Archive for the ‘corporate governance’ Category
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?
I am a little late to this, but last week a bit of a debate erupted about whether it is better or worse to split-up the political and commercial capitals of countries. It was sparked by an off-hand concluding remark by Luigi Zingales in an article for the City Journal on whether New York is likely to retain its title as the world’s financial capital:
Greg Mankiw picked up on that quote and spread it around the interwebs.
Then Matt Yglesias weighed in, countering with the boring vs. exciting capital hypothesis:
One model, seen in France and the UK, is of a single dominant city. Another model, seen in Italy, is where your capital is also your largest city (Rome), but the main financial and business center is elsewhere (Milan). Then you have your scenarios, seen in the US and Canada, where a capital is established someplace a bit random specifically to avoid choosing between major cities. This tends to lead to capital cities with a reputation as ‘boring.’
No one was taking this too seriously. But they raise some interesting questions about the relationship between government and economic growth. Zingales and Mankiw’s idea is that separating government from the financial sector is a good thing. They don’t really expand on why, but I can guess at their reasoning: they think that a financial industry that is too close to government is likely to be over-regulated and hamstrung. Yglesias’s idea is simply that stand alone government capitals may be boring (Springfield, Ottawa) or beautiful (Edinburgh, Rome), but whether the capital stands apart shouldn’t matter for much when it comes to actual growth. I’d offer two contrasting alternative hypotheses for why co-locating government and industry might actually matter:
- The Full of Themselves Hypothesis: This one has to do with status hierarchies. Where the government capital is also in the largest city, your status as a government type competes with other status hierarchies (industry, media, education, etc). But in places where the government is the most important game in town, there is really only one status hierarchy. My idea is that legislators are more full of themselves in places where government is the big dog in town. The prediction, then, is that that would be worse for economic performance as legislators go off willy-nilly coming up with big, but ill-conceived, ideas.
- The Social Capture Hypothesis: This one has to do with networks. Where the government capital is also in the largest city, you’d expect bureaucrats and legislators to hobnob fairly regularly with elites from industry and other sectors. This should tend to make their decision-making more elitist (and in the case of finance, more sympathetic to the interests of bankers). Where government stands alone, government should be (a) less beholden to elite interests and/or (b) more influenced by a wider spectrum of special interest group lobbying.
Thanks to the joys of Wikipedia, it’s fairly simple to pull down a few quick and dirty statistics. Nothing definitive, but enough to whet the appetite…
Social scientists have a certain longing for the social arrangements of the past. That longing surprises me. The general argument is that in the past we had more collaboration and less competition, more friends and less anonymous exchange, more community and less markets, more happiness and less violence.
Anthropology long held to a “noble” view of the past — wikipedia has a decent summary of the “noble savage” argument. But, the bottom line is that the golden age of tribal and communal life was not that golden after all: life was short, threatened by all kinds of violence, many were ostracized and the virtues ascribed to these forms of social organization simply never existed. In short, the data support the opposite argument: things are increasingly better compared to the past. For example, Keeley’s War Before Civilization: The Myth of the Peaceful Savage highlights how there has been a radical reduction in violence — so, even if we factor in the recent two world wars, we are by a magnitude much safer in today’s society compared to tribal life. And, Clark’s Farewell to Alms: A Brief Economic History of the World highlights just how far we have comparatively come in terms of wealth and welfare over the past two centuries (no matter what you think about his provocative book, the comparative data he highlights is hard to argue with) .
Organization theorists also idealize the past. For example, Paul Adler and Charles Heckscher advocate communal arrangements that hearken to the past. Fabrizio et al, in their AMR article, longingly (Fabrizio: correct me if that’s the wrong characterization) point out that the post World War II image of organizations was one of “community” and “family” — a more employee and collaboration-oriented effort compared to the current market ethos where lay-offs and competition seemingly are the norm.
I tend to be skeptical about this type of retrospective idealization. First, on the whole, its tough to make meaningful comparisons between the past and present when we don’t necessarily have all the data (nor counterfactuals, though perhaps some natural experiments), wealth is one thing but there’s a host of intangibles of course as well (“happiness”). Second, scholarly longing-for-the-past tends to take the form where we focus on one or two dimensions without more holistically looking at whether we truly are better off on the margin. So, for example, if lay-offs as a whole have increased, are there commensurate trends where employees now have increased mobility and choice — is that a good or bad thing? For whom?
Third, its seemingly hard to make stereotypical statements about the general ethos of organizations (given vast organizational/organizing heterogeneity), specifically as we have many experiments going on with various types and forms of organizing: open source, organizations emphasizing various mixes of extrinsic and intrinsic rewards, “market” versus “family” oriented organizations, etc.
So, I wouldn’t dare to say that we organizationally live in the “best of all possible worlds,” but might we be inching toward it? Or, are we regressing? Or will the optimal models of organization automatically emerge as organizations compete and as we try out various forms of production? OK, granted, these are ideologically-laden questions — I know. But, the extant longing-for-the-past and generally negative tenor about the present seems quite counter-productive to me.
