The CEO vs. the technostructure

by JakeS Fri Jun 26th, 2009 at 06:58:20 AM EST

On the face of it, one of the puzzling aspects of recent economic history is the way CEOs, ~~investment bankers~~ loan sharks and (other) corporate raiders have taken control of the Western^TM planning system away from the lower-level organisations that used to plan and implement industrial production in advanced industrial economies (what Galbraith called the technostructure).

I've been mulling over what could have happened, and I have come to think of three points that I believe are important:

Activist shareholders are more likely to be raiders than builders. A shareholder in a modern, technologically advanced company cannot stay sufficiently abreast of the operations of the company to make a useful contribution to the management. Looting, on the other hand, requires no detailed concept of the day-to-day operation of the company, only power to set required dividends and the will to go the nuclear option and liquidate the enterprise if it fails to provide those dividends.
Insufficient marginal taxation means that it is more profitable for CEOs to assist the looting in exchange for a cut of the take, than to resist the looting in order to preserve their long-term tenure within the firm. If marginal taxes are raised, steady salaries become more valuable relative to lump sum payments. And vice versa. Looting gives you lump sum payments, tenure in a healthy organisation gives you a steady salary.
Insufficient countervailing forces within the corporate hierarchy. If more groups from within the company were represented in the boardroom, it would be harder to loot the company (or at least to loot it profitably). People and groups within the company's technostructure have both the knowledge to exercise actual influence from the boardroom (as opposed to shareholders and their nominal representatives), and a strong interest in the preservation of the corporate technostructure that pays their salaries and is the source of their personal power. Of course these groups could also be bought by a prospective looter, but the more people you have to cut in on the take, the less profitable looting becomes.

promoted by whataboutbob

There are various ways to attack this problem, and I will suggest two here:

To solve the problem of insufficient marginal taxation is technically speaking the simplest: Raise marginal tax rates.

To remedy the lack of countervailing forces within the corporate hierarchy, I am personally partial to giving employees formal representation in the boardroom. Preferably via direct elections, using secret ballots, with one employee given one vote. This should not be construed simply as a way to impose socialism on the corporation - although I am not ashamed to say that this is part of the purpose. I also believe, however, that giving the employees (effectively representatives of the technostructure) a strong formal representation will serve the interests of long-term investors and society at large (at the expense of the interests of looters).

The interests of the technostructure - perpetuating the organisation and securing its independence from outside interference - align very well with the interests of long-term investors: The capitalist enterprise can only be perpetuated as an independent organisation if it has a steady and stable revenue flow, and investors who take the long view will ultimately benefit from such stable and steady revenues. The interests of the technostructure also correspond with the needs of society at large, at least to a much greater extent than the interests of the corporate raider does. This should hopefully be fairly self-evident: Maintaining an advanced technological society requires a functioning planning system, and a functioning planning system requires a strong technostructure. Corporate raiders, on the other hand, are not a requirement for a functioning industrial society.

- Jake

[This diary is an adapted and expanded version of this comment]

The CEO vs. the technostructure | 79 comments (79 topical, 0 editorial, 0 hidden)

Re: The CEO vs. the technostructure (4.00 / 16)

I lived and worked through the transformation of a traditional, very long term, technocratically managed business into a global corporate raiding "brand management" business. The chief executive was ultimately imprisoned for his part in a share support operation, released on compassionate grounds when he developed Alzheimer's disease, and made a miraculous recovery on release. He once introduced a senior Executive to another person at a meeting as his "successor" whereupon the unfortunate Director was left to collect his personal effects at the door.

For a long time we were quite successful in resisting his "business methods", including the Mormon Bain Business Consultants he paid millions to produce SWOT analyses of our operations and to identify cost savings. The presence of strong Unions and a great deal of organisational cultural cohesion helped, with even senior management going on strike at the particularly ridiculous antics of one of his Minions, last seen heading a sales office in South East Asia somewhere.

But ultimately the business was assimilated into the new corporate culture. Virtually no insiders were promoted. Resistant managers were made redundant; The Unions bought off. It was about power rather than money per se, and the question of marginal tax rates (then very high) was barely relevant. The business was hollowed out. A production company was turned into a brand management company. Engineers replaced with marketeers. Accountants with computers.

Globalisation and the economies of scale have enabled the business to survive and prosper, often despite rather than because of the activities of top management. Globalisation was also a handy way to circumvent the fairly advanced forms of worker participation and profit sharing models which had been part of the traditional business model. Because as business become global, unions and worker participation mechanism remain local - and increasingly irrelevant as one business unit is pitched against another.

Until such time as the trade union movement - and labour law - is globalised, there is no internal corrective mechanism for the activities of corporate raiders. Shareholders - except for a few hedge funds - are irrelevant. Governments are held in thrall by the threat to locate elsewhere. Social democracy is no more because global businesses are beyond local or national control.

That is the beauty of Globalisation. It removes a business beyond the confines of the nation state - whilst all the conservative dupes are bought off by a re-branding exercise which paints the business as somehow patriotic or aligned with their interests. Many top business executives I knew were far more radical than their Union counterparts stuck in the old local/national model. They knew what was going down but could do little about it. They played the corporate game with the hand they were dealt. But the reality is that Global business is now beyond all effective regulation, and don't let a few high profile spats between marquee names like Microsoft and Commission distract you from that reality...

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Jun 24th, 2009 at 05:50:19 PM EST

Re: The CEO vs. the technostructure (4.00 / 5)

I feel your pain, Frank. I've been going through the same thing at my university - ruthless top-down management replacing a perfectly functional technostructure. Modern Management^TM indeed.

It's a point I haven't touched upon in the diary: Have modern managers become more power-hungry than managers of old? Does the fact that they are viewed by society as leaders rather than as glorified sales reps do unhealthy things to the management profession's egos?

It's possible. Certainly a perspective I hadn't thought about.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jun 24th, 2009 at 07:31:16 PM EST
[ Parent ]

Re: The CEO vs. the technostructure (4.00 / 11)

But this has also happened in politics.

The early socialists were - more or less - conviction politicians. Now after the third wayers we have a socialist brand with little or no actual socialism, used as an excuse for personal vanity, ambition, financial gain and authoritarian power.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Jun 24th, 2009 at 07:36:04 PM EST
[ Parent ]

Re: The CEO vs. the technostructure (4.00 / 4)

I think that the rise and fall of the Third Way is a little more complicated than that.

Not a whole lot more complicated, mind you, but a little bit.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jun 24th, 2009 at 07:38:30 PM EST
[ Parent ]

Re: The CEO vs. the technostructure (4.00 / 11)

I would put it down more to structural and cultural factors rather than personality factors. Egotism wasn't invented today or yesterday. What IS new is the almost unlimited and unconstrained power than deregulation and globalisation gives top management.

Previously, corporate leadership structures where delicate balancing acts between technocratic engineers and production experts, conservative accountants, obfuscating HR "professionals", militant trade unionists, and upstart marketeers. Globalisation and computerisation has taken the Unions and middle management out of the picture. Now doers are derided and the Powerpoint strategist is king.

