mnot’s blog

Design depends largely on constraints.” — Charles Eames

Saturday, 23 July 2005

Who Do We Work For?

Filed under: Economics

The FT Global 500 is pretty much what you see when you look up “capitalistic orgy” in the dictionary. It’s a compilation of the largest 500 mega-corporations in the world, as measured by the market.

So, when I picked up the print edition while overseas last month, I was frankly a bit surprised to see an openly soul-searching article entitled “ Fair shares?” by FT’s management editor, Michael Skapinker. It relates the concerns of those who criticize unbridled capitalism;

Every time a company declines or disappears (usually because another one acquires it), people suffer. Employees lose their jobs. Their lives and those of their families are disrupted. Workplace friendships are ripped apart as staff are made redundant or forced into early retirement. Pensioners who gave their working lives to the company are deprived of the satisfaction of knowing they helped to build something enduring. Neighborhoods decline as factories, bank branches or shops close. All this to satisfy the short-term whim of stock market investors.

Things get even more interesting when he turns his gaze onto how people respond to “the way that companies put shareholder value above all other interests.”

[T]he most impassioned attack came in an article by Sumantra Ghoshal of London Business School, published posthumously in the US Academy of Management’s Learning & Education Journal earlier this year. Ghoshal, who died in 2004 at the early age of 55, argued that putting shareholders’ needs first was based on the outdated notion that they were the risk-takers who made capitalism possible. In fact, he said, shareholders took little risk. If they were unhappy with the company’s management, they could sell their shares. The real risk-takers were company employees, he said. For dissatisfied employees, moving jobs was much harder. It was also more difficult for companies to recruit talented and committed workers than it was to find investors.

“In every substantive sense, employees of a company carry more risks than do the shareholders,” Ghoshal wrote. “Also, their contributions of knowledge, skills and entrepreneurship are typically more important than the contributions of capital by shareholders, a pure commodity that is perhaps in excess supply.”

Wow (emphasis mine); that’s one of the most thought-provoking things I’ve read in some time. Mind you, Ghoshal was a respected management guru, not a raving Marxist; that said, his words could be the basis of another revolution. Hungry for more, I Googled Ghoshal’s manuscript, “ Bad Management Theories Are Destroying Good Management Practices.” [pdf]

“By propagating ideologically inspired amoral theories, business schools have actively freed their students from any sense of moral responsibility.” — Sumantra Ghoshal

In a nutshell, Ghoshal argued that business schools have, for the past 30+ years, been preoccupied by two things, to little good result.

First, they have a need to have their work considered in the same favourable light that “hard” science is, by replacing ethics with “a firm belief in causal determinism for explaining all aspects of corporate performance.” This is problematic, according to Ghoshal, because unlike in science, where the universe acts in much the same way no matter what you say about it, the object of the social sciences — people — will change based on what you think about them, either rising to the occasion or sinking as appropriate. He calls this misapplication of the scientific method “the pretense of knowledge.”

The second theme is that of ideology of liberalism (in the original economic, rather than subsequent social, sense), and no name pops up more in this context than Milton Friedman. Ghoshal posits that they’ve become focused on the negative aspects of business — i.e., risks — while ignoring the positive ways that businesses and people interact. He calls this “the negative problem” of an “ideology-based gloomy vision”, which has lead to phenomenon like the complete exclusion of social benefits from business planning, because it is “irrational” and considered an aberration in a free, open market.

Dismal science, indeed.

I can’t help but wonder how technology can be used to help put management back on track. Right now, for example, investors can easily buy and sell the rights to a company’s future revenues with the click of a mouse; the price the market pays sends a signal to management about how they’re doing. It’s a very coarse-grained signal, however; it doesn’t say whether the investors prefer a long-term approach, or are in it for a quick ride.

Since we have the technology to buy and sell so easily, can we not also have the ability to impart more information into the transaction? To tell the Board that we’d prefer them to think beyond the next quarter? That maybe they’re paying the executives too much? How hard would that be for NASDAQ or E*Trade to do?


James Tauber said:

I agree with much that is said but I think that makes me more of a free market capitalist than less.

