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  • Who gets what from whom?

    Posted by Chicago Boyz Archive on June 4th, 2004 (All posts by )

    Michael’s post, “Wolves & Sheep,” raises some points I have mulled about on and off. Let me start out with a comment once made to me which tied together many disparate observations. A friend of mine works for a very large vendor of medical products. He is smart, hardworking, and astute about office politics. He worked his way up to being a major salesman of very expensive, niche products. There are only a few people in the world who do what he does. He has been able to leverage his rare expertise to switch firms a few times, getting very substantial increases in pay and bonuses and other goodies each time.

    My friend explained very well the general phenomenon, where Michael’s post is about a few specific episodes. He put it something like this: “Remember, this country is organized, managed and operated by and for the people at the top.” This is true of all countries everywhere. It is not a problem with a solution. It is an immutable reality. He offered many specific examples. If you are not high enough up the business ladder, you take your wages, keep your nose clean, and you get in trouble if you waste a paper clip. Get above a certain line, and all of a sudden things that were terminable offenses are now taken as normal and expected behavior. Use of company vehicles is one conspicuous example, or what type of travel and dining are considered billable is another: rigid rules for subordinates, a goodie-bag for the top guys. The tax code is written to favor those with the income and sophistication to take advantage of it, for example, and businesses structure the compensation of senior personnel to take maximum advantage of the tax code. Boards of directors are a very weak check on this basic reality They see perfectly well that the purported “agents” of the corporation, its executives, act not only like owners but sometimes more like absentee landlords. But, remember, all of the guys on the board are themselves “above the line” and benefit from the status quo and will only tinker at the margins. In other words, the Lockheed managers Michael mentioned keep all the bonus money because they can. Businesses exist in theory to serve their customers and enrich their shareholders. In practice, they often serve and enrich their management first and the other constituencies second and their employees distinctly last. Lockheed makes airplanes but its de facto, over-riding purpose is to enrich its management.

    That is what it is like in America. Should we bemoan this? Not really. It is way, way, way worse in most other countries. Also, a critically important element here is that competitive pressure is real and intense and puts a substantial check on all this, far more than most places. Also, to the extent the abuses become too egregious, or are accompanied by bankruptcy or perceived business failure, they can become fodder for the media, which can cause a career to end in disgrace. And looming in the background, truly abusive behavior may attract the attention of the State Attorney General or the Department of Justice. The executive who goes too far may find himself handcuffed in his office and perp-walked out of his office in front of the TV cameras. This remote but really scary threat provides some check against the most extreme abuse.

    More importantly, the fact that this country offers so many opportunities allows us to shrug off the frequently grotesque behavior of senior management in our major companies. In the good old USA any individual person can at least theoretically (1) hack her way to the top of the business ladder by means of talent, cunning and animal stamina and get those goodies for herself or (2) build her own business and run it her own way, or (3) find a way to opt out of the rat race by, say, getting some public sector job or living down-market in some inexpensive place or otherwise foregoing the tastiest of the material goodies on the smorgasbord in exchange for peace and quiet or self-respect or a few hours a day not at work. And in fact, many, many people take advantage of these opportunities which our fabulously productive system makes possible.

    But no one should ever be surprised that there is lots of ugly, cynical, injustice in the business community, or narrow-mindedness, or irresponsible greed, or pathological egotism in its top ranks. Adam Smith had no respect whatsoever for the moral character of business people. He thought they’d do anything for a buck, or in his day a shilling, and use any means fair or foul to hang onto it once they got it. Human nature being what it is, that is very frequently true. A lot of senior business people are fine people. I’ve met some. Some are simply malign. I’ve met one or two of those. Most are talented people who from time to time succumb to ordinary weaknesses when faced with the temptations of greed and pride and power.

    The American capitalist system is a very good one in comparison to others that have been tried or which are realistically conceivable, and it creates many wonderful opportunities and many wonderful and affordable products. But it is not always pretty to look at in operation. Its enemies focus only on the latter, its friends, like me, focus primarily on the former. We should value our capitalist system without romanticizing it, and understand and try to mitigate its defects without vilifying it. We need to be realistic about the limits of the possible and the enduring weakness of human nature.

     

    3 Responses to “Who gets what from whom?”

    1. Mitch Says:

      What we’re really dealing with is the “agency problem.” The owners want to make a profit, but don’t have the time or ability to manage the managers. What they must do is align the interests of the managers with the interests of the owners. In a capitalist system, this is usually done by rewarding the managers for the performance of the company. This could be in the form of stock or options, which increase in value under successful management, or performance-related bonuses.

      Sorry to say it, but we peons don’t really enter into the equation. If we produce for the company, we should either get rewarded (as part of the alignment of interests) or sell our services to another buyer.

      The US also has a method for disciplining managers that other companies do not: the hostile takeover. When this happens, the shareholders essentially fire the management. The usual trigger for one of these is shareholders expressing their lack of confidence in management by selling the stock. The low stock price attracts bidders. This process is more difficult or impossible in some other markets. This is also why US shareholders tend to protest when management tries to put anti-takeover measures in place (poison pills, staggered board terms, etc.).

      I’m not saying this always works, or works well. the Enron and WorldCom managers served their own interests by artificially inflating the stock price and performance measurements of their companies. It could also be that the incentives to management are unreasonably lavish, or that the incentives can be gamed in ways that don’t benefit the company.

      As for the boards of directors, I wouldn’t put much hope in them. Even the “independent” directors are usually too close to management and too far from the operations to be of any use. Increasing the transparency of the company’s operation and the power of shareholders to place their own representatives on the board might help some.

    2. Lex Says:

      Mitch, agreed on all points, especially the possibility of hostile takeover as a discipline for management, a point which I should have mentioned.

      “…the incentives can be gamed in ways that don’t benefit the company.” Absolutely, if by “company” you mean shareholders, absolutely not if by “company” you mean the purported agents, the officers.

      “…Increasing the transparency of the company’s operation …” That is the way to go, generally. Let the shareholders know everything except the trade secrets, and let them sell their shares if they don’t like what they see.

      Agreed about being a peon — the world is built to keep you in that status. The short answer is to not be a peon. The long answer is if you get stuck being a peon, try to figure out a way to get out of being a peon. That’s the overarching message. America is a great country, but it is a country whose greatness lies in letting the game be played hard, with winners and losers. Don’t ever think it is a nice party where everybody gets cake. Some people get a lot of cake, a bunch of people get a little cake, and a few people get no cake. But, by God, in America we make the damn cake every day. That’s something. It’s a lot.

    3. rdbrewer Says:

      “Remember, this country is organized, managed and operated by and for the people at the top.”

      And high-falutin socialists are just using government to fight for the same hegemony.