ARTICLE The Rise and Fall of Finance and the End of the Society of Organizations

18 Pages·2009·0.16 MB·English

by  Cadmus Professional Communications

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2009 Davis 1
A R T I C L E
The Rise and Fall of Finance and the End of the
Society of Organizations
byGeraldF.Davis
ExecutiveOverview
Large corporations were a dominant force in American society for generations through their employment
practices, expansion choices, and community connections. As the United States has shifted to a postin-
dustrial economy, however, finance has increasingly taken center stage. This article documents shifts in
corporate employment, institutional investment, corporate organization, financial services, governments,
andhouseholdtiestofinancialmarketsoverthepastthreedecades.Iarguethatalltheseshiftscanbeseen
aspartofaninterconnectedmovementtowardafinance-centeredeconomy,andthattherecenteconomic
downturn can be viewed as one outcome of this broader movement.
Bio The global economic downturn that closed the pillars of American social structure. For most of
first decade of the 21st century revealed the the 20th century, social organization in the
centrality of finance to American society. United States orbited around the large corpora-
Problems with arcane securities traded by obscure tion like moons around a planet. Understanding
financial institutions rapidly spun out of control, the workings of the corporation was the key to
potentially putting global capitalism itself at risk. understandingour“societyoforganizations.”Peter
Like a loose thread that manages to unweave an Drucker described this vision of society in 1949:
entire sweater, the mortgage crisis evolved into a “In the industrial enterprise the structure which
creditcrisisandultimatelyintoaneconomiccrisis actually underlies all our society can be seen ... .
that is rivaling the Great Depression of the 1930s. It symbolizes the new organizing principle of an
The economic crisis in turn has forced us to grap- industrial society in the purest and clearest form,
ple with the fact that the United States is now a just as the perfect crystal in a mineralogical mu-
fully postindustrial economy. By March 2009, more seum presents in perfect form the organizing prin-
Americans were unemployed than were employed in ciple which the mineral always tends to follow in
manufacturing, and all signs pointed to further dis- whatever shape it is found” (Drucker, 1949, pp.
placement in the goods-producing sector. 28–29). But today, as this paper argues, corpora-
The disappearance of manufacturing employ- tions are no longer the organizing principle of
ment has corresponded to another change: large U.S. society. As a result, we are left to pick up the
corporations have lost their place as the central pieces of an economic crisis saddled with institu-
tions and a conceptual model of society suited for
ThisarticleislargelybasedonmybookManagedbytheMarkets:How an era that has passed.
FinanceReshapedAmerica.Oxford,U.K.:OxfordUniversityPress,2009.I In this article, I describe how we got here and
thankGarryBrutonandtwoanonymousreviewersforwisesuggestionsfor
suggest some of the implications for management
improvingtheargument,andLynnSelhatforexpertediting.
GeraldF.Davis([email protected])istheWilburK.PierpontCollegiateProfessorofManagementattheRossSchoolofBusiness,the
UniversityofMichigan.
CopyrightbytheAcademyofManagement;allrightsreserved.Contentsmaynotbecopied,e-mailed,postedtoalistserv,orotherwisetransmittedwithoutthecopyrightholder’sexpresswritten
permission.Usersmayprint,download,ore-mailarticlesforindividualuseonly.
2 AcademyofManagementPerspectives Month
scholarship. The argument has many moving kets waxed. The old model of the organization
parts, and each component could be (and has man was increasingly replaced by a model of the
been)thesubjectofabook-lengthtreatment.The investor trading in various species of capital (fi-
risk of such a 30,000-foot view is that important nancial, human, social). This model, it is safe to
details are left out. But the parts are interlock- say,hasfailed,butmanagementscholarsandprac-
ing—it is more like a novel than a short story titioners are yet to fully adapt our theories or
collection. In short, I argue that the shift from an policies as business moves to its new incarnation.
industrialtoapostindustrialeconomyintheUnited
Stateswasdecisivelyshapedbyfinance,andthatthe
TheArrivalofPostindustrialSociety
ascendance of finance effectively ended the reign of
In 1973 sociologist Daniel Bell published a book
the society of organizations. Societies of organiza-
titled The Coming of Post-Industrial Society: A
tions still exist outside the United States, particu-
Venture in Social Forecasting to speculate on the
larly in East Asia. But I argue here that events
implications of broad trends in economy and so-
unfoldedintheUnitedStatestofavorfinanceatthe
ciety, primarily in the United States. One of the
expense of organizations.
most visible trends—and the source of the book’s
The argument is as follows. As manufacturing
title—was “postindustrialism,” defined most sim-
employment gave way to services and the largest
ply as a situation in which “the majority of the
employers shifted from firms such as GM to those
labor force is no longer engaged in agriculture or
such as Wal-Mart, the nature of the employment
manufacturing but in services” (Bell, 1973, p. 15).
