Enriching managers
William Pfaff International Herald Tribune/Los Angeles
Times
Monday, September 9, 2002
iht.com
PARIS The orthodox response to the crisis of
American capitalism is to reform the system, but
reform is useless when the system itself has
failed. Enron was a scandal but also the product of
a pathological mutation in capitalism.
Most people who are not economists, probably
including most graduates of American business
schools, do not understand that the capitalist
model we now use is a recent invention.
It is not the system that created the modern
industrial economy and modern Western
prosperity. It rests on a conception of the business
corporation that became generally accepted only
in the 1970s and '80s, and was substituted for
what before was known in the United States as
"stakeholder capitalism," in which management
was considered accountable to employees and
community as well as owners.
A French economist, André Orléan, has called the
new system "patrimonial" or "owners' capitalism,"
because "all the economic actors (managers,
employees, small investors, banks, the state) are
expected to align their interests to support the
interests of the owners of the company." These
owners are the stockholders, whose interest is a
return on investment. This means that they
expect a high and rising value for the stock and a
steady increase in profits.
The theory is open to criticism for its indifference
to social issues, but is coherent. However, as the
international public has discovered in recent
months, the theory has not been practiced.
Instead, in the United States and in countries that
have adopted the American business model,
something new, "managers' capitalism," has been
substituted for owners' capitalism. This new
version of capitalism functions primarily to enrich
corporate managers as a class.
In 1941, James Burnham, a repentant Trotskyite,
published a book called "The Managerial
Revolution," which was to have a lasting effect on
economic thought and business theory. Burnham
said the old class struggle had been overturned by
the emergence of a new class, the managers, who
were replacing the old-style capitalists of classical
Marxist analysis.
Burnham said the American economy of the
1930s, shaped by New Deal government
interventions, and the economies of the Soviet
Union and Nazi Germany all were run by this new
class.
Other business theorists refined his idea, and a
general agreement emerged that the classical
capitalist as a social type had been replaced.
Companies today are rarely controlled by
individual owners or families. Pension and
investment funds have become the most
influential holders of corporate stocks, but they do
not function as old-style owners. Their sole
interest is investment return, and that is the
criterion by which they judge a corporation's
professional management.
In theory, of course, professional managers act in
the interest of the owners. It has been taken for
granted that the objective of professional
management is efficiency and the well-being of
the corporation. Yet this proves not to have been
the practice of many managers. The corporate
scandals revealed during the last year all have one
thing in common. In all of these cases, the
corporation was being run to profit its managers,
in complicity if not conspiracy with accountants
and the managers of other corporations.
Managers served complaisantly on one another's
boards and on the remuneration committees of
one another's companies. "Independent" directors
were beneficiaries of corporate business or
charity. These managers often proved indifferent
to the long-term interests of their companies,
making decisions for short-term advantage that
were predictably damaging to the company, if not
ultimately ruinous.
Their purpose seems to have been to get out in
time, with a fortune acquired at the expense of
stockholders and employees.
Since "everyone" was doing the same thing,
including persons eminent in successive
administrations in Washington, why should they
have looked upon what they were doing as
reprehensible? Employee interests were
systematically disregarded. The stock option
system tied employee pensions to company
investments, under company management, and
pension funds were frequently exploited to
management advantage, if not simply looted.
Owners' capitalism failed in practice because the
markets have so diffused corporate ownership that
no responsible owner exists. Managers exploited
that void to turn corporations into mechanisms for
their personal enrichment. This is morally
unacceptable, but it is also a corruption of
capitalism itself, and of the society in which it
functions.
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