Finally, economics is getting a huge amount of the blame for everything that is negative in organizations and markets: corporate malfeasance, greed, self-interested behavior, etc. But, didn’t all of these negative factors exist far before the relatively recent introduction of neoclassical economics?
It’s well known that the English and the French have very different philosophies of gardening. An English garden, traditionally, is naturalistic; the garden emerges from the soil with the appearance of only minimal tending. The French like their gardens formal. They are going for order and for sight lines. French gardens make you stand back and take in the grandeur.
The difference is reflected in their approach to shrubs. The English are great at pruning; they will cut a shrub down to the smallest nub of green and then let the thing flourish while being careful to prune it along the way to keep it healthy. The French shape and twist a bush until it conforms to their will.
Which brings us to what the Obama Administration should do as the owner of the U.S. auto industry. Timothy Geithner, Larry Summers and, apparently, a guy named Brian Deese, are currently engaged in the first part of the process: cutting back the shrub to its core. They will lop off huge branches leaving a much smaller nub of a once mighty and unwieldy industry.
But, then what? There is little interest—politically, culturally or otherwise—for an approach that would resemble anything like French topiary. You have to reach back to the early 1980s to find a time when anyone (other than Robert Reich) used the term “industrial policy” without irony or scorn. So no one will be bending this industry to its will. But, that doesn’t mean that the U.S. government cannot engage in some English-garden-style pruning.
How might the Administration let the nature of the industry express itself while at the same time maintain some overarching vision for the garden that will result? I offer three ideas which I think are both reasonable and actionable while not imposing anything on the industry, French-topiary-style.
If you’ve got an idle hour sometime in the next couple days — I highly, highly recommend this EconTalk podcast from two days ago: Leeson on Pirates and the Invisible Hook. The discussion covers all kinds of engaging issues: the social organization of pirates, governance, recruiting, incentives and motivation, pirate strategies, etc. Here’s the book (by Princeton University Press): The Invisible Hook: The Hidden Economics of Pirates. Previous orgtheory Pirate posts, including previous references to Leeson’s work, here.
As a side note, two plugs.
1) EconTalk is fantastic (my iPod-capable device generally downloads the latest edition within days of it being broadcast, and thus I don’t have idle moments any more).
2) Is Princeton University Press brilliant, or what? I love their book selection, fantastic — a visit to their “new in print” section usually always yields something that is a must-read.
OK, while I’m in book-plugging mode — here’s another must-have book: Rich Burton’s (long-time Duke org theorist) book Organizational Design: A Step-by-Step Approach (Cambridge University Press). I’ve plugged the book before. The book does not collect dust on my shelf as I refer to it frequently myself, or often it’s out on loan with one of my graduate students.
Organizational design is sort of a lost art. If organizational design is simply window-dressing, about legitimacy, then the functional and practical aspects can quickly get lost in the mix. This book is about the nuts and bolts, both a theoretical and a practical guide.
Rich was in town a few weeks ago and I had a chance visit with him about this book and his work more generally. He incidentally also has a organization design-related software application, OrgCon, that is meant for both practitioners and students. I have not had a chance to play around with hit, but plan to do so soon. I cover some basics related to organizational design in my graduate org theory course, but, based on the queries I get from class alums, design is something that practitioners are heavily wrestling with these days and thus I plan on adding more organizational design into my course. More on that later (along with a bleg).
Say you’re smart. Really smart. And talented too. What would it take for you to go work for AIG?
Stakeholder theory seems intractable—it suggests that governance ought to (somehow) consider and reconcile the interests and preferences of various organizational stakeholders. But, the problem is that matters of stakeholder conflict and uncertainty do not really get vetted (stakeholder governance of course works great if interests happen to be aligned), and more generally stakeholder theory does not seem to provide mechanisms to resolve concerns related to the ordering of disparate stakeholder interests and preferences. [Issues we've discussed before.]
I just attended the Utah-BYU Winter Strategy Conference last weekend, and Joe Mahoney gave a very nice overview of stakeholder thinking, in particular focusing on economic and legal approaches to thinking about stakeholder governance, specifically matters related to property rights. Not sure Joe’s paper necessarily resolves the concerns many have about stakeholder governance, but, nonetheless he gave a very engaging presentation on the matter —- (pdf) here’s the associated paper—specifically calling for strategy scholars to return to their stakeholder-inspired roots.
Was anyone really surprised when A-Rod was found to have used steroids? Not me. I’m a Giants fan, and as a fan of the Giants and Barry Bonds I long ago lost my innocence when it comes to the steroid question. Of course the best players in baseball used steroids! Duh. The owners of Major League Baseball created enormous incentives for players to do so and they provided few to zero mechanisms to hold players accountable for using illegal substances. Heck, steroids weren’t even explicitly banned by baseball during the steroid era. So what do you expect to happen when high rewards go to players who use steroids and the organization they work for fails to do anything to discourage their use? Rampant steroid use!!! It doesn’t take a genius to figure that out.
