No less than former GE CEO Jack Welch, the hero of many a business school case study, has seen the light and fallen from his high horse, calling SVM "the dumbest idea in the world." Perhaps that's because GE lost 60 percent of its market value since Welch left in 2001? Is GE that much worse now, or was it overvalued then?
Explaining what Welch meant, Forbes' Steve Denning argued that in practice, SVM is not so much about executives' maximizing the firm's value, but rather managing (or manipulating) investors' expectations of the firm's value. Citing the example of GE, he concluded that Welch & Co. were clearly managing the firm's earnings with uncanny precision. Denning argues for regulatory changes that could thwart the influence of managed earnings and managed expectations, and get business back to the previous dogma of management guru Peter Drucker that, "There is only one valid definition of a business purpose: to create a customer."
Using other words, celebrated business leader Steve Jobs echoed Drucker's classic sentiment to biographer Walter Isaacson.
To whom then do we appeal for amelioration, when there is nobody to appeal to but impersonal market forces?
Meanwhile, alternative theories like the Triple Bottom Line and Porter's Shared Value have started to gain credence. More companies are at least paying lip service to it, and the related concept of Corporate Social Responsibility (CSR). Personally, I believe CSR is bunk.* Expecting firms to focus on something other than their bottom line is misguided and naive, no matter what they state on their websites and annual reports. It's not what they're made to do. What are the internal incentives for firm employees to promote CSR? Few or none. Meanwhile, CSR gives irresponsible firms PR cover for their misdeeds.
(*When CSR really works is when consumer watchdogs, labor unions, environmentalists and other organizations shine the light of public scrutiny on the firm's lofty stated aspirations. Yet this is just public regulation by other means -- and arguably not the most efficient means -- not the result of public altruism by the firm. And crucially, these public critics are often not even the firm's customers, shareholders or employees, but rather "stakeholders" in the most amorphous sense of CSR, meaning they may have no direct economic stake in the firm's performance.)
(*When CSR really works is when consumer watchdogs, labor unions, environmentalists and other organizations shine the light of public scrutiny on the firm's lofty stated aspirations. Yet this is just public regulation by other means -- and arguably not the most efficient means -- not the result of public altruism by the firm. And crucially, these public critics are often not even the firm's customers, shareholders or employees, but rather "stakeholders" in the most amorphous sense of CSR, meaning they may have no direct economic stake in the firm's performance.)
But I want to talk about the public arena.
Tragically, the theory of SVM has been accepted by many policy-makers and academics as the best model not only for individual firms, but also the model around which to structure our economy. In effect, these public-sector cheerleaders of SVM gave up their prerogative and obligation to engage in precisely the kind of long-term planning for the common good that firm-level SVM is a incapable of doing. What is good for the firm is the firm's decision; what is good for society is not. It's ours, the people's.
Yet too many have swallowed the Kool-Aid that the "invisible hand," i.e. the mystical, untraceable aggregate of millions of individual business decisions, leads to the best outcomes in all respects for society. Taken to its logical conclusion, this misguided belief compels policy-makers and regulators not to meddle at all; they should get out of business's way and let the magical accounting of economic debits and credits do its thing. Because better outcomes for society simply aren't achievable. Nay, a committed group of human beings with a singular purpose has no purpose, in their view, outside the confines of the firm.
(The one exception to this rule of human endeavor, conservatives tell us, is private charity, which they believe should replace publicly-funded safety nets. Yet a simple look at poverty statistics pre- and post-LBJ show us that charity never was, and never can be, nearly adequate to "mop up" the Dickensian poor among us. Indeed, the key failing of private charity -- with its high overhead, wasteful duplication, lack of scale, and most importantly, non-reporting on performance -- is that it is at its weakest when it's needed most: during economic downturns.)
Certainly, we must strive for a delicate balance between impeding business and giving it free dominion over society. Unfortunately, today we hear many thinkers and politicians on the Right calling for chainsawing regulations and giving polluting industries and exploitative labor practices free reign over our economy -- all in the name of creating jobs. Indeed, I have no doubt that gutting regulations would boost those firms' bottom lines in the short and even medium term, and even create jobs. What worries me is the long term. When our productivity suffers from lack of skills and capital that have been exported, never to return. When unaccounted-for pollution creates enormous health costs which nevertheless exist in the real economy yet are absent in polluters' financial statements. When we have privatized every government service and public asset until we are at the mercy of executives whose primary motivation is this year's bonus, and next year's "golden parachute."
To whom then do we appeal for amelioration, when there is nobody to appeal to but impersonal market forces?
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