We haven't seen him in the paper for a few months and decided to swing by his site to see what he was up to.
From Professor Kay's personal website, January 21:
For the past fifty years or so, the economic theory of the firm has been based on the paradigmatic model of corporate activity which perceives the firm as a nexus of contracts, its boundaries defined by the relative transaction costs of market-based and hierarchical organisation. Issues of both corporate governance and corporate management are seen as principal-agent problems, to be resolved by the establishment of appropriate incentives. This approach has had considerable influence on corporate behaviour and on public policy. Business has placed ever-greater emphasis on ‘shareholder value’ and incentive-based schemes of executive remuneration have become widespread....MUCH MORE
In this paper, I describe the origins, development and effect of the ‘markets and hierarchies’ approach. I argue that this reductionist account fails at a political level, giving no coherent account of the legitimacy of such corporate activity – that is, no answer to the question ‘what gives them the right to do that?’ – and additionally that the model bears little relation to the reality of successful corporations. I describe an alternative tradition in the understanding of business, owing more to organisation theory, corporate strategy and business history, which treats the concept of corporate personality as more than a legal doctrine. In this view, corporations are social organisations: their competitive advantage is based on distinctive capabilities which are the product of their history, their internal architecture and organisational design, and the relationships with employers, customers, suppliers and commentators at large which arise from them. This is not just a more plausible account of what firms actually do: by recognising the social foundations of corporations, we are better placed to understand how and why corporations and their varied stakeholders succeed.
General Motors
In 1955, when Fortune prepared its first list of the world’s largest 500 corporations, General Motors led the field by some distance, with sales and profits almost twice those of its nearest rival, Standard Oil of New Jersey (now Exxon Mobil).1 It was in the context of a commercial landscape dominated by large manufacturing corporations such as GM, and a few oil companies such as Exxon, that much of the foundational literature on corporate governance, organisational theory, business history and corporate strategy and business strategy and the theory of the firm was written.2 As a result these texts all describe – implicitly or explicitly – General Motors.
The organisation that was General Motors was to a significant degree the creation of its chief executive of twenty years, Alfred Sloan. Sloan had taken control of a small bearings company with money borrowed from his family. That company benefitted from the growth of the automobile industry in the early years of the twentieth century and was acquired by the nascent General Motors. Billy Durant, the founder of GM, was a brilliant salesman and buyer of businesses, but had substantially less talent as a manager, and as a result GM was driven close to the point of collapse in the turbulent years that followed the First World War. Pierre du Pont, of the du Pont chemical family and the company’s largest shareholder, forced Durant out of the corporation. Sloan gained du Pont’s support and in 1923 became President of the company with a plan to manage Durant’s unwieldy empire. Under Sloan’s leadership, GM overtook Ford to become not only America’s leading automobile company, but the largest manufacturing corporation in the world.
Sloan’s success as a manager raised its own questions about how the firm would survive without him, and GM’s Chief Financial Officer Donaldson Brown was concerned that the whole senior management team who had created General Motors were reaching retirement. (Sloan, who had been at the helm of General Motors for 20 years, postponed his departure to assist the war effort).3 Both Brown and Sloan believed that their legacy would be better sustained if an outsider analysed and documented what they had created, and Peter Drucker was chosen to fulfill this role.4
The result was a business classic, The Concept of the Corporation, which turned Drucker from refugee Viennese intellectual into management guru. Sloan granted Drucker what business school professors today call “access”, on a scale that any modern professor could only dream of. For two years, GM paid Drucker’s salary, and allowed him to shadow Sloan. After meetings, the President of General Motors would retire with Drucker to discuss how the day had gone. Unfortunately, Sloan and his colleagues did not like the result, and did not even respond to Drucker’s book. They simply ignored it. In retirement – Sloan stepped down from his executive role in 1946 but continued as chairman of the GM board for another decade – Sloan wrote his own account. My Years at General Motors waspublished in 1964 when Sloan was 87, and only two years before his death. Drucker claims that Sloan described this work as a response to Drucker, but in keeping with Sloan’s earlier approach there is no reference whatsoever to The Concept of the Corporation in it.5
Why did Sloan dislike Drucker’s book so much? It was certainly not because it was hostile to GM: the overall tone is one of admiration for the company and respect for the men who had built it. However, Drucker raised questions that Sloan and his colleagues did not wish to discuss, and attempting to bury the book was their response to this challenge. Professional managers did not derive their power from the ownership of the means of production. So what gave legitimacy to the power that Sloan and his colleagues exercised? What was the proper scope, and necessary limits, of that authority? What defined the social role of the modern, professionally managed corporation? These were the issues which Drucker sought to open in The Concept of the Corporation; Sloan’s response was to close the book.
The Corporate Economy
But The Concept of the Corporation was nevertheless widely read. Seventy years later, Drucker’s book is still in print, and it established him as the first, and perhaps still the most insightful, of business gurus. It was studied closely by Sloan’s successor at General Motors, Charlie Wilson; the beneficiary Brown and Sloan had most in mind when they had commissioned Drucker. Nor was its impact limited to GM. When the eponymous founder of GM’s principal rival Ford died in 1946, Henry Ford II was quick to install professional management. Ford’s ‘whizz kids’ borrowed extensively from GM’s techniques and systems and enabled a revitalised Ford to contest market leadership once again.6 The most famous of the ‘whizz kids’, Robert McNamara, went on to become Kennedy’s Secretary of Defense and severely tarnished his reputation demonstrating that the systems of control and analysis which had proved so effective in Detroit failed six thousand miles away in the Mekong Delta and along the Ho Chi Minh trail.7
But McNamara was not the first automobile company chief executive to be summoned to manage the US government’s largest business. In confirmation hearings, Wilson has been widely reportedly as saying ‘what’s good for General Motors is good for America’. What he actually said was ‘I thought that what was good for America was good for General Motors, and vice versa’.8 But no matter: the distortion of the exchange exemplified the central role which the large diversified corporation had come to play in modern economic life – and the suspicion, if not outright hostility, which that role would provoke....