Businesses are re-organised every 6 months and a permanent state of anxiety and compliance induced by everyone having to re-apply for their own job twice a year. Short-termism and self preservation are king. Anyone there for more than 5 years must be dead wood. If you don't have a plan to radically transform the business within 2 years you're yesterday's man. There is always someone else more willing to comply. Career planning becomes a sort of personal brand management.

When top management achieve almost absolute power, why wouldn't they use it to their own advantage? The corporate stakeholder model of Shareholders, Management, employees, customers, suppliers, and government is dead. There is no effective control of top management unless absolute disaster ensues, and in that case, the real perpetrators are usually long gone. They don't stay long enough to be found out.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Jun 24th, 2009 at 08:05:18 PM EST
[ Parent ]

Re: The CEO vs. the technostructure (4.00 / 5)

But they haven't actually been given any new formal powers. There has been a cultural shift, but the main shift is that they are now exercising their formal powers, which they were not before. Effectively, they have pulled off the same kind of coup that a constitutional monarch might do to overthrow the constitutional part of the monarchy.

I can understand how the Reagan version of globalisation has destroyed the trade unions. What I don't understand is how it has given management an advantage over the technocrats and engineers. But it may be a cultural thing; once it becomes culturally acceptable for management to exercise its formal powers, things start changing.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Jun 25th, 2009 at 02:53:39 AM EST
[ Parent ]

Re: The CEO vs. the technostructure (4.00 / 8)

IT has dramatically changed the structure of power in a modern global corporation. Organisational structures are much flatter, less hierarchical, and more directly answerable to the CEO. Middle managers, once "lifers" who had built of huge social, collegial and professional networks within the organisation, are now all gone, replaced by "yellow pack" generic managers brought in from other organisations and discarded at will, cogs in a wheel.

The organisational memory has reduced from 60 years to 6 months. No one knows or cares what you did 12 months ago. Your job is to address the personal agenda of your direct superior - and he will probably also be gone or elsewhere within a year or two. Organisational knowledge is contained, not in people, but in manuals and IT systems - maintained by external contractors.

One of my last jobs was to oversee the introduction of a major MRP system across several countries. There were huge problems at the transition basically because senior managers had signed off on a system design which bore little relationship to what happened in the real world. Why? Because they had never "worked their way up" though the business, didn't know or understand what their underlings did, and didn't care anyway, as their main objective was to ditch the underlings.

Problem was that the business was actually a lot more complex than they ever realised, and their underling's jobs a lot more skilful than they appreciated. However that RW business knowledge was being rapidly lost as people were made redundant. I ended up having to ask third party IT contractors how the business actually worked, because they knew a huge amount more about how the business worked than the so called management "process owners". Of course the IT contractors moved onto the next business once their contract with us ended.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Jun 25th, 2009 at 05:47:35 AM EST
[ Parent ]

Re: The CEO vs. the technostructure (4.00 / 5)

And so the MBA set killed the industrial corporation.

A man of words and not of deeds is like a garden full of weeds; a man of deeds and not of words is like a garden full of turds — Anonymous

by Carrie (migeru at eurotrib dot com) on Thu Jun 25th, 2009 at 05:49:21 AM EST
[ Parent ]

Re: The CEO vs. the technostructure (4.00 / 5)

I'm not even sure that many of the imported "senior managers" HAD MBA's. Their main skill set consisted of powerpoint presentations and the ability to have moved elsewhere when the results of their "business transformation plans" had shown them to be less than well grounded in reality.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Jun 25th, 2009 at 06:01:02 AM EST
[ Parent ]

Re: The CEO vs. the technostructure (4.00 / 6)

And so Microsoft killed the industrial corporation.

Powerpoints are newspeak with diagrams.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Jun 25th, 2009 at 06:51:04 AM EST
[ Parent ]

Re: The CEO vs. the technostructure (4.00 / 2)

IT has dramatically changed the structure of power in a modern global corporation. Organisational structures are much flatter, less hierarchical, and more directly answerable to the CEO. Middle managers, once "lifers" who had built of huge social, collegial and professional networks within the organisation, are now all gone, replaced by "yellow pack" generic managers brought in from other organisations and discarded at will, cogs in a wheel.

I don't buy that explanation. If this hypothesis were correct, we these changes should have been manifesting themselves in the '90s, when mass deployment of IT in the corporate organisation took off in earnest (in the early '90s there were still typewriters around and as late as the mid-'90s it was still not ridiculous to picture a highly professional office without computer terminals). But they actually began in the early '80s, back when personal computers were glorified typewriters, all the world was a VAX, serious computing tasks were carried out on mainframes, the internet consisted of ARPAnet, MILNET and a handful of university departments, and BASIC was considered a new and exciting invention.

Furthermore, if electronic communications were the fulcrum that the robbers used to shift the technostructure out of power, we should have seen that the organisations which were early adopters of electronic communication should be the ones that were first to succumb to the CEO plague. They were not. University departments were the very first to begin using electronic computers on an industrial scale, and they have been some of the last holdouts against the new management culture.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Jun 25th, 2009 at 08:08:23 AM EST
[ Parent ]

Re: The CEO vs. the technostructure (4.00 / 10)

I think you misunderstand both the timing and the nature of the computerisation process which facilitated the changes outlined above. Computerisation in the 1980's and 1990's was largely about automating high volume transaction within pre-existing business processes. Their impact was mostly to reduce manual production line jobs, and relatively low level secretarial and clerical jobs.

The computerisation since the late 1990's has been fundamentally different. The huge SAP implementations I was involved in then completely globalised business processes throughout global businesses. Thus there is one procurement process for procuring everything from paper clips to power stations anywhere in the world. One supplier file. One processes for approving purchases. One process for approving new suppliers. ALL pre-existing paper and computer purchasing processes are replaced. There is no need for local procurement managers or system administrators in local markets. A purchasing manager in HQ can control ALL purchases. We reduced our supplier file in one market from 11,000 suppliers to 3,000 globally.

Multiply this for every business process from finance to production, to logistics, to sales, to customer management, to marketing, to business intelligence, to product innovation and design. Local in market managerial staffs are almost not required for many business functions. A global function controls all these activities and has direct access to all the data available to the organisation to faciliate decision making. We are talking 1,000's of redundencies amongst managerial and professional staff, never mind production line, clerical or admin staff.

University departments are tiny admin units by comparison. The complexity of their business processes - lecturing, producing research, accessing funding for research, monitoring student performance - are almost trivial and very small scale by comparison. Perhaps if you had one global department teaching economics to millions of students worldwide in multiple locations in most countries in the world you might have a comparable organisation or computerisation project. You would have one syllabus, one exam process, one list of acceptable approaches to the subject, one set of lecture notes, one system for monitoring students etc... .please don't give THEM any ideas!

