Tag Archives: Milton Friedman

A Quibble Over Robert Reich’s “CEO” Statesman

JDZellerbach

J.D. Zellerbach

One of the posts on this blog with consistently high traffic is The First CEO, which was my first attempt to track down the earliest instances of the acronym “CEO.” With a little help from the people at Webster’s Dictionary and the Harvard Business Review, I found that those came in the 1970s. In subsequent posts on this theme, I tried to make some historical sense of the literary evidence I’d uncovered.

So I have a quibble with Robert Reich’s polemic in The American Prospect (and elsewhere; he’s syndicated), comparing the CEOs of today and their “shameful,” self-serving silence in the face of Trumpian authoritarianism to the “CEOs” of the 1950s:

I’m old enough to recall a time when CEOs were thought of as “corporate statesman” [sic] with duties to the nation. As one prominent executive told Time Magazine in the 1950s, Americans “regard business management as a stewardship,” acting “for the benefit of all the people.”

That prominent executive, held up here as a model corporate statesman, was pulp and paper executive J. D. Zellerbach. Zellberbach was not a CEO — he could not have been in the 1950s — but the President of Crown Zellerbach. Reich is using the term “CEO” loosely, then, but in this piece that seems to prevent him from thinking historically about the CEO as an institution.

Perhaps he should have instead asked whether the institution of the CEO in the 1970s represented a rejection of “socially-conscious” business leadership for which he’s calling.

Remarkably enough, in Saving Capitalism, Reich himself quotes Zellerbach’s statement to Time Magazine just before he discusses the shift from the benevolent managerialism advocated by industrialists like Zellerbach to “a radically different vision of corporate ownership” that set in during the 1970s (and brought with it, among other things, the institution of the CEO). It’s worth reading this passage to the bitter end:

In the early 1950s, Fortune magazine urged CEOs to become “industrial statesmen,” which in many respects they did—helping to pilot an economy generating broad-based prosperity. In November 1956, Time magazine noted that business leaders were willing to “judge their actions, not only from the standpoint of profit and loss” in their financial results “but of profit and loss to the community.” General Electric, noted the magazine, famously sought to serve the “balanced best interests” of all its stakeholders. Pulp and paper executive J. D. Zellerbach told Time that “the majority of Americans support private enterprise, not as a God-given right but as the best practical means of conducting business in a free society….They regard business management as a stewardship, and they expect it to operate the economy as a public trust for the benefit of all the people.”

But a radically different vision of corporate ownership erupted in the late 1970s and early 1980s. It came with corporate raiders who mounted hostile takeovers, wielding high-yield junk bonds to tempt shareholders to sell their shares. They used leveraged buyouts and undertook proxy fights against the industrial statesmen who, in their view, were depriving shareholders of the wealth that properly belonged to them. The raiders assumed that shareholders were the only legitimate owners of the corporation and that the only valid purpose of the corporation was to maximize shareholder returns.

This transformation did not happen by accident. It was a product of changes in the legal and institutional organization of corporations and of financial markets—changes that were promoted by corporate interests and Wall Street. In 1974, at the urging of pension funds, insurance companies, and the Street, Congress enacted the Employee Retirement Income Security Act. Before then, pension funds and insurance companies could only invest in high-grade corporate and government bonds—a fiduciary obligation under their contracts with beneficiaries of pensions and insurance policies. The 1974 act changed that, allowing pension funds and insurance companies to invest their portfolios in the stock market and thereby making a huge pool of capital available to Wall Street. In 1982, another large pool of capital became available when Congress gave savings and loan banks, the bedrocks of local home mortgage markets, permission to invest their deposits in a wide range of financial products, including junk bonds and other risky ventures promising high returns. The convenient fact that the government insured savings and loan deposits against losses made these investments all the more tempting (and ultimately cost taxpayers some $124 billion when many of the banks went bust). Meanwhile, the Reagan administration loosened other banking and financial regulations and simultaneously cut the enforcement staff at the Securities and Exchange Commission.

All this made it possible for corporate raiders to get the capital and the regulatory approvals necessary to mount unfriendly takeovers. During the whole of the 1970s there had been only 13 hostile takeovers of companies valued at $1 billion or more. During the 1980s, there were 150. Between 1979 and 1989, financial entrepreneurs mounted more than 2,000 leveraged buyouts, each over $250 million. (The party was temporarily halted only when raider Ivan Boesky agreed to be a government informer as part of his plea bargain on charges of insider trading and market manipulation. Boesky implicated Michael Milken and Milken’s junk bond powerhouse, Drexel Burnham Lambert, in a scheme to manipulate stock prices and defraud clients. Drexel pleaded guilty. Milken was indicted on ninety-eight counts, including insider trading and racketeering, and went to jail.)

