History of American Business Blog

Corporate Responsibility

This post is related to an issue close to my heart.  As an entrepreneur who is on his second employee-owned company, I find the evolution of corporate governance, etc. to be a bizarre mix of raw capitalism and the strange affectation of American's to written law (in this case the idea that corporate Boards are responsibility only to stockholders, etc.).  I met a very interesting person at the Artificial Economics conference and Spain and after some sangria-lubricated conversations my new friend (Gilbert Peffer from U. of Barcelona) sent the following link to me.

http://www.demos.co.uk/publications/reinventing-the-firm written by William Davies.

The book is free for pdf download.  To quote from the introduction -

"The economic crisis that peaked with the banking meltdown of autumn 2008 has been accompanied by some striking renunciations of faith. In October of that year, Alan Greenspan, former Chairman of the US Federal Reserve, declared that ‘the whole intellectual edifice’ on which financial regulation had
rested had collapsed, meaning that he had been ‘partially wrong’ in his policy decisions.1 The following March, Jack Welch, the former CEO of General Electric and poster child of the ‘shareholder value’ movement, admitted that ‘shareholder value is the dumbest idea in the world’.

Greenspan’s confession made greater headlines, but Welch’s was no less significant. The shareholder value creed – the belief that a company’s primary purpose is to maximise its value for the benefit of external shareholders – was as much a part of the neoliberal ‘intellectual edifice’ as Greenspan’s belief that financial markets are self-correcting. The creed, embodied by Welch and articulated in Alfred Rappaport’s 1986 book Creating Shareholder Value, derived from a very limited understanding of what a firm is. At its heart, the shareholder value philosophy presented firms as comparable to any other economic object that could be owned, traded, invested in and profited from. From this perspective, the price of a firm’s stock was the best and most complete representation of its true value, and satisfying shareholder interests was the overriding goal of management.

This perspective blankly ignores a number of critical aspects of how firms work and succeed."

Davies looks at alternative ways to understand ownership and responsibility, with particular emphasis on the role of employee ownership in Britain.  Davies argues that pluralistic ownership concepts are much more suitable for modern needs and in particular for modern corporations where value is mostly intangible, such as people, operational concepts, culture, etc.  So far a very interesting read (I haven't completed it yet) and certainly something that needs discussion as we evolve our understanding of what it means to be a corporation.

While Traveling in Spain

So as I will be off in beautiful Vallavolid, Spain attending a conference (Artificial Economics 2009) I will do my first post on a topic of interest regarding a disturbing trend in the US economy.  The economists in the class will be familiar with the topic, that of the Gini Index, which is a simple measure of wealth distribution.  As a general rule the higher the Gini index, the more disparate the gap between rich and poor.  http://en.wikipedia.org/wiki/File:Gini_since_WWII.gif   illustrates the Gini for several countries, dating from about 1950 through this decade.  What is interesting is to note the time at which the Gini for the US began a significant climb upwards (1981).  Of course, 1981 is an interesting point in US political and economic history as this was the point in time where our economic policies began to be driven by the idea that the wealthy are the drivers of the economic engine, therefore anything that helps the wealthy will be good for our economy.  The overall results are pretty obvious.

Also, as I will not be in class on Thursday I figured I would add a few comments on a couple of the readings for that evening.  First, McGuire & Ohsfeldt on "A Quantitative Rehabilitation of Beard".  An interesting article that has what I consider to be a serious flaw.  No numbers!  The "Results" section uses terms like "robust" and "significant" yet what the authors consider to be robust or statistically significant is not disclosed.  There is room for a 2 page list of variables used in the logit analysis, but no actual data or computational results are given.  Very disappointing. 

Second, Lanoreaux on "Banks, Kinship and Economic Development".  Looking at the example of Pawtuxet Bank (p. 658).  In 1820 Rhode Island had a total of about 83,000 residents.  Let's assume maybe 6,000 in Pawtuxet (didn't have time to dig into the data to find the actual number but this seems at best a high number).  This would suggest maybe 1,200 families.  Just as an exercise consider the wealth to be Pareto distributed, with an exponent of 1.  That means the n^th wealthiest family has wealth of about the wealthiest family divided by n. The top 10 households would have more than 38% of the total wealth of the town.  The Top 10 would have more than 56% of the total wealth of the 100 most wealthy households.  If we assume that the wealthiest households would be the only ones that might need to use a bank for loans, then the 47% of outstanding loans to a group of brothers wouldn't be too surprising.

Perhaps what is to be learned from the Kinship paper is that wealth is concentrated. And that a small number of families can easily dominate the economic landscape of a small town.  Now, as we move to larger cities with a number of banks, social network clustering, based on families and friendship networks (the two of which were very interconnected in the early republic) would strongly correlate with bank resource utilization.

With that I am off to Valladolid to talk about Artificial Economics, as compared to the standard fantasy economics traditionally taught in university.