The Supreme Court has sided with Wal-Mart in the class action case. As regular readers of this blog will be well aware, sociologists have been more than usually involved in the case and the debate surrounding it. The slip opinion, written by Scalia, discusses Bill Bielby’s testimony and dismisses it:
The only evidence of a “general policy of discrimination” respondents produced was the testimony of Dr. William Bielby, their sociological expert. Relying on “social framework” analysis, Bielby testified that Wal-Mart has a “strong corporate culture,” that makes it “‘vulnerable’” to “gender bias.” He could not, however, “determine with any specificity how regularly stereotypes play a meaningful role in employment decisions at Wal-Mart. At his deposition . . . Dr. Bielby conceded that he could not calculate whether 0.5 percent or 95 percent of the employment decisions at Wal-Mart might be determined by stereotyped thinking.” The parties dispute whether Bielby’s testimony even met the standards for the admission of expert testimony under Federal Rule of Civil Procedure 702 and our Daubert case … The District Court concluded that Daubert did not apply to expert testimony at the certification stage of class-action proceedings. We doubt that is so, but even if properly considered, Bielby’s testimony does nothing to advance respondents’ case. “[W]hether 0.5 percent or 95 percent of the employment decisions at Wal-Mart might be determined by stereotyped thinking” is the essential question on which respondents’ theory of commonality depends. If Bielby admittedly has no answer to that question, we can safely disregard what he has to say. It is worlds away from “significant proof” that Wal-Mart “operated under a general policy of discrimination.” … Respondents have not identified a common mode of exercising discretion that pervades the entire company—aside from their reliance on Dr. Bielby’s social frameworks analysis that we have rejected. In a company of Wal-Mart’s size and geographical scope, it is quite unbelievable that all managers would exercise their discretion in a common way without some common direction. Respondents attempt to make that showing by means of statistical and anecdotal evidence, but their evidence falls well short.
While dismissing the particular body of evidence presented as insufficient to establish the Plaintiff’s central claim, the decision does not make any more general remarks about the relevance of social-scientific evidence. (At least not to my untrained eye. Those with a legal education are welcome to comment.)
The ruling was unanimous with respect to rejecting certification, but Ginsburg wrote a partial dissent (joined by Breyer, Sotomayor, and Kagan) on the question of the scope of the ruling, and did not sign on to the middle section of the decision (where the social science evidence is discussed). She writes, in part,
The plaintiffs’ evidence, including class members’ tales of their own experiences, suggests that gender bias suffused Wal-Mart’s company culture. … the plaintiffs presented an expert’s appraisal to show that the pay and promotions disparities at Wal-Mart “can be explained only by gender discrimination and not by . . . neutral variables.” Using regression analyses, their expert, Richard Drogin, controlled for factors including, inter alia, job performance, length of time with the company, and the store where an employee worked. The results, the District Court found, were sufficient to raise an “inference of discrimination.” … The District Court’s identification of a common question, whether Wal-Mart’s pay and promotions policies gave rise to unlawful discrimination, was hardly infirm. The practice of delegating to supervisors large discretion to make personnel decisions, uncontrolled by formal standards, has long been known to have the potential to produce disparate effects. Managers, like all humankind, may be prey to biases of which they are unaware. The risk of discrimination is heightened when those managers are predominantly of one sex, and are steeped in a corporate culture that perpetuates gender stereotypes.
In a footnote to that “long been known” sentence, Ginsburg cites Goldin and Rouse’s paper on discrimination in Symphony orchestras (revealed by the comparison of blind with non-blind auditions). The partial dissent does not mention Bielby’s testimony.
I’ll leave it to those more qualified than myself to assess the technical aspects of the ruling (e.g., with respect to Daubert), along with its meaning and likely consequences. It’s worth noting, finally, that even as they dismissed certification for the class, the three women on the court joined the dissent.