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Jun 25th, 2009 at 08:35:13 AM EST
[ Parent ]

amen n/t (4.00 / 3)

Diversity is the key to economic and political evolution.

by Cat on Thu Jun 25th, 2009 at 08:57:59 AM EST
[ Parent ]

please destroy after reading (4.00 / 7)

Perhaps if you had one global department teaching economics to millions of students worldwide in multiple locations in most countries in the world you might have a comparable organisation or computerisation project. You would have one syllabus, one exam process, one list of acceptable approaches to the subject, one set of lecture notes, one system for monitoring students etc... .please don't give THEM any ideas!

Um, I'm afraid this may be where we are heading with online education already . . . Sure, there will remain the Harvard boutiques for the fortunate few and a small number of brilliant students every year, but everyone else will get their degrees from their local branch of "Bain" university easily accessed through the facebook ad on their desktop at home, from "instructors" making minimum wage, "course designers" making a little more, "deans" whipping everyone into shape, keeping the gravy train running on time for the "vice presidents," "chancellors," who will be taking home their HUGE profits, er "salaries." Outsource the "library" to Google books, and the "tutoring" to 24/7 hotline operation in Bangalore (or whereever), and you've pretty much covered everything. No need to keep the bathrooms clean or the lawns mowed. You could even keep a virtual campus center or quad where students could gather electronically under the watchful eye of management. In case of radical ideas or rebelliousness, students could be locked out at any time. Same goes for the instructors. Meanwhile, the Olde Time Professors will be hanging out behind the shrubs, should anyone care . . .

by jjellin on Thu Jun 25th, 2009 at 09:18:33 AM EST
[ Parent ]

Re: please destroy after reading (4.00 / 6)

After all knowledge is only a commodity, and students but knowledge capitalists in training. And when you have global businesses you need global employees trained in identical ways doing the same thing in entirely consistent ways. One language, one behaviour pattern, one thought process, one process...

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Jun 25th, 2009 at 09:31:24 AM EST
[ Parent ]

Re: please destroy after reading (4.00 / 2)

Exactly. Uuhhh, that's even scarier than I was thinking. Now, I'll be having nightmares. Good thing its still morning here. Maybe by tonight I'll forget.

by jjellin on Thu Jun 25th, 2009 at 09:47:04 AM EST
[ Parent ]

Re: please destroy after reading (4.00 / 4)

a design of How to create "the right performance culture" inside and outside a corporate organization, from Foote, Matson, and Rudd, "Managing the knowledge manager", McKinsey Quarterly (2001)

annotated

Diversity is the key to economic and political evolution.

by Cat on Thu Jun 25th, 2009 at 11:57:16 AM EST
[ Parent ]

Re: please destroy after reading (4.00 / 5)

Frank Schnittger:

students but knowledge capitalists in training.

i see them as greyhound whippets being trained for the track, where their trainers will bet on them...

...or money-making machines, shiny, glossy, active info-bank-ATM's, geared to unquestioningly feed the profits from their labour 'upstairs', while their own doubts about the process are rendered silent under a barrage of tantalising carrot-images, winning the lottery, 'making it big', philippe patek watches, the sailing channel, celebrity-obsession and the like.

consumer coma, in the sunset flare of a passing era.

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Thu Jun 25th, 2009 at 01:17:29 PM EST
[ Parent ]

brilliant (4.00 / 2)

"where their trainers will bet on them" wow . . .

"the sailing channel" . . . help . . .

"tantalising carrot-images" . . . <keels over>

and, "the sunset flare of a passing era" is just too timely for words today . . . farewell Michael Jackson, icon of an age and true genius

by jjellin on Thu Jun 25th, 2009 at 09:15:30 PM EST
[ Parent ]

Re: The CEO vs. the technostructure (4.00 / 2)

I'm aware of that difference between computerisation in the early '90s and before and the late '90s and after.

But that is precisely my point: The outrageous CEO power grabs began a full decade before the electronic automation you mention. Almost all the faults in corporate culture that we bemoan today were already present during the Savings and Loan crisis. So they are clearly antecedent to the technical revolution at the heart of your experience.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Jun 25th, 2009 at 09:46:55 AM EST
[ Parent ]

Re: The CEO vs. the technostructure (none / 1)

I can only speak from my experience in my own firm. Perhaps the technological revolution occurred sooner in the US financial services sector - I think it did as the process in a financial services company are arguably less complex. But there was also a very different corporate culture in the US and Europe at the time - with the US model now dominant everywhere.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Jun 25th, 2009 at 10:26:52 AM EST
[ Parent ]

Re: The CEO vs. the technostructure (4.00 / 4)

transfer of productivity ("profit") to investors, as foretold and sold by just one IT analyst, c. 2002

Interests in preserving structural relationships between (actual) people prevents deep IT penetration of FIN and COMMOD sectors. Asymetrical market knowledge (and adverse selection) is a feature not a bug.

Diversity is the key to economic and political evolution.

by Cat on Thu Jun 25th, 2009 at 12:29:59 PM EST
[ Parent ]

Re: The CEO vs. the technostructure (none / 1)

i remember the charles clore scandal (70's?), and thinking 'this is a new echelon of criminal', then we had the appropriately named michael milken, but it was still rare, now it's the deluge, after the savings and loan scandal one might have thought the phenomenon would slow down, but no, it's amped up exponentially.

enron was the smoke coming out of the financial engine, now bits are falling off by the mile and the day...

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Thu Jun 25th, 2009 at 01:21:58 PM EST
[ Parent ]

I'm not sure (4.00 / 2)

the real, massive increases in CEO pay mainly happened in two phases: in the dotcom bullrun of the late 90s, and in the more recent Bush years.

I'll also note that this has coincided with the European institutions turning from French-speaking and French-inspired to English-speaking and English-inspired, because of the arrival of the Scandinavian countries, the replacement of fundamentally pro-European Mitterrand by euro-skeptic Chirac, in addition to overall trends.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Thu Jun 25th, 2009 at 10:40:30 AM EST
[ Parent ]

Re: I'm not sure (none / 1)

Jerome a Paris:

the real, massive increases in CEO pay mainly happened in two phases: in the dotcom bullrun of the late 90s, and in the more recent Bush years.

Does anyone have historical data on the level of executive compensation?

A man of words and not of deeds is like a garden full of weeds; a man of deeds and not of words is like a garden full of turds — Anonymous

by Carrie (migeru at eurotrib dot com) on Thu Jun 25th, 2009 at 10:49:12 AM EST
[ Parent ]

Re: I'm not sure (4.00 / 5)

There's this:

and this to show that most of the increase in incomes have come in the form of higher wages rather than in the form of capital gains:

Wage increases are associated with the managerial class, ofcourse.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Thu Jun 25th, 2009 at 11:03:26 AM EST
[ Parent ]

Re: I'm not sure (none / 1)

In your last chart you can see that executive compensation increased starting around 1980 and stalled with the S&L crisis and the recession of the early 1990's.

So it's not just about the dot-com starting in the 1990's as you claim.

