04 Oct 2007  What Do YOU Think?

Has Managerial Capitalism Peaked?

Summing Up. Professor Jim Heskett considers his reader's comments on the growing imbalance between what John Bogle terms managerial capitalism and owners' capitalism.

 

Summing Up

The clear consensus of those responding to this month's column is that managerial capitalism, as John Bogle terms it, has peaked. But what will follow it is less clear.

Many doubt that the form of owners' capitalism represented by private equity is the answer. C. J. Cullinane expressed his concerns by saying, "Our capitalism has evolved into a financial pyramid scheme and not industry building."

One piece of evidence that something is wrong with managerial capitalism was presented by B. V. Krishnamurthy, who cited the results of a study of 300 listed companies that found that "firm performance and top management compensation are inversely related." And this may not have taken into account the large severance payments made to those being asked to leave their leadership jobs because of mediocre performance.

But a debate arose over whether the establishment of direct oversight of management by owners—an important element of owners' capitalism—through the vehicle of private equity ownership is the answer. Adrian Grigoriu maintains that "A private ownership will tend to hold more control over and involvement in the board and CEO performance." Jacoline Loewen agreed, saying that "private equity partnerships have a vested interest in the growth of the company and hence see it as a living, growing, evolving organism that they can help."

A contrary view was put forth by K. Subramanian, who asserted, "The so-called merits of private equity management were oversold … companies taken over by private equity groups have been stripped of their assets … and hold unsustainable debt burdens." Gerald Nanninga, in lamenting the decline of "emotional investment" among managers, pointed out that "the owners are no better. Be it mutual funds or hedge funds, these so-called owners have virtually no emotional investment in the companies (they own)." B. D. Majuqwana comments that "the biggest drawback for PE is that it … does not aim to create new companies." Cheri Thomas says, "We need to worry about hedge fund managers and private equity managers raking in billions while decimating companies and destabilizing markets more than we worry about whether the CEO of Ford took home a few paltry millions while actually running a company that is open to shareholder control."

In looking forward, several suggested that the next era of capitalism, an answer to both managers' and owners' capitalism, may be something we may call entrepreneurial capitalism. Paul Hudnut, who suggested the term, offered a prediction: "Just as many of our largest companies/industries did not exist 30 years ago, my bet is that 2037 will be very different as well. And this will be due to entrepreneurs, not private equity funds or public company boards." This may be linked, as D. R. Elliott suggested, to the rise in the "knowledge economy" where "thanks to cheap computing capacity and the Internet, it doesn't take a billion dollar R&D platform to discover the next technology platform." Jim Winkelmann agreed, but with a caveat: "The rebirth as always (will) be in the entrepreneurial sector … creating opportunities for the next hijackers to come in and plunder the corporate treasuries for their self enrichment."

To what degree will entrepreneurial capitalism be the antidote to both managers' and owners' capitalism? Are we about to see a rebirth of Schumpeter and his belief in the power of entrepreneurial behavior in the economic process? If so, what can we do to foster the process? What do you think?

Original Article

There is a growing call for a redress of the imbalance between what John Bogle terms managerial capitalism and owners' capitalism. In his 2005 book, The Battle for the Soul of Capitalism, Bogle describes owners' capitalism as "an enormous transfer of wealth from public investors to the hands of business leaders, corporate insiders, and financial intermediaries."

Headlines remind us of very large payouts to CEOs, regardless of their performance. (In fact, it could be argued that in many cases payouts are inverse to success, since many have been occasioned by the firing of the recipients.) Some critics contend that managers have received a disproportionate share of the fruits of corporate success, leaving too little for workers or owners. Even hedge funds have been derided as better management compensation devices than investment vehicles.

What's the reason for these phenomena? According to one report, Michael Jensen and Kevin Murphy, in a book to be published in the next several months, CEO Pay and What to Do About It, lay much of the blame at the feet of boards of directors. They claim that CEOs in public companies should be answerable to directors for poor performance but in fact are not. Directors, representing an indirect form of governance, are poor representatives of owners. They are far too lax in influencing employment contracts and management incentives. The options they grant are too generous and fail to take into account the cost of capital employed during the term of the option. The severance payment arrangements to which they agree are too lavish, regardless of the reasons for severance.

Jensen and Murphy's antidote is private equity fund ownership, in which owners (as directors) have direct oversight over managers, ways in which compensation is pegged to performance, and ways in which value is increased in either the short or the long term. Many maintain that the accumulation of huge pools of money in private equity funds will bring a more sophisticated investor to the table, one capable of countering the power of the executive and exercising better governance in companies even as large as Chrysler.