relation changed: The long-term mutual obliga-
At the time he wrote the book, the United States
tions of old were replaced by expectations of more
was the only “postindustrial” society by this crite-
temporary attachments. Changing employment
rion, with about 60% of its labor force in services;
ties were facilitated by the advent of relatively
the vast majority of other countries’ economies
portable defined-contribution pensions, which
were still dependent primarily on agriculture and
provided a vast source of new investment for mu-
natural resource extraction.
tual funds—particularly the half-dozen largest
Today the transition to postindustrialism is
fund families that captured the bulk of these in-
nearly complete in the United States, as agricul-
flows. The growth of pension investment helped
ture and manufacturing account for less than 10%
concentrate ownership in the hands of institu-
of the total labor force (and that percentage con-
tional investors, which abetted an overriding cor-
tinues to fall). Figure 1 shows the relative propor-
F1
porate focus on shareholder value as the ultimate
tions of the nonfarm labor force engaged in retail
measureofcorporateandmanagerialperformance.
and manufacturing and documents a continuous
This orientation toward share price led corpora-
decline in manufacturing’s share since the Second
tions to restructure toward a flexible original
World War, and an absolute decline in manufac-
equipment manufacturer (OEM) or network
turing employment since the late 1970s. The 21st
model of corporate organization, which further
century has seen an acceleration in this trend:
encouraged more tentative employment ties.
Between December 2000 and May 2009, the
At the same time, securitization (turning loans
United States lost 5.25 million manufacturing
and other assets into tradable bonds) changed the
jobs, or more than 30%.1 Troubling signs in du-
Fn1
nature of banking and finance, allowing more
rablegoodsindustries—particularlyautomanufac-
kinds of assets to be traded on markets and open-
turing, where two of the three U.S.-based manu-
ing new avenues for households to participate in
facturers had fallen into bankruptcy—indicated
financial markets. Households increasingly be-
that there was more bad news to come.
came both investors (through pension plans and
retail mutual funds) and issuers (through securi-
tized home mortgages, credit card debt, student 1LaborstatisticsbyindustryandsectorareavailablefromtheBureau
loans, and insurance payoffs). As ties to particular of Labor Statistics, http://data.bls.gov/PDQ/outside.jsp?survey(cid:1)ce and
http://www.bls.gov/news.release/ecopro.t01.htm. News releases on unem-
corporate employers waned, ties to financial mar-
ploymentarepostedathttp://www.bls.gov.
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2009 Davis 3
Figure1
%ofUSNonfarmWorkforceinManufacturingandRetail,1939–2008
40
35
30
25
Manufacturing
20
Retail
15
10
5
0
Year 1944 1950 1956 1962 1968 1974 1980 1986 1992 1998 2004
Source:BureauofLaborStatistics.
The loss of jobs in manufacturing prior to the can produce all the food a nation needs, IT-
downturn was often attributed to offshoring—the enabled manufacturing requires only a minimal
use of foreign contractors for production. There is workforce. Postindustrialism, in other words, is
clearly a great deal of offshoring, as the near- less about moving jobs around the globe than
disappearance of industries such as textiles dem- about the inevitable effects of productivity im-
onstrates. But a more fundamental source of lost provements in a capitalist economy (cf. Kollm-
manufacturing employment is expanded produc- eyer, 2009).
tivity. The United States still leads the world in One of the most visible manifestations of the
manufacturing value added, with a global share of new postindustrial American economy is the
about 22%. Japan is number two, with 14%, and changeinthecompositionofthelargestcorporate
China trails with 11% (Hilsenrath & Buckman, employers. Table 1 lists the 10 largest U.S. em-
T1
2003).2 But the manufacturing sector’s productiv- ployersin1960,1980,and2009.Inthetwoearlier
Fn2
ity is such that relatively few employees are re- periods, the list was dominated by a handful of
quired.Thisbecameevidentduringthedownturn, large manufacturers, AT&T, and Sears. Many
whenmanyAmericanmanufacturersfoundthatit ofthesecompaniesdatedtheiroriginstothewave
was impossible to find anyone to lay off because of industrialization and consolidation around the
their remaining employees accounted for such
high revenues. The Wall Street Journal in March Table1
Fn3 2009 quoted the CEO of Parker Hannifin3 as 10LargestU.S.CorporateEmployers,1960–2009
saying: “Because of productivity gains, every one
1960 1980 2009
of my people carries more dollars in sales today
GM AT&T Wal-Mart
[i.e., $200,000 per worker compared to $125,000
AT&T GM Target
in 2000]. If I need to cut back, I have to cut back
Ford Ford UPS
fewerpeopletoachievethesamegoal”(Aeppel&
GE GE Kroger
Lahart, 2009). Like modern industrial agriculture,
U.S.Steel Sears SearsHoldings
with which a comparatively minuscule labor force
Sears IBM AT&T(SBC)
A&P ITT HomeDepot
2Timeseriesdataonmanufacturingvalueaddedbycountryisavail-
able at http://www.nationmaster.com/graph/ind_man_val_add_cur_us- Exxon Kmart Walgreens
manufacturing-value-added-current-us. BethlehemSteel Mobil Verizon
3ParkerHannifinisamanufacturerofmotionandcontroltechnolo-
ITT GTE SUPERVALU
gies and systems, providing precision-engineered solutions for a wide
varietyofmobile,industrial,andaerospacemarkets. Source:Compustatfor1960and1980;Form10-Kfor2009.