Or does it? A fan poll at ESPN.com shows that the majority of fans (61% the last I checked) hold the players responsible for the spread of steroids in baseball. I just can’t fathom this logic. Baseball fans have somehow fooled themselves into believe that steroid users were a few bad apples and continue to demonize those players who were known to have used. I thought that this A-Rod revelation might be the final nail in the coffin that causes fans to lose their innocence forever. But this doesn’t appear to be the case.
Sports fans recreate the illusion of individual accomplishment every year. They believe that athletic competition really does reward individual merit and that the best individuals find a way to rise to the top. They believe this despite the fact that the most popular sports tend to be team sports in which interdependence is a major factor. We’ve talked about the team in team sports here before. It’s almost certainly true that there are great athletes out there who simply outshine their opponents when called upon, but the ability of any great athlete is modified by the team context and, more generally, by the competitive context. A-Rod is great, no doubt, but would he have been able to maintain his greatness in an era when great pitchers were using steroids to enhance their recovery and strength? Would he have been able to attain super-stardom without the use of steroids in a field of other steroid users who were setting new records right and left? Maybe not, we just don’t know. The point I’m trying to make is that A-Rod was acutely aware of the competitive problem he faced by not using steroids and that is why he chose to use. It’s the same reason that Barry Bonds and Roger Clemens – the two other superstars of this generation of baseball players – chose to use steroids. It’s the reason that hundreds of lesser talent also used.
I’m not saying that as a baseball consuming public we should just call it good and move on, but I do think that the narrow focus on the individual players as a source of the steroid problem is completely uncalled for. Why not blame the owners? They were obviously profiting from the steroid era (at least as much as the players were). They had the power to negotiate for greater control of substance testing in players. They could have used the media in a campaign to institute testing before it became a huge problem (Bob Costas and others were calling for more intense scrutiny for a long time). It’s not as if they weren’t aware of steroid abuse. They could have done more and they didn’t because they were basking in the glow of the home run and the revenue it brought. So before you blame and unthinkingly reject their Hall of Fame-worthiness, it’s about time someone started holding owners accountable for this mess.
Some law and economics resources. First, from the first author’s web site, here’s a link to a full-text pdf (25 Mb) of Robert Cooter and Thomas Ulen’s (third edition) 477-page primer on law and economics. Second, here’s an online encyclopedia of law and economics.
Economic sociology seems to offer a more realistic conception of economic activity and production, specifically highlighting how exchange and economic activity occurs in embedded relationships rather than in atomistic, arms-length markets. Individuals are likely to be aware of opportunities, or are likely to have certain beliefs or expectations or information, based on familial, friendship, communal and other ties. In short, economic activity and exchange is embedded in social relations.
This key intuition, that economic activity is embedded, has led to a more normative or prescriptive agenda as well — not only is an embedded conception of economic activity more realistic, but it is also argued that embeddedness has significant advantages over market-like relations. Rather than search for partners, or monitor another’s performance, or write up hard-to-specify contracts—one might instead benefit from a more mutualistic and trusting relationship with increased joint effort, information and resource flow. Trust, in essence, forms a governance mechanism.
While the virtues of embeddedness are extolled, it seems that the other side of the argument gets short shrift. (This came to mind as I was reading the Bernie Madoff link that Fabio provided in the previous post.) In the Madoff case it appears that trust indeed was the relied-upon governance mechanism for the investment activity, and from what I have read (the Madoff wikipedia site has lots of details), the whole operation was highly embedded: the investors found their way to Madoff via various familial, communal and other ties (well, what other way is there?) and heavily relied on these ties in making their investment decision.
But, ironically, it seems that the whole endeavor could have benefited from a market “check” of some sort: some arms-length, some due diligence, a contract, something. Undoubtedly these existed. But, the key point is that ironically the argument from embeddedness is that information can better be gleaned via alternative sources (which indeed appeared to be in place), while market mechanisms may actually stifle rather than further economic activity. The Madoff case perhaps provides a counter example.
Now, had things turned out differently, had Madoff truly created value for his investors, then I suppose this would be another exemplary story of embeddedness and trust as an effective governance mechanism. But, the normative argument for embeddedness deserves an asterisk, the upside of embeddedness gets disproportionate attention.
[I might add ----I'm not sure how the various contexts of economic sociology compare; whether we are looking at how people get jobs, or how firms work with suppliers, or how analysts judge companies, or in this case, how people find investment opportunities. From what I can tell, the theoretical insights from all of these contexts are often borrowed quite readily, without thought for contingencies---and thus I'm going out on a limb by suggesting that the insights from the Madoff case perhaps also apply to these other settings.]
Yes, Larry Summers would gag at the thought. He probably thinks sociology has the same scientific content as bathroom graffiti. But the nomination of Summers as a White House adviser does raise some engaging sociological questions. His carreer touches on professional power, reputation, and public image in fascinating ways.
- First, what was Summer’s alleged problem? Few disputed his intellect, his work ethic, or desire to improve the university. The issue was interactional. The constant criticism was that he simply could not restrain the impulse to doggedly challenge others, or hide his disdain of people he viewed as mental inferiors. Even critics have admitted that his ideas for Harvard were fairly reasonable in many cases.