Another phenomenon may provide a different kind of response to the challenge. Flush with more cash than good ideas, many large public companies are buying back their stock (which may be undervalued because they have more cash than good ideas) at a remarkable rate. If it continues, it will be a short step to take some of these firms private through the vehicle of a leveraged buyout. In this case, managers as owners will be held directly accountable for their performance.

Who will be the beneficiaries of the possible rebirth of owners' capitalism? Will the use of capital be improved through the leveraging of underleveraged assets by owners who can bring superior financial engineering to the game? Will this foster growth and jobs? Or will this just saddle acquired organizations with too much debt, requiring significant cost reductions and related layoffs?

As a result of these developments, will CEOs and the power of the executive be brought back into balance with that of owners? Or is this just the latest development in an era in which financial engineers have gained the upper hand? Has managerial capitalism and the power of the executive peaked? What do you think?

To read more:

John C. Bogle, The Battle for the Soul of Capitalism (New Haven: Yale University Press, 2005).

Michael C. Jensen and Kevin J. Murphy, CEO Pay and What to Do About It (Boston: Harvard Business School Press, forthcoming) as reported in Louis Uchitelle, "Revising a Boardroom Legacy," The New York Times, September 28, 2007, pp. C1 and C5.

Comments

    • Anonymous

    Jensen and Murphy seem to me to miss the point. It is immaterial whether the disproportionate rewards are going to directors of quoted companies or to people who run private equity funds. The substantive point is that it is being concentrated increasingly in the hands of a greedy few instead of spread fairly between multiple shareholders and employees. That surely spells trouble for the future, just as it did when the greedy few were medieval barons or communist nomenklatura.

     
     
     
    • CJ Cullinane

    Managerial Capitalism has indeed peaked and is in decline. This fact hit me when the 'sub-prime' problem burst in august. The first people asking for government intervention through a rate cut were the self proclaimed 'capitalists'. Our capitalism has evolved into a financial pyramid scheme and not industry building. New automation, advanced training for employees, replacing old obsolete facilities builds industries, not large bonuses, and when growth stops decay begins.

    The persistent 'pegging' to short term performance/stock price has a cosequence in that the manager is going to go for the big bonus and not long term competition and growth.

    Watching the television pundits begging for the Federal Reserve to lower interest rates to save the banks from the terrible decisions they made and CEOs saying that they need rate cuts to survive bodes poorly for managerial capitalism. Charlie

     
     
     
    • Dr B V Krishnamurthy
    • Director and Executive Vice-President, Alliance Business Academy

    There is growing evidence to show that firm performance and top management compensation are inversely related. In a study of 300 listed companies, we have found that the total compensation of top management in the top 5 percent of the companies measured by a variety of criteria (ROI, Growth, Market Share, Efficiency, and Innovation) was less than that in the bottom 5 percent of the companies measured along the same set of criteria.

    This is indeed a frightening scenario and it is time that all those interested in the future indulge in some introspection. On the one hand, at the operational and even at the SBU head level, organizations emphasize performance and relate compensation directly to agreed results. The consequences of non-performance are simple and straight-forward - such managers are shown the door.

    And yet, the same criterion does not seem to hold when it comes to top management. Thanks to the golden parachute and similar schemes, paradoxically, top managers are encouraged to get away with value-dissipating performance.

    The solution suggested may not work because of the size of today's corporations and the difficulty in identifying and motivating people with investible funds to be part of the private equity as a route to be on the board of directors. Leveraged buyouts have repeatedly shown, with rare exception, to be harbingers of trouble. Contrary to what classical finance would have us believe, debt may not be the cheapest form of capital.

    The only way out may be to link top management compensation to long-term growth and value creation as opposed to the fascination for quarterly results. While there is a strong case for rewarding good performance, there is perhaps an equally strong case for punishing poor performance including, but not limited to, some form of ostracization of those who tend to place personal gratification and the illusion of power above the public good. Unless this is done, and done quickly, the future of capitalism as we have known it all along may be a question mark.

     
     
     
    • Adrian Grigoriu
    • Strategy and EA consultant

    It appears that there are a couple of issues to be debated: the public versus the private ownership and the excessive pay of executives. The answers seem to be hidden in the question.

    Historically, societies based on collective ownership have failed since they do not promote personal responsibility.

    Also, the public ownership control, performed through the board of directors, does not deliver well because there is no effective governance act to regulate, enable or empower them against the executive; the boards themselves are not adequately accountable for failure.

    An explanation for the second issue is that the CEOs, while having all the authority, are not held sufficiently, financially responsible by the board or law for their performance. People would be more reluctant to candidate for the CEO role, any role for that matter, if properly held accountable.