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4 AcademyofManagementPerspectives Month
turnofthe20thcentury.Thetypicalworkplaceof hour in February 2009, while those working in
these firms was both large and interconnected. general merchandise retailing made $10.78. The
Ford’s famous River Rouge plant employed 75,000 Current Population Survey for January 2004 re-
workers when it was completed in 1927, and grew ported that the median employee in auto manu-
from there. A visitor to the Rouge in the late facturing was 44 and had been with his current
1960s could have followed a shipment of iron ore employer for 8 years, while the median worker in
from one end of the complex through its process- electricalequipmentandappliancemanufacturing
ing into steel and ultimately into the body of a was46andhad10years’tenure.Retailemployees,
Ford Mustang that rolled off the assembly line at incontrast,averagedthreeyears’tenurewiththeir
the other end. current employer, even though they were 38 years
Large-scale workplaces facilitated labor organi- old on average (see Davis, 2009, p. 201 ff.).
zation, and for decades the largest firms were in In a retail economy, workplaces are both
the vanguard of progressive human resource man- smaller and less overtly interdependent than in
agementpractices,oftenatthebehestofunionsor mass-production manufacturing. Even Wal-Mart
in an effort to forestall them. During the Second Supercenters, perhaps the largest organisms in the
World War, many large manufacturers attempted retail ecology, typically employ fewer than 350
to skirt wage restrictions by offering expansive people. Yet like the auto assembly line, retailers
benefits packages to lure scarce labor. These are susceptible to a postindustrial form of Taylor-
“academy employers” set the standard for other ismthankstothepervasiveuseofinformationand
employers with systems of internal labor markets, communication technologies (ICTs) such as
job security, health insurance, and retirement “workforce management” software systems. These
benefits, and thus had a substantial influence on systems automate the time-and-motion studies of
the nature of the employment relation in the Frederick Taylor’s Scientific Management, track-
United States (Cappelli, 1999; Jacoby, 1997). ing the minute-by-minute productivity of sales
Today, the largest employers are overwhelm- associates and monitoring how many milliseconds
ingly in retail, where wages, benefits, and tenures it takes cashiers to scan each SKU in a grocery
are substantially lower. The shift has been stark: cart. Managers in remote locations can monitor,
By 2009, Wal-Mart employed about as many compare, and discipline every salesperson in a
Americans (1.4 million) as the 20 largest U.S. retail chain with the aid of real-time standardized
manufacturers combined, and 9 of the 12 largest comparison charts and discreet wireless headsets.
employers were retail chains.4 The wage and ten- Scheduling can be automated to reward the pro-
Fn4
uredifferencesbetweentheoldguardandthenew ductive with prime hours and punish the weak
are striking. On average, production workers in with less-desirable opening and closing times
motor vehicle manufacturing earned $27.43 per (O’Connell, 2008). With less need for direct su-
pervision and middle management, such retail
4Iestimatedthelargestmanufacturingemployersusingfirms’annual outlets might optimistically be called a “flat” hi-
10-K statements, accessed at http://www.sec.gov. “Manufacturers” were erarchy. But the flip side of a flat hierarchy is
thosederivingmostoftheirrevenuesfrommanufacturing,anincreasingly
limited room for advancement beyond the sales
uncertaindetermination.IBMwouldhavebeenclassifiedasamanufacturer
when most of its sales were in hardware such as mainframes, but it now floor.
derivesthelargemajorityofitsrevenuesfromglobalservicesandsoftware.
Large-scale employers that provided job secu-
GEderivesroughlyhalfitsrevenuesfromGECapitalFinance(36.7%in
2008) and NBC Universal (9.3%). Moreover, some firms report U.S. rity, career mobility through job ladders, and gen-
employmentdirectly;others(suchasGMandFord)reportNorthAmeri- erous health and retirement benefits seem to have
canemployment—presumablyincludingCanadaandMexico—whileoth-
been artifacts of the corporate-industrial age in
ers do not break out employment but do report revenues by geographic
segment,allowingaroughapproximation.Giventhesecaveats,estimated the United States. Many of the so-called academy
U.S./NorthAmericanemploymentforthe10largestmanufacturersatyear
employers have explicitly renounced the former
end 2008 are (in thousands) Boeing (162), Lockheed Martin (131),
Northrop Grumman (124), GM (116), Tyson (99), General Dynamics practices that tied employees to their firms,
(92), Ford (89), United Technologies (78), Emerson Electric (70), and through freezing company pensions and phasing
Pepsico(64).Forcomparisonpurposes,grocerychainSupervalu,number
out retiree health benefits. General Motors, for
10onthelistoflargestemployers,had192,000workersin2008.