- What’s the source of this interaction style? Summers comes from a family of economists, so he probably was encouraged to develop a contentious style. But more broadly, economists have an unusual intellectual position. Yes, all academics are snobs, but economists are the only social scientists who are good at math and they don’t often get confronted by other math intensive people, like computer scientists. So you feel like you’ve got something no one else has. Toss in that economics is about people so you can lecture them about policy. It’s a social context that encourages you to look down on others, or at least appear that you do. However, I’d argue that this really wasn’t the deepest problem with Summers. I’d say that he didn’t have a good sense of the social landscape of Harvard. You can be tough, even mean, but you can survive if you know how your organization runs. He apparently alienated people without thinking about a core constituency, or how to get people to behave in a collegial environment. In universities, you don’t win by winning arguments, you win by building coalitions behind arguments.
- Summers had weathered many storms as Harvard president, and also as a Clinton adviser. But it wasn’t until 2005-6 or so that there was a social movement to get rid of him. What happened? The common story was that he was done in by his comments about female scientific aptitudes. I’d say this was only part of the story. Yes, that made a lot of people mad. But you don’t lose a job like the Harvard presidency over one gaff. If you do a little more investigating, you soon realize soon before his resignation that (a) he’d bumped off a popular dean and (b) there was a scandal where Summers had used Harvard funds to help a fellow economist get out of legal trouble with the Russian government (scroll down for details – you can always depend on Michael Moore for good muckraking). The women in science scandal was important, but it was merely the straw that broke the camel’s back. My theory is that Summers did the opposite of what a lot of leaders do – he burned through social capital left and right rather than cultivate ties. When he was pressed in scandals, which is not unexpected of a prominent leader, he was left with little support and his enemies struck.
- The Summers-Rorschach Test: After leaving office, Summers became everyones’ whipping boy/darling. Since Summers clashed with ideological allies, his image became rather fuzzy and he could be adopted, in the popular imagination, by anyone. Conservatives used him as a conservative hero – even though the guy has very liberal politics. Feminists carved another notch in the tomahawk. And liberals felt good that the source of so many harsh comments got canned. And orgtheorists relished another good leadership case study.
- I honestly don’t know if his reputation is cleaned up, but the NYT article claimed he went out of his way to help a lot of people – students, colleagues, and politicians. The article also noted that it’s unreasonable to expect a total change. Also, given his expertise, I’d doubt that he’d be left out of any democrat’s administration. Perhaps what he did was not really engage with a wider intellectual world, but simply rebuilt his network from like minded people who should have liked him in the first place.
In the end, I think Summers provides a lot of food for thought. His path highlights an interesting combination of extreme personality and a strong professional position in a totally unique institution. There’s a brilliant biography to be written about this guy.
When I teach undergrad orgs, I have a week on organizational failure. I use the 9/11 example to ask the question: why do organizations fail to act when they have sufficient knowledge and resources?
- 9/11 – Experts knew al-Qaeda was a threat. The WTC had been attacked before and some of the people involved were being tracked by police. Yet, little was done.
- The Mumbai attacks – Once again, various organizations and state agencies knew something was up. One hotel even stepped security for a while, then backed down. There is also a long history of Pakistani terror groups who attacked Indian targets. Even during the attack, it appears local police were not capable of responding properly.
- The financial sector melt down of 2008 – Though it’s complex, the AP reports that many in the Fed knew something really, really bad was going to happen, sometime last year. Yet, there was little action till September.
- Katrina – people knew for years that the levies weren’t good. The Feds knew that Katrina was level 5, yet a very slow response.
- Pearl Harbor – You don’t have to be a conspiracy theorist to acknowledge that the US Navy was caught off guard – even though the Japanese had attacked every other Western power in the Pacific.
- Enron – people knew that key players had stopped using standard accounting techniques and started counting debts and losses as assets. Key signal that something bad was going to happen.
In class, I try to guide people away from the idea that leader X is dumb, or “people are greedy.” Instead, I try to provoke more systematic thinking through the “Dan Marino fallacy.” That’s when people blame Marino’s lack of a Super Bowl win on him, instead of on the whole organization.
The explanation I like to push is that such organizational failures are rare events and it’s hard to make people cooperate in such cases. Think Katrina – who wants to raises taxes for a 1 in 30 year hurricane to do engineering work? Which leader wants to turn a democracy into a police state to prevent a 1 in 20 year terrorist attack? If you were in my class, what theory would you offer for such huge, but well informed, blunders?
Corporate managers are often derided for acting unethically. Some attribute the corporate scandals of Enron and WorldCom as well as the more recent financial crisis to greedy, unethical behavior by managers. As Teppo noted in a post last year, the finger of blame is also being pointed at business schools for failing to educate students about their moral and social responsibilities and, instead, giving them purely technical skills that can be abused to advance their own self-interest at the expense of stakeholders.
In the October issue of the Harvard Business Review, Rakesh Khurana and Nitin Nohria propose that one solution would be to professionalize management. (This is an argument advanced in Khurana’s book, From Higher Aims to Hired Hands; see these past orgtheory posts). Professionalization would give management a greater sense of responsibility and duty because, presumably, members of the profession would be sanctioned or expelled if they didn’t live up to its standards (like a lawyer being debarred or a doctor losing his medical license).
