Tag Archives: managerialism

La Deutsche Vida

Foreign family business and capital flight. The case for a fraud to fail

By Giovanni Favero, Università Ca’ Foscari Venezia (gfavero@unive.it)

Abstract:
The research here proposed is a micro-analysis of a business ending in bankruptcy in the aftermaths of the first oil shock, concerning the Italian subsidiary of a German wareenamelling group established in the town of Bassano in 1925. Following the budget reports and the interviews with the former entrepreurs, the company flourished until the 1960s, when managerial and entrepreneurial successions emphasized the growing difficulties deriving from growing labour costs. A tentative reorganization of the company was hindered in 1968 by union resistance and political pressures for the preservation of employment levels. In 1975 the board of directors decided to declare bankruptcy as a consequence of the huge budget losses. However, a subsequent inquiry of the Italian tax authority discovered an accounting fraud concerning hidden profits in 1974 and 1975. The fraud disclosure shows how historical conditions could create the convenience for performance understatement not only for fiscal purposes, but also in order to make divestment possible. However, it is also used here as an element to argue that business sources and the story they tell should not be taken at their face value, and that a different reconstruction of the company’s path to failure is possible. The literature concerning the missed recognition of opportunities is then mobilised in order to interpret the inconsistencies that emerge from the triangulation of business archives, press columns and interviews with union representatives and politicians. This allows to put back into perspective what results as an obsession of company management with labour costs, concealing the importance of other competitive elements, such as the increasing specialisation of the producers of home appliances. This ‘refractive error’ may be typical of businesses operating in (presumed) mature industries at international level, where wage differentials offer the opportunity to pursue quite literally exploitation much further.

URL: http://econpapers.repec.org/paper/vnmwpdman/63.htm.

Reviewed by Bernardo Bátiz-Lazo

This paper was distributed by NEP-HIS on 2013-12-15 and offers an interesting combination of business and accounting history around the long-term performance of the Italian assets of an Austrian family business (named Westens). The investment relates to a enamelling plant in the town of Bassano in 1925 (called Smalteria Metallurgica Veneta or SMV, today part of BDR Thermea). The Bassano plant was one of the largest factories of glazed products (for use in electric water heaters, bathtubs and heating products like radiators). Favero’s story takes us from its origins until the Westens leave the company in 1975. Activities, however, continued and by “the end of the 1970s the company focused its production in the heating sector… In the mid-eighties the company expanded into foreign markets. “[see further here].

Air photo of original factory (Source: http://www.baxi.it/storia/)

Air photo of original factory (Source: http://www.baxi.it/storia/)

The narrative gyrates around the Bassano plant, some three generations of Westens and an equal number of internal grown talent at the helm of SMV. Favero argues that the reason behind the origins of SMV and other similar investments in Central and Easter Europe by the Westens was to overcome growing protectionism and the end of Empire. However, the number of secondary references suggests the SMV case is relevant for Italian business history and perhaps, more could have been said about this. Nevertheless, we can follow the changes in corporate governance, the attitude of the family to foreign investments, the changing relationship between national branches and SMV’s “strategy” (a term used rather loosely by the author) as the 20th century progresses. Also how the plant was established on the basis of a then unique process of enamelling, a source of competitive advantage that also erodes as time goes by. Some discussion about the role of Chandler’s “first mover advantage” within family business would have been desirable here.

It is evident that Favero has had access to a large number of source material (including oral histories and fiscal authority memoranda and investigative papers). Yet the case is rather short and this result in the narrative progressing some time in jumps rather than a smooth flow. For instance, it is only until the end that we learn why the fraud was discovered five years after the original owners declared bankruptcy. Namely the intervention of the Italian government to maintain employment kept the plant (or the company, its not clear) afloat. There is also reference to some “bad blood” between the Westens and the Italians but we are not totally sure why and when. There are indications of growing tensions with unions and Favero tries to make a case about “management’s “obsession with labour costs”. We could also benefit from learning about the inconsistencies Favero between different sources. Perhaps an idea would be to add a timeline where one side maps changes in strategy, corporate governance or in the ruling family and the other side maps changes in the environment.

However, in its present form this makes a potentially useful teaching case in a world economic history, international business or globalisation course. Favero also claims the SMV case is part of a larger project looking at Westens’ investments in different countries. I certainly look forward to future instalments.

Giovanni Favero

Giovanni Favero

A History of Japanese Audit Firms, 1965–2010

Integrating Personal Expertise: A History of Japanese Audit Firms, 1965–2010

by

Masaru KARUBE (Institute of Innovation Research, Hitotsubashi University, Japan)

Hironori FUKUKAWA (Graduate School of Commerce and Management, Hitotsubashi University, Japan)

ABSTRACT

To examine empirically the knowledge integration process of professional expertise that individuals have in a professional firm, this paper examines the emergence and growth of four large audit firms (ShinNihon, Azusa, Tohmatsu, and ChuoAoyama) in Japan over a period from the mid-1960s to 2010. Known as the Big Four, these firms—the product of a series of mergers between more than 70 audit firms—handled the vast majority of audit services for listed companies during this period. After the dissolution of ChuoAoyama in 2006, the remaining three audit firms have dominated the market.

A longitudinal case study documents how these professional service firms were successful in providing nationwide services through mergers with domestic competitors and the provision of global services in alliance with large international firms, even though they did not sufficiently realize the systematic attainment of individual expertise. The historical account of this process suggests that the two driving forces underpinning the merger growth of the Big Four were strategic intent in (1) systematizing individual expertise and (2) establishing nationwide and global service networks in response to the increase in size and growing diversity and complexity of their client base. Finally, this paper discusses the knowledge tension between localized individual expertise and organizational knowledge in a global context.