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2009 Davis 5
instance, notified its white-collar retirees in July intermediaries. This happened through a change
2008 that in the new year they and their depen- in pension financing that channeled a large por-
dents would no longer be covered by GM-fi- tion of household savings into a very small num-
nanced private health insurance because it had ber of mutual fund complexes, which ultimately
become too costly. Instead, they would be com- ended up holding concentrated ownership posi-
pensated with a $300 increase in their monthly tions in hundreds of U.S. corporations.
pension checks (Bunkley, 2008). Most companies that provided pensions prior
GM was simply following the path blazed by to the early 1980s did so through so-called “de-
some of its peers. GE’s former CEO Jack Welch fined-benefit” plans that paid retirees benefits ac-
earned the nickname “Neutron Jack” in the early cording to their tenure with the company. In a
1980s by shrinking GE’s payroll of 400,000 by defined-benefit plan, the employer is responsible
more than one-quarter. In 2001, Welch summa- for creating an investment pool sufficient to fund
rizedthenewemploymentcompacthehadhelped the stream of pension income promised to its
usher in for a group of Harvard MBA students: “If employeeswhentheyretire.Defined-benefitplans
there’sonethingyou’lllearn—anddot-comshave provided employees strong incentives to spend
learned it in the last year—is no one can guaran- their careers with particular employers. With the
tee lifetime employment ... . You can give life- advent of the 401(k) in the early 1980s, however,
time employability by training people, by making the large majority of employers that still provided
them adaptable, making them mobile to go other pensions began a shift toward funding relatively
places to do other things. But you can’t guarantee portable plans in which employees and firms both
lifetime employment” (Lagace, 2001, p. 1). And if contribute to an individually owned pension that
corporate employers have abandoned the vestiges can be rolled over if the employee changes jobs.
of long-term employment as anachronistic, so too These “defined-contribution” plans effectively
have employees. Contemporary workers are too transferred risk from employers to workers, who
sophisticated to invest in developing firm-specific were now responsible for making sensible invest-
skills for a company that might go from good to mentchoicesontheirownbehalffromamongthe
great to liquidation, as Circuit City did. In a options offered by their employer (see Cobb,
service economy, it’s best to keep one’s skills suf- 2008; Hacker, 2006). Although employers were
ficiently generic so that one is “mobile to go other motivated in part by cost considerations, the ef-
places to do other things”—say, selling sweaters fect was to loosen the ties that bound employees
instead of cell phones. to firms, further reinforcing the trends described
The result of the shift from manufacturing to in the previous section.
service, in short, has been a disaggregation of The growth in defined-contribution pension
employment in which the attachments of workers plans helped fuel the growth of the mutual fund
to particular firms is more tenuous, expected ten- industry. Those 401(k) plans most commonly in-
ures are shorter, and workplaces themselves are vest in mutual funds. Some plans offer options
often on a smaller scale. The traditional rationale other than mutual funds—Enron famously
for maintaining long-term employment relations matched its employee contributions with Enron
was in part to encourage the development of in- stock that employees were forbidden to shift to
vestmentsinfirm-specificskills.Greateremployee other investments—but mutual funds are perhaps
mobility thus goes hand in hand with lower firm- the dominant destination for employee contribu-
specific investments. tions. The mutual fund industry thus grew enor-
mously during the 1980s and 1990s, both through
TheRiseofInstitutionalInvestment 401(k)s and through retail investment, as house-
The disaggregation of employment that accom- holds found mutual funds to offer better returns
panied postindustrialism had another, less ob- than other savings vehicles. The Investment
vious effect, namely, the promotion of greater Company Institute reported that there were 564
aggregation in corporate ownership by financial mutualfundsin1980,3,079in1990,and8,155in
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6 AcademyofManagementPerspectives Month
2000. Assets under management increased from known fund complexes, which maintained nearly
$135 billion in 1980 to $12 trillion in 2007. And 40% of the industry’s assets under management
where only 6% of households were invested in over the past two decades. As a result, a few fund
mutual funds in 1980, 45% were in 2008. Inflows families—Fidelity, Vanguard, and the American
were particularly pronounced in the 1990s: Ac- Funds in particular—grew to become the most
cording to author and historian Steve Fraser: prominent owners of corporate America. (They
“More was invested in institutional funds be- have since been joined by Barclay’s through the
tween 1991 and 1994 than in all the years since enormous popularity of its iShares exchange-
1939” (Fraser, 2005, p. 583). The bull market traded funds.) At any given time during the past
and investment by households were mutually 15 years, Fidelity was the largest shareholder of
reinforcing during the subsequent decade, as roughly1in10U.S.corporations.Becausemostof
retail investors are typically “momentum inves- Fidelity’s funds are actively managed and rely on
tors” (putting money into the stock market in the research of in-house analysts, Fidelity often
the wake of price increases). By 2001, according ends up being the biggest shareholder of several
to the Federal Reserve, 52% of households competitors in the same industry. In early 2001,
owned stock—the highest proportion in U.S.