A man of words and not of deeds is like a garden full of weeds; a man of deeds and not of words is like a garden full of turds — Anonymous

by Carrie (migeru at eurotrib dot com) on Thu Jun 25th, 2009 at 11:11:14 AM EST
[ Parent ]

Re: I'm not sure (4.00 / 3)

Galbraith's industrial corporation needs to be independent from outside interference. Now suppose an unforeseen crisis leads to indebtedness beyond the level that can be sustained by the old business model. Suddenly many corporations have to convince their creditors that they can grow like a malign cancer or face insolvency. The CEO would then be the guy with the cancer plan who tries to ensure that the creditors get their pound of meat.

by generic on Thu Jun 25th, 2009 at 02:00:56 PM EST
[ Parent ]

Re: I'm not sure (none / 1)

I seem to recall being shocked when I heard that a Mr. Nobody-anyone-ever-heard-of bank president (I think that was his title?) at a No-big-deal bank in the late 1980s made over a million dollars in a year, and in that year, he was one of the top earning bank presidents. I'll see if I can dig up that information. It was so shocking, but it was the beginning of a trend as I remember it.

After that, the smash-and-grab was on, and the CEO class never looked back.

by jjellin on Thu Jun 25th, 2009 at 09:25:42 PM EST
[ Parent ]

Ah, here it is (none / 1)

His name was Baldini, and he was the president of Comfed mortgage who was paid over $2 million in 1987. Here is a link to an archived article which makes the point that his earnings were really something at that time:

http://www.highbeam.com/doc/1P2-8010445.html

and here is a link to some document related to the FDIC investigation a decade later which mentions his base pay and bonuses in 1987 adding up to over $2million. I can't remember what eventually happened to Baldini, but he got into some trouble after the bank/mortgage company failed. It was an 80s thing.

http://www.qui-tam.net/USga1121.htm

by jjellin on Fri Jun 26th, 2009 at 08:45:54 PM EST
[ Parent ]

Re: I'm not sure (none / 1)

My comment below (with sources linked) may be relevant:
http://www.eurotrib.com/comments/2009/6/24/17130/0955/77#77

In 1987, Jim Baldini, the president of Comfed mortgage made over 2 million dollars. Less than $400,000 was salary; the rest was "bonus." As I recall at the time, it was shocking to think that anyone could possibly "earn" that much money in one year.

by jjellin on Fri Jun 26th, 2009 at 08:59:09 PM EST
[ Parent ]

Re: The CEO vs. the technostructure (none / 1)

To turn the question, why was not the CEOs formal powers used to such an extent before the 80ies?

Was poor performance punished before the 80ies? Was there too powerful countervailing forces (and how did they decline)? Was there a fear of a workers revolution?

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Thu Jun 25th, 2009 at 02:19:53 PM EST
[ Parent ]

Re: The CEO vs. the technostructure (4.00 / 2)

Much higher marginal tax rates meant that this kind of (cough) innovation made no difference to real income.

IT has also had the effect of making drive-by trading possible. It also meant that share prices could be monitored minute by minute, which has an obvious short-term influence.

Previously share dealing was a more leisurely affair, and there wasn't such an obsessive interest in talking up prices with bullshit - or reorienting towards a growth maximising corporate performance landscape, if you prefer.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Jun 25th, 2009 at 03:05:40 PM EST
[ Parent ]

Re: The CEO vs. the technostructure (none / 1)

My guess is that tenure was more valuable, compared to lump-sum payments.

It's an equilibrium, of sorts: If the norm is that executives have long tenures, it becomes hard to get a slot, so a short-termist rape-and-run executive will hit a brick wall because he'll have a hard time getting new positions when he runs from the company he looted. Not because he'll have a problem being accepted into a new slot (he'll still be hired by his golfing buddies, after all) but because there are much fewer vacancies. This pressure to do a proper job while you are in the business will naturally tend to promote a long-term outlook that will in turn make it valuable to retain the executives over the long term.

On the other hand, you can get a new equilibrium in which the CEO can expect only a short tenure - in which case asset stripping becomes much more attractive as a strategy relative to real work, because the guy who benefits from his work will be the next CEO. At the same time, rape-and-run becomes more viable because there is a greater CEO turnover (so there will, at any given time, be more open slots when he has to run from the crashing company into a new top job). Obviously, this further reinforces the culture of short CEO tenures, which makes long term vision increasingly precarious.

It's entirely possible (but I won't claim to have evidence for it) that corporate culture can jump between these two states given the right (wrong?) external shocks. The Raygun Revolt may have been one such shock.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Jun 26th, 2009 at 04:14:24 AM EST
[ Parent ]

Re: The CEO vs. the technostructure (none / 0)

So means (the formal right of the CEO to do almost anything), motive (marginal tax rates going down in the US in the 70ies) and opportunity (the Raygun Revolt).

And once it started it amassed power in the hands of a few who could finance people who promoted its spread.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Fri Jun 26th, 2009 at 01:34:41 PM EST
[ Parent ]

Re: The CEO vs. the technostructure (none / 0)

It's a possible explanation. I and others have advanced other possible explanations for a mechanism elsewhere in the diary.

What I'd like to do is read through the diary and comment thread in one sitting and synthesise the suggestions into a single reasonably coherent explanation (or, if that is impossible, at least make it clear which models are being proposed).

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Jun 26th, 2009 at 04:31:45 PM EST
[ Parent ]

Re: The CEO vs. the technostructure (4.00 / 2)

Yang and Brynjolfsson, "Intangible Assets and Growth Accounting: Evidence from Computer Investments" (NYU, MIT, NBER)

Abstract: "This paper revises growth accounting methodology to take into account the value of intangible assets [read, "human capital"], particularly those associated with the computerization of many firms in recent decades. We propose a modification of the production function, adopted from the q theory of investment, that treats the adjustment costs and costs associated with the creation of intangible complementary assets as investments instead of current expenditures. We present evidence that the computer-related protion of these intangivle investments is substantial and growing. ...In particular, we find that the magnitude of the intangible capital investments that accompany computerization of the economy is plausibly far larger than the direct investments in computers themselves. A revised estimate that takes intangible investments [read, conversion to automated business processes] into account that the TFP [read, total factor productivity] of the US economy grew up to 1% per year faster during the past decade than previously estimated."

"in the '90s, when mass deployment of IT in the corporate organisation took off in earnest". To rephrase: "in the '90s, the corporate organisation began to lever installed, private IT by migrating most of their distribution (marketing) functions to public telecom networks."

i.e. web-based, self-administered (client, employee) data collection and transaction further eliminate residual costs associated with FTEs.