Professionalizing management would require a couple of conditions. 1) They would need some kind of code that would allow managers to decide appropriate behavior and 2) they would need to be able to control who belongs to the profession. This latter aspect of professionalization, closure, is essential to self-regulation. The more open an occupation is, the easier it is for newcomers to enter and undermine collective efforts to control adherents. Without closure, any code of ethics of values, no matter how persuasive, wouldn’t be normative. It is this condition of closure that seems the most problematic when thinking about how to professionalize management. Khurana and Nohria tackle the problem this way:
Organizational boundary decisions are inextricably linked to organizational capability building, heterogeneity and performance. Nonetheless, there has long been a rather strained relationship between organizational economics (which addresses boundary decisions) and the literature on organizational capabilities (which addresses heterogeneity). The two literatures are frequently pitted against each other.
An upcoming special issue of Organization Science seeks to redress this issue and begin to truly integrate these two literatures. Here’s the call for papers (pdf from INFORMS web site): “Organizational Economics and Organizational Capabilities: From Opposition and Complementarity to Real Integration.”
Here’s Nicolai’s post on the same issue.
We’ve had our share of posts here at orgtheory on executive compensation. But today I draw your attention to the motherload of compensation debates. In the most recent issue of the Academy of Management Perspectives (sorry, I can’t find an online link), Steven Kaplan, the esteemed professor finance at the University of Chicago, defends his testimony before Congress in which he maintained that CEOs are not overpaid and, in fact, may be underpaid. In the other corner are Jim Walsh of the University of Michigan and John Bogle, former CEO and author of The Battle for the Soul of Capitalism. Kaplan maintains in his essay that CEOs are compensated based on the financial performance of their companies, which he illustrates by showing that their pay is positively correlated with stock price performance (which can mostly be accounted for by exercised options). Walsh and Bogle will have none of it.
Bogle maintains that stock price performance is not the right measure of performance. Corporate boards are using options as a means to entice already well-paid executives to take the jobs, but he doesn’t believe this compensation practice has actually helped improve long-term corporate health.
Simply put, stock prices are a flawed measure of corporate performance. Prices (using Lord Keynes’s classic formulation) involve both enterprise – the yield on investment over the long term – and speculation – betting on the psychology of the market….[B]asing compensation on increasing the intrinsic value of business would be a far better way of rewarding executives for durable long-term performance. For example, CEO compensation might be based on corporate earnings growth, corporate cash flow (even better, for it is far more difficult to manipulate), and dividend growth, and on return on corporate capital relative to peers and relative to corporations as a group (say, the S&P 500). Such measurements should be taken only over an extended period of time, and only after deducting the corporation’s cost of capital (23).
Walsh is a bit harsher in his assessment of Kaplan’s argument. Walsh wonders about the moral appropriateness of the argument.
While scholars must be willing to challenge accepted thinking, it is also true that our work ought to grasp the underpinnings of that accepted thinking. Public concern about executive pay is not about the nature of pay/performance sensitivities, nor is it about envy. The concern is about fairness. Taken-for-granted norms of fairness are essential to the health of the free market system. They too need to serve as a reference point for assessing CEO pay. If we defend the CEO compensation practices…as evidence of a spontaneous market process, then some might wonder about the viability of a society that tolerates such a process. It many not even be so far-fetched to imagine its downfall (30; emphasis added).
Walsh then questions whether Kaplan has conflicting interests that might not make him the most objective assessor of what is the best way to compensate executives.
It is also unfortunate that [Kaplan] never revealed his other interest in this compensation question. Professor Kaplan is not just a business scholar. His University of Chicago Web page notes that he currently serves on the boards of Accretive Health, Columbia Acorn Fund, and Morningstar. The Morningstar Web site reports that he joined their board in 1999 and currently serves as their compensation committee’s chair….That site also includes SEC filings for the past few years. There we learn that Professor Kaplan enjoyed the proceeds from the sale of more than $3.8 million worth of stock in a recent 18-month period. While he is the Neubauer Family Professor of Entrepreneurship and Finance at the University of Chicago, he is also an extremely well-compensated insider in the governance regime he so passionately defends. Congress and his AMP readers should know that (32).
Unfortunately, Kaplan does not offer a rebuttal (that appears in AMP, at least) to Walsh’s claim that he is a biased source.
I am probably most known for my work on rent appropriation from competitive advantages so let me first start with a tight link between that work and Teppo’s work on methodological individualism (I’m sure you’ve already gotten an earful on this ;-).
I cannot consider seriously the notion that rent might accrue to a “firm” – this does not seem to be a meaningful question. Some would, no doubt, argue that this is the central proposition of the strategic management literature. It reminds me of the adage that organizations don’t behave, people do. Thus, within the firm, rent may be appropriated by any of the stakeholders – of which shareholders are but one group. For the most part, theories of competitive advantage do not seek to explain when, specifically, shareholders will appropriate rent. And yet, we would not, by and large, expect to observe rent in measures of organizational performance unless shareholders realize the rent (since the rent would otherwise be appropriated as expenses – before measures of accounting residuals are calculated).