for instance, Fidelity’s parent owned 6.9% of
history—and most did so directly or indirectly
Wendy’s International and 6.4% of McDonald’s,
through mutual funds.5
Fn5 where it was the largest single shareholder. And
The broad spread of stock ownership among
although not an “owner” in the traditional sense,
the American populace left some commentators
Fidelityhasthepowertobuy,sell,andvoteshares,
rapturousaboutthenew“democratizationofown-
giving it great potential power in corporate gov-
ership” and its potential benefits (e.g., Duca,
ernance (Davis, 2008).
2001; Hall, 2000). An electorate attuned to the
Yet while corporate ownership has become
financial markets had incentives to become more
more concentrated in the United States than at
economically literate and might be more readily
any time since perhaps the First World War, this
persuaded by fiscal arguments that appealed to
has not resulted in a revival of the sort of finance
their interests as shareholders. But the democra-
capitalism that reigned a century ago, when J. P.
tization of ownership is clearly a representative
Morgan’s henchmen served as directors on dozens
democracy, channeled through intermediaries.
ofboardsofcompanieshehadfinanced(Brandeis,
Fewer than one in five households owned shares
1914). If anything, mutual funds are remarkably
directlyincompaniesin2007,aboutthesamerate
passive in corporate governance, even though
as three decades earlier. Moreover, the value of
fund families routinely gather ownership blocks of
the average family’s portfolio in 2009 was under
over 10%. The reasons for this are up for debate,
$23,000 (see Bucks et al., 2009, p. A27). Stock
but one is clear: The largest mutual funds are also
ownership was broad but not deep among the
among the largest providers of pension fund ser-
American populace. The real significance of this
vices to corporate employers, and Fidelity con-
movement was in its effect on the structure of
tracts for benefits outsourcing with hundreds of its
corporate ownership.
portfolio firms. In a highly interconnected finan-
The growth in the mutual fund industry was
cial world, there are good reasons not to offend
highlyuneven.Althoughthenumberoffundsand
actual or potential clients with unseemly share-
their assets under management grew in the aggre-
holder activism.6
gate, the biggest beneficiaries of the flood of new Fn6
retail investment were the half-dozen or so well-
6Foradescriptionofthegrowthinconcentratedownershipbymutual
5Figures on mutual funds are from the 2009 Investment Company fundsandacomparisonwithearly20th-centuryfinancecapitalisminthe
InstituteFactbook,accessedathttp://www.icifactbook.org/.Datafromthe UnitedStates,seeDavis,2008.Theclassicaccountofearly20th-century
FederalReserve’striennialSurveyofConsumerFinances,includinghouse- financecapitalismintheUnitedStatesisfoundinBrandeis,1914.Foran
hold ownership data, and related publications are available at http:// analysisofconflictsofinterestinproxyvotingbymutualfunds,seeDavis
www.federalreserve.gov/PUBS/oss/oss2/scfindex.html. andKim,2007.
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2009 Davis 7
ShareholderValue,CorporateRestructuring, be overwhelmingly paid in the currency of stock
andthe“OEMModel” options during the 1990s.
When corporate executives look out at their By the end of the decade, any lingering doubt
investors today, they don’t see the dispersed about the purpose of the corporation, or its com-
widows and orphans of times past—they see mitment to various stakeholders, had been re-
a relative handful of financial institutions. Nearly solved. The corporation existed to create share-
three-quarters of the average Fortune 1000 corpo- holder value; other commitments were means to
ration’s shares were owned by institutional inves- that end. Mission statements posted on corporate
tors in 2005, with mutual funds making up the websites in the late 1990s made this clear: “We
most concentrated block. Fidelity, one of the big- exist to create value for our share owners on a
gest fund families, held blocks of 10% or more in long-term basis by building a business that en-
hundreds of corporations at the same time. The hances The Coca-Cola Company’s trademarks.”
outcome of three decades of increased individual And “Sara Lee Corporation’s mission is to build
participationinfinancialmarkets,throughmutual leadership brands in consumer packaged goods
funds and 401(k)s, has been a re-concentration of markets around the world. Our primary purpose is
ownership in the hands of a few financial inter- to create long-term stockholder value.”