Amy Myrick is a doctoral student in sociology at Northwestern University. Amy completed her JD from Northwestern University Law in 2009. Amy helped draft the Amicus Brief filed by the ASA about the Wal-Mart case and is a coauthor with Laura Beth Nielsen on related papers. The following is a response to Chris Winship’s earlier post about the Amicus Brief.
Wal-Mart attacked Sociology. The ASA responded.
An important overlooked point for those who think the ASA should have abstained: the ASA decided to file a brief in this case to defend sociology at large, not to defend Bill Bielby or his conclusions. Wal-Mart’s Supreme Court brief – widely read and reported in both academic and non-academic circles – attacked not just the expert in this case, but sociology’s basic legitimacy in a way that demanded a response. Wal-Mart claimed that because women employees could not identify a specific discriminatory policy, they had to rely on “statistics, sociology, and anecdote.” Wal-Mart then derided each of these sources of evidence, devoting an entire section of its brief to the discipline that ASA helms and to which we all belong. At minimum, Wal-Mart picked the fight.
Wal-Mart then used an article from a law review (not peer-reviewed) to summarize what sociology “does” and is incapable of doing, even adopting a term – social framework analysis – that sociologists do not own, and that fails to capture sociology’s actual capabilities. According to Wal-Mart, “Dr. Bielby’s social frame-work analysis fails because it lacks a reliable, scientific basis for linking general research to the corporate setting.” This assertion does two things: it labels sociology with legal jargon and claims that, per methodological shortcomings, its cumulative research has no “scientific” value in court.
Had ASA not filed a brief, Wal-Mart would have been allowed to redefine sociology as part of a sham triumvirate that has nothing “scientific” to say about corporate practice in cases like this. Walking away would have been an embarrassing surrender. The ASA brief is clear that it aims to show how sociology can make supported claims about how particular cases are likely to work based on cumulative research, and that reliable methods govern this process – in other words, this is science. Bielby comes in only in reference to whether or not he used those methods. In the ASA’s own words:
“While we offer no opinion on the substance of Dr. Bielby’s testimony or conclusions, we stress that the methods through which he reached these conclusions are widely accepted and are the bases for research published in the top peer-reviewed social science research journals.”
I found this interesting, the Strategic Management Society (respected body of academics and practitioners in the area of strategic management) is looking at creating a “strategy certification.” Here’s the logic:
You have your taxes completed with the help of a CPA and make your financial investments with counsel from a CFA. You might exercise with a certified personal trainer or a certified yoga instructor or send your invoices to be put into Quickbooks by a certified virtual assistant. So, of course, when you are developing strategy—a strategy that may require you and your organization to take considerable risks or make sizable investments and difficult decisions—you call on the insights of a certified strategist.
If only there was such a person. [More here.]
“Certifying” a strategy raises some interesting questions. So, what Certified Public Accountants do is one thing. Auditing and certifying the financials of an organization is based on the principles of comparative similarities (for example, based on rules such as the GAAP). Strategic activity, on the other hand, is about comparative differences between organizations — differentiation is the sine qua non of strategy. Organizational strategy, furthermore, is forward-looking and thus it is hard to somehow “certify” subjective assessments — where agreement is extremely unlikely — and the prospects of some radical innovation or course of action. What to one looks like an escalation of commitment, to another might look like a bold strategy. In short, I find it hard to see what exactly could be certified about an organization’s strategy.
I suppose one might think about certification and stakeholder-related considerations (indeed, these are raised in the above link), but then we get into all kinds of value-related issues. For example, I’m guessing we would get a wide range of opinions from organizational scholars on whether Wal-Mart’s strategy should be certified. This certification issue seems fraught with some of the same problems as “evidence-based management” — passing muster depends on whose evidence we are using and who is certifying. And, don’t extra-institutional actors, essentially, provide a type of legitimation that proxies certification —- protests and activism send signals that serve as a de facto, albeit ex post and noisy, certification.