    A private ownership will tend to hold more control over and involvement in the board and CEO performance.

     
     
     
    • K. Subramanian
    • Not employed, Freelance

    To fall back upon private equity fund ownership is more like falling from the frying pan into the fire. In recent years, in the wake of huge take-over bids, private equity groups like Carlyle, KKR, etc had become respectable. It reflected a new a trend in which much of US and European companies would be taken over by private equity groups. Many theories and arguments were 'discovered' to defend the rise of private equity. Sadly, it was an aberration. It was a false dawn and was bred by current global imbalances flush with liquidity and vaulted astronomically by LBOs and CDOs of a questionable nature. The subprime crisis has brought the chariot to a grinding halt. Practically all the deals in the pipeline are stuck in mire. Central banks are expectd to salvage them by pumping in billions of dollars of public funds. At what cost and whose benefit?

    The so-called merits of private equity management were oversold. It may, at best, hold good for individual companies but not across the board as a new way of managing companies. By now it clear that the companies taken over by private equity groups have been stripped of their assets (cash?) and hold unsustainable debt burdens. It is unclear how many of them will go bankrupt in the next round of the financial crisis. The honeymoon for private equity is over. The phenomenon had killed itself by over reach and will not last long even if the current tax benefits, which are the sole basis for their growth, are not withdrawn. Now liquidity has a new fear of private equity groups. Legends like Schwartzman may have to live off their past earnings. In any case, it is a weak and unsound paradigm to rely on as a model of capitalism.

     
     
     
    • Shann Turnbull
    • Principal, Int. Institute for Self-governance

    For Managerial Capitalism to reach its peak we need a system of property rights that more equitably distributes ownership to create a more efficient and sustainable society. In this way, the few could not exploit the many as now occurs by the managers of public companies and those in Private Equity firms as discussed by Bogle, Jensen and Murphy.

    The ability of managers in public companies and owners of private firms to obtain excessive rewards is because the rules of owning corporations allows investors to get grossly overpaid with "surplus profits". Surplus profit is the cash received by investors after their investment time horizon. So by definition they are profits in excess of the incentive to invest. This means that investors and/or the executives controlling the cash flows can get overpaid to reduce the efficiency, equity and political sustainability of our current form of capitalism. As accountants do not use investment time horizons to report profit, surplus profits are not reported and are not recognised by economists. Evidence of surplus profits is provided by Bogle who noted the ?enormous transfer of wealth from public investors to the hands of business leaders, corporate insiders, and financial intermediaries."

    Managerial capitalism would peak with the introduction of ecological capitalism in which ownership rights to corporations and realty would become dynamic and time limited like all forms of life instead of being static and perpetual.

    Reported profits would not change if the ability to write off the cost of investments for tax purposes was tied to its ownership transferring to stakeholders at the same rate. In this way co-ownership and control would become much more widely spread. An incentive would be created for firms to distribute their operating cash flows and expand their operations by sponsoring "off-spring" corporations with re-investment through the capital markets. Investment decisions would transfer from executives to the owners and their agents to greatly expand the size and efficiency of the market as well as "Democratising the Wealth of Nations", the title of my 1975 book.

     
     
     
    • Paul Hudnut
    • Entrepreneur/teacher, various

    A few other trends to watch that may impact managerial capitalism:

    1) Rise of entrepreneurial capitalism in other countries and increasing freedom of movement of human capital. The advantages of large firms may be in decline. 2) Start-ups with "baked in" focus on triple bottom line, vs. MNC's with "bolted on" efforts, may provide more opportunity, and less liability, to new entrants 3) Increasing popularity of social enterprises as first jobs for graduates of elite business schools (e.g., Teach America eclipses McKinsey).

    While financial capital is the focus of this post, human/social capital is flowing somewhat differently. Hard to know if this is the beginning of a "tip" or just a fad. I am investing my (limited) financial and social capital based on the view that this is a sustainable trend in sustainable business. Just as many of our largest companies/industries did not exist thirty years ago, my bet is that 2037 will be very different as well. And this will be due to entrepreneurs, not private equity funds or public company boards.

     
     
     
    • SG Khalsa

    In my opinion John C. Bogle's book "The Battle for the Soul of Capitalism" is a must read for any person that has ever offered their viewpoint as to the "good" or "bad" of business.

    He leaves no groups untouched either for their personal greed, "absentee" way of investing, or lack of control--either self-regulation or governmental controls.

    He says it best, so I defer my comments. Relax, take some time, and enjoy the read; uplifting, because now you know one way to make the world better and it doesn't matter which political party you belong or how much your believe in capitalism.

