| ||
The Corporate Cocoon  They’re not particularly bad people, you understand. In fact, many of them are pleasant and smart. But they’re being slowly digested into the body of a larger host: the 21st Century Mega-Corp Network. They wake up each morning in their quiet bedrooms, go through the usual preliminaries, and climb into their modern cars. They turn on the backseat video to anesthetize their kids, drive on inoffensive streets to well-guarded schools, drop the kids off, and head to their quaint train stations. At those stations, their semi-elite status is confirmed by all the other mega-corp employees who live precisely the same way. As scheduled, the train shows up, and they take their seats. Here, a bit of individuality shows up: One will get predigested “safe facts” from his or her newspaper. Another, his or her gossip from People magazine. The more up to date will watch a show on a brand-new smartphone. Perhaps one or two will plug in to a shiny new iGadget, submerge any thoughts in songs provided by the entertainment corps, and recline, semi-comatose, till they arrive at the city center. Then they emerge from the trains into a brilliant, cavernous station with wall-to-wall advertising: Buy the newer, faster phone! Take a vacation to a pristine beach, with happy, beautiful people frolicking in their swimsuits! Give your spouse a new car for Christmas! Most important, these ads will feature people just like them: Happy, successful corporate employees. They walk down the streets to their glistening offices past a sea of corporate logos: places to eat and drink, to buy clothes, coffee, and cell phones; and past seemingly eternal government buildings. All is institutional, all is certified, all is polished… all is hollow, all is homogenized. The same goes for their mega-corp jobs and their mega-corp colleagues. Their world is a second verse of the 1950s: a little bit louder and a little bit worse. The institution is back. It ruled in the ‘50s; it was dethroned in the ‘60s and ‘70s; it idled going into the ‘80s, and then began its return. Now it’s back at the top of the heap and rules from cradle to grave. We all know the script: Do well in school (an institution). Rebel with music from the entertainment corps (institutions). Wear the new shoes/jeans/etc. with the best corporate logos (institutions). Get a university degree (from an institution). Take student loans to do so (from an institution). Take a job at a big firm with great benefits (interacting institutions). Get a home loan (from an institution). Build a 401(k) (more institutions). Believe in democracy (a multilayered institution). Be a good citizen and vote (same as above). Send your children to daycare, then school (institutions). Buy brand-named goods (from other mega-corp institutions). Watch the best in entertainment (corporate institutions). Conduct your relationships on Facebook (a vampire institution). Trust in Social Security and Medicare (Ponzi institutions). Residence in the corporate cocoon is not evil per se, but it substitutes for actual living.Corporate life takes place vicariously: in advertisements, in movies, and in politics. Even its McChildren are prevented from interaction with the real world—rushed from one institution to another, then safely back home: numbered, evaluated, and surveilled the whole time. The streets, offices, and boardrooms of the mega-corp world are rich and shiny, but they are swept clean of real life. They are places where souls go to whither and die—albeit slowly and with continuous validation. A Free-Man’s Take is written by adventure capitalist, author, and freedom advocate Paul Rosenberg. You can get much more from Paul in his unique monthly newsletter, Free-Man’s Perspective. | ||
| Share or Comment on this article. |
-
Corporate Death by Management Hubris Doug French, Contributing Editor
This year global M&A is at a seven-year high. Yet, study after study shows the failure rate of acquisitions to be between 70 and 90 percent. Corporate CEOs, either for their own aggrandizement, or in an attempt to jumpstart prospects for their firm, believe the answer is to grow larger through acquisition.Writing in the Harvard Business Review, Clayton M. Christensen, Richard Alton, Curtis Rising, and Andrew Waldeck theorize:
So many acquisitions fall short of expectations because executives incorrectly match candidates to the strategic purpose of the deal, failing to distinguish between deals that might improve current operations and those that could dramatically transform the company’s growth prospects. As a result, companies too often pay the wrong price and integrate the acquisition in the wrong way.
That’s an academic and cumbersome way of pointing out plain and simple hubris—something that has plagued mankind forever and will never go away. “Hubris is so deeply ingrained in our culture that it is a latent force within each of us,” writes Mathew Hayward in his book Ego Check. “Hubris originates with our need to be highly confident and our propensity for turning that confidence into overconfidence.”Hayward quotes Warren Buffett who said about paying excessive premiums in mergers, “Apparently many managers were overexposed in impressionable childhood years to the story in which the handsome prince is released from a toad’s body by a kiss from a beautiful princess. Consequently, they are certain their managerial kiss will do wonders for the profitability of Company T(arget).”
Thank goodness for those that see the glass as half full and make the world of commerce go round. But as Kirkpatrick Sale argues in his book Human Scale, almost everything in modern America and the West generally is too big. Size is the problem with everything—buildings, cities, agriculture, firms, schools, and especially government.
Maybe this problem started before the corporate structure was even thought of. Robin Dunbar, the head of the Social and Evolutionary Neuroscience Research Group at the University of Oxford, has studied humans’ trebling of brain size and the journey through time from simple hand tools to digital marvels.
While our brains have expanded and human creation is cleverer, as social beings we’re stuck with the same equipment our ancestors had 5,000 or 50,000 years ago. And the maximum size of a social network is 150, or Dunbar’s number. That doesn’t sound like many, but it’s three times more than a chimpanzee’s.