Wal-Mart seems to be in everyone's crosshairs these days. An Amazon book search of "Wal-Mart" pulls up the following, selected titles and subtitles.
- the case against wal-mart
- the deception of individual choice
- the face of twenty-first-century capitalism
- nickled and dimed
- the high cost of low price
- the conspiracy of wal-mart and the government
- from warhol to wal-mart
- the united states of wal-mart
C-SPAN has featured many Wal-Mart books over the past years. The most "fair & balanced" and well-thought-out book, at least from what I saw, seems to be Charles Fishman's Wal-Mart Effect (listen to him on NPR here). Perhaps another option for your summer reading list.
Much has been discussed about the Walmart case and ASA Amicus Brief in the postings and comments on the orgtheory [with subsequent posts 1, 2] and scatterplot blogs. Little, however, has been said about the literature review in the ASA Amicus Brief, though it spans a little more than half the main body of the Brief. Some have even suggested that the only thing the Brief does is take the position that the methods that Bill uses are those of science and sociology in particular. Clearly it does much more. [In providing the analysis below, I want to be quite clear that I am not making any claims about what people’s motives were in writing and submitting the ASA Brief. Laura Beth has been quite clear about hers and I believe her.]
I spent last night reading through all the comments on orgtheory and scatterplot. My key goal in writing my initial post was to get a discussion going about the role of sociology in the courts and the particular problems involved. I guess I succeeded! My interest in the Walmart case was only secondary and I discussed it, the ASA Amicus Brief, and Bill’s expert report because it was current, was potentially important, and exemplified many of the issues that I thought needed to be discussed. I did not write it to attack the ASA as Sally Hillsman has accused me of in an email to the Council. Truthfully, I do not know enough about what was done to know whether I would believe it to be unproblematic or not. If the Council, the ASA members’ elected representatives, had the time to seriously consider the matter, read the materials involved, appreciated the issues, and voted to submit an Amicus Brief to the Supreme Court, then I think I and others should not complain. Of course the Mitchell et al. paper does attack the ASA brief, but on scientific, not procedural grounds. [I should also note that Sally’s claim that I offered Laura Beth the opportunity to publish her reply to Mitchell et al. in SMR and withdrew that offer is factually incorrect. I withdrew the offer for her to write a quite different paper, for quite defensible reasons. All that said, what will go in the SMR special issue is still evolving.]
In reading through all the comments last night I was amazed by the number times various people said I said particular things (using their words, not mine), and claimed that I thought various things (with no access that I am aware of to my mind). Amy’s post is perhaps the extreme example of this. In an actual court proceeding this may be appropriate. I don’t think it is appropriate for blogging, assuming the goal should be to try to understand each others’ thinking–why they believe what they think is reasonable–and that by hearing what each other thinks, we might improve and deepen our own thinking. Let’s not put words in people’s mouths or thoughts in their heads. If a position someone has taken is important for a point you want to make then quote the person. If you believe someone thinks a particular thing and that is why they are taking the position they do, then ask them whether that is what they think. More generally, as Laura Beth has asked, let’s keep it as diplomatic as possible. In doing so, this will vastly increase the likelihood of having a constructive dialogue.
Underlying the debate about the ASA amicus brief is a fascinating theoretical question about the link between organizational culture and discrimination. I don’t want to wade into the specifics of the WalMart case – I’m much less informed about the case and the brief than are many of the commenters – but I think it’s worthwhile to think more generally about how one could establish empirically that an organizational culture leads to discrimination. What is the theoretical link between culture and discrimination and what kind of empirical evidence would you need to show this link? I’m also going to steer away from the legal interpretation of discrimination. My reason for writing this post isn’t to discuss employment law; rather I’m just interested in what we think about this from a social science perspective.