Lately, I have been exploring a much more fundamental question that is closely linked to org theory and the recent discussion here on life cycles. We know that strategic capabilities do not emerge instantaneously. Rather they are developed and acquired over time (see Helfat and Peteraf’s 2003 SMJ article). As such, those stakeholders involved in assembling the capability have time to prepare for its eventual emergence while others are very much in the dark.
This means that rent appropriation activities may often precede the actual generation of rent as parties are organizing and assembling the requisite resources. For example, the organizational form that is selected in which to embed a new capability reflects concerns about the desired rent appropriation regime as well as the efficient governance structure. Indeed, stakeholders regularly make tradeoffs among these factors.
Perhaps an example would be illustrative. Tony Fadell is the entrepreneur who developed the iPod. Haven’t heard of him? There’s good reason. Apple doesn’t want his story to be told. He left his job designing digital audio players for Phillips Consumer electronics to start his own company (Fuse Systems) to develop his idea for a player with a better software interface that worked with an online music store. He chose this form despite the obvious fact that Phillips had valuable complementary assets that could make the vision easier to achieve. Only when he failed to raise sufficient funding did he seek support from Phillips, Realmedia, and finally Apple Computer. When Steve Jobs was very enthusiastic, he asked Fadell to lead the 30 member iPod design team. However, Fadell remained an independent contractor (an externalized transaction) presumably because this gave him added negotiating leverage. Once the project was successful, he renegotiated his employment and has since been promoted to be the Sr VP in charge of the iPod/iPhone division. While his compensation has not been disclosed, between mid 2006 and mid 2008, Fadell sold Apple stock valued at $20,044,924, exercised options valued at $8,891,593, and was granted additional stock options valued at $9,220,000. While this $38M is clearly not all of the compensation he has received for his role in the development of the iPod, it would appear that he has shared in its economic success.
In sum, I would find it hard to tell the story of the emergence of the iPod as though the only organizational design concerns the best way to assemble resources and design efficient (least costly) governance structures. For one thing, there are a number of key stakeholders – efficient for whom? The ultimate organizational form is a negotiated outcome from interested parties. It may not be the ideal for any one stakeholder. Finally, all of this shifts over time (including the organizational form) as the capability lifecycle unfolds over time.
Given this, I would ask, what is the most promising direction for organization theory to develop?
I just noted that all 23 chapters of the interesting (though rather over-the-top and one-sided) documentary “The Corporation” are viewable here.
The Academy of Management has a new publication that creates a space for management scholars to provide reviews and critical appraisals of the literature. The Academy of Management Annals released volume 1 of the new series over the weekend. The first volume contains some interesting-looking pieces (I haven’t actually read any of them yet), including a paper by Kim Elsbach and Michael Pratt on the physical environments of organizations and an article by Paul Adler, Linda Forbes, and Hugh Wilmott on critical management studies.
In an unrelated topic, check out Gordon Smith’s post on the B corporation, a new corporate governance structure that allows managers to “hard-wire their social responsibility into their governing documents.” The basic idea is that social responsibility should/can be a legally sanctioned activity of corporations if the organization can legally commit itself to certain non-shareholder stakeholder groups at founding. As Gordon notes, this illustrates how contracts can be a useful device for institutionalizing organizational identity. Gordon and I make this point in our paper, “Organizational Perspectives on Contracts,” which, by the way, is very close to finding a journal home. More on that later.
Apparently not an April Fool’s day prank, I’ve recently read that Antioch College is up for sale. $12M. Check out the UPI news story here. Yes, *the* Antioch College, that graduated folks likes Coretta Scott King and Clifford Geertz. I wasn’t terribly surprised. Antioch, though respected, has been on a down hill slide for decades, with one administration after another driving the school downward. A few orgtheory comments:
The traditional liberal arts college is a shrinking population. Expensive and few people are willing to pay top dollar for non-vocational higher ed. In contrast, the for profit higher ed sector is booming. Antioch is just an extreme case in a big trend.
Strangely, Antioch’s graduate programs have done ok because they packaged the Antioch brand name with distance graduate education. Those don’t seem to be for sale. It’s only the liberal arts programs that crashing. It’s ironic that what remains is the for profit adult education component of a famous liberal arts college.
Is this a case of too much political correctness? Antioch has a history of relatively extreme campus politics. Thus, it’s been hard to recruit a lot of students who can pay $$$. Lethal for an institution that must support a fair number of tenure track faculty.
What will happen? I wouldn’t be surprised if many buyers approached the trustees but negotiations failed over issues like faculty and organizational identity. Good case study of how identity inhibits survival. I predict a future ASQ or AMJ article here.
What *should* happen? $12M is small potatoes these days, so I think an educational innovators should scrap up the money and use Antioch to push a new brand name in education. Maybe a first tier conservative liberal arts college? How about one, like Berea, devoted exclusively to low income students? Or how about a more mellow multicultural institution? Or combine grad-undergrad programs? $12M is a small price to pay for the chance to really try out a new educational philosophy. Think about it.