Brynjolfsson, Hitt, and Yang, " Intangible Assets: How the Interaction of Computers and Organizational Structure Affects Stock Market Valuations," (NYU, MIT, Wharton, NBER)

Abstract: "This paper investigates the proposition that the widespread use of information technology has increased investment in intangible organizational assets [read, "human capital"]. Using firm-level data, we find that each dollar of installed computer capital [read, hardware and software] in a firm is associated with at least five dollars of market value, after controlling for other assets. We interpret this value as revealing the existence of a large stock of intangible assets [read, automated business processes] that are complementary with computer investment. Using data on organizational practices at each firm, we identify [sic] a specific cluster of practices that appear to represent at least some portion [read, FTE labor] of these intangible assets. Not only are these practices correlated with computer investments [read, replacement, modification, and license costs], but firms that combine higher computer investments with these organizational characteristics have disproportionate increases in their market valuations. We conclude that investors believe that the contribution of computers is increased when they are combined with certain intangible assets, specifically including the cluster of organizational changes [read, FTE labor substitution] that we have identified."

Diversity is the key to economic and political evolution.

by Cat on Thu Jun 25th, 2009 at 11:20:00 AM EST
[ Parent ]

Re: The CEO vs. the technostructure (4.00 / 2)

ditto.

How did management get so much power? And so much money? What good does it do for the college?

by jjellin on Wed Jun 24th, 2009 at 09:25:53 PM EST
[ Parent ]

Re: The CEO vs. the technostructure (4.00 / 2)

I love this:

even senior management going on strike at the particularly ridiculous antics

Interesting analysis. And depressing.

And, speaking of Bain Management, Mitt Romney, our former Governor, still wants to be President and is no doubt running. He is always tooted as such a smart businessman.

by jjellin on Wed Jun 24th, 2009 at 09:22:09 PM EST
[ Parent ]

Re: The CEO vs. the technostructure (4.00 / 4)

The Bainees had a remarkable methodolgy. They had access to top management than any middle manager would die for - even "consultants" barely out of college. They did powerpoint presentations but never allowed anyone have a hard copy. They were brilliant at re-utilissing the same few concepts in every context, and their main goal was to hoover up as much local business knowledge as they could and then recycle it as part of their business transformation plans. They operated largely in pairs, like Mormon missionaries. They identified huge savings to justify their costs - but the savings always had to be implemented and achieved by someone else, of course.

This is quite a few years ago now. No doubt their methods have evolved.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Jun 25th, 2009 at 06:16:10 AM EST
[ Parent ]

Re: The CEO vs. the technostructure (4.00 / 4)

They also make up the 'client success' stories on their website.

They're pure fiction. WTF?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Jun 25th, 2009 at 06:48:12 AM EST
[ Parent ]

Re: The CEO vs. the technostructure (none / 0)

This is how capitalist enterprises always have worked. The effin East India Company exhibited the same process. There is a complex dance between state and social (custom) regulation, and the tendency of managers of any business to loot the business or engage in rapacious/illegal business operations. Religions tend to bureaucracy and/or mania. Armies tend to insurrection. Business tends to looting.

by rootless2 on Fri Jun 26th, 2009 at 10:45:26 AM EST
[ Parent ]

Re: The CEO vs. the technostructure (none / 1)

All I can say in response is that my former employer had a 230 year prior history of not working in this way. It used to have a complex hierarchical structure based partly on class and partly on meritocracy where people served their time, did exams, but were, above all "company men and women", generally serving for life.

Of course there are many disadvantages to this sort of system as well, and change was inevitable and to be welcomed. Many positive changes were made as well. My former boss was the first person to rise up from the shop floor - having joined at the age of 14 - to become Managing Director. However I think it does the complexity of corporate history a disservice to lump everything together and say everything was always the same.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Jun 26th, 2009 at 11:23:23 AM EST
[ Parent ]

Re: The CEO vs. the technostructure (none / 1)

I'm not saying all corporations behave this way all the time. I'm saying that there is a tendency and if the environment in which the company exists encourages that tendency then ...

by rootless2 on Fri Jun 26th, 2009 at 12:22:09 PM EST
[ Parent ]

Re: The CEO vs. the technostructure (none / 1)

"Talk about centralisation! The credit system, which has its focus in the so-called national banks and the big money-lenders and usurers surrounding them, constitutes enormous centralisation, and gives to this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but also to interfere in actual production in a most dangerous manner -- and this gang knows nothing about production and has nothing to do with it."

Marx, Capital Vol. III Part V
Division of Profit into Interest and Profit of Enterprise. Interest-Bearing Capital.

by rootless2 on Fri Jun 26th, 2009 at 05:57:45 PM EST
[ Parent ]

Re: The CEO vs. the technostructure (4.00 / 3)

I'm going to recycle three old comments of mine since they are à propos here...

a February 8 comment to Jerome's diary What were they thinking? from February 7th, 2009:

Galbraith distinguishes between "Entrepreneurial Corporations" with owner-managers, and "Mature Corporations" with a professional management and rather remote shareholders. What Galbraith did not envision when he wrote 40 years ago was the rise of the "CEO class", separate from both managers and shareholders, with its "executive compensation" culture.

a comment to rdf's diary Corporations Must Maximize Profit from May 14th, 2009

According to Galbraith in The New Industrial State, large US corporations up to at least 1970 did not operate as if their most important concern were profit maximization but rather self-preservation of the corporation itself.
This was to the detriment of the shareholders, and with CEOs being rather obscure figures not receiving the outrageous compensations they receive nowadays.
Since 1970 we have seen the rise of a fantastically remunerated CEO class and things like fiduciary responsibility to the shareholders have become convenient ideological justifications for doing things that the CEOs want to do.
Also, since shareholder value as currently understood seems to depend less on dividends that on rising stock valuations, it is not even clear that "delivering shareholder value" requires "dividend maximization", let alone "profit maximization".

And finally, a comment that spawned a relatively long subthread in Fran's Salon for 15. February:

JK Galbraith's claim in The New Industrial State is that as corporations get larger and transition from entrepreneurial (owner-managed) to mature (professionally managed) the source of economic power and influence ceases to be capital and is instead organizational ability. Therefore the seat of power within the corporation shifts from the shareholders to management. Also socially, the educated elite replaces the capitalists as the most influential class. Also, the claim is that the mature corporation is run with its health as a corporation as the highest priority, above profit generation or "shareholder value". Management and the "technostructure" run the company for their own self-preservation like the owner-manager of an entrepreneurial corporation runs the corporation for their own profit.
What he was writing in the 1960's seems to fit the facts of the large American corporations like IBM, AT&T Bell, Ford, etc... Also, back in the 1960's management didn't get the outrageous remuneration they get these days. Galbraith didn't envisage the rise of the CEO class or the "executive compensation" rationalisation, just like he didn't envisage that Friedman, who Galbraith derided as a hopeless romantic, would rise to be one of the most (devastatingly) influential economists of the 20th century.
So this got me thinking... I think what happened since Galbraith wrote his book was that the Owner class realised they had lost control of the corporations to professional management, and so the scions of the Owners rather than idly sit on their portfolios got MBAs and seats on boards of directors and started appointing each other as CEOs and giving themselves and each other outrageous remunerations and invented "executive compensation" as a rationalisation for what amounted to looting the corporations they were running. And the best part is that they no longer needed to actually own shares in the companies they managed/looted, all they needed was to have CEOs appoint board members and boards appoint CEOs, both within and across companies (through "institutional" cross-ownership). Meanwhile, shares with (as Galbraith already observed) little decision power and decreasing (as a result of looting by the CEO class) profit were dumped on pension funds and retail investors.