Organizational culture is a broad term that identifies differences between organizations in practices, beliefs, values, and symbols. Organizational culture consists of the unwritten rules of the game that organizational members rely on to get stuff done, make decisions, etc. Culture shouldn’t be equated with the formal structure or demographic composition of the organization, although the two may co-vary. For example, a formal hiring policy isn’t part of an organization’s culture. Organizational culture is also distinct from the broader set of institutional forces – norms, logics, etc. – that shape all organizations in a field. We often imagine that organizational culture consists of distinguishing features of organizations. I don’t think this is a necessary feature of organizational culture, but identifying the distinguishing features of a culture may be necessary from an empirical perspective if you want to demonstrate a causal link between culture and discrimination.
So what are the possible mechanisms that link culture to discrimination? Here are just a few possible mechanisms:
- Informal selection criteria – what are the informal, shared criteria that members of the organization use to hire and retain employees (e.g., see Lauren Rivera’s work on hiring in professional firms)? Do these criteria favor some classes of individuals over others?
- Values – Does the organization have a value system (e.g., collectivist or individualist) that promotes the development of in-group biases? Do these biases lead to unfavorable evaluations of people who are not a part of the in-group?
- Selection practices and settings – irrespective of job performance, how and where are decisions about hiring and retention made? Are those decisions made in places or using activities that vary in their appeal to certain classes of people? For example, if retention depends on your liking of golf, the organization would naturally favor retaining or hiring people who play a lot of golf.
- Beliefs or personality traits – does the organization favor beliefs or personality traits that are disproportionately found among a certain class of people (e.g., beliefs about working overtime)? For example, if the organization favors aggressive behavior, then the organization would tend to hire and retain people who have this personality trait.
Once you’ve identified theoretical mechanisms, I think there are three parts to empirically verifying a link between culture and discrimination.* You first want to show that these elements of culture actually vary across organizations. If your claim is that a particular kind of culture is especially discriminatory, then you want to be able to show how that kind of culture varies. If you can’t show variance across organizations, then you really can’t establish that any single cultural element leads to more bias than another. Second, you want to show that individuals with the same characteristics receive differential treatment in hiring and retention in different organizational cultures. Ideally, you’d like some sort of natural experiment where you took the same individual and had them apply for a job at organizations that varied along the different cultural dimensions. Alternatively, you’d show how roughly equivalent individuals are treated differently in hiring and retention, depending on the type of culture. Finally, you need to be able to make the case that cultural bias in hiring/retention decisions is independent of job performance. It may be that individuals who have certain beliefs are going to perform better in that organization than individuals who do not share those beliefs. If this is the case, than cultural competence may be the cause of outcome differences rather than superficial preferences.
I imagine this last empirical criterion is the most controversial because of feedback processes within the organization. It may be that individuals differ in performance because an organization’s culture inhibits the employees’ development. For example, if women are given fewer leadership training opportunities because they are not given access to the same socialization settings as men, then you could still show that the culture indirectly shapes discrimination. This would essentially require a fourth step of empirical verification. Does culture mediate discrimination by constraining the kinds of opportunities that employees of a certain class have for advancement? If you can show that this is the case, then you can still empirically demonstrate a causal link between culture and discrimination.
* Demonstrating causality in social science is notoriously difficult to do. At best we can show that X is one of the causes of Y. Usually we are only capable of showing that we have good reasons to think that X might be one of the causes of Y.
Note: Chris is a professor of sociology at Harvard University and the Harvard Kennedy School of Government and, since 1995, he has edited Sociological Methods and Research, which is a peer-reviewed scholarly methodology journal. SMR content is also available on the SMRblog.
The current employment discrimination case against Walmart raises the important question of whether social science, and sociology in particular, can effectively participate in court cases and at the same time maintain its scientific integrity. If the answer is yes, there is then the further question of what criteria need to be met for scientific integrity to be maintained. These are important questions requiring discussion, even debate. But first some history.