I don’t associate the problems of large corporation with free market capitalism. I associate them with the lack of it. Sure, viewed as atomic entities from the outside, large companies are operating in a market with one another; but internally, viewed as a collection of individual employees, large companies have far more in common with centrally planned socialism than free market capitalism and share many of the same deficiencies.

People need to see themselves as individuals in the market rather than employees of corporations in the market.

It is serendipitous that just before I read your post, I read one on Signal-vs-Noise entitled Side-Business Software: The neglected software market, where Jason says: “Who cares about the Fortune 500? It’s time to care about the Fortune 5,000,000.”

Sunday, July 24 2005 at 7:18 AM

Ian Bicking said:

This makes me think about microunions. Though I haven’t figured out what that might mean.

The free market/capitalist pundits treat people as cogs, and the discussion here is falling into that same pattern. Except it’s a discussion about how the cogs are intelligent cogs, or how management and stockholders should take better advantage of their cogs. It’s a little sad – I don’t think you guys are cruel and manipulative capitalists or anything, it’s just that mainstream economic thought has lost the capacity for anything imaginative or humanistic, and has lost the ability to consider people as conscious players.

What I take from what Ghoshal is saying is that employees should start taking their fates in their own hands, that they should be conscious (and hence organized) participants in their economic fate.

You guys are saying that employees should be more forceful in begging their management to be nice to them. Or maybe that management should throw them scraps more often, depending on which side you are advising.

Sunday, July 24 2005 at 9:05 AM

James Tauber said:

Ian, I thought considering people as conscious players was exactly what I was saying.

My point is that this individualism is truer to free market liberalism than the collectivism found in large corporations.

My idea of a “capitalist orgy” (to use mnot’s phrase, although I take it in a positive sense) involves individuals no where near the Global 500 companies.

And “free market/capitalist pundits treat[ing] people as cogs”? In my experience, that’s more of a collectivist habit than a free market liberal one.

Sunday, July 24 2005 at 10:15 AM

Yaron said:

I don’t think any of this invalidates the fundamental concept of a joint stock company - to maximize return for share holders.

However as we in the west move to richer and richer vistas (pun intended) we have the challenge that our most valuable employees become more powerful economic actors. Once the value of a company really was in its brick and mortar and people were cogs. Now (in knowledge industries at least) the value is in people and so the people matter. This inevitably puts more power into the hands of the employees as it is their actions that directly determine the success or failure of the corporation. This really is new and it’s importance can’t be overstated. (BTW, for an extreme example of this, look at what happened to Merrill Lynch’s management when its employees stopped believing in them)

The end result is that employees are now in a position to demand much better treatment from companies. This “better treatment” doesn’t just come in the form of higher pay or better benefits but also in terms of demanding that their management protect the employees investment in the company by focusing on long term consistent profitability over short term results.

Both of us know companies that have focused more on short term earnings than long term consistent profitability and we have seen the consequences in terms of employee retention and the damage that the mass exodus of employees who don’t believe their interests are being protected can do.

I don’t imagine that the whole market will figure out the new rules all at once and I’m sure many companies will have to crash and burn before the lesson gets through. But the beauty of capitalism over other systems of economics is that is has repeatedly proven that it can learn these lessons faster and apply them more widely than any of its competitors.

Sunday, July 24 2005 at 10:25 AM

Simon St.Laurent said:

Interesting piece. I think there may be something else going on, a bias both ideological and practical that tends to favor the (now) easily fluid market for capital over the not very fluid market for labor. (It’s “capitalism,” right?)

Businesses have striven for years to reduce their dependence on skilled (and expensive, and often ornery) labor, preferring to use cash investments to develop systems whereby labor becomes vastly cheaper or even irrelevant. Driving down (or passing on) costs seems to fall primarily on wages rather than dividends, at least if management is doing its God-given duty to please shareholders.

(It’s also hard to argue that employees have particularly strong power to demand change right now. Wages aren’t rising, unions are weak, and the labor market just isn’t particularly tight.)

The risk that laborers take with their contribution has been historically undervalued by employers. Lately employers seem to have encouraged employees to increase that risk yet further by investing in the very company they work in, taking advantage of the employee’s likely greater familiarity with the company they work for relative to everything else on the investment market.