The most recent issue of Business Ethics Quarterly captures an interesting symposium on stakeholder theory from last year’s Academy of Management conference: “Dialogue: Toward a Superior Stakeholder Theory.” The dialogue included not just those who’ve directly contributed to stakeholder theory — Freeman, Donaldson, Agle, Mitchell, Wood — but also Harvard’s Michael Jensen. The symposium was an effort to explicate the current and future state of stakeholder theory.
After reading the articles, I did not come away feeling that much better about stakeholder theory, specifically, the “theory” part of it. I certainly agree that stakeholders matter. Perhaps stakeholder theory is an effort to re-iterate that organizations are dependent on others for resources, legitimacy, etc (cf. Pfeffer & Salancik, 1978). I agree. But, beyond that, I am not sure what theoretical or even practical intuition I can get from it. One clear success, as the first article notes, is that the stakeholder language has widely diffused itself into practice (see the interesting analysis that the first authors do on Fortune 500 company web sites and the use of the word “stakeholder”), but, it seems that further articulation of the theory itself is needed.
For example, its easy to talk about a stakeholder approach when stakeholder interests are aligned, but, when there are competing interests, and inevitably this is the case, what are the proposed decision-criteria? How are disparate stakeholder interests prioritized? What are the appropriate boundaries of the organization? Undoubtedly there’ll be much work forthcoming on these and other related issues.
Here’s a slew of past orgtheory posts on stakeholder-related issues.
For the above paper’s abstract, click here: Read the rest of this entry »
Apparently CEOs are not overpaid; that is, once you take into account company size, market cap, talent, etc. Here’s a summary on a recent study published in the Quarterly Journal of Economics:
As Gabaix and Landier write in a new Quarterly Journal of Economics article, the sixfold increase in American CEO pay from 1980 to 2003 is almost wholly explained by the roughly sixfold increase in market capitalization of big U.S. companies over the same period. (Asset values have increased sixfold because both corporate earnings and the price-to-earnings ratio investors are willing to tolerate have increased by factors of 2.5.) The trend lines of market capitalization and executive payouts rose and dipped in near-perfect tandem.
According to Gabaix and Landier’s model, the talent differences among CEOs are generally minor. For example, if a given firm substituted the most talented CEO for the 250th most talented CEO, its market capitalization would only increase by 0.016 percent. But for a $500 billion company like ExxonMobil, 0.016 percent is equivalent to some $80 million. In other words, as companies get bigger, a talented CEO can have a greater impact. Therefore, large companies bid up prices across the board for the small number of men and women deemed capable of managing them. The reason CEO pay in other countries (such as Germany) tends to be lower is that the “big” companies abroad are generally smaller than the big companies in America. We do not yet have a global market for CEO talent.
*Just noted that this is old news, Brayden posted on it nearly two years ago.
Pirate alert! Remember that cool working paper about pirates and democracy that Fabio linked to last summer? It is now in print in the Journal of Political Economy, “An-arrgh-chy: The Law and Economics of Pirate Organization.” In the paper Peter Leeson, an economist at George Mason, examines the organizational structure of pirate ships, comparing them primarily with merchant ships. Pirates, in contrast to the autocratic authority structure of merchant ships, developed democratic mechanisms of governance, complete with checks-and-balances and constitutions. The democratic governance system of pirates ensured that no single officer on the ship could dominate and abuse his authority for personal gain. In comparison with merchant ships, pirate ships did not face the principal-agent problem. Pirates owned their own ships (or at least occupied them without rent) and could take all of the booty for themselves, whereas merchants worked for landlubbers who owned the assets of the ship. Leeson’s conclusion is that pirate democracy was a response to the economic conditions of piracy.
One of the interesting insights of Leeson’s study is that pirates were one of the first groups to develop democracy as a form of governance.
The institutional separation of powers aboard pirate ships predated its adoption by seventeenth- and eighteenth-century governments. France, for example, did not experience such a separation until 1789. Nor did the United States. The first specter of separated powers in Spain did not appear until 1812. In contrast, pirates had divided, democratic “government” aboard their ships at least a century before this (pg. 1066).
Here is Leeson’s website. I can’t help but chuckle at the prominent skull and crossbones directly above his title as the “BB&T Professor for the Study of Capitalism.” If you wondered how an assistant professor starting in 2005 has rapidly advanced to full professor, check out Leeson’s loaded CV. Peter is also a regular at the Austrian Economists blog.
I teach MBA students Organization Theory and one section of the class is focused on organizational design; in future years I plan on extending that section (presently its three class periods). The design of orgs is a lost art, but my interactions with past graduate students now in industry suggests that the skill is in very high demand.
The best, theoretically informed yet practical, resource I have found for org design is Burton, DeSanctis, and Obel’s short book Organizational Design: A Step-by-Step Approach (Cambridge). The book is fantastically clear, succinct, simple and focused — an excellent resource (Peter Abell’s organization theory textbook has many of the same features). However, given the wider breadth (beyond design) of the org theory class, I use Nohria’s “Note on Organization Structure;” its also very good.