By early fall, if not sooner, the Supreme Court will make a key decision in the largest employment discrimination suit in history: Dukes v. Walmart. Oral arguments in the case were heard on March 29. The suit itself, involving a class of as many as 1.5 million women, alleges that Walmart has systematically discriminated against women in its salary and promotion decisions. Potentially, billions of dollars in damages are at stake. The question before the Court, however, is not whether Walmart in fact discriminated against its employees but rather whether such a large case, involving women working in varied circumstances in thousands of different stores and involving different supervisors can be thought to constitute a single class and thus whether the class should be certified.
Our University of Wisconsin orgtheory correspondent (former orgtheory guester Russ Coff) sent me some links related to McKinsey’s test and audit for organizational strategy (given our previous post about the SMS strategy certification). The current, Jan 2011 issue of McKinsey Quarterly features ten audit-like tests for organizational strategy.
Here are the questions:
- Will your strategy beat the market?
- Does your strategy tap a true source of advantage?
- Is your strategy granular about where to compete?
- Does your strategy put you ahead of trends?
- Does your strategy rest on privileged insights?
- Does your strategy embrace uncertainty?
- Does your strategy balance commitment and flexibility?
- Is your strategy contaminated by bias?
- Is there a conviction to act on your strategy?
- Have you translated your strategy in an action plan?
(By the way: orgtheory.net answers “yes!” on all the above questions, including the bias one.)
So, I see the point of “audits” like this, though still am skeptical about whether strategies, in radically uncertain environments, can meaningfully be assessed ex ante. Nonetheless, the whole strategy audit thing is an interesting concept (and trend/fad?) that many people appear to be thinking about.
Nominate your favorite posts in the comments.
In our conversation about the ethics of protesting Wal-Mart, it occurred to me that one of the substantive values at stake for the local protesters was authenticity. In a global market, in which centripetal forces of the market tend to pull producers and consumers toward greater homogeneity, local values become ever more meaningful as communities seek to maintain authenticity. Resistance to globalization is often expressed through attempts to differentiate yourself and your identity by demonstrating you’re a more authentic representation of some ideal type. Wal-Mart, in a sense, is just the material representation of the imposition of global market values on this local community.
This striving for authenticity seem pretty crucial to current theories about categories and organizational identities. For a nice overview of this literature, check out Carroll’s and Wheaton’s unpublished paper on the “organizational construction of authenticity.” For a fascinating illustration of the politics of authenticity in a global market, you should read Michaela DeSoucey’s ASR paper about “food traditions and authenticity politics in the European Union.” The qualitative portion of her analysis focuses on how French foie gras has become a means to maintain authentic French food culture in the face of increasing regulation and isomorphism in Europe. She points out that foie gras has become a source of national pride – a marker of collective identity for the French – that has become further institutionalized via French legislation that designated foie gras as part of the ‘‘officially-protected cultural and gastronomic patrimony of France.’’
The 2005 legislative protection of foie gras reflects and emboldens the use of cultural narratives of tradition and nationawithin foie gras’s social and material worlds. Producers and state representatives recognize foie gras as something dear to them placed in potential jeopardy by external forces. Foie gras has come to represent and demarcate French national patrimony, at least in part, because it is morally contentious elsewhere. Today, preserving foie gras is a small but significant way for the French to defend the idea
Foie gras has become a symbol of French identity perhaps, strangely enough, because it has been so contested outside of France. The more that the EU and U.S. activists try to make foie gras morally objectionable, the more important the symbol becomes as a way of signifying French authenticity. DeSoucey’s case study is a beautiful illustration of how market homogenization creates opportunities for new identities to emerge as a means of resistance.