    Practicalism is the new, even if not perfect, ideology.

     
     
     
    • Phil Clark
    • Clark & Associates

    Let's eliminate the big words and address the fundamental concepts. Everyone works in their best interest. The key is to define best interest. For far too many years, the measure has been dollars, cents, big cars, homes, and for many the celebrity's lifestyle. With those goals we will continue as we are.

    Where do we want this economy and nation to go? In fact, let's look at the last "What Do YOU Think?". Wasn't it focused on business schools? Where do they focus?

    As long as we allow greed and economic unbalance to succeed it will continue.

    Check the mirror. What type of economic life for this nation are you fighting for?

     
     
     
    • Jacoline Loewen
    • Partner, Loewen & Partners

    Managerial Capitalism is an old style business model in decline because emerging pools of private equity (private money) are the new species crowding out these oaks of finance.

    Jensen and Murphy, in their book "CEO Pay and What to Do About It", are right on track with their claim that "Directors, representing an indirect form of governance, are poor representatives of owners. They are far too lax in influencing employment contracts and management incentives."

    What happens is that Directors spend time with the CEO and then human nature, being what it is, they find it difficult to question. Add to that the money for salaries is not money coming out of the Director's own back pockets, and you can understand that these Directors don't feel the same level of pain of the private equity partners who actually own the company. That cash is coming out of their annual profits, but worse, out of capital to build the company's future.

    I call it the ATM versus the living organism style of capitalism--the ATM machine representing public shareholders who see companies as money spewing machines.

    In comparison, private equity partnerships have a vested interest in the growth of the company and hence see it as a living, growing, evolving organism that they can help.

    If you were CEO of a division or a company, which type of investor would you prefer? One that is uninvolved and sees your business as an ATM? Or investors who show up and may hammer you on sales direction but who are excited about the company?

     
     
     
    • D R Elliott
    • CEO, TEQ Development

    To say managerial capitalism has peaked is to suggest that there is at least one better alternative to displace it. So what is it (or them)?

    We are living in what is being called a Knowledge Economy. A small part of that knowledge is tied to financial engineering. Managerial capitalists have done an effective if self-interested redaction of financial technologies to define and improve corporate business performance. The reduction of finance by technology is a productivity enhancement that reduces the bodies needed to manage it thereby centralizing control in hands of fewer operators. Not surprisingly, the remaining operators have also tied their compensation to the financial technologies they employ.

    Financial engineering is considerably less than 10 percent of the knowledge capability of the Knowledge Economy. So what is happening in the other 90+ percent? Unlike the centalization of financial management, the rest of the Knowledge Economy is undergoing radical de-centralization. Thanks to cheap computing capacity and the Internet, it doesn't take a billion dollar R&D platform to discover the next technology platform.

    So it occurs to me that the micro-economies of knowledge development are more likely than not going to impact managerial capitalism with these new economies of scale. As they do, we can expect the mechanisms of capital markets and managerial capitalism to change as well.

    The one caution I would offer is that while knowledge tells us what is possible to do it does not tell us what is best to do. And those are problems best solved by metaphysics not particle physics.

     
     
     
    • Anonymous

    Jensen & Murphy's antidote is dead wrong. The private equity fund owners demonstrate a higher level of greed than corporate managers, though perhaps only because they have access to larger amounts of loot.

    It seems clear that the real problem we face is greed, which is abetted by a prevailing attitude that "I" am entitled to whatever "I" can take by any means, and enabled by the fact that those in power have no effective controls or restricions on them.

    In our American society, which can be described as vengeance-driven on many levels, there is no punishment for greed. Rather, it is often envied.

    This problem has roots far deeper than the top levels of the corporate organization chart; it is a problem of morality, of distinguishing right from wrong on a purely human level and then doing what is right.

    Looked at another way, few seem to have learned the lesson implicit in The Goose That Laid The Golden Egg.

     
     
     
    • BLHayes
    • Principal, BlazeFox

    I think that we're suffering from a confusion in thinking from the history of the past 50 years, in which government let big company funds implicitly cover more and more social spending. (MIT's Lester Thurow has been saying this for quite a while, so I can't take credit for this.)

    As a society we need to ask ourselves just what is the proper role for government? For example, in health care, where I've spent quite a bit of my career, in the US we run around the issue of individual choice of caregivers. I am sure that a more economically valid question would be "How can we maximize the risk pool?".

    To move away from medicine, a hard working honest person may have been a "just" member of capitalism and not one of the much-maligned "welfare queens" people like to run against, and still wind up at age 65 poor and with a chronic medical condition. Welfare as long-term care for some in our society is not discussed, but government does have a function as a "risk pool".

