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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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Investors and bankers scrutinize firms when they seek outside money, either debt or equityUnlike Baran and Sweezy, Galbraith dismissed profit maximization as the goal of the giant firm in favor of the growth in sales and prestige. To thrive, it needed not maximum profits, but a secure minimum of earnings that would keep it from having to tap troublesome capital markets or cope with demanding outside stockholders (pp. 151-152). Secure mediocrity was the ideal. The technostructure had little to gain from high profits, which would only be passed along to shareholders, and might even entail higher risk risk that could disturb managerial autonomy. His technocrats were modestly paid, and managerial compensation was divorced from the stock price. [T]he case for maximization of personal return by top management is not strong (p. 108). Growth in revenue, however, was a sure route to growing power, prestige, and employment: Expansion of output means expansion of the technostructure itself (p. 157). The totem of sales growth was magnified on the national level in the sanctification of rapid GDP growth as the end of all economic activity. But, warned Galbraith, any lapse in growth could be catastrophic. His reasoning is illuminating in light of recent middle-management layoffs. Costs can no longer be reduced simply by laying off blue-collar workers. The technostructure had become a major cost-center, in modern jargon, and could not be reduced piecemeal, but would have to be lopped off in vast swathes. Worse, the technostructure would have to make the decision to attack itself to fire ones fellow club members. Such actions would not have the agreeable impersonality which is associated with firing someone at a greater distance or of a different social class (p. 158). Like Berle, but unlike Baran and Sweezy, Galbraith argued that the large corporation had become subservient to society and the state. Government stabilized the economy, provided a skilled workforce, and set the strategic tone for the national economy. Planning and administration, a joint venture by large firms and the state, had replaced market relations. Stockholders had become passive and functionless, remarkable only in his capacity to share, without effort or even without appreciable risk, the gains from the growth by which the technostructure measures its success (p. 356). The (Keynes-echoing) euthanasia of stockholder power, along with the supersession of the market mechanism by the state and the technostructure, had become accepted facts of life (p. 357). Galbraith lodged aesthetic objections to this new regime it made ugly cities and vulgar ads but its political and economic triumph seemed secure. Edward Hermans 1981 study, financed by the Twentieth Century Fund, was a swan song of managerialism. Based on 1970s data, Herman found U.S. firms to be overwhelmingly under managerial control, with a steady decline in control by families, financial interests, and outside corporations since the 1920s. Citing work by Richard Rumelt, Herman nonetheless rejected Galbraiths claims about the diminished role of profit maximization, arguing that the modern corporations decentralized profit centers, individual units responsible for profit and loss to top management, were a form of direct scrutiny that could be even more intense than the less immediate pressures of product markets. Senior managers of U.S. corporations often run them as a sort of hothouse capital market, with divisions competing aggressively for the allocation of capital from headquarters. Managerialism, liberal and Marxist, shared a belief that competition was a thing of the past. Stable oligopolies and managerial rationality had replaced the anarchy of 19th century laissez-faire. In some sense, this was an accurate description of the world, particularly the United States, in the 1950s and 1960s. It ceased to be true by the 1970s. The conglomeratization movement of the late 1960s thrust Wall Street into the remaking of corporate America; neither vestigial nor passive, financial operators played board games with whole companies. The recession of 1973-75, then the worst since the 1930s, shattered confidence and was the first view of a new nastiness in the economic tone that would characterize the next 20 years. U.S. firms would suffer the bite of competition from Japan and Europe, smashing the Galbraithian idyll. The deep bear market of 1973-74, the first act of several years of sluggish-to-awful stock markets, led to massive shareholder disappointment and a fresh wave of takeover activity, the first since the 1960s. Managerialism was under siege. Aux armes, rentiers! Early U.S. manifestations of bank or financial control theories were the heartland populism of the middle and late 19th century, which was directed against the railroads and the financiers behind them. This populist tradition was picked up by the muckrakers of the turn of the century, who blasted Standard Oil, Morgan, and the other spheres of influence (Ayalas Bank-Spheres school). In 1913, the famed Pujo Committee of the U.S. House of Representatives uncovered a system of interlocking directorates and other forms of influence centered around six major banks: J.P. Morgan & Co.; First National Bank of New York; the National City Bank of New York; Lee, Higginson & Co.; Kidder Peabody; and Kuhn, Loeb. The bankers control over credit to the giant enterprises in their orbit gave them control over the commanding heights of the U.S. economy, creating significant barriers to entry for those outside the circle. This is the purest form of banker control theory. Later analysts, including Paul Sweezy in the 1930s, made similar influence maps, though not always with the same names and positions. Sweezys model was not bank-centered, but he did include a bank in each one of his eight