Maybe those risks are appropriate for managers, who seem to be effectively given their shares in some form or another, but it seems very hard to me for companies to justify asking their employees to buy their own stock, even at a subsidized rate, especially as a long-term investment. Even when they do, it rarely seems that employees as stockholders are taken seriously, perhaps because they’re generally kept to a small percentage and fragmented as much as possible when they’re not.

Not that I expect any of this to change, but it’s well-worth thinking about, regardless of the size of the organization. Unfortunately, outside of cooperative institutions set up deliberately to recognize these issues, too many managers appear to believe shareholders take all the risk and deserve all of the rewards to be had. The impact of that perspective on those of us who aren’t primarily rentiers is something they’d rather ignore.

I’d like to see more done on stakeholder rather than stockholder perspectives. I know New York and Pennsylvania have such things built into their corporate codes, but believe Delaware - the most popular place in the U.S. because of its general friendliness to stockholders - does not.

Monday, July 25 2005 at 1:41 AM

eric scheid said:

When i was reading the initial post I thought of another involved party (neither employee, employee, nor shareholder), and the effect they have on this ecology. I refer of course to government and legislature. The law supports and encourages companies in pursuing shareholder value, right down to siding with shareholder lawsuits.

I wonder how much, or how little, tweaking of the legislative environment it would take to tip the balance the other way.

Monday, July 25 2005 at 7:08 AM

Jeff Bone said:

“Since we have the technology to buy and sell so easily, can we not also have the ability to impart more information into the transaction? To tell the Board that wed prefer them to think beyond the next quarter?”

I wonder if the market doesn’t already do that to some extent, with the supposed “overvaluation” of future-oriented and long-term focused companies such as the dot-coms during the bubble, Google today, etc.

Just musing…

Monday, July 25 2005 at 9:02 AM

James Tauber said:


I think we’re largely in agreement. I’m not saying we should live without large corporations. I’m just saying that I consider many of the problems with large corporations to be indicative of the fact that internally they are closer to command economies than free markets.

I do think, however, that the existence of large corporations, in many instances, is the result, not of free markets, but rather state intervention. I also think that, another reason for their existence, Coase’s transaction costs, is diminishing for many industries.

Bottom line, though, is I don’t think the solution to the problem is to be less free market. I don’t blame “unbridled capitalism” because I don’t think the solution is for it to be more bridled.

Monday, July 25 2005 at 12:19 PM

pwb said:

I’m not sure I agree with Ghoshal and he offers little evidence to support his contention. In fact, shareholders have little or no control over their destiny whereas employees are in near total control.

Earnings are simply a very efficient metric and generally work fairly well.

Tuesday, July 26 2005 at 9:41 AM

BloggerRuggles said:

Similar to my thoughts of exactly a year ago in a moment of grumpiness -

When will government recognize that the shareholder is inimical to the long-term profitability of the company?

Thursday, August 4 2005 at 3:03 AM

ryan said:

How on earn can you claim stockholders have little or no control and employees have total control over their destiny?

That’s an absurd assertion other than in a text book. Apply it to reality.

The barriers to moving around the share market as a stockholder are for all realistic purposes zero. You buy sell on a whim to suit what you want and as an owner you can excercise rights to determine the course of the company (of course tempered by your % ownership etc). Your assertion only holds true if a stockholder is locked to one stock.

The barriers to moving around the employment market are huge. Moving jobs can mean moving home, state, losing standard of living, losing benefits, changing schools, poverty. The employee also has no power over the direction of the company though they can certainly effect the outcome on mass, but that outcome is tempered by the direction already steered.

Thursday, August 4 2005 at 4:51 AM

pwb said:

Switching investments doesn’t get you a whole lot of control nor much certainty of appreciation and I know very view stockholders able to exert any influence on a company.

Whereas keeping a job and earning an income is relatively easy. And at a small company you might even be able to drive success. And if on commission, you can really influence your income.

Pretty obvious to me.

Thursday, August 4 2005 at 7:23 AM

KirkH said:

There has been a lot written recently about how corporations are becomming irrelevant because knowldge workers can work from home and a teenager with a three year old computer can create the next big thing.