    I feel that Canada and Scandinavia have engaged in this discussion in a far more serious way than we in the US have. I suggest that this discussion become far more serious as the baby boom population ages. The issue is NOT whether social security is solvent, but it IS do we have the proper role for corporations and people in this society? Corporations have fought to get out of the traditional caretaker role that GM, IBM, AT&T and others took on during the 50s. Government should have taken it on in a way that reinforces the economic values that we want to maintain. Let's discuss how to make this happen sooner rather than later.

     
     
     
    • Jim Winkelmann
    • Principal, Blue Ocean Portfolios

    Unfortunately "managerial capitalism" has not yet run its course.

    The shareholder base of the major public companies is as diluted as it ever has been. The controlling shareholders used to provide an accountability back stop to the hired guns brought in. Now in most cases the controlling shareholders have been diluted through inheritance, mergers, and add on capital raises.

    The prime and recent example of this was the Wachovia-AG Edwards merger. The Edwards family owned less than 5 percent of the stock and the vast majority of the AGE float was in index funds. Even though the Edwards family was vocally opposed to the merger there just wasn't any votes from the index funds to support the family's position.

    This merger could have been a poster boy for Bogle's book. Nothing was achieved except fat retention bonuses for superfluous and duplicative senior managers, who negotiated obscene pay packages with themselves.

    Bogle is right--the managers have hijacked corporate America and unfortunately this tide is still rising.

    The rebirth as always be in the entrepreneurial sector. And the cycle will continue as the newer companies elect to pursue the valuation and liquidity that the public market place still offers creating opportunities for the next hijackers to come in and plunder the corporate treasuries for their self enrichment. No one is there to stop them!

     
     
     
    • Anonymous

    Boards hold little ownership stake and are only peripherally involved. CEOs--so-called professional managers--show total disregard for domain expertise. CFOs rubber-stamp recalculated earnings based on increasingly meaningless rules. Sycophants follow their Boss like lemmings. Analysts sitting in cubes in New York speculate market values and capitalization. Regulators permit the reconstruction of Ma Bell, give us the current mortgage debacle, and turn our national surplus into mountainous foreign debt.

    Has the looting peaked? We'll know by the sound of the crushing collapse when the perception bubble bursts once again and we realize that all our wealth creation has been shipped to Eastern Europe, India, and China. I hadn't realized how many people had read "Atlas Shrugged"; too bad they didn't finish the book and learn how their story actually ends. But then again it seems to take a 1929, a 1941, or a 2001 to wake the American people up long enough to take action vital to their own self-interest.

     
     
     
    • tyasuda
    • founder, thecapitalclinic

    To frame the debate regarding the "peaking" of (i) managerial capitalism and a redress of the "imbalance" towards (ii) owner's capitalism, and more particularly a sub-species of the latter - private equity fund ownership of the present and future cash flows of enterprises, may be a useful Bayesian starting point to explore the many faces of capital. But it is only a starting point.

    Indeed, the check on managerial excesses and poor governance of our MNCs by pro-active private equity fund stakeholders may well provide a much-needed "redress" when addressing who has first dibs on the "excess" cash box of the business enterprise, (i) the inner sanctum of corporate managers with adversarial over-sight by ham-strung, lawyered, and D & O protected directors, or (ii) private equity "stake-holders" who are themselves conflicted [as summarized below].

    The high risk premium that the market currently assigns to clear (that is to say, balance in turn) the expectations of (i) private equity "investors" and (ii) private equity fund "managers" [getting their 2 and 20 percent] generally requires the leverage provided by short-term commercial bank financing that must be liquidated according to a time horizon imposed by risk-adverse credit committees and regulators.

    The foregoing model of capital intermediation, of course, superimposes its own complex dynamics and creates its own set of inherent conflict of interests within the leveraged private equity fund structure itself [which is all the more exacerbated when the managing partner component of these firms obtain separate public-listings].

    I suggest that ownership capital represented by private equity funds will run into its own "peaking" problems regarding the broader question: what constitutes an optimal model of "capital" formation.

    A more relevant framing exercise might be to compare the predominate form of "corporate capitalism" today and the growing empowerment of web-based micro-finance units in the form of what might be usefully identified as "cottage industries 2.0." This would permit fuller consideration of the varieties of capitalism that are beginning to sprout in the modern era, to encompass social and cultural capital, as well as the financial capital that remains the tunnel-vision focus of our all-too money-minded academies, gifted teachers, and the best and brightest of our students and entrepreneurs.