Even where raids did not occur, CEOs nonetheless felt pressured to maximize shareholder returns for fear their firms might otherwise be targeted. Hence, they began to see their primary role as driving up share prices.

A Fifth Note on the First CEO: The Postwar Fad

We don’t usually think of corporate boardrooms as places where fads start or take hold. But that’s probably the the best way to account for the adoption of the CEO title by American corporations in the postwar period. Or at least that’s the view urged in this 1999 paper by Allison and Potts, which a reader shared in a comment on my post about the postwar provenance of the term CEO: from the mid 1950s to the mid 1970s, the adoption of the Chief Executive Officer title spread, primarily through “board interlocks” — or through individuals serving on multiple corporate boards.

Allison and Potts present the title’s diffusion through corporate networks as a “no brainer,” “an innovation largely without consequence to adopters.” It was a case, they say, of “contact-only diffusion” or “diffusion with contagion,” in which no serious choices or business decisions had to be made; the title may have helped clarify the difference between President and Chairman, but for the companies Allison and Potts study there was no “non-trivial economic benefit or cost” involved. Companies adopted the title Chief Executive Officer largely because they were emulating other companies: “diffusion of the CEO title was strictly mimetic, a true fad.”

cumulativeCEO
Everybody was doing it. Container Corporation of America started the trend in the late 1940s: why, Allison and Potts don’t explain, but I hope to make some sense of that at some point in the future; it’s intriguing, to say the least, that the company led by Walter Paepcke — Aspen booster, patron of the arts, and promoter of big ideas — led the way. In 1955, CCA was the only one of the largest 200 industrial companies in the United States that had a Chief Executive Officer. By 1975, all but one of the bunch had adopted the title.

CEO Titles

The fad takes hold in four stages: an early period, from 1955-1961;1962-1965, when adoption rates climb dramatically; a late middle period, from 66-71; and a final period where we see adoption rates drop off, mainly due to the remaining number of small adopters.

Though Allison and Potts don’t distinguish the adoption of the Chief Executive Officer title from the use of the acronym CEO, it’s in that late middle period, which they call the “inflection point” of the fad, where we start to see the first traces of the acronym “CEO” in the Harvard Business Review and other business publications. Shareholder value theory makes its debut in 1970. By the time the fad has run its course, in 1976, Jensen and Meckling have published their theory of the firm: the CEO has been identified as the primary “agent” of the firm’s success. He has also begun to enjoy unprecedented political influence, social prestige and cultural celebrity. What began as a boardroom fad has produced a new icon of American power.

Has Management Become Significantly More Incompetent?

I don’t really have a dog in the Lepore-Christensen fight. Lepore’s strongest point, that Christensen’s theory of “disruption” is both a flawed theory of history and itself an artifact of history, seems to have gotten lost in the fray. Lepore overreached in her New Yorker piece, and now Christensen’s adherents and acolytes have come out in full force. There hasn’t been much room for careful discussion of Christensen’s theory as a discourse or artifact of post-industrial social collapse — which is, I suppose, what interests me most about it.

Still, I’m following the controversy, and yesterday, John Hagel offered a welcome, level-headed contribution to the discussion. Here, I simply want to paraphrase the comment I left on his post, because it touches on some themes I’ve written about in connection with the rise of the CEO (notably here, here and here.)

Hagel wants to move the discussion of Lepore-Christensen away from intramural antagonism and the clash of personalities and disciplines to look at “fundamental and systemic trends.” Clearly, he says, “something very profound is happening — and it’s largely escaped notice.” One measure of this bigger shift: “the topple rate at which US public companies in the top quartile of return on assets performance fall out of… leadership position.” That rate, he notes, increased 40 percent between 1965 and 2012.

There are lots of possible explanations for that wild increase. It seems safe to say there must be some great historical forces at work. Otherwise, Hagel writes, “one would have to believe that management is becoming significantly more incompetent over time”; and I guess nobody would seriously believe that. Here, at least, we’re meant to pass over the thought with a knowing smile: of course management has not become significantly more incompetent over time. Right?

I didn’t seriously entertain the thought of growing managerial incompetence again until I arrived at Hagel’s concluding paragraph. There, he offers a few suggestions on how incumbent players might “more effectively respond to these disruptive approaches (short of resorting to regulation and other public policy measures).” One suggestion is that management find ways to take the long view: incumbent players need “to find ways to expand the horizons of their leadership team beyond the next quarter or next year.” Myopia is always dangerous, and more dangerous now than ever before.

At the same time, short-sighted management has a history, and as I’ve suggested in my posts on the rise of the CEO, the most interesting chapter of that history starts right around the time the topple rate increases, in the 60s and 70s.