Jerry Davis’s new book will certainly challenge your way of thinking, especially if you’re a dyed in the wool organizational theorist. His book, along with his article “The rise and fall of finance and the end of the society of organizations,” contests the view that corporations are a core structure in society. Although they were once social institutions, having been infused with value and a kind of “soulful” meaning to communities and wielding massive economic and political power, corporations are now reducible to contracts, relational or otherwise. The reason for this change was that society itself transformed. People reconceptualized the organization as something other than an institution with indebtedness to its society and members and as something less than a political juggernaut. Through legal changes, deregulation, and changes in corporate and investor practices, the corporation is now nothing more than a legal shell that houses economic exchange of various types. If you don’t believe this, Jerry would probably point to the securitization of corporate assets, noting that everything about a corporate entity can be bought and sold in small chunks on a securities exchange. The reconceptualization of corporations as bundles of assets has reduced their responsibility to anyone other than their shareholders. This gradual drift from “welfare capitalism” has been accompanied by a deterioration of employee commitment to corporations.
In his book Jerry provides an intriguing historical account of this change. Some important facts stick out in his analysis. 1) Due to the takeover wave of the 1980s and subsequent changes in agglomeration, the average company is now much less diversified than it was 30 years ago. In 1980 the median large manufacturer operated in three industries; by 1995 the number of industries had been cut to one. 2) Employment concentration has weakened over time. In 1960 the top ten firms employed roughly 5% of the U.S. workforce. In 1980 this number declined to 4.6% and by 2000 the top ten employed less than 3%. 3) The largest firms today, like Wal-Mart and McDonald’s, have high employee turnover rates, especially when compared to the old large employers in manufacturing industries. The median employee in transportation manufacturing has a tenure of eight years, while the average tenure in the food services industry is 1.5 years. Thus, the more dominant employers in today’s age are less likely to retain their employees than was true in the past. The implication of this is that the social bonds between the corporation and its employees are disintegrating.
Consider this description of the corporation in chapter 3 of his book:
After the bust-ups of the 1980s, the idea that the corporation was nothing but a nexus, and that it had no special connection with its employees, became increasingly true. Firms became adept at retaining contractors rather than hiring permanent employees; outsourcing tasks outside their “core competence;” and engaging in more-or-less temporary alliances rather than vertical integration. The conglomerate had rendered dubious the idea that the corporation had an organic unity: parts came and went through acquisitions and divestitures, and to find a “core” or “essence” to an ITT was a fool’s errand. The network organization took the next logical step: the corporation was not attached to particular parts, or even to particular members. It was, “in a very real sense,” simply a nexus of contracts that existed to create shareholder value (91-92).
Such is the state of the corporation. A bedraggled, ineffectual monster of yesterday. Or is it?
Jerry’s book is extremely useful I think for pointing out important corporate trends and challenging organizational theorists to adapt to the new economic conditions. And the book also raises important questions, including: if the employment relationship has changed, what function do corporations have in today’s society? Why do we still continue to see corporate hierarchies even in the midst of this reshuffling of parts? Where is the center of power now? Even if corporations are on their way out, what should we make of extensions to their citizenship rights? Who or what should the state regulate or do we live in an era in which regulatory control of corporations (read: anti-trust and competitive practices) makes less sense? Or are we fooling ourselves? Is shareholder value just another shield to justify managerial policies (policies that may, in fact, benefit only the managerial class)? Who captures wealth in the system described by Jerry? And if corporation is not the primary medium for wealth generation, what should we study – the contract?
The metaphor that labels education as an “investment in human capital” and friendship as an “investment in social capital” has gone from an academic provocation to a corrosive b-school cliche. But there is one case where “human capital” is exactly the right term: corporate-owned life insurance, a.k.a. “dead peasants insurance” or “dead janitors insurance.” “Through so-called janitors insurance, hundreds of companies have taken out life-insurance policies on millions of workers of all kinds — with the companies as the beneficiaries. Employers take out the coverage because the policies provide tax-free investment buildup for the companies and provide tax-free death benefits when the workers, former employees and retirees die.”
