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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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British money capital preferred to wander overseas in search of higher returns than were available at homeYou have to leave the field of economics to find much interesting thinking about corporations. Theres no better starting point than the taxonomy proposed by the Csar Ayala (1989) in his excellent survey of the field. Ayala, a sociologist, divided the literature on the control of big business into three schools of thought Robber Baron, Managerial, and BankSpheres. As he put it, The Robber Baron school is committed to the idea that Big Business represents a historical regression which reintroduced feudal elements into the economy; the Managerial school is committed to the idea that managers rule the economy; and the Bank-Spheres school is committed to the idea that banks rule the economy. All three views have a long pedigree, and remain popular today, embedded in populist thought of both left and right. The Robber Baron school holds that the great empire builders of the late 19th and early 20th century like Gould, Rockefeller, and Morgan appropriated through violence and conspiracy the wealth of the nation that was once dispersed in the hands of small producers. Rather than viewing concentration as proceeding from the inner essence of capitalism, as both Marxists and most business historians would, the Robber Baron school sees it as a perversion of a natural state of competition. This naturalization of petty capitalism is a dearly held American myth; it forgets the violence that marked the appropriation of the continent in the first place, and it also forgets the earlier violence that marked the establishment of capitalism in Europe the theft of common land, the criminalization of vagrancy, of even poverty itself, that Marx called primitive accumulation. While the Robber Barons undoubtedly committed many crimes, legal and moral, during the course of their empire building, and businesses today commit crimes, literally and figuratively, every day of their existence, there is little doubt that large firms are far more efficient and formidable competitors than the tiny producers they replaced. It was not crime that made big business what it is today, nor is it crime that keeps it there. In this regard, an interesting contrast can be made with British capitalism, which was very late in adopting the modern large corporate form. Early joint-stock companies were dissolved after theyd done their work of opening up foreign trade, and the mainstream of business was dominated by small and mid-sized firms of a sort more congenial to the Robber Baron school. The smaller firms were owned by a family or a small group of partners, and run in a highly personal style, rather than being professionally managed by a well-structured hierarchy. This organizational backwardness gave U.S. and German firms a critical edge as Britain lost ground to its rivals in the late 19th and early 20th centuries (Arrighi 1994, p. 282; Chandler 1990, chapters 7-9).5 These British firms also failed to invest at a sufficiently high level. As Chandler (1990, p. 285) noted, these failures happened despite the fact that London was the largest and most sophisticated capital market in the world, a market, ironically, that German and U.S. firms tapped for finance. British money capital preferred to wander overseas in search of higher returns than were available at home. Deep capital markets are no substitute for good management, and the presence of the first is no guarantee of the development of the second. Berle, Means, and managerialism Typically, the concern with the governance of the modern large corporation, which hinges in the classic formulation on the separation of ownership and control, is traced to Adolph Berle and Gardiner Meanss The Modern Corporation and Private Property (1932/1967). To Berle and Means, modern capitalism is characterized by the simultaneous concentration of production in the large corporation and the dispersion of ownership among hordes of shareholders. That dual movement marked a profound transformation in the nature of property. The function of the 19th century owner-entrepreneur had been divided in two. Formal ownership was delivered into the hands of thousands, even millions, of dispersed stockholders, rarely capable of organizing themselves to affect the operations of the firms whose titles they held. Actual control, however, fell to managers, who though formally responsible to the stockholders, were in fact largely independent, self-sustaining, and answerable to no one in particular as long as things didnt go badly wrong. In the eyes of jurisprudence, a firm and its owners were entirely distinct, with the corporation itself acquiring the rather mystical status of a person under law. This arrangement is a surprisingly recent innovation in economic and legal life. In the eighteenth century, the corporate charter was essentially a gift of the state, typically for a very specific purpose, like the right to trade in the Hudson Bay area, or to run a ferry service.6 This tradition extended into the 19th century, as the early railroads were laid down. Frequently it was a grant of monopoly privileges. Charters typically were specific: the enterprises mission was tightly defined, and its capital structure and financial practices were closely supervised. With the growth in the scale of production, these strictures were loosened. In 1837, Connecticut passed the first modern law of incorporation, permitting associations for any lawful business. Over the next 60 years, most other states fell into line. Step by step with the development of the modern corporation or maybe just a step or two behind came the growth of managerial autonomy. For example, in the early 19th century, shareholders werent allowed to delegate their vote by proxy to management; but by the time of Berle and Means, the proxy had become one of the principal instruments not by which a stockholder exercises power over the management of the enterprise but by which his power is separated from him (p. 129). Shareholders typically have had neither the time nor the machinery necessary for scrutinizing management and attending annual meetings, so in normal times they delegate the responsibility of voting their shares to the managers who are formally their hired agents. In his preface to the 1967 revised edition, Berle described the new system as one of collective capitalism, an affair that yokes together thousands of corporations, and millions of employees, owners, and customers too many people to be considered private enterprise in the classic sense; and since the state was now so deeply involved in economic affairs, no redefinition