mediaries. This was precisely the opposite of what For manufacturers in particular, the relentless
had happened during the first wave of individual focus on share price promoted the spread of the
stockmarketparticipationinthe1920s,wherethe network or “OEM model” of corporate organiza-
quadrupling of shareholders in a few short years tion.8 Ironically, the name “original equipment Fn8
had broadly dispersed ownership, creating the fa- manufacturer” implies precisely the opposite of
mous “separation of ownership and control.”7 what it means in practice. Nike is a prototypical
Fn7
Theriseofrelativelyconcentratedinstitutional OEM:Itfocusesonthedesignandmarketingofits
ownership has corresponded with an increased products while leaving their production and dis-
focus on share price as the most relevant measure tribution largely to others. Coca-Cola is another:
of corporate performance. This is by now a famil- Although an outsider might see its business as
iar story, told in a number of books such as Mi- selling sugary carbonated beverages, the Coca-
chaelUseem’s(1996)InvestorCapitalism.Thecul- Cola Company itself is primarily in the brand
tural result is all around us. By the late 1990s, the management business, while manufacturing and
financial news media were pervasive, financial distributing the product is done by dispersed bot-
analysts such as Mary Meeker and Henry tlers.9 The value added by Nike or Coca-Cola is Fn9
Blodgett were household names, and firms faced through intellectual property—brands, patents,
high levels of scrutiny for their share price per- advertising copy, distribution know-how. Nike
formance. It became difficult to walk through a and Coke, like pharmaceutical companies and
public place, or to browse the Web, without universities, are in the ideas business.
being made aware of how the stock market was Share price is both a consequence and a cause
doing. Talking heads on CNN and the various of corporate structure: a consequence because the
financial news networks were inevitably accom- market values firms with different structures dif-
panied by a stock ticker crawl at the bottom of ferently, and a cause because executives adopt
the screen, so that CEOs (or even American strategies and structures with an eye toward the
presidents) were tethered to the market reac- expected market reaction. One of the best-docu-
tions to their every word. CEOs had personally mented regularities is the so-called “conglomerate
compelling reasons to attend to their company’s
share prices, as executive compensation came to
8What I here call the OEM model is akin to the network models
describedelsewhere,e.g.,ScottandDavis,2007.Sturgeon(2002)similarly
describeda“modularproductionnetwork.”
7Onpatternsinhouseholdownershipduringtheearlypartofthe20th 9The Coca-Cola Company does, however, own 35% of Coca-Cola
century,seeCox,1963.Thephrase“separationofownershipandcontrol” Enterprises, its largest bottler, responsible for 16% of Coca-Cola’s global
isprimarilyassociatedwithBerleandMeans(1932). volume.
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8 AcademyofManagementPerspectives Month
discount,” in which firms operating in more than radicalformsofrestructuring.Forexample,“board
one industry suffer lower market valuations than stuffers” in electronics—generic manufacturers
comparablefocusedfirms.Foraconglomerate,the such as Flextronics and Solectron, capable of as-
stock market value of the whole is often worth sembling and delivering virtually any electronic
much less than the sum of the parts if they were product from cell phones to servers—allowed
freestanding companies. Beatrice was an example: high-tech versions of the Nike model across a
At the beginning of the 1980s, the company’s wide variety of electronic products. A Hewlett-
portfolio of products included various branded Packard vice president explained why it turned
foods (e.g., La Choy), Culligan plumbing equip- over its computer manufacturing and distribution
ment, Airstream travel trailers, Samsonite lug- to a board stuffer: “We own all of the intellectual
gage, and dozens of others. Conglomerates offered property; we farm out all of the direct labor. We
a tempting target for outside raiders, who could don’t need to screw the motherboard into the
make a quick profit by buying such chronically metal box and attach the ribbon cable” for an
undervalued firms, splitting them up, and selling HP-branded computer to be an HP (Hansell,
the parts off to buyers in related industries in the 1998, p. 3:1). The rationale for restructuring ulti-
newly relaxed antitrust environment provided by mately turned on the idea that the stock market
theReaganadministration.Asaresult,aboutone- values intellectual property over tangible assets.
third of the 1980 Fortune 500 disappeared during CEO John Bryan of Sara Lee, maker of consumer
the 1980s, largely due to bust-up takeovers that brands such as Champion, Hanes, and Ball Park
collectively redrew the American industrial map Franks, stated it plainly when he explained why
(Davis, Diekmann, & Tinsley, 1994). his firm was divesting most of its manufacturing
By the 1990s, corporate executives were in- capabilityinordertofocusonitscorecompetence
tensely aware of the stock market consequences of of brand management: “Wall Street can wipe you
diversifying outside of their “core competence,” out. They are the rule-setters. They do have their
and this helped drive their restructurings. For in- fads, but to a large extent there is an evolution in
stance, when Ford CEO Alex Trotman an- howtheyjudgecompanies,andtheyhavedecided
nounced the firm’s spinoff of its financial division to give premiums to companies that harbor the
Associates First Capital in 1997, he said: “We most profits for the least assets” (Intrinsic Value,
believe the market value of the Associates is nei- 1997).