Wal-Mart was the biggest user of COLI in the 1990s, taking out insurance on 350,000 of its workers, and received some negative attention for it a few years ago. But bankers now appear to have taken the lead in perfecting this innovation, using death benefits on current and former workers as a tax-free means to fund executive bonuses and retirement income. “The insurance policies essentially are informal pension funds for executives: Companies deposit money into the contracts, which are like big, nondeductible IRAs, and allocate the cash among investments that grow tax-free. Over time, employers receive tax-free death benefits when employees, former employees and retirees die.”
Insurers had a strong interest in building this business, of course, and those interested in “institutional entrepreneurship” might find a great tale in how insurance companies managed to persuade state regulators that companies had an “insurable interest” not only in current employees but in those they had fired years ago. (The Wall Street Journal describes one bank that bought life insurance on a credit risk manager who had already survived two brain surgeries; fired him four months later; and subsequently collected $1.6 million when he died.)
The financial services industry is regarded as a wellspring of American innovation. Many of the fruits of this innovation have been enjoyed around the world in the past two years. But insurance rarely gets its due. Yet from Charles Ives and Wallace Stevens to AIG’s Hank Greenberg, the insurance business has nurtured artistic genius, in music, poetry, and legal legerdemain.
Walmart has joined the Center for American Progress and the Service Employees International Union in advocating for employer mandated health care coverage. In this letter to President Obama, the three organizations ask the government to consider legislating “an employer mandate which is fair and broad in its coverage.” The alternative, they argue, are higher taxes for everyone.
Pundits are surprised by Walmart’s backing of this kind of reform because they see it as clashing with Walmart executives’ class interests. For the most part, a vast business coalition, which includes the U.S. Chamber of Commerce, has opposed employer mandated health care coverage. Matthew Yglesias notes that Walmart’s position is a significant break from the “highly ideological behavior of the business community.”
I’m somewhat skeptical of that take. Walmart, more than most businesses, stands to gain a lot from health care reform of this type. As Jeffrey Young notes, 90% of Walmart’s employees already have health care coverage of some type. The companies that would be hurt the most by an employer mandate would be smaller businesses, not the large companies like Walmart that have the benefits of scale. Walmart’s competitive advantage over smaller companies would likely cement its position as the top retailer in the country/world.
Rather than seeing health care reform as a class-driven issue, I’m more inclined to see it as an issue that fragments the business community. As Jill Quadagno’s research on the New Deal showed, business interests are rarely unified. Instead, businesses use legislation as opportunities to advance their own organizational interests. While in this case a certain segment of business interests – especially those of the small business community – may be more aligned, there is significant variation in the extent to which businesses will benefit from health care reform.
During an NPR program I listened to Monday one of the commentators noted that few pure investment banks still exist – Goldman Sachs and Morgan Stanley being the lone survivors. Most have been acquired by what are becoming known as global wealth management or financial services firms. The new global financial services firms look much more like diversified conglomerates, financial Wal-Marts, than they do Wall Street banks.
This transformation of the finance industry certainly seems like an odd twist to an economic sociologist trained in the last decade. Like many of you, I learned about the function of status in markets by reading Joel Podolny’s work on investment banks. I remember very clearly reading his 1993 paper for an undergraduate class and seeing the tombstone advertisement listing the investment bank underwriters, in order of status, of a new security. Reading Podolny’s paper sent off all sorts of “this is cool!” signals inside of me, which helped me decide that year that I wanted to be a sociologist. Perhaps this is why it seemed so strange (and kind of sad) that most of the high status banks in his study no longer exist.
Table 2 (pg. 857) ranks the banks by status. Interestingly, two of the three highest status banks still exist as independent entities. Morgan Stanley (#1) and Goldman Sachs (#3) are still kicking around and refuse to dip their toes into the waters of commercial banking (but for how long?). First Boston (#2) was acquired by Credit Suisse in 1988 and the FB name was officially phased out in 2006. Bank of America will acquire Merrill Lynch (#4) and Lehman (#6) and Bear Stearns (#13) are both goners. Travelers Group acquired Salomon Brothers (#5) in 1998, which has since been subsumed by the giant Citigroup. Investment banking seems to no longer be a viable model; commercial banks, in contrast, have more sources of funding and have been more profitable. It may not be long before Morgan Stanley and Goldman Sachs are forced to either buy a commercial bank or allow themselves to be acquired by one.