Some replies...Melanchthon:

See also Alfred D. Chandler's "The Visible Hand: The Managerial Revolution in American Business"

THE Twank:

"interlocking directorate" from my high school (late '60s) days taking history courses comes to mind.

A man of words and not of deeds is like a garden full of weeds; a man of deeds and not of words is like a garden full of turds — Anonymous

by Carrie (migeru at eurotrib dot com) on Thu Jun 25th, 2009 at 04:04:27 AM EST

Re: The CEO vs. the technostructure (4.00 / 5)

It sort of sounds like the county council where I used to live writ large. The old county I lved in was split down into two sections covering two new counties, and the senior planning staff all went to one of the two offices. Instead of naturally promoting the senior staff there to take the place of the people whod left, more pliable junior people were brought in over their heads. For several years there was grumbling that the only way to reliably get planning consent was to be related to members of the council. (A now retired former senior planning officer also claims that you can now only get planning permission for rectangular plots, as the calculation of areas for any irregularly shaped plot is above the ability of the new senior staff. He also has a tendancy to turn an interesting shade of purple when his former employers are mentioned)

After many complaints, the local government ombudsman investigated, and demanded that planning procedures were brought into line with accepted practice before the next year. On returning and finding that nothing had been done he threatened the council members with being barred from holding office, whereupon he was informed that what he thought about banning people didn't matter, as a selection of local families had control of the parties, and if he banned someone, then the only person that the party would put up for their seat would be that banned members cousin, who would do exactly the same thing.

Any idiot can face a crisis - it's day to day living that wears you out.

by ceebs (ceebs (at) eurotrib (dot) com) on Thu Jun 25th, 2009 at 05:41:50 AM EST
[ Parent ]

Re: The CEO vs. the technostructure (none / 1)

I'm not quite sure I buy that story. For one thing, I don't see a mechanism for how this happened. For another, I am not sure that there is quite as substantial an overlap between the new CEO robber-barons and the old money robber barons as this version implies.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Jun 25th, 2009 at 07:06:48 AM EST
[ Parent ]

Re: The CEO vs. the technostructure (4.00 / 4)

I am not sure that there is quite as substantial an overlap between the new CEO robber-barons and the old money robber barons

You raise a good question for research. I personally do see the connection, but it would be difficult to substantiate, although I suppose it is about family wealth, which could be somewhat discernable. But another point is that even among the robber barons, there is infighting and some level of turnover, no? The problem with robber barons is that they undermine democracy. So all this talk about reforming the system through government regulation is already somewhat compromised because of the influence of the robber barons themselves and the corporations they control (as managers, owners, whatever). Fox, chickencoop, etc.

by jjellin on Thu Jun 25th, 2009 at 10:00:18 AM EST
[ Parent ]

Re: The CEO vs. the technostructure (none / 1)

jjellin:

So all this talk about reforming the system through government regulation is already somewhat compromised because of the influence of the robber barons themselves and the corporations they control (as managers, owners, whatever).

'somewhat compromised' wins the understated euphemism prize, jjellin!

they'll just have to spin the lies harder and harder, and keep coming up with guileless-looking cherubs like cameron to spin... and the public in our discomfort will be ever more motivated to decipher the bullshit, blogging will continue to grow to facilitate this.

eventually the lies will become so flimsily outrageous tha a tipping point of trust will come, things are speeding toward that convergence mostly in italy and the UK, imo.

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Thu Jun 25th, 2009 at 01:35:15 PM EST
[ Parent ]

Re: The CEO vs. the technostructure (4.00 / 2)

to decipher the bullshit, blogging will continue to grow to facilitate this

You're really on to something there. Well, I suppose deciphering the bullshit sounds a little more discerning than what the stenographers of the media do. We might comfort ourselves with that.

by jjellin on Thu Jun 25th, 2009 at 09:35:46 PM EST
[ Parent ]

Re: The CEO vs. the technostructure (none / 1)

Stories of stock scams and financial scandals of the early 20th and back into the 18th century are - not all that different from what we see today.

by rootless2 on Thu Jun 25th, 2009 at 10:36:21 AM EST
[ Parent ]

Re: The CEO vs. the technostructure (none / 0)

Yes, but Mig's model implies that there is a considerable overlap in the people (or at least in the dynasties) involved. And I am not so sure of that.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Jun 25th, 2009 at 05:37:35 PM EST
[ Parent ]

Re: The CEO vs. the technostructure (none / 0)

me neither.

by rootless2 on Fri Jun 26th, 2009 at 10:40:06 AM EST
[ Parent ]

Re: The CEO vs. the technostructure (4.00 / 4)

I believe this is exactly right.

So this got me thinking... I think what happened since Galbraith wrote his book was that the Owner class realised they had lost control of the corporations to professional management, and so the scions of the Owners rather than idly sit on their portfolios got MBAs and seats on boards of directors and started appointing each other as CEOs and giving themselves and each other outrageous remunerations and invented "executive compensation" as a rationalisation for what amounted to looting the corporations they were running. And the best part is that they no longer needed to actually own shares in the companies they managed/looted, all they needed was to have CEOs appoint board members and boards appoint CEOs, both within and across companies (through "institutional" cross-ownership). Meanwhile, shares with (as Galbraith already observed) little decision power and decreasing (as a result of looting by the CEO class) profit were dumped on pension funds and retail investors.

I've been thinking the same thing, but could not figure out how to express it so well. Perhaps if I had read Galbraith, it would have helped.

The "managers" who have taken over, are really the owners who have figured out how to cut out all the other so-called "owners" (stockholders) in order to gain control of the corporations and the flow of money into their own pockets, which they feel completely entitled to, in just the manner you have described.

There must be or have been some advantage to having multiple owners, aka stock holders, that enticed the original owners to open up their companies to the public in the first place--tax benefits for corporations, for example. Because otherwise, why would those owners have gone through the trouble of pretending to include the stockholders as "partners." I suppose it was to raise money. Once the money from the stockholders was acquired, the owners then had to work out the problem of cutting them out from any real decision-making and power over top management (the real owners).

There must also be some advantage to being "management" rather than "owner," and perhaps it has to do with responsibility and liability. If you are "management" and the company blows up a town or poisons a river, you walk away, while the corporation cleans up the mess. The individual manager and his family are protected, while the corporation drones, not being human, respond to management commands, yet feel no pain.

by jjellin on Thu Jun 25th, 2009 at 09:43:01 AM EST
[ Parent ]

Re: The CEO vs. the technostructure (4.00 / 3)

The distinguishing feature is the complete absence of personal liability or responsibility.

This seems to be the definition of 'liberty' in the US, and is also the implicit state religion - the ability to act in greedy, destructive, violent and oppressive ways to others with no danger of consequences.

