Separation Anxiety

This is a follow up to my article Nobody's Fault where I looked at what I said was a typical management screw up in a major corporation.

One of the commentators said:

"Short the stock"

by which he implied that the value of the stock was likely to fall.

In fact, since the incident I related occurred (five years ago), the stock price has more than tripled.  So the question is, how is it that we can find cases of what seem to be flagrant cases of poor management, yet still see companies thriving?

The idea that poor management should inevitably lead to poor performance is based at least in part on things like Adam Smith's theology of the "Invisible Hand".  Poor management should lead to increases in price and should lead to a decrease in the quality of the product.  Sooner or later, competitors will emerge that will be more efficient both in cost and quality, and they will knock the inefficient company out of the market. The likelihood that this will happen represents a risk for the person running a business.  This risk is what drives them to be efficient. Amen.

In fact, Smith's whole theory, insofar as this kind of risk is a driver of the whole thing, was already falling apart when he was alive and writing in the 18th century with the rise of the joint stock company (which today we simply refer to as the corporation).  The creation of the corporation led to the separation of ownership from control.  In the early days of the corporations, back before corporations became "persons", they were envisioned as a means to protect an individual from personal risk.  With a corporation, only the corporation took on risk and only its assets were on the line in the case of a failure.  It seems rather strange to look at now, because while it limited personal risk, it also transferred risk outside of itself by limiting the assets that an aggrieved debtor could obtain if the corporation collapsed. (One wonders if the Life of Trump would have been radically different with his bankruptcies if his personal assets had been available for investors to recover from).

In separation of ownership and control, he "stockholders" (whose principle job seems to be to collect dividends (sometimes) and see their stock values appreciate while serving as the source of moral blame for the managers to do whatever they need to do) are mostly strangers to the businesses.  The managers are an entirely separate group.  And this means that there is all sorts of room for a misalignment between the risks that the owners are taking and the risks that the managers take.

What the modern investor mostly wants is a predictable positive yield. Predictable is the key word here, because although everyone wants lots of money, no one really wants to speculate. What the modern corporate CEO does is to produce a prediction for the "market" each quarter and then makes sure that the prediction is met.  Since the positive yield can come from any source (and these days mostly comes from finance rather than production), corporate managers internally can focus on the hard Indiana-Jones-Running-Naked-In-The-Forest risks of corporate politics.  What is at risk for the professional corporate manager is his personal success, which means promotion and better access to the trough.  Actual business failure at a corporate level is bad, but in my experience at least, when it happens it seems to take everyone by surprise. Even if it affects whole sectors.

In theory, the "owners" of a company should be able to fire the managers.  But the chances of this happening is tiny, unless someone does something so bad that it gets out to the general public.  The bigger risks inside the company is someone getting blamed or someone not getting the credit.  This is how it works.

I am sure that someone is going to say that businesses can still fail according to Adam Smith's theology.  And this is true.  But in a country where the economy is in the hands of virtual monopolies in its key sectors, where assets are financialized, where the stock market moves independently of production, where businesses take their tax cuts abroad for investment, where consumers lack a great deal of information about price and quality, where pay increases for corporate C-Suite executive rise higher on a basis for a "market" in high salaries rather than the value they add, this ain't your grandma's capitalism.

 

unagidon is a contributing editor to Commonweal.

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