If you’ve found additional, helpful org design resources, please let me know (via email or drop them in the comments).
Apparently, absolutely nothing – according this forthcoming Journal of Marketing study by Pravin Nath and Vijay Mahajan.
The emergence of the Chief Marketing Officer position on the top management teams of major companies was hailed, the article notes, as a “renaissance of sorts” for the marketing function itself (with marketing scholars themselves also taking renewed pride in their discipline), but, this study appears to throw a rench into the celebration.
These discussions of course emerge in every field. Do managers matter? What about CEOs, TMTs, HR? What about industry or firm effects? The questions are perennial; for example, in the Strategic Management Journal one can expect to find a firm v. industry v. manager variance decomposition study quite frequently (here’s a sampling) - each study with more data, with better empirics, a new level. It amounts to healthy descriptive empirics which certainly can inform theoretical work.
1. Loyal reader Belle Lettre on taking organizational theory courses in different academic departments.
2. Charlton Copeland at blackprof.com asks whether black alumni from majority white schools should give their money to historically black colleges. Comments worth reading. Best answer: yes, you should give to white majority schools because you can help wherever black students may be.
“History in general, and the American experience in Vietnam in particular, have much to teach us, but both must be used with discretion and neither should be pushed too far. The Vietnam analogy, for all its value as the most recent large-scale use of American force abroad, has limits. Most importantly, the applicability of the lessons drawn from Vietnam, just like the applicability of lessons taken from any other past event, always will depend on the circumstances of the particular situation at hand.”
If nothing else, it’s worthy thick description. The interviews show how traumatized US leaders were by the Vietnam war and how that affected later choices. Another case study of letting the worst outcome carry too much weight in policy judgments.
Bob Sutton has three interesting posts on organizations and layoffs.
The business historian John Steele Gordon, author of Empire of Wealth, has a fascinating little piece in Barron’s looking at the origins of modern accounting standards. In the article, Gordon discusses how accounting was a self-imposed mechanism for ensuring transparency in a market dense with secrecy and corruption.
Accounting, the application of statistics that most concerns the world of business, has encountered damn lies many times since the first accountant put on an eyeshade in ancient times. Today, the rules of accounting are highly elaborated and legally mandated. Sarbanes-Oxley is only the latest attempt in a more than century-long quest to make sure that corporate books are not cooked.
Regulators might wish you believed it was the government that introduced Generally Accepted Accounting Principles and independent auditors to the marketplace — to keep the players there honest. It was not. It was the players in the marketplace themselves….
Few public companies issued annual reports. When in 1866 the New York Stock Exchange asked the Delaware, Lackawanna, and Western Railroad for its financials, the railroad curtly replied that it “makes no reports” and “publishes no statements.” Translation: Drop dead….
Matters were changing. In 1869, the New York Stock Exchange merged with its chief rival, the Open Board of Brokers, and became the overwhelmingly dominant institution on the Street. For the first time it became important for brokerage firms to belong to the exchange and for companies to have their securities listed. The NYSE quickly began to impose rules on both brokers and on the companies that sought listings.
As the country’s industrial economy exploded in size in the last decades of the 19th century, the need for capital exploded as well. Increasingly, that capital could only come from the great Wall Street banks, of which J.P. Morgan & Co. was the apotheosis. These banks needed to be sure the books were honest before floating an issue of securities.
To ensure honesty, the stock exchange and the banks increasingly required that the books be certified by independent accountants, a profession that quickly grew at this time. As late as 1884, only 81 self-employed accountants were listed in the city directories of New York, Chicago, and Philadelphia combined. Five years later, there were 322 listings.
While there isn’t a ton of research on the sociological aspects of accounting, there is some good stuff out there (mainly coming from the journal Accounting, Organizations, and Society). Wendy Espeland’s and Paul Hirsch’s 1990 paper examines the symbolic effect that accounting had in legitimating the conglomeration movement in the 1960s. In 1991 AJS paper Bruce Carruthers and Espeland argue that accounting practices not only serve a technical function through rationalization (following Weber) but accounting also has a rhetorical function by lending legitimacy to business ventures. And Carruthers’ 1995 AOS paper explores the implications that new institutional theory might have for understanding accounting practices’ effects on organizations.
- Gordon at the Conglomerate (formerly Wisconsin, now BYU Law) gives an overview of a session on ‘comparative governance’
- Nicolai at O&M gives a roundup of recent journal articles
- An overview of the comparative capitalism/varieties of capitalism literature
- A forthcoming Organization Science paper on comparative governance
This is a question posted on behalf of one of my brilliant graduate students (BGS): Is there a literature on the negative effects of loose coupling/decoupling? BGS pointed out that there is usually a functionalist undertone to decoupling arguments. You try to shield the work in the organization by doing the institutionalized ceremony. Once the pesky public has stopped trying to regulate/interfere with your work, you can safely go about your business.
What about the opposite? What if you cut yourself off from the institutional environment, only to find your org/subunit deprived of crucial resources? And then you slowly, or quickly, die? What kind of literature deals with that sort of situation? Please post answers in the comments, so BGS can see them. Thanks!