major groups. Only a few years later, however, Sweezy decided that financial power had declined during the Depression (Ayala 1989), and by the 1960s, finance largely disappeared from Monopoly Capital. It reappeared, though, in the pages of Sweezys Monthly Review starting in the 1970s. This oscillating theoretical role for finance is a reflection of historical trends, rather than confusion or inconsistency; its refreshing to watch a theorist change with the times rather than catechistically stick to a single model and bend the facts to fit. Interest in financial control, or at least influence, began to grow across the ideological spectrum. In the mainstream, Baum and Stiles (1965), spied a growing potential for financial power that was as yet unexercised. After the 1968 publication of a report by the House Banking Committee, detailing the ownership of large blocks of stock by the trust departments of the major New York City banks, theories of financial control enjoyed a renaissance on the left, notably the long, book-length series in Socialist Revolution by Robert Fitch and Mary Oppenheimer (1970) and the later book by David Kotz (1978) a book that owes a great deal to Fitch and Oppenheimer. Most Marxists rejected the Fitch/Oppenheimer thesis that the New York banks were exerting increasing control over industrial America, and that managerialism was dead with great vehemence. In a response to Fitch and Oppenheimer, Paul Sweezy (1972) answered the question of their title, who rules the corporations? with a simple declaration: monopoly capital rules the corporations, including not only industrials and utilities but also banks and other profit making institutions. Following Marxs formula that the capitalist is the personification of capital, Sweezy argued that monopoly capital was personified by monopoly capitalists, that is, the inhabitants of the executive suites and boardrooms of Americas giant corporations. According to Sweezy, there was no conflict between financial and industrial interests; faithful to Lenin and Hilferding, he argued instead that monopoly capital was the union of finance and industry into a single entity. The giant corporation, with its dozens of subsidiaries and divisions, was more a financial being, not unlike a stock portfolio, than the simple productive unit run directly by an old-style industrialist. If finance were separate from and dominant over industry, Sweezy asked, why did the lordly financiers allow General Motors to set up a subsidiary to finance vehicle purchases (the General Motors Acceptance Corp., or GMAC)? Theres no question that the large Fortune 500-class industrial corporation is run on financial principles, that its business units are often deeply involved in finance General Electric has a very active financial arm, GE Capital; the other big auto companies have large units like GMAC; and all the familiar rest. But theres also no question that in recent years purely financial interests have increasingly asserted their influence over these hybridized giant corporations. Kotz outlined several stages in the evolution of finances relationship with nonfinancial corporations. The first, between the Civil War and World War I was characterized by first the promotion of railroads and then their subsequent reorganization, with the help of European capital, and then the promotion of the big industrial trusts all under the guiding hand of bankers. The next period, which ran through the 1929 crash, was marked by a trend towards institutionalization and away from strong individual bankers, and the international transformation of the U.S. from borrower to lender. During the New Deal, the bankers were on the run, blamed for the slump and finding themselves under closer scrutiny and tighter regulation. No one needed the investment bankers either; large corporations financed themselves, either through profits or direct deals with institutions, and the federal Reconstruction Finance Corp. usurped a great part of the functions of what in an economic sense is investment banking, in the words of a Wall Street partner (quoted in Carosso 1970, p. 395). After World War II, however, Kotz argued, there was a resurgence of banker power, led by insurance companies, mutual funds, and, most important, the trust departments of commercial banks. Unfortunately, Kotz turned to the old model of groups, though he couldnt decide whether the groups were dominated by their banks, with the industrial members subordinate, or if they represented a fusion of common interests. Kotzs classification scheme was this: a Chase group, consisting of two commercial banks, Chase Manhattan and Chemical, and two insurance companies, Metropolitan Life and the Equitable; a Morgan group, consisting of two commercial banks, Morgan Guaranty and Bankers Trust, the Prudential insurance company, and two investment banks, Morgan, Stanley and Smith, Barney; a Mellon group, consisting of Pittsburghs Mellon Bank and the investment bank First Boston; and a Lehman-Goldman, Sachs Group, consisting of those two old-line (predominantly Jewish, in contrast to the WASPy pedigree of the other groups) investment banks (Kotz 1978, p. 85). While the case for such alliances has been difficult to make since the New Deal reforms of the 1930s, the concept looks hopelessly out of date in the 1990s. Long-term relationship banking broke apart beginning in the late 1970s; customers and bankers now shop around for the best deal rather than respecting long-term business ties; portfolio management boutiques have eclipsed bank trust departments in money management ; and ownership changes have transformed the supposed interest-group landscape. Prudential bought Bache in the early 1980s to have its own in-house investment bank and distribution network for offloading some of its own financial holdings; Smith Barney is now a subsidiary of the Travelers insurance company; First Boston is owned by a Swiss bank; and Lehman has been bought and sold several