Every statement, opinion, or position from the radical right in the US can be reduced to the belief that 'leaders' should have total freedom of action to maximise personal benefit, with the minimum of legal, moral and personal accountability. Corporate culture is an instantiation of this.

Here's another look at Robert Nozick, whom In Wales mentioned in her equality diary.

Robert Nozick - Wikipedia, the free encyclopedia

Robert Nozick argued that a consistently libertarian society would allow and regard as valid consensual/non-coercive enslavement contracts, rejecting the notion of inalienable rights. He wrote in Anarchy, State and Utopia:
"The comparable question about an individual is whether a free system will allow him to sell himself into slavery. I believe that it would."^[3]

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Jun 25th, 2009 at 10:12:04 AM EST
[ Parent ]

Ouch (4.00 / 2)

I believe indebtedness is slavery, albeit "temporary," or so we like to believe. And indebtedness is rampant; we've all signed on that dotted line. But like slaves, we, the debt holders, are subject to our masters' whims to raise rates, and fines, and fees, and change our due dates, drink our babies' blood, etc. Your view of freedom as freedom to act without moral responsibility seems horrifyingly true--for those of a certain set. Don't forget, our jails are choking on the souls of the morally (or at least legally) responsible. But freedom is not for everyone, I guess.

by jjellin on Thu Jun 25th, 2009 at 10:32:49 AM EST
[ Parent ]

Re: Ouch (4.00 / 2)

Well, that's the paradox - membership of that set is defined as having that kind of 'freedom.'

Absence of that kind of 'freedom' - and having to live with consequences - defines you as someone who is excluded from that set.

So it's not that criminality doesn't exist as a concept. It's just that it's very selectively applied, and that being above some or all of the concepts of law and civilised behaviour marks you as a member of that set by definition.

We've seen this over and over in both politics and business in the US and the rest of the globalised world.

The criminality has an extra layer of indirection - muggers will steal from you directly, while CEOs will steal from you by way of legal, political and financial coercion.

But the results are depressingly similar, and often just as fatal.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Jun 25th, 2009 at 10:43:28 AM EST
[ Parent ]

no no no no, but I think you're right (4.00 / 2)

So it's not that criminality doesn't exist as a concept. It's just that it's very selectively applied, and that being above some or all of the concepts of law and civilised behaviour marks you as a member of that set by definition.

That just sounds so medieval. It seems to me that the whole of US history has been about unwinding that political and social hierarchy and making this "freedom" thing available to more and more people by dispersing power among them.

The reality, depressingly, is that there is always a push back by the few colluding against the many to consolidate power. Globalization seems not to have introduced ideas of democracy to the world as much as it has introduced new methods of oppression to those who have power and want to keep it--without moral responsibility.

I wonder if globalization is one step forward and two steps back, or the reverse?

by jjellin on Thu Jun 25th, 2009 at 12:12:43 PM EST
[ Parent ]

Re: no no no no, but I think you're right (4.00 / 2)

The problem with globalisation is that it has been all about economics - increasing corporate power - and absolutely not about politics - increasing the power of global political organisations. Economic empowerment allied to political depowerment in the form of deregulation. Thus the UN has to be undermined, the EU disembowelled, the US deregulated.

In some ways globalisation is also a misnomer. It has only been acceptable when effectively an extension of the US empire. Otherwise its Chinese workers stealing our jobs.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Jun 25th, 2009 at 12:26:31 PM EST
[ Parent ]

Re: no no no no, but I think you're right (none / 1)

Very good points. You've got me thinking now.

Maybe Iran is but a first convulsion (and maybe not even the first) of globalization in the political dimension, which makes it much scarier for those in power, and much more significant historically. I keep hearing people say that the protests there are already far beyond Mousavi and even the election itself. What does that really mean?

by jjellin on Thu Jun 25th, 2009 at 12:36:36 PM EST
[ Parent ]

Re: no no no no, but I think you're right (4.00 / 2)

As Chris Cook has argued, its a struggle between the old guard and a "modernising" element in the Iranian elite. One more amenable to globalisation than the other.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Jun 25th, 2009 at 01:02:13 PM EST
[ Parent ]

Re: no no no no, but I think you're right (4.00 / 3)

In fact, the modernisers were in control of the reins of power (ie the oil complex), and have now lost it to the backwoodsmen.

But, as I argue in my article, these new guys do not have the technical expertise to run a modern economy, and I must say that even in the five years I have been going there Iran had made great strides in modernising (not all of the oil money was siphoned off).

The new people in control can typically be identified by PhDs (Iranians have inordinate respect for qualifications, particularly Western qualifications) from the Imam Khomeini University in "Strategic Studies" and the like. These are (allegedly) handed out if you get your name right on the title page.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Jun 25th, 2009 at 03:53:50 PM EST
[ Parent ]

Causes and effects (none / 1)

What is it about the condition of Western society in the 1950s and 1960s that lead to the rise to power of the Friedmanian Right in Thatcher/Reagan? That rise is, to me, the mechanical process by which modern corporations were transformed from the regulated staid organizations of the Eisenhower period back into Robber Baron trusts albeit with SAP instead of a bunch of clerks. The whole process involved a large number of legal changes, muzzling of regulators, tax changes, and so on. Did something in the economic system cause the superstructural political change or was it a political change that caused economic changes or some mix?

As VI Lenin might have said, JP Morgan Co. is merely JP Morgan plus SAP.

by rootless2 on Thu Jun 25th, 2009 at 10:44:32 AM EST
[ Parent ]

Re: The CEO vs. the technostructure (none / 0)

An interesting argument...

SSRN-Why Has CEO Pay Increased so Much? by Xavier Gabaix, Augustin Landier

This paper develops a simple competitive model of CEO pay. A large part of the rise in CEO compensation in the US economy is explained without assuming managerial entrenchment, mishandling of options, or theft. CEOs have observable managerial talent and are matched to assets in a competitive assignment model. Under very general assumptions, using results from extreme value theory, the model determines the level of CEO pay across firms over time, and the pay-sensitivity relations. The model predicts a cross-sectional constant-elasticity relation between pay and firm size. It also predicts that the level of CEO compensation should increase one for one with the average market capitalization of large firms in the economy. Therefore, the six-fold increase of CEO pay between 1980 and 2003 can be fully attributed to the six-fold increase in market capitalization of large US companies. The model can also be used to study other large changes at the top of the income distribution, and offers a benchmark for calibratable corporate finance. We find a minuscule dispersion of CEO talent, which nonetheless justifies large pay levels and differences. The empirical evidence is broadly supportive of our model. The size of large firms explains many of the patterns in CEO pay, in the time series, across industries and across countries.

