Noam Scheiber recently delved into a sadly unplumbed line of economic inquiry in his latest piece in The New Republic. He asks what economic strength America still possesses in the wake of the rise of the business school-trained manager. Knowing many friends in this industry, and having come to this conclusion upon wondering where America’s “competitive advantage” currently exists, I found the article particularly poignant and accurate. The problem is that our competitive advantage is now reduced to American managers’ ability to squeeze out accumulated profits, leverage assets, and cook the books. Our economic focus has shifted from long-term growth and empire to short-term profitability by any means necessary.
By the 1980s, the conglomerate boom was reversing itself. Investors began seizing control of overgrown public companies and breaking them up. But this task was, if anything, even more dependent on fluency in financial abstractions. The leveraged-buyout boom produced a whole generation of finance tycoons—the Michael Milkens of the world—whose ability to value corporate assets was far more important than their ability to run them.
The new managerial class tended to neglect process innovation because it was hard to justify in a quarterly earnings report, where metrics like “return on investment” reigned supreme.
Our entrepreneurial spirit is still strong in the digital world, I hope. But one might note that the success stories of these industries typically only grow into empires by remaining largely private and immune to the pressures imposed by public shareholders (e.g., Google, Facebook, Twitter), while most of the failures are those that raised public capital and attention and tried to do maximize profit without building the necessary infrastructure to stay ahead of the razor-sharp competitive curve imposed by the pace of technological advancement. Of course, the conventional wisdom of capitalism is that such shareholders are forces for good in corporate management, keeping check on managers’ tendency to extract from the corporation. But when one looks back to the older style of management, the managers all grew from being experts at understanding the core products being offered by the institutions they stewarded. Today’s managers are admittedly more “competitive” in that their expertise lies in understanding finance and how to create temporary or perceived profitability, which is really all a diversified shareholder can be expected to demand from management.
Harvard business professor Rakesh Khurana, with whom I discussed these questions at length, observes that most of GM’s top executives in recent decades hailed from a finance rather than an operations background. (Outgoing GM CEO Fritz Henderson and his failed predecessor, Rick Wagoner, both worked their way up from the company’s vaunted Treasurer’s office.) But these executives were frequently numb to the sorts of innovations that enable high-quality production at low cost. As Khurana quips, “That’s how you end up with GM rather than Toyota.”
Again, capitalism left alone to its natural ends displays a tendency to over-leverage itself. I hope I am wrong about this idea, but now what do we do with that wisdom?
No comments:
Post a Comment