For all of the calls for intervention it looks like Moore’s law and the Internet will soon silence the critics of capitalism. The problem with capitalism was a simple lack of free market enabling technology. These are early days and any bumps in the road will elicit calls for an end to globalization but that is because the left is just as impatient as the myopic shareholders they love to criticize.

What would the left protest if there were no more mega corporations? Maybe they’d gather on the lawns of small business owners and point to home gyms and saunas as evidence of the insidious rise of domestic sweat-shop labor.

Thursday, August 4 2005 at 9:26 AM

Jonathan Weisman said:

The argument that’s presented about shareholders’ risk is false because it overlooks a crucial point. The risk to shareholders is not a risk to a particular shareholder, but to all.

The idea that a given shareholder can sell is true, but only if someone else wants to become a shareholder. If being a shareholder isn’t beneficial, then no one would want to buy.

If shareholders, collectively, were to sell their shares, with no buyers, the result would be a liquidation. The company would cease to exist, and the employees would be in a bind.

The problem doesn’t stem from a focus on shareholders, but from a focus on particular shareholders in both cases: that the current group should be satisfied (which includes those employees with options – and make no mistake, highly compensated officers are employees, too). If attention were properly paid to “shareholders” as an abstract concept of those who have contributed capital, this problem wouldn’t arise.

The interesting question about other methods of estimating the virtues of business decisions remains though, but the issue is not whether they are susceptible to the same fault that usually undermines shareholder value as a concept. It is whether these methods, their peculiar vulnerabilities considered, will be more or less likely to produce bad results.

That’s a hard thing to see; but it shouldn’t be an obstacle to experimentation. . .

Friday, August 5 2005 at 9:59 AM

Sean said:

You also have to consider the consumers. They are also a driving force when it comes to keeping things balanced. Yes the employees are more important than the stockholders and the consumers are more inportant than both employees and stockholders.

Saturday, August 6 2005 at 3:24 AM

Alex in Los Angeles said:

For the sake of argument, it would be helpful to correctly characterize the argument with which you disagree.

Of course switching investments doesn’t increase shareholder control or grant much certainty of appreciation but it certainly mitigates RISK. If I may be so bold as to paraphrase Goshal, the point of Goshal’s argument is dealing with the risk of bad management not income maximization.

So, it might be easy to keep a job and earn income, but that is in fact opposite of the point. The point was that employees ARE committed to a company (to a much greater extent than a shareholder). So employees risk more in the case of poorly run companies.

Shareholders generally invest a lot less, relatively, than employees generally do, and employees have a much longer horizon when judging management. This by definition involves more risk, obviously.

In other words, Goshal’s argument is in part that Shareholder investment of capital is less risky, and often less valuable, than employee commitments to companies in many cases. Correct me if I’m wrong.

Of course, I would agree with others that experimentation is called for to decide whether greater emphasis on employee stakeholders in management decisions would lead to better managed companies.

Monday, August 8 2005 at 11:12 AM

adam alford said:

Who are you all?

I sit here with my limited experience and i wonder if any of this makes sense?? I see a lot of badgering between certain individuals on what is and what isn’t; but are any of this claims accurate? No. They are all individualistic approaches to solutions we’re creativity is scarce. The bottom line is; we are locked in a room dictated by large corporations. Those by any means necessary look out for their own interest in any transaction…

Hey, I’m only 25yrs old, what do I know??

Friday, February 2 2007 at 8:09 AM

Gordon said:

I worked for a large multi-national company who brought in a manager from another country. He was probably selected for his beliefs in globalization and I was astounded by his effect on the way we did our jobs. He believed that all of our actions should be based on maximum benefit for the stockholders. I, on the other hand, felt that they take little risk and our actions as engineers should be based on making the manufacturing operations where we worked as efficient as possible and to reduce the costs by making improvements and solving problems. Needless to say, since my way of thinking did not agree with his I was terminated. I understand that his style of management has resulted in a lowering of morale and less effective service to the corporate masters. Sorry that I am not choosing my words in the ‘egghead’ style of others expressing their thoughts here. But, stated briefly - the idea that we are working for the stockholders is just plain bullsh*t!

Monday, November 5 2007 at 12:49 PM

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