     
     
     
    • Simon Stapleton
    • Principal, COMMERCE-SAVVY.COM

    The moral and ethical aspects of this subject can be debated adnauseam--it's very subective.

    I'm sure that shareholders react badly to news that the CEO of the company they part-own is paid so well. But isn't this similar to the situation in sports? Obscene salaries are given to top sportsmen and women because that's what it takes to land and retain them on your team. If you don't pay it, someone else will. The situations where poor performers are paid more... well that's just an indication of a flawed or rushed recruitment process.

     
     
     
    • Kapil Kumar Sopory
    • Company Secretary, SMEC(India) Private Limited

    To delve into the present morass of unjustified CEO compensation that is not in sync with the overall perfomance of the organisation, one has to understand the supply and demand factors prevailing in the head-hunting area as far as top management, in particular,is concerned.

    Availability of skill is very short and there is a cut-throat competition in the market. Obviously, the advantaged are the CEO's. Shareholders' say is not of consequence becauses management can explain away large monetary hikes to factors made to sound logical on the surface.

    The private sector is generally not reasonable while accelerating compensation. The Indian Prime Minister's recent oblique comments about exorbitant salaries paid to CEO's in the private sector caused private sector managements to react critically. This has now made bureaucrats (IAS category) raise their voices for matching compensation. Debates will go on and authorities may succumb.

    The country is becoming richer through the wealth attributable to the very creamy layer (of managers), but the level of poverty among the masses does not reduce. It is time better distrbution of wealth be thought of and priority actions taken, but it does not appear to be a possibility in the near future.

    Managerial capitalism is, therfore , a stark reality and has got to be accepted as an unavoidable feature.

     
     
     
    • Gerald Nanninga
    • VP, Retail Ventures, Inc

    Another point to consider is the shift in emphasis between monetary investment and emotional investment. Ever since the implied contract between employees and employer was broken, there has been a decline in the emotional investment an employee will give to their employer. Even at the highest C-levels of business, tenure is near an all time low. If no long term emotional commitment or expectation of staying around is held, then one is left with just trying to get as much money as one can as quickly as possible.

    And the owners are no better. Be it mutual funds or Hedge funds, these so-called owners have virtually no emotional investment in the companies. They are just gamblers betting that they can win on their company bets.

    Back in the days when the name of the company was the same as the last name of the CEO, there was a lot more emotional investment in the outcome of the company. Outcomes were measured in more than just money. The CEO knew they were there for the long-haul, so they had better build a great, long-lasting company.

    Rather than trying to build great companies, we seem more intent on cashing in today. Those possessing this skill are winning the salary game.

    To me, it is no coincidence that this short-term "get it all today" mindset is taking place at the same time that the profession of long-range strategic planning is dwindling.

     
     
     
    • John Lagace
    • Manager/partner, E&C Company

    Interesting comments. I suspect the younger crowd is suggesting capital (that which is invested) can originate from other than the private sector. THE PUBLIC SECTOR HAS NO CAPITAL OTHER THAN THAT CONFISCATED FROM INDIVIDUALS!! No matter the reason/justifiction, it is stolen property. Sustainable anything is pure rubbish. Capitalism has been and will always be sustainable. Nothing more sustainable.

    If you try to redistribute, you give capital to those least likely to be able to benefit from it and remove it from those able to create wealth that is best shared through job creation.

    The future? All socialist/communist states will abandon their central economies for capitalism with a centrally controlled government intact.

     
     
     
    • B. D. Majuqwana
    • Shishina Holdings

    The author seems to have faith in the positive role by played by so-called private equity (PE) capitalism. He seems to think that PE is as an antidote for "managerial capitalism". I find this less than convincing when considering the record of PE.

    This shows PE is more about easy and quick riches at almost no risk. PE is not about building self-sustaining companies in the long run, but that is what society needs. The financial record of PE companies is superficially impressive during the early stages of development but as the number of companies and the size of deals become statistically significant, a different picture is likely to emerge.

    A winner takes all situation will emerge (this seems to be the case already) giving rise to the same situation of monopoly capitalism that created managerialism. Once more rewards will be inversely related to performance. Managerial monopoly capitalism grew out of the bandwagon of scientific management that also created easy reaches for a few of its perpetrators. Similarly, the private equity bandwagon will be a source of reaches for a few but it will ruin a great many until it too reaches its developmental limit.