ther fully nor consistently reflected in Ford’s stock By now, cell phones, hot dogs, PCs, pet food,
price. Because the market views Ford as an auto- and pharmaceuticals are routinely produced by
motive company, it has not fully recognized or contractors, leaving OEM firms to manage the
rewarded us for our diversification in nonautomo- intellectual property behind these products—pat-
tivefinancialservicesbusinesses”(Bradsher,1997, ents, brand names, trademarks, and research ca-
p. D1). ITT’s CEO announced a plan to split his pabilities. For Sara Lee, as its CEO hinted, a
venerable conglomerate into three freestanding production line was worth less than the advertis-
parts (insurance, industrial products, and hotels ing line “Gentlemen prefer Hanes.” The conse-
andcasinos)withthisexplanation:“Wejustthink quences of the spread of the OEM model have
that having these three companies acting and occasionally been tragic. In 2007, thousands of
operating and being evaluated in their own busi- dogs and cats in the U.S. fell ill when their food
nessenvironmentswillprovideinvestors,analysts, turned out to have been tainted with melamine, a
and those who deploy debt a simpler, more clear cheap industrial filler that is chemically similar to
way to evaluate us” (Strom, 1995, p. D1). The protein. More than 100 competing brands, from
boundaries of the firm, in other words, were Science Diet and Iams to Wal-Mart’s Ol’ Roy,
shaped less by considerations of transaction costs turned out to be manufactured by the same ven-
and asset specificity than by the cognitive capac- dor, Ontario’s Menu Foods, which in turn relied
ities of Wall Street (cf. Zuckerman, 1999). on anonymous foreign suppliers for its “meat.” A
Over time, share price concerns drove more few months after that incident hundreds of hu-
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2009 Davis 9
mans were injured, and 81 killed, when batches of cial banking, took place at the same time that
Baxter Healthcare’s blood thinner heparin were banks were restructuring along lines similar to
discovered to be toxic. The drug was manufac- other corporations.
tured by a Chinese vendor that in turn relied on
mom-and-pop suppliers for a key ingredient that
appeared to be the source of the taint: pig intes- SecuritizationandtheChangingNatureof
tines (see Davis, 2009, Chapter 5). Banking
Thanks to two decades of restructuring driven Finance itself has not been immune to the allure
by a quest for shareholder value, the global supply oftheOEMmodel.Inthiscase,itistraditional
chains of contemporary corporations increasingly banking that has been transformed through the
resemblethe“nexusofcontracts”describedbythe practice of “securitization”—that is, turning assets
finance-basedtheoryofthecorporation(Jensen& (suchasloansonthebalancesheet)intosecurities
Meckling, 1976; for more on global supply chains, tradedonmarkets.Thetraditionalmodelofbank-
see Rivoli, 2005). One consequence of this wide- ing is fairly simple: Banks gather deposits from
spread restructuring is that career ladders ain’t savers, who are paid interest, and lend it to bor-
what they used to be. Horatio Alger stories of rowers,whopayitbackatahigherrateofinterest.
ambitious young people from modest backgrounds In the movie It’s a Wonderful Life, banker George
working their way up from the mailroom to the Bailey explains this model to his anxious deposi-
CEO’s office, always apocryphal, are even more tors, who are causing a run on the bank: “No, but
unlikely now that the mailroom (and the food you ... you’re thinking of this place all wrong. As
service, human resource department, IT depart- ifIhadthemoneybackinasafe.Themoney’snot
ment, and support staff) are all contracted out. here.Yourmoney’sinJoe’shouse...rightnextto
Research suggests that young men entering the yours.AndintheKennedyhouse,andMrs.Mack-
labor market in the 1980s and 1990s were much lin’s house, and a hundred others. Why, you’re
morelikelytoremainin“entrylevel”jobs10years lending them the money to build, and then,
laterthanweretheirpredecessorsinthelate1960s they’re going to pay it back to you as best they
and early 1970s. It appears that for many, the can. Now what are you going to do? Foreclose on
career ladder had been replaced by the career them?”