A man of words and not of deeds is like a garden full of weeds; a man of deeds and not of words is like a garden full of turds — Anonymous

by Carrie (migeru at eurotrib dot com) on Thu Jun 25th, 2009 at 10:44:47 AM EST

Re: The CEO vs. the technostructure (none / 0)

Then why does this same argument and model not apply to ordinary workers' pay? What is that all about? Could it be that the CEO got to
"earn" their compensation by pushing their workers under the bus? Why were the workers' interests not seen as aligned with the company's interests and longterm health, while CEO's interests were?

by jjellin on Thu Jun 25th, 2009 at 12:17:59 PM EST
[ Parent ]

Re: The CEO vs. the technostructure (none / 0)

because workers are a cost of production whereas CEO's are just sharing in the profits

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Jun 25th, 2009 at 12:55:24 PM EST
[ Parent ]

Re: The CEO vs. the technostructure (4.00 / 2)

Frank Schnittger:

CEO's are just sharing in the profits

Are they? Properly, CEO compensation is still a "remuneration cost".

The real reason is that the management sets everyone's compensation including their own. So, the Board votes the CEO and themselves a generous compensation package, and the staff get peanuts in comparison.

Since the CEO appoints the Board and the Board appoints the CEO, it is clear that they both deserve a huge payback.

A man of words and not of deeds is like a garden full of weeds; a man of deeds and not of words is like a garden full of turds — Anonymous

by Carrie (migeru at eurotrib dot com) on Thu Jun 25th, 2009 at 01:03:12 PM EST
[ Parent ]

Re: The CEO vs. the technostructure (4.00 / 5)

Internal corporate metrics for comparing and benchmarking unit costs between sites and with competitors don't take board remuneration into account. Workers pay rates tend to be determined by collective agreements, national agreements, and local market conditions, and thus not under the direct control of the board. However a 10% increase in worker remuneration in a large business could cost Billions whereas a few million extra for the CEO is peanuts by comparison. Most Main Board directors don't involve themselves in projects/decisions below c. €50 Million. It would be beneath their dignity.

One Director I knew blew £100M on an IT project to "e-transform" the business with virtually no positive benefits for the business other than the "learnings" gained. I am not aware of it having adversely effected his career although he has recently left the business - c. 7 years later- which is several lifetimes in terms of the corporate career culture nowadays. So no-one would have remembered his earlier project in any case..

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Jun 25th, 2009 at 01:15:27 PM EST
[ Parent ]

Re: The CEO vs. the technostructure (4.00 / 2)

Properly, CEO compensation is still a "remuneration cost"

Salary (a "remuneration cost") is a component of Operating Expenses. Salary is however only a portion of total compensation afforded employees. Stock options, for example, are not an operating expense. Allocation of certificates held or withheld from future issues is a Balance Sheet (credit event) description of total assets.

Deferred cash compensation and schedule distribution typically are not represented in any one consolidated financial statement, as corporate officers routinely reserve disclosure of profit (loss) attributable to the activities of special purpose entities (SPEs) such as bonus pools and subsidiary trust funds in which "c-level" (recall Hank Greenberg, AIG) hold ownership interests.

Diversity is the key to economic and political evolution.

by Cat on Thu Jun 25th, 2009 at 01:46:44 PM EST
[ Parent ]

Re: The CEO vs. the technostructure (none / 0)

What a difference in respect towards excutives and workers!

by das monde on Fri Jun 26th, 2009 at 09:07:25 PM EST
[ Parent ]

Re: The CEO vs. the technostructure (4.00 / 2)

How does that model compare to data from before 1980? That the ability to loot a company correlates well with company size, I can readily believe - much greater lootings can take place without rapid detection. But in order to actually do what they claim it does (explain rises in CEO pay without reference to interlocking directorates, frauds or other abuses), their model will have to account for both

The remuneration structure from the early '50s through to the '00s.
Disparities in CEO pay between companies. Not all publicly listed companies are being looted. Not even all companies of a similar size are being looted. So the average - and even quite possibly the median as well - executive remuneration can be highly misleading.

Adding weight to the second point in particular, it is entirely possible that only a subset (a third, say) of companies in any given size group are being looted at any given time, with the looters moving rapidly between firms and/or sectors.

It is not clear to me from the abstract you quote whether it deals with these questions.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Jun 25th, 2009 at 05:59:01 PM EST
[ Parent ]

Shareholders (4.00 / 2)

What is a bet and what is an investment?

I'd like to know the consequences in public company share transfers if there were different taxes on, for instance, share deals that held onto shares only within the calendar year (i.e. bought and sold between 2 dividends), shares held over 2 dividends, and shares e.g. held for 5 years. The first case incurring the highest transfer taxes.

You can't be me, I'm taken

by Sven Triloqvist on Fri Jun 26th, 2009 at 09:49:35 AM EST

Re: Shareholders (4.00 / 2)

The advantage of a Tobin tax on share transactions is that it makes short term speculation relatively expensive/uneconomic. The higher the tax, the greater the incentive to reduce transaction levels.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Jun 26th, 2009 at 09:54:54 AM EST
[ Parent ]

Re: Shareholders (4.00 / 2)

Sven Triloqvist:

What is a bet and what is an investment?

A bet is a short/medium term transaction made with a view to making a capital gain.

An investment is a medium/long term transaction made with a view to acquiring a source of income (or capitalised income).

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Fri Jun 26th, 2009 at 10:02:57 AM EST
[ Parent ]

Re: Shareholders (none / 0)

I don't really see how any secondary market small transaction really is an investment...

Un roi sans divertissement est un homme plein de misères

by linca (antonin POINT lucas AROBASE gmail.com) on Fri Jun 26th, 2009 at 10:23:54 AM EST
[ Parent ]

Re: Shareholders (none / 1)

But from a regulation POV, how do you make a distinction between them?

You can't be me, I'm taken

by Sven Triloqvist on Fri Jun 26th, 2009 at 10:42:32 AM EST
[ Parent ]

Re: Shareholders (4.00 / 3)

Bets that take place entirely within the secondary market are largely (to low order, at least) irrelevant to mature industrial enterprises. The shareholders can go long, go short, tie themselves into a knot or scream until they are blue in the face. It does not matter.

What matters is a) institutional shareholders (pension funds, investment trusts, etc.) who can actually amass sufficient power to hamstring the company (whether by short-termist outlooks, outright looting or simply making decisions that they are not competent to make). And b) creditors who are sufficiently big to do the same thing.

I actually think that this may be the mechanism I was looking for earlier: Between WWII and Ronnie Raygun, the investment trusts were fairly well suppressed, and the large banking consortiums were spayed and neutered.

With deregulation of the financial sector and the privatisation of pensions, money markets saw a rise of large, organised shareholders and large, organised creditors, who, however, did not have any idea about how to actually run the companies they were investing in/lending to. So they looted them instead - whether by accident or design.

This led to a breakdown of intra-corporate solidarity - a sense that with every man for himself, the only sensible thing to do was to strip as many assets as one could carry and leg it with the proceeds before anybody got wise to your operation.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Jun 26th, 2009 at 11:23:10 AM EST
[ Parent ]

Re: Shareholders (none / 1)

Marx might have said a thing or two about the development of monopoly capitalism as well...

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Jun 26th, 2009 at 11:27:49 AM EST
[ Parent ]

The CEO vs. the technostructure | 79 comments (79 topical, 0 editorial, 0 hidden)

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