The world has grown increasingly complex, yet, “for the last 11,000 years humans have lived in a brave new world of huge numbers, equipped only with the social skills and framework allowed by a far older biology,” write Dunbar, Clive Gamble, and John Gowlett in Thinking Big: How the Evolution of Social Life Shaped the Human Mind.
So how does society deal with large numbers if we socially max out at 150? “The power of charisma: religion, leadership and warfare,” according to Dunbar and his coauthors. For instance, “religion is the social and psychological stress imposed by large communities.”
They point out that large communities have too many competing males. “In such situations charismatic leaders provide a natural focus around which everyone can gather and sign up to whatever particular masthead the leader happens to espouse,” write Dunbar et al.
Charismatic leaders are important to super-large communities, allowing groups to impose discipline on itself. However, the leader “will always pursue the strategies that are more in line with his or her interests than anyone else’s.”
The Austrian School of economics believes the problem is more basic. There are limits to the size of a firm due to the lack of information via prices. In a presentation for the International Conference on Prices & Markets held in Toronto last week, University of Guelph Professor Glenn Fox quipped that it’s a miracle firms exist at all.
Firms are supposed to provide a framework for producers to satisfy human demand, channeling the talents of employees with capital to serve customers. But as firms get bigger (and some don’t have to get very big at all) bureaucratic ineptitude takes over.
Ludwig von Mises famously determined that socialism can’t function because there are no market prices in a socialist economy to distinguish more or less valuable uses of social resources. Peter Klein points out in his book The Capitalist and the Entrepreneur that Mises wasn’t just talking about socialism. Mises was addressing the role of prices for capital goods.
Murray Rothbard extended the analyses of Mises to considering the size of firms, and the problem of resource allocation under socialism to the context of vertical integration and the size of an organization. He wrote that the
… ultimate limits are set on the relative size of the firm by the necessity for markets to exist in every factor, in order to make it possible for the firm to calculate its profits and losses. … there can be no implicit estimates without an an explicit market! When an entrepreneur receives income, in other words, he receives a complex of various functional incomes.
Rothbard continued. “To isolate them by calculation, there must be in existence an external market to which the entrepreneur can refer.”Entrepreneurs make guesses about future prices and allocate resources accordingly to satisfy customer wants and turn a profit while doing it. If there is no market for capital goods, resources won’t be allocated efficiently whether it’s a socialist economy or otherwise. The market economy requires well-functioning asset markets. Without these prices, decision making is destroyed.
As firms get too big, economic calculation gets muddied because firms don’t receive the profit-and-loss signals for their internal transactions. Managers are lost as to how to allocate land and labor to provide maximum profits or to serve customers best.
As these firms grow (especially by acquisition), one part of the company is often the provider and another part of the company is the customer, yet there are no market prices to allocate resources efficiently.
Rothbard wrote,
Economic calculation becomes ever more important as the market economy develops and progresses, as the stages and the complexities of type and variety of capital goods increase. Ever more important for the maintenance of an advanced economy, then, is the preservation of markets for all the capital and other producers’ goods.
Professor Klein makes the pointas soon as the firm expands to the point where at least one external market has disappeared, however, the calculation problem exists. The difficulties become worse and worse as more and more external markets disappear, as [quoting Rothbard] “islands of noncalculable chaos swell to the proportions of masses and continents. As the area of incalculability increases, the degrees of irrationality, misallocation, loss, impoverishment, etc., become greater.”
When firms expand, company overhead expands. And there is difficulty in allocating overhead or any fixed cost for that matter amongst various divisions of a firm. “If an input is essentially indivisible (or nonexcludable), then there is no way to compute the opportunity cost of just the portion of the input used by a particular division,” explains Klein. “Firms with high overhead costs should thus be at a disadvantage relative to firms able to allocate costs more precisely between business units.”You know what overhead looks like: It’s what Dilbert creator Scott Adams describes as organizations “riddled with hamster-brained sociopaths in leadership roles,” sitting around having meetings and looking at PowerPoint presentations. M&Ms kill productivity—not the candy: managers and meetings.
Too much management is required when firms get too big. If managers knew how to manage, there wouldn’t be dozens of new management books constantly for sale—like Who Moved My Cheese?, Who Made My Cheese?, Who Moved My Secret?, Who Moved My Soap?, and Who Moved My Church?.
People trying to manage are so desperate they look to Rudy Giuliani, Attila the Hun, and George W. Bush for management secrets.
“Middle management is becoming a dumping ground for professionals who have no special skills,” writes Adams. “It’s the safest place to put them.” The Dilbert Principle is that it takes less brains to manage than to be managed, and in his book, The Dilbert Future, Adams contends the result will be “that skilled professionals won’t put up with the indignity of being ‘managed’ by idiots.”
Despite the lack of management talent the deal-making continues at rising valuations. “Buyers on average paid targets 13 times EBITDA in the first half of the year, compared with 11.8 times in the same period last year. That was the highest level since 2008, according to Thomson Reuters data,” reports Reuters. Hayward contends paying high premiums “is just one type of decision-making outcome that is affected by excessive pride; and, in this case, it is usually exaggerated or overweening pride.”
Nothing makes CEOs and managers overconfident like record stock prices. But it’s today’s expensive purchases that will be their downfall later on.
-
Friday Funnies In memory of the recent election festivities, here’s a great clip from Cheers where Woody becomes a candidate.That’s It for This Week Have a great weekend, and remember that virtual living is not real living. Get your hands dirty.
Paul Rosenberg
Editor, A Free-Man’s Take
No comments:
Post a Comment