    I think the biggest drawback for PE is that it is fundamentally predatory and also does not aim to create new companies. It is analogous to cannibalism, to be sure. Its spread seems destined to lead to a greater sense of insecurity for workers. Perhaps it is high time that the well being of employees becomes the cornerstone of modern business, as opposed to so-called shareholder "value." If managerial capitalism is in crisis, that is surely good news--but faith in PE capitalism is misplaced. Why not pay attention to the growing number of democratically owned and run companies, e.g. Gore and Associates, Mondragon, SEMCO, etc.? Are these models not superior to PE?

     
     
     
    • Edward J. Dodson
    • Director, School of Cooperative Individualism

    One public policy response to the excesses existing in executive compensation within corporations is to use tax policy to encourage the formation of cooperative enterprises over the corporate form of ownership.

    A parallel approach for corporations would be to impose a graduated gross revenue tax structure on corporations based on the ratio of executive-to-median employee compensation (or some more appropriate formula. Basing the tax rate on gross revenue prevents expensing of executive compensation to effect a lower tax obligation.

     
     
     
    • madakadze tinashe
    • revenue specialist(taxation), zimbabwe revenue authority

    Whilst CEOs do a great job steering organisations into success most of them are overpaid.In most cases directors are too reluctant to scrutinise the details of management contracts.This is maybe because one would be a director of many companies and would be too busy to get into the nitty-gritty of management pay and rewards or even demand perfomance.

    Shareholders are also not helping the situation because the majority just invest and leave everything to directors and management. Annual meetings are poorly attended and serious questions rarely raised with regards to management perfomance and their rewards.

    Managers should be paid well but shareholders and employees should enjoy a fair share.Why stifle the owners of capital(sharehoders) and those who work it (employees)?

    Shareholders should be active during annual meetings and this would prompt directors to follow management perfomance and rewards.This will also reduce group think in board meetings because the resultant decisions would be criticised by investors at AGMs.

     
     
     
    • Edward Hare
    • Retired Director, Strategic Planning, Fortune 300 Mnf'r.

    I hear Professor Heskett's question as "is there hope?" for what most people see as very, very, serious flaws in the dynamics of business....and society.

    Rising above the details of CEO pay, the performance of Boards as enablers, the "right" form of capitalization, and athlete salaries, several posts point out the very nature of human behaviors. And how those with power and position are unlikely to act much beyond their own short-term self-interests. And that market dynamics for "talent" are in part responsible for the excesses we read about daily.

    Seems to me that there is a small number of factors that, when combined, faciltate the imbalances that authors write about. When the money gets big enough it attracts a certain type of person. When oceans of public money are made available through the "Magic of Government Intervention" free-market dynamics are badly distorted (even though we love to delude ourselves that ours is a system of free-market capitalism!!).

    When company executives can see a way to enlist accomplices to excessively compensate themselves.....well, you get what we have. When the exchange of money-for-value gets so distant or derivatized then that exchange begins to lose sight of reality. Sports stars salaries being funded by huge pools of adverstising money (an invisible cost passed onto consumers) and taxpayer-funded stadiums is a wonderful example.

    In my last days in Corporate America it became obvious that mangers were playing with Monopoly Money....that a dollar of revenue and profit had lost any real meaning to them. They were just numbers on paper. But they knew full well that employees were simply "costs". An input that Business Schools had taught them need to be minimized. The results.....pretty predictable.

    Until we re-order our thinking and take distortions OUT of our systems things won't change much. Those with power, position, and friends will just find another mechanism to "game" a revised system. Sadly, I don't think we've moved beyond that.....yet.

    What I want to know is......how come we keep examining the same underlying dynamics all the time that manifest themselves differently? We yearn for Leadership....yet can't find much. We seek "fairness"....but it's hard to come by. We turn to the "government" to straighten things out....yet it seems mired in it's own self interests and polluted by money and special interests. What will it take to get any substantive change in the trajectory of human behavior in business? Who could be the Martin Luther King or Archbishop Tutu that is willing to stand up and take the lead? Is there any organization with enough independence and respect (the U.S. Congress fails that criteria) that could be formed to influence public policy and marshall private sector actions?

     
     
     
    • Cheri Thomas
    • NAI Nashville

    Anyone interested in this topic should listen to the program that Bill Moyers did with William Donaldson and Robert Kuttner, http://www.pbs.org/moyers/journal/10122007/profile.html. They talk about the inability of the capital markets to police themselves, and the cost the "financial economy" is inflicting on the "real economy."

    We are focusing on the wrong problem when we focus on whether "managerial capitalism" has run its course, despite admitted problems. The public companies run by managers are open to scrutiny, and when problems are diagnosed, solutions follow. They may not be perfect, but they are possible.