of private could ever be broad enough to apply. Research was no longer carried out by lone inventors, but in teams, and no longer within a single enterprise, but in cooperation with university and government researchers often with subsidies from public and nonprofit sources. (Despite the individualist ideology of the high-tech world, basic research as well as product development still is highly social.) To the 1967 Berle, these changes had moved us toward a new phase fundamentally more alien to the tradition of profit even than that forecast in the first edition of their book, published 35 years earlier. Reading the updated Berle 27 years later, even more than the 1932 original, its hard to imagine that anyone could have thought that modern corporate society moves by anything significantly different from the maximization of profit. But the belief that the advent of the large corporation had changed capitalism into a more humane, progressive force was a core belief of American liberalism from the New Deal through the end of the 1960s. Profit maximization, the motor of 19th century entrepreneurial capitalism, had been replaced by growth, and competition by long-term corporate planning and administered prices. In one moving cri de rentier (pp. 115-116), Berle and Means denounced the potential for managerial abuse of the poor owner: out of professional pride, managers may maintain labor standards above those required by competitive conditions, or improve quality above the point that is likely to be maximally profitable to shareholders! This holds the potential for a new form of absolutism, relegating owners to the position of those who supply the means whereby the new princes may exercise their power. Reversing the usual populist casting, its not the owner of capital who is the parasite in this model, but the managers who run production. As Berle and Means put it, historically speaking, shareholders have surrendered a set of definite rights for a set of indefinite expectations (p. 244). For example, shareholders have no right to sell corporate property on their own; they delegate such powers to their agents, managers. That alone makes shareholding a different kind of ownership from what the common sense of the word describes. But shareholders have an out: they can sell their shares. As Berle and Means said, stock markets are a means for transforming these expectations into cash, which is why the market is a focal point in the corporate system of today (p. 248). If there were no market to let them out of a position quickly and cheaply, absentee owners would think twice about assuming their strange role. Berle and Means spoke of investors as supplying capital to corporations, and argued that the markets provision of liquidity allows them to get this money back on a moments notice at no expense to the corporation. But stock investors rarely supply funds to the corporations they own; with rare exceptions, theyre simply buying shares issued long ago from others who bought them in the same manner. So the social division of labor that Berle and Means describe between the providers of capital who are the real risktakers and the managers who are largely insulated from risk is too flattering to the rentier. Their characterization of stockholders as entirely passive is quaint. While Berle and Means did acknowledge a disciplinary role for stock prices in general firms that want to raise equity capital have to cultivate the markets favor they allowed for no direct assertion of shareholder influence on management. Quite the contrary; they described the relation between stockholders and the modern firm as fundamentally casual. For property to be easily passed from hand to hand, the individual relation of the owner to it must necessarily play little part. It cannot be dependent for its continued value upon his activity. Consequently, to translate property into liquid form the first requisite is that it demand as little as possible of its owner... [I]f property is to become a liquid [sic] it must not only be separated from responsibility but it must become impersonal like Iagos purse: twas mine, tis his, and hath been slave to thousands (p. 250). Impersonal, alienated property, easily parceled out and passed around: what an alluring model of society. The Modern Corporation and Private Property offered a rethink of the notion of profit (p. 300). By official definitions, profit is the reward for risk-taking and a spur to efficiency. What then will motivate modern managers? Although they control the pace of innovations in production, any windfall profits they might generate will mostly be passed on to stockholders. If managers do innovate, they arent properly rewarded; and if they know they wont be properly rewarded, they may shirk at innovation. Bureaucracy, dispersed ownership, and complex and contradictory sets of incentives had replaced the clarity of the owner-manager of yore. Berle and Means (p. 245) rather excessively called this an approach toward communist modalities. Ironically, this line of thinking has gone out of fashion with the capitalist triumphalism of recent years, whose preferred mode has been the celebration of the entrepreneur. Of course, right-wing ideologues and publicists have celebrated smaller firms and demeaned dinosaurs like IBM, but the grip of giant firms on the U.S. economy and increasingly on the global economy has hardly been loosened. These ideas didnt originate with Berle and Means. A century and a half earlier, Adam Smith (1976, Book 2, pp. 264-265) had this to say about the joint-stock company (a quote thats a staple of the corporate governance literature, and this chapter will be no exception): The directors of such companies, being the managers rather of other peoples money than of their own, it cannot be well expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their masters honor, and very easily give themselves a dispensation for having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company. Smith made this sound like the doom of capitalism, something the corporate form has obviously not brought about. Berle and Means themselves cited Walther Rathenaus observations, drawn from German experience, that ownership had been depersonalized, and the enterprise itself had been objectified into an independent life, as if it belonged to no one. [This] leads to a point where the enterprise becomes transformed into an institution which resembles the state in character (p. 309). This prefigured Berle and Means; Smiths observation reads more like an early version of modern rentier thought. Writing in 1896, Herbert Spencer (1972) noted that the development of the credit system had allowed production to break beyond the limits of individual owners or small partnerships, a development that also made