Roach Motel as another unexpected consequence The best-known form of securitization is mort-
of the shareholder value movement (Applebaum gage-backed bonds, in which hundreds or thou-
et al., 2003; Bernhardt et al., 1999). sands of mortgage loans are pooled together and
The trends I have described so far were mutu- then divided into bonds that, by the law of large
ally reinforcing. Changes in the largest employers numbers, have more predictable and “safer” re-
corresponded to changes in pension financing to- turns. This practice allows banks to free up funds
ward defined-contribution plans that facilitated for additional lending and generally lowers the
both the decline in career attachments to partic- cost of taking out a mortgage. Rather than relying
ular employers and increased participation in fi- on a local bank and its depositors to fund their
nancial markets through mutual funds. The home purchase, buyers can access funds from dis-
growth in institutional investor size and influence persed investors around the world via mortgage-
turned the firm focus to the share price implica- backed securities. A modern-day George Bailey
tionsoftheirchoicesofstrategyandstructureand, might have a more difficult time explaining con-
enabled by information technology, firms increas- temporarybanking:“No,butyou...you’rethink-
ingly adopted network forms that further weak- ing of this place all wrong, as if I held your
ened the bonds between workers and firms. mortgage on my balance sheet. I sold your mort-
The increasing importance of finance, however, gage to Countrywide 10 minutes after we closed
did not lead to the dominance of particular finan- the deal, and they sold it along with 3,000 other
cial institutions. Consolidation in some parts of the mortgages to Merrill Lynch, which divided it into
financial services industry, particularly commer- bondsthatwereboughtbyaCaymanIslandsLLC,
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10 AcademyofManagementPerspectives Month
which bundled them together with other mort- investment banks after the disappearance of Bear
gage-backed bonds into a collateralized debt obli- Stearns, Lehman Brothers, and Merrill Lynch in
gationthatCitigroupsoldtoaNorwegianpension 2008. By this point, many of the largest banks had
fund. Now what are you going to do? Stop making become essentially portals to financial markets,
your payments and force those Norwegian retirees analogous to OEM corporations. Homeowners
to go back to work?” might send their mortgage checks to Washington
Securitization turned expansive during the Mutual or Citibank, but behind the brand, the
1990s, driven by demand from institutional inves- real mortgage owners turned out to be dispersed
tors seeking outlets for their funds, supply from bondholders around the world. Just as corporate
Wall Street banks that got paid by the transac- ownership was becoming more concentrated
tion,andinformationtechnologythatenabledthe thanks to institutional investors, mortgage owner-
valuation of ever-more-exotic instruments. From ship was becoming more dispersed through secu-
home mortgages to auto loans to credit card re- ritization, in which thin slices of American mort-
ceivables and corporate loans, almost anything gages came to be held by global institutional
with an income stream seemed to end up as a investors—including Norwegian pension funds.
bond, and the bond market vastly outstripped the The global supply chain in finance created a sit-
stock market in value. Innovations in asset- uation in which American mortgages were as
backed securities turned surprisingly postmodern. toxic in the portfolios of foreign investors as mel-
David Bowie received $55 million in return for amine was in the dog chow of American pet
bonds backed by his future music royalties. J.G. owners.
Wentworth, the nation’s largest purchaser of fu- The tangled web of financial connections
ture payments, mounted a television ad campaign around the world meant that individuals’ eco-
to persuade those receiving insurance settlements nomic ties with their fellows became increasingly
for their personal injuries to sign over their complex. Through my pension plan, I may own
monthly payments in return for a lump sum, with part of my neighbor’s home mortgage, auto loan,
the claims to be bundled and sold as bonds. And and credit card debt, and be a beneficiary of his
elderlyretireesinFloridawerewinedanddinedby life insurance. “Social capital” has taken on a
entrepreneurs seeking to buy their future life in- more than metaphorical meaning.
surance payoffs. Talk show host Larry King sold As banks and other financial institutions con-
the settlement rights to two of his life insurance solidated and merged across industry boundaries,
policies for $1.4 million, but later thought better financebecameavastmeta-industrythatincluded
of it: As his lawyer put it, “The insured never commercial banking, investment banking, insur-
knows if the guy barreling down the highway in a ance, real estate services, student loans, and oth-
large truck coming in the opposite direction holds ers. By 2000, roughly 40% of the profits of the
the insurance policy on his life. We don’t know S&P500 came from financing, and companies as
whether the owner is a Wall Street hedge fund or diverse as GE and Enron were effectively banks or
a Mafia don” (Pleven & Silverman, 2007).10 hedge funds with some intermittent industrial
Fn10
The prevalence of securitization for business operations (Ip, 2002).
and other loans meant that traditional commer- Meanwhile, traditional commercial banks be-
cial banking and investment banking had become came far more concentrated, as a handful of na-
increasingly difficult to distinguish from each tional titans—in particular, Bank of America, JP-
other. This development was ratified by the con- Morgan Chase, and Citigroup—came to control
version to commercial banks of Goldman Sachs anoutsizedproportionoftheassetsanddepositsof
and Morgan Stanley, the two remaining major the industry, turning a traditionally local business
into an international one. Local and regional
players were attractive targets for acquisitive
10Foramoregeneraldiscussionofsecuritizationanditseffectsonthe banks. Charlotte-based North Carolina National
financialservicesindustry,seeDavis,2009,Chapter4.Ontheemergence
Bank grew to become Bank of America through
ofthemarketfor“viaticals,”seeQuinn,2008.
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