URL: http://econpapers.repec.org/paper/hitiirwps/13-07.htm

Review by Masayoshi Noguchi

This paper is an interesting piece of work that intertwines management and accounting history with a focus on post-war developments in Japan. The paper was distributed by NEP-HIS on 2013-04-06.

The main issue is ‘how knowledge workers collaborate and create new knowledge through collaboration’ in general, and ‘how professional knowledge workers collaborate between themselves and how collaboration is organized’ (p. 2) in particular. Then the authors state the research question in this study as follows:

‘Our basic research question concerns why large audit firms through a series of mergers have replaced audit services, as initially provided by a single or limited number of individual accountants’ (p. 2).

The fieldwork in Karube and Fukukawa’s paper moves forward by exploring the official history of accounting firms while, at the same time, looking for stated motivations of mergers during the post-war period. As a result, they state the following views as motivation for mergers amongst accounting firms:

‘(1) to overcome the intrinsic contradiction between economic dependency and the independence of audit opinion,

(2) to enhance their systematized audit capabilities to meet the growing and diverse need for audit services by client firms, and

(3) to acquire new client firms by establishing a reputation for audit services’ (p. 2).

Point (3) above is the most interesting, particularly given the stated aim of Karube and Fukukawa. Point (3) seems to be an important driver that helps to explain the mergers between major large-scale firms, according to the authors; who also state that:

‘…such explicit differences did not exist between major firms in terms of the substance of competence. Rather, it seems that no explicit difference in terms of the substance of competence promoted further competition for scale expansion. In other words, scale itself came to serve as a symbol of competence in the competition process between audit firms, especially large major firms. Scale expansion through merger then emerged as a reflection of the intense competition for the social proof of competence’ (p. 27).

According to Karube and Fukukawa, audit firms expanded through the acquisition of the audit services for the Nippon Telegraph and Telephone Public Corporation, Japan National Railways and the Japan Tobacco & Salt Public Corporation. In this regard, greater detail as to the process and selection of these acquisitions would provide interesting case material and warrant further examination in order to deepen the business history of Japanese corporation. In this regard Karube and Fukukawa state that:

‘…these firms were all large, the expectation was that the designated auditor or auditors would have sufficient human resources to provide audit services for such large firms. Moreover, many audit corporations shared the understanding that audit service was in essence difficult to differentiate, so that the size of the audit firm mattered for gaining these sorts of clients’ (pp.17-18).

A key concept in this study is ‘the social proof of competence’, where acquiring reputation, social status and symbolic outputs is more important than actual results/outputs. Therefore, for Karube and Fukukawa during the post-war period Japanese professional auditors:

‘…are more concerned about gaining social proofs of competence than the substance of competence. To do this, they pursue strategies that win reputation from clients, acquire good clients regarded as having high status, and produce symbolic outputs that are visibly appealing to clients. Reputation also derives from each client’s own experience of audit services, or is inferred from the provider’s past experiences, including their courses of action and results. Thus, past courses of action and experience for providers matter in gaining reputation from clients’.

In spite of this profound understanding, the authors develop the following proposition:

‘…in contrast to consulting services, as audit services derive more from the formal audit procedures decided by government, it is more difficult to differentiate services. Thus, the most symbolic output is the scale of services, as exemplified by the number of clients, the number of good clients, revenues from audit services, and the geographic coverage in providing services’ (pp. 6-7).

To be sure, the author will also consent to the other elements, such as recognition from influential others, such as government, being important, though size is one of the important elements for acquiring reputation.

Finally Karube and Fukukawa find no evidence that expansion through mergers contributed to an improvement in organizational competence nor that it improved the quality of audit services (and reduce accounting fraud. Specifically the authors state that:

‘…in the light of the substantial integration of organizational competence, there should be efforts to remove such weak integration as soon as possible after the merger. In the case of Asahi-kaikeisha Audit Corporation, it took nearly 10 years to dissolve the personalized audit system and to systematize the job and client rotations of junior professionals among audit offices within the firm. … As a result, Japanese audit firms succeeded in gaining social proofs of competence by way of scale expansion through mergers rather than realizing the substance of competence, in that they still faced difficulties with the internal integration of the merged firms’ (pp. 25-26).

‘The fact that this mobility [of accountants caused by the demise of Misuzu Audit Corporation] was observed six years later when Chuo and Aoyama merged in 2000 implies not only the existence of insufficient integration but also the presence of strong relationships between clients and accountants in their operations, suggesting the possibility of insufficient systematization of the substance of organizational competence’ (p. 28).

If the social proof of competence and substance of competence are completely different and scale expansion pursues the former objective, this result of the merger of the audit firms is quite natural. Probably, the relationship of both would not be so simple. The merger between the audit firms should have offered an important opportunity to enhance organizational competence, such as wider risk diversification, enhanced economic independence, strengthened bargaining power, improvement through scale merit, nationwide services, etc. Rather it largely depends on the management after the merger whether this opportunity can be exploited or not. In this sense, the authors’ following indication is appropriate:

‘[w]hile merger can be the “easiest” way for a firm to grow, the process of post-merger integration remains a critical and ongoing issue for management’ (p.29).

When Accountants Come to Power

Management From Hell: How Financial Investor Logic Hijacked Firm Governance
By Robert R. Locke (lockerobert3@aol.com)
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.

URL – www.boostzone-editions.fr

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.

Robert R. (Bob) Locke

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).

H. Thomas Johnson

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)