What happens to status-based competition in this kind of market? There are only two high status players left and it’s not clear that they will have any sort of advantages over the diversified financials in underwriting. Podolny asserted in a footnote of his 1993 article that market stability was key to status competition. “[M]arkets in which status is positively correlated with profits will be more stable than markets in which status is inversely correlated with profits” (847). The assumption has been that investment banks had higher status than commercial banks and that they could protect their market niche by limiting the ability of new market entrants, like commercials or other diversified financial firms, to compete for price. However, this no longer seems to be the case, and as a result the profitability of pure investment banks has disintegrated. Following Podolny’s thinking, then, status relations should no longer be an effective relational mechanism in the market. Status may matter again in the future, but probably not until there is some level of market stability.
Peter Klein points to a new book by the economic historian David Landes that tracks some of the world’s most famous family businesses. This NY Times review of the book is intriguing, but it also raises what I think is an important question: what is unique about family firms? The reviewer writes that the book makes a good argument for the prominence of family firms. A third of Fortune 500 firms are still family businesses (depending, I suppose, on what you consider to be a family firm).
Wal-Mart is still overseen by Sam Walton’s son. The family controls about 40 percent of the company’s stock, and a third generation is moving up through the Walton business empire. It’s a good question whether professional outsiders would have maintained, for good or for ill, the almost religious commitment to cost-cutting that the heirs seem to have inherited from the old man.
Something about holding up Wal-Mart as the paragon of family business just seems wrong. Anyone who has followed Wal-Mart over the last decade realizes that the Walton clan may still have a significant ownership stake in the company but they have very little to do with the day-to-day operations. Wal-Mart seems like the classic case of the professionalization of a family firm. The CEO, CFO, and entire management team could be executives at any corporation. Sure, some of the ideals embraced by the company were passed down from Sam Walton, but this happens in any company. Cost-cutting is part of the organizational identity of Wal-Mart and also one of its distinctive competencies. But is it correct to say that it is symptomatic of the family firm? I doubt it.
Personally, the idea that family firms are unique in some way is appealing to me. As someone who believes that our theories have made organizations appear too generic and have tried to erase important distinctions, I think it’s important to look for those core, institutional characteristics that mark the boundaries of various organizational types. But I’m not sure what those characteristics are in family firms. An ASR article by Ingram and Lifschitz takes us in the right direction, I think (see also this post by Teppo and this one by Peter). Still, this seems like a substantive area of organizational research that is still seriously understudied.
…if Walmart insists on charging only 10% more for its organic foods, it will be virtually impossible for the concept of ‘Organic’ to survive.
So, is it the price that suggests a product is organic, or, the way the product is grown or produced?
There is I think a wider definition of Organic (capital “O”) that Hargadon might be implicitly referring to – namely Organic (beyond no pesticides used etc) for many people also seems to connote a broader consideration for a wider set of stakeholders when producing or growing and selling a product. (Adding how a product is sold to the conception of Organic is interesting). So, I am guessing that in many consumers’ minds capital “O” Organic implicitly means that employees are treated fairly (best place to work-lists), environment and community receives consideration (x % of profits given back, volunteer work etc.). Wild Oats (or Whole Foods) indeed seems to fit the profile – see their community page - a one-stop, capital “O” shop for food, community, church, and giving. So perhaps Wal-Mart meets a narrower, small “o” conception of organic product-wise, though not a capital “O” Organic conception stakeholder-wise.
Somehow I don’t believe that Wild Oats customers will start frequenting Wal-Mart anytime soon (they are busy protesting Wal-Mart), even if Wal-Mart tries to move (whether real or perceived) in the capital “O” direction.