Around 1965, as profit rates in manufacturing fall and as the postwar boom yields to post-industrial reality, new ideas of management take hold. One of them is what Jack Welch once called “the dumbest idea in the world”: the doctrine of shareholder value. As this doctrine becomes boardroom religion, we see the rise of the “CEO” as corporate savior (in Rakesh Khurana’s phrase) and cultural celebrity.

Short-termism and, in some cases, risky financial manipulation become the name of the game. Compensation packages reinforce bad habits. Strategists and management consultants take their cues from the C-Suite, and tailor their offerings accordingly.

I’m not saying the rise of the CEO, the doctrine of shareholder value, or the promise of sustainable competitive advantage in the 70s and 80s explain the increase in the topple rate, but clearly they should be taken into account here; and we should give growing managerial incompetence its due. Bad ideas about what counts as business success — and misguided actions by business (and political) leaders — certainly make businesses more vulnerable to the kind of disruption that interests Hagel: the loss of leadership position.

Big scary historical forces may be overtaking us, but if competence in the face of those forces is what we’re after, then failed ideas of corporate purpose and failed models of corporate leadership ought to be called out, questioned, and radically altered or just dropped.

Are the Seventies Finally Over?

Adam Nagourney had a piece in yesterday’s Sunday Review about the changing political allegiances of the Sunbelt and how those changes might signify “an era’s end.”

The Republican Party has grown used to having “a lock” on the region stretching from Florida through the south, and to Western states like Arizona, Colorado Nevada and California; but with the nomination of Frostbelt candidates Mitt Romney and Paul Ryan, the region looks up for grabs.

“Pummeled by the collapse of the housing market,” the Sunbelt suburbs have “soaring” poverty rates; and that, according to Harvard’s Lisa McGurr, “will transform the ability of the Republican party to appeal to suburbanites with private, individualistic solutions.”

What’s more, the Sunbelt’s demographics are changing – to illustrate, Nagourney mentions Latino and Asian “enclaves” in Orange County, and Latinos moving in large numbers to Texas and Arizona – even as Republicans have been pushing an anti-immigrant agenda.

If this week’s Republican convention marks the end of an era, it’s the end of an era that began in the 1970s. Then, a demographic shift from the industrialized Frostbelt to the Sunbelt precipitated the political realignment now on the wane. The northeastern liberal elite lost its exclusive hold on power; the liberal state came under assault. And when the barbarians arrived at the government gate, we gleefully let them in. All across the country, Americans were fed up with taxes, had lost faith in government, and began to disengage from public life. By the end of the 1970s, writes Bruce Schulman:

Americans not only accepted that markets performed more efficiently, but embraced the previously outlandish idea that they operated more justly and protected freedom more efficiently than government. The entrepreneur became a national hero, and suspicion of business, a mistrust of unregulated corporations that had anchored American politics since the 1930s, all but vanished from American political discourse. (The Seventies, p. 249)

Those were the days when Milton Friedman assured us that business had no greater obligation to society than to “maximize shareholder value”. This doctrine went hand in hand with Friedman’s hostility to the liberal state, his contempt for the inefficiencies of government, and his contention that free enterprise, unfettered by regulation and unburdened by taxes, would deliver political freedom and prosperity. What’s most striking is that by the end of the Seventies the majority of Americans had enthusiastically came around to that point of view. We all but abandoned the commons:

The slow march of privatization had pervaded the entire Seventies. It complemented all of the decades’ changes in attitudes: impatience with taxes and centralized authority, experimentation with new forms of community [including self-taxing private entities like homeowners’ associations and Business Improvement Districts, which supplanted and suborned municipal governments], Sunbelt self-reliance, and the fiscal crises that deepened municipalities’ reliance on private funds. (249)

The push toward privatization and “Sunbelt self-reliance” in the Seventies was also a retreat from the idea that we rely on each other – a retreat from the idea of “society” itself.

Hurricanes like Katrina or the one bearing down on the GOP convention this week don’t just threaten Sunbelt serenity; they are crises that heighten and exaggerate the shortcomings of the Sunbelt ethic. The same could be said for the financial tsunami that overtook us in 2008, and forced many people in the Sunbelt from their homes. (Foreclosure rates are high throughout the region.)

Despite the impending hurricane and the financial storm most Americans are still weathering, it’s unlikely anyone on stage in Tampa this week will speak about the limits of Reaganesque self-reliance or the things markets cannot do. But we have obligations to each other markets sometimes threaten, and sometimes simply cannot help us meet.

I’d at least like to think that with the Sunbelt’s eclipse more than the electoral votes of a few states are in play. Maybe, just maybe, the Seventies are finally coming to an end.