available for industrial purposes, numberless savings which otherwise would have been idle. [S]tagnant capital has almost disappeared. Stagnant capital is no capital at all; Spencer meant that money hoards that might have festered in isolation can, by virtue of the modern system, be transformed into capital. But, as hed written 30 years earlier in Railway Morals and Railway Policy, the joint-stock structure is rich with opportunities for mischief. The system reproduces all the faults of political democracy, Spencer argued; just as there are tremendous gaps between voters and their representatives, shareholders have little effective control over a firms directors and managers, and directors and managers resent any expression of supervisory interest. Like their prototype, joint-stock companies have their expensive election contests, managed by election committees, employing election agents; they have their canvassing with its sundry illegitimate accompaniments; they have their occasional manufacture of fraudulent votes. While modern law has made outright fraud extremely rare, in both the political and corporate arenas, Spencers description remains an accurate characterization of the corporate proxy contest. The difficulty of running an electoral challenge to corporate management gives the small organized party a great advantage over the large unorganized one. Shareholders are diffused throughout the whole kingdom, in towns and country houses; knowing nothing of each other, and too remote to coperate were they acquainted. They know nothing about business, and are, in most cases, incompetent to judge of the questions that come before them. Spencer painted this unflattering picture of the typical railways ultimate owners: [E]xecutors who do not like to take steps involving much responsibility; trustees fearful of interfering with the property under their care, lest possible loss should entail a lawsuit; widows who have never in their lives acted for themselves in any affair of moment; maiden ladies, alike nervous and innocent of all business knowledge; clergymen whose daily discipline has been little calculated to make them acute men of the world; retired tradesmen whose retail transactions have given them small ability for grasping large considerations; servants possessed of accumulated savings and cramped notions; with sundry others of like helpless character all of them rendered more or less conservative by ignorance or timidity, and proportionately inclined to support those in authority. To these should be added the class of temporary shareholders, who, having bought stock on speculation, and knowing that a revolution in the Company is likely to depress prices for a time, have an interest in supporting the board irrespective of the goodness of its policy. Dont managers and shareholders share an interest in maximizing profits? No, Spencer said; managers may have no long-term interest in the firm, but may bend its affairs to maximize their personal profits rather than the firms. Spencer joins Smith as a precursor of modern rentier thought. Berle and Means made the same point about managerial opportunism in their conclusion: the men in control of a corporation can operate it in their own interests, and can divert a portion of the asset fund or income stream to their own uses, and the shareholders are sociologically and legally powerless to stop this. Had they stopped here, Berle and Means would have fit nicely into the proto-rentier crowd. But, according to them, instead of trying to strengthen the rights of passive shareholders, the community could choose to relax classic notions of property rights. Outright plunder should be prevented, but the community must also assert its rights, and the corporation must be governed in the larger interests of society. Should the corporate leaders, for example, set forth a program comprising fair wages, security to employees, reasonable service to their public, and stabilization of business, the shareholders should accept the hit to profits guaranteed by this high-minded program. Corporate control, they concluded, should develop into a purely neutral technocracy, balancing a variety of claims by various groups in the community and assigning to each a portion of the income stream on the basis of public policy rather than private cupidity (pp. 312-313). Economic government would come to resemble classic American interest-group politics.7 Mainstream economics acknowledged the transformations outlined by Berle and Means, but claimed that they didnt matter much. Competitive product markets and the threat of takeover assured the basic classical notions of the firm (insofar as the firm was theorized at all) still applied to large, manager-dominated firms as well as small entrepreneurial units. The firm as black box essentially survived both Coase and Berle and Means. Outside mainstream economics, however, managerialism held great sway, even on much of the left. As Baran and Sweezy (1966, pp. 15-16) said in Monopoly Capital, in the modern giant corporation, control rests in the hands of management . . .a self -perpetuating group with [r]esponsibility to the body of stockholders...a dead letter. They dismissed fashionable propaganda of the 1950s and 1960s like Berles, among others about how the soulful corporation had come to balance social responsibility with profit making, arguing to the contrary that modern firms are if anything better positioned to maximize profits than the smaller ones of yore, because of longer planning horizons. In their model, investment funds are almost entirely internally generated (which they still are), and therefore firms are largely independent of the financial sector (which they still arent). While Baran and Sweezy rightly noted the incredible expense of intermediation the army of high-paid brokers, agents, and bankers its role was largely unexamined; instead, finance was reduced to an absorber of surplus, and dismissed in less than three pages (Baran and Sweezy 1966, pp. 139-141). For liberals of the 1960s, the scripture was Galbraiths (1967/1978) New Industrial State. To Galbraith, the stockholders were vestigial, a purely pecuniary association divorced from management, too numerous and dispersed to have any influence (Galbraith 1967/1978, pp. 71-79, 138). When displeased with their corporation, they would sell the stock rather than pick a fight with management. Stockholder rebellion among large corporations was so rare that it can be ignored, because trouble-free profitability was the norm. Of course, management told Congressional committees that the board and the stockholders were in control, and conducted yearly meetings to flatter the nominal owners, but Galbraiths corporation was run by the technostructure. |
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