    I believe that our economy and our polity is much more threatened by the structure and behavior of the financial markets, especially private equity funds, hedge funds, fund managers, and other unregulated entities such as the mortgage-backed securities industry. These are huge, opaque, and not open to scrutiny or regulation. They trade in instruments even they don't understand very well, looking for any kind of edge in returns, heedless of risk. And the fall-out is economy-wide.

    We need to worry about hedge fund managers and private equity managers raking in billions while decimating companies and destabilizing markets, more than we worry about whether the CEO of Ford took home a few paltry millions while actually running a company that is open to shareholder control.

    Cheri Thomas, MBA '80, DBA '86

     
     
     
    • Anonymous

    I find it increasingly difficult to understand the market and I think that is because it is increasingly difficult to understand financial reporting realities.

    My preference is to see a return to private ownership of companies. This could be in the form of employee ownership. What the country needs and what a few investors or CEOs need is not important as a whole. I am thinking of the social fabric of the nation when I say that private companies may be better for America. So, as for managerial capitalism, I don't think it is a success. As for ownership capitalism, yes but be careful how you do it.

     
     
     
    • Lorenzo Ferlazzo
    • ferfin llc

    I'd agree with much of what Edward Hare writes. I guess this topic is also asking "what is the most viable alternative to managerial capitalism and how should this alternative be defined?" Before promoting new ideas maybe its worthwhile re-evaluating and revising existing governance parameters. After all, we're dealing with a bunch of individuals with varying responsibilities who apply varying degrees of accountability to varying levels of managerial competency - which is a lot of human variables to manage, and it is human to err.

    Technology also errs; an analogous example of managerial capitalism is the algorithmic trading program used by hedge funds. Essentially, most of the decision-making becomes autonomous, with results reflecting the propensity for human managers to set varying performance objectives and investing owners to apportion varying levels of investment and accept varying levels of risk. Private equity managers also err...

    So, what are we really looking at? My view is that there's no definitive alternative to a practice defined as managerial capitalism. At any stage of corporate and social evolution we're always tweaking to seek improvement. Is it necessary to radically alter an approach that has generated appreciable results over time regardless of disparities (imbalances) in wealth? What would make an alternative such as ownership capitalism better? Can anyone imagine the Wilshire 5000 companies guided by ownership capitalism?

    If this debate is about unfair CEO and director hegemony in publicly-traded companies, owners might express their opinions by adjusting their investment positions sufficiently so to elicit change in behavioral decision-making, in other words take their money where they expect to receive what they consider to be reasonable social and financial dividends.

     
     
     
    • David Martin
    • MBA '79, BearingPoint

    To the extent that private equity really is "private" it seems unlikely that it will ever have enough money to replace public equity. The problem is that boards of directors do not effectively control their managers because ownership is too diverse. Directors should be more accountable to their shareholders and less to the managers. Shareholders need to find ways to band together to insist on improved accountability of their directors.

    Such changes could either be imposed by the SEC or by the market as a way to increase shareholder values. Would more investors send their money to firms where the board has demonstrated a commitment to representing shareholders rather than managers?

     
     
     
    • Jay Somasundaram
    • citizen, Homo Sapiens

    Managerial capitalism is really two different concepts: managerialism and capitalism. My opinion is that both have reached their peak.

    Managerialism is about bosses giving orders. While this appears to be optimal for certain situations, the alternative organisational structure challenging managerilism is perhaps best captured by the phrase communities of practice. Capitalism, as Wallerstein puts it, has become a method of dominating the masses, such as religion and the divine right of kings were in previous ages. Certain economic models, such as markets, are useful, but too often we forget that they have serious flaws, and they frequently end up doing as much harm as good.

     
     
     
    • Anonymous

    The private vs public equity question is beside the point - both have their upsides and downsides, neither is actually "better" than the other. Consider the following:

    1. Research has shown that most private equity returns above the market average are due to leverage (debt), and on a risk-adjusted basis, private equity fails to outperform the public markets. Thus, PE is no better at creating traditional shareholder value than public management is.

    2. PE does not take a "buy-and-hold" management approach - rather, the aim is to rapidly improve a company before selling it off. This role of fixing broken companies is a very legitimate and necessary role, but what is often traded off is a long-term focus (which is also required, and some would say, sorely lacking today).

    3. Income inequality is fundamentally a public policy issue, i.e. the government needs to come up with a better system of income distribution, via a combination of taxes (+/-), subsidies and incentives for lower-income households, appropriate public spending (e.g. investing in education), etc. However, government is incapable of doing this unless the population decides to vote in a mandate for change - and herein lies the problem. On the whole, the population is happy voting for policies that appear attractive to them individually (e.g. lower taxes) rather than "nation building" policies (e.g. improved public education).