costs of the management practices they pursued to maximize financial returns for the personal gain of the owners and their “elite” agents. In retrospect it seems clear that many of those practices seriously impaired the vitality and strength of the American economy in the past 30 or so years.
Locke demonstrates persuasively that the damaging consequences of these investor-capitalist management practices were not experienced to the same degree outside America, where management practices were guided by alternative economic philosophies that viewed the purpose of a business in terms of the interests of a much broader constituency than just investor-capitalists and their manager-agents, and not just in terms of maximizing immediate financial returns. He shows how large corporations in Germany and Japan are managed from an “entity” perspective that views success as ensuring the corporation’s long-term survival and sustainability on behalf of all its constituents – employees, customers, suppliers, communities and shareholder/owners — not just owners and their manager-agents. A firm run from an entity as opposed to a proprietary perspective measures success in terms of conditions that contribute to firm sustainability – e.g., average longevity of employees (presumes that returns on investment in humans increase with tenure of employment), employee training, customer satisfaction, reputation, quality of design and delivery, and financial returns (sufficient to flourish and develop over many generations, not maximum short-term profits).
Locke cites research findings showing that American firms that are run from a proprietary perspective do report higher financial returns in the short run than do firms run from an entity perspective. In Germany or Japan, however, the entity firms, although earning less spectacular short-term returns, do earn respectable returns, and they live much, much longer. To indicate the long-term consequence of this difference, Locke cites a 2001 book by Richard Fosterand Sarah Kaplan entitled Creative Destruction: Why Companies That Are Built to Last Underperform the Market–And How to Successfully Transform Them. The authors of this book interpret the increasingly rapid rise and fall (turnover) of large corporations on American financial markets in the 20th century as evidence that the markets weed out less efficient firms by rewarding current financial performance over firm longevity. Although the authors view this outcome favorably, Locke points out that their conclusion begs the question,
“At what cost to individuals, society and Earth’s life-support system do markets achieve such outcomes?”
Indeed, in the post-1970s era of investor capitalism the “leaders” of American corporations (whether top managers working from inside a firm as agents for the investor-owners or take-over operators working for themselves from outside a firm) have pursued the goal of maximum financial returns at increasingly heavy cost to workers, communities, and government. It is not an exaggeration to say that top managers or investors no longer view a business corporation as a community of people (employees, managers, investor-owners, suppliers) serving people (customers and communities) for the economic well-being of society. Instead, they view a business corporation as a commodity with a market value/price set by traders in global financial markets. In other words, a corporation is viewed as a pool of investors’ financial capital seeking maximum returns, if not in one enterprise then by liquidating that enterprise and re-investing the capital in another enterprise ad infinitum.
Because it is assumed that financial markets obey the dogma of financial economics and value corporations according to their discounted current and expected future financial returns, then top management’s job inside a firm is to maximize those returns even if the steps management takes to do so destroy the firm by, say, off-shoring work to lower-wage countries, outsourcing supply purchases to force down prices of non-labor inputs, re-locating headquarters and bank accounts in other countries to reduce taxes and so forth. No different in principle, even if the steps taken are often more extreme, are the steps taken by an outside private equity firm that borrows funds in order to purchase a target corporation, take control and then pursue steps to increase the target firm’s market value by, say, cutting costs via layoffs, revising labor contracts to reduce wages, terminating employee pension contracts and so forth. In addition, private equity take-over firms often use their legal control of the target firm to pay themselves hefty management fees and other forms of compensation. They also borrow against the firm’s assets and draw out cash from its employee pension funds, and then use that cash to pay back the loans they borrowed to purchase the target firm originally. Eventually the private equity firm hopes to cut costs and raise the financial returns of the target firm sufficiently to re-sell it for more than their purchase price, pocket the difference, and walk away much richer. They leave behind a financially-strapped community of unemployed workers, bankrupt suppliers and tax-starved public services. In several chapters Locke enlivens his discussion of these practices with references to specific private equity take-over firms, especially Bain & Co., an example of the industrial-capitalist spirit at its most socially destructive and immoral, particularly its activities conducted in the 1980s and 1990s by Bain’s most famous partner, former Massachusetts Governor and 2012 Republican candidate for U.S. President, Mitt Romney.
This book is for anyone who is concerned about the precarious state of the US economy, including those who are, or plan to be, employed by large corporate businesses. Implicit in the book’s message is the conclusion that investor-capitalist management of “corporations-as-financial-commodities” is an important cause of the growing inequality of wealth and income in the American economy. The huge private fortunes amassed as a consequence of this inequality are being used increasingly to control elections and legislatures in the United States, threatening to replace democratic governance in American society with plutocratic control by a handful of unimaginably rich individuals, almost all of whom view the economy and society through the nineteenth-century liberal ideology of individualism and free markets.
N.B. See also the review by Dominique Turcq (Editor)