times. Kotz was also unable to argue persuasively that financial control made much difference. He claimed that corporations under financial control were likely to maximize profits, with perhaps a bit more caution than they might otherwise more like old-line capitalist firms than the soulful manager-run corporations of high liberal theory (Kotz 1978, pp. 143-144). He further argued that financial control meant a greater concentration of economic and political power than textbook myths about competitive markets and dispersed power. While this is undeniably true, large manager-run corporations also give the lie to textbook myths its hard to reconcile the real GM with the textbook image of the passive, price-taking corporation adapting to market conditions and Kotzs claims about the exercise of monopoly power by banks were largely speculative and unproved. Kotz and Fitch and Oppenheimer were virtually alone in the 1970s in arguing for a major financial role in the governance of big business. Managerialism had largely won the theoretical argument and it seemed empirically well-grounded, too. the financial upsurge Things in the mid-1990s, however, are another story entirely. Todays corporate world bears little resemblance to that described by Galbraith, Baran and Sweezy, and Herman: shareholders are far less passive, boards less rubber-stampish, and managements less autonomous than at any time since Berle and Means. Since the early 1980s, influence from the financial sphere has been greater than at any time since the 1920s. Its not so much that the managerialists were wrong. Their descriptions and analysis were right for their time, but the corporate world has changed enormously over the past 20 years. There was little conflict between managers and stockholders during the Golden Age, and it even seemed possible that wages could increase steadily without eating into profits. Large firms could behave as quasi-monopolies, raising prices when costs rose, controlling the pace of technical change, and blocking entry of competitors. Now that Golden Age is gone. Growth is suppressed through tight monetary and fiscal policy, technical change is rapid, companies as grand as IBM and GM can stumble, wages have been forced down to expand profits, and competition is encouraged worldwide by deregulation and market-opening policies. The owners stockholders, Wall Street, whatever you want to call them have encouraged these changes in the interests of controlling inflation and boosting the prices of financial assets. Their control isnt preeminent; managers have resisted stockholder interference, though workers have lost nearly every battle. Managerialism and the vestigial role of the stockholder were historically contingent features of the Golden Age, not the markers of a new phase of capitalism. Financial control is an admittedly imprecise term, encompassing a whole spectrum of influences. Its classic U.S. usage refers to the takeover of industrial firms by banker-operators like J.P. Morgan, buying up an important share of its securities and taking seats on the board. When a firm was Morganized, there was no question about who controlled it, whatever the formal financial and managerial structures. While that kind of direct bankerly control was banned by the financial reforms of the 1930s, there are some industrial firms that were taken over during the 1980s, brought under the control, if not ownership, of leveraged buyout boutiques like Kohlberg Kravis Roberts and Forstman, Little though for the most part this treatment was reserved for firms below Fortune 500 size. In many, perhaps most, cases, these were not intended as permanent arrangements; the idea was to take the company public again at a later date at a great profit to the buyout artisans either because they managed to achieve new efficiencies thanks to their managerial genius and the disciplinary effects of debt, or because an interminable bull market would simply accommodate them profitably through the mere passage of time. Influence need not be so direct as outright ownership. The classic textbook explanation of the power of finance is that investors and bankers scrutinize firms when they seek outside money, either debt or equity. Certainly this is the case, but influence need not be even this direct. Managers may simply take a cue from the price of their firms stock, or listen to the advice of analysts and investors about what course they could take to boost it. Also, most large corporations have representatives of banks and insurance companies sitting on their boards, but of course their degree of influence is both debatable and variable. Such financial boardmembers may only exert their influence at critical moments. As Kevin Delaney (1992, pp. 69-71) pointed out, John Schroeder, a retired vice-chair of J.P. Morgan who served on the Johns-Manville board, was instrumental in pushing the firm to file for bankruptcy when faced by mounting legal claims for exposing its workers and customers to asbestos. (Morgan had served as Manvilles lead bank for over 50 years.) Bankruptcy protected the assets of the company against claims of the litigants, allowing the creditors not only to be repaid in full, but also to lend Manville fresh money at high interest rates. Stockholders were nearly wiped out, and the asbestos victims awards were strictly capped. The moral the corporate governance moral, that is, leaving aside the stingy treatment of the injured is that the financier on the board may be quiet when things are going well, but in a crisis, he or she may be a crucial player. The Johns-Manville example may be a model of the broader upsurge of financial influence; financiers may have been satisfied with corporate performance during the Golden Age, but more recent decades have been the economy-wide equivalent of an asbestos crisis. This might be a good time to take a look at recent theories of corporate governance. |
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