Corporate Capitalism

Capitalism has been spectacularly successful over the last two hundred years in harnessing technology and labor. This continues to take place first and foremost inside the individual firm. Changes in the way it is owned and managed in response to ever increasing scale and scope of industrial production have in this respect been instrumental to that success. To date, the balance of power within the firm has see-sawed back and forth between the two, giving rise to four distinct types of corporate capitalism — family, managerial, institutional, and welfare — each with its own management philosophy and organizational structure.

Keywords Agency Role of Management; Bureaucracy; Corporation; Family Capitalism; Financialization; Institutional Capitalism; M-Firm; Managerial Capitalism; Oligopoly; Technostructure; U-Firm; Welfare Capitalism

Work & the Economy > Corporate Capitalism

Overview

Imagine for a moment the marketplace as a giant wheel, its hub the center of all economic production, its rim the sum total of the needs and wants we individually signal, the spokes that connect the two is the for-profit firm. Now watch the wheel turn: that's capitalism in action. Dent or break enough 'spokes' and the wheel will collapse or fly apart: livelihoods are lost, good and services go unsold, firms go bankrupt, orderly markets breakdown. And that's why, to paraphrase the great sociologist Max Weber, control over the means of production — land, labor, machinery, and materials — must be exercised by a common management, for this arrangement alone assures the most efficient use of each. As does a distinct form of private ownership: the joint-stock company, whose shares can be bought and sold on the open market (Collins, 1980).

For this to work, however, ownership rights, privileges and obligations had to have the force of law. But for such de jure protections to be extended, the enterprise had to be a legal entity in its own right, i.e. be incorporated. Otherwise, shareholders were required to pay any and all of the venture's debts whether or not they actually had a hand in running them up. So either the individual shareholders actively participated in day-to-day affairs of the business, a managerial non-starter, or else trust that company officers are not spendthrifts or incompetents.

Understandably, the risks outweighed the potential rewards for many prospective investors. Vast amounts of capital were withheld consequently until the individual shareholders' liability was somehow limited by law. The first viable work-around, the commenda, enriched the Italian merchants of the fourteenth through sixteenth centuries, and their patronage of the arts fueled the Renaissance. It restricted the liability of non-managing partners but not, significantly, of managing partners. They too were exempted eventually as the commenda morphed into the modern-day corporation (Gillman & Eade, 1995).

Further Insights

Capitalism is by its very nature ecumenical. Scale, however, greatly affects organizational structure: the manner in which operations are monitored and supervised, decisions are made and communicated. How authority is exercised is not as important as who exercises it; the owner or the manager, and at whose behest? In search of an answer, corporations have reinvented themselves four times so far, progressing in organizational forms from family to managerial, to institutional and welfare capitalism.

Family Capitalism

The family as corporate entity is actually a very old legal principle. Aristotle commented in the fourth century BCE on how the family had to honor any commercial obligation entered into by any of its members. Back then, of course, the small farms, artisan's workshops, and trader's market-stalls around which economic life revolved were family owned and run. Yet the industrialized European Community (EC) of today bears a striking resemblance to the Greek city-states of antiquity: over 75 percent of businesses in the EC around the year 2000 were family-owned. These going concerns accounted for 65 percent of all the goods and services produced there (Jones & Rose, 1993, p. 1). And nowhere is the latent appeal of family capitalism more evident today than in China's surging economy. Between 1989, the first year they were counted, and 2002, private enterprises, most of which were family owned, grew in number over twenty-five-fold to top the two million mark (Zhang & Yu, 2005, p. 4).

Why family capitalism? Well, first of all, members of extended families know and trust each other. They willingly float short term loans to tide over financially strapped relations and frequently pool resources to mutual advantage. As such they're far more approachable than a bank or venture capitalist when the time comes to raise seed money. As employees, secondly, they will work long hours for little pay and require less supervision. All of which an owner can put to good advantage in keeping overhead costs low, provided that he or she remains a hands-on manager. The more separated an owner grows from day-to-day operations, the more extended the lines of intra-company communications and control and the more problems this creates. That's why most family-run businesses remain 'mom and pop' operations.

But family capitalism is entrepreneurially friendly only to a point. Successfully starting a business and expanding one are two very different undertakings. Each additional market entered, new product-line launched or production-technology installed increases a firm's scale and scope. Confronted daily with too many decisions and too many problems to solve, many of a technical nature, the hands-on, informal management style that was once such a strategic asset becomes a liability. A more hierarchical management structure that cedes operational control to specialists and business professionals is required. Without it, as many a family-owned and -run blast-furnace, shipyard, and textiles-mill in nineteenth-century Britain discovered too late, a firm cannot leverage the economies-of-scale or more efficient production technologies as well or as quickly as their better organized competitors and profits turn into losses, success into failure. To accommodate this necessary growth, a family-owned firm had to recast itself as a bureaucracy.

Now, families have successfully made this transition yet maintained overall control by reserving very senior management positions for themselves. France's Michelin is one, South Korea's chaebol conglomerates are another. Their success rests as much on what they didn't do as what they did, though, for the owners of family businesses are just as prone to human temptation as the rest of us. And there are many pitfalls unique to their station in life just waiting to ensnare them: nepotism, the siphoning off of capital to finance opulent lifestyles, management decisions inspired by family feuding instead of sound business sense, succession struggles, etc. Avoid these and the successive generations of the family can and do provide their firms continuity, a strong corporate culture, and an emphasis on the company's long-term as opposed to its short-term financial performance.

Managerial Capitalism

In capital- and technology-intensive industries like oil, steel, car manufacturing, etc., economies of scale matter: the more production capacity at a firm's disposal, the lower its unit-costs compared to its competitors'. Coordinating the inputs to and outputs from such a complex techno-structure was virtually impossible without the attendant bureaucracy. With its centralized decision-making, standardized production, and uniform administrative procedure, this nineteenth century innovation perfectly suited mass industrialization. It imposed a machine-like precision and orderliness on day-to-day operations that allowed the firm to undertake and coordinate on a very large scale a host of highly specialized, often technical functions.

At first, the 'managers' that held this bureaucratic structure together were largely first-line production supervisors or technical experts. They held their positions by virtue of their functional knowledge and expertise. As their number grew within the firm, however, so did the need to monitor, coordinate, and direct their efforts and, by extension, the efforts of those below them. This responsibility increasingly fell to a new class of professional manager versed in more generic business principles and practices. And with them came a top-down, pyramidal management structure that could easily accommodate growth widely adopted by corporations adopted in the first half of the twentieth century. (Wilson & Thomson, 2006).

And they had to grow to earn the profits to constantly reinvest in increasingly expensive production technologies. At stake was their continued ability to manufacture the high-tech items consumers and businesses wanted at the lowest possible cost. They could of course turn to the financial markets to raise the enormous sums required but would then be saddled with heavy debt burden for years to come. Or, profits permitting, they could finance these capital projects themselves out of their retained earnings. So grow they did in sales, personnel, plant size and number, geographic reach, and, more problematically perhaps, so too did the range of products they manufactured. Diversification acted as a hedge against cyclical downturns in particular industries. Corporations keen to maintain their profitability year-in, year-out expanded far afield from their traditional markets, acquiring established business in different industries if necessary, to broaden the scope of their product portfolios (Fusfeld, 2000).

But no two (much less three or four) industries are exactly alike. An organization whose underlying dynamic is to search out and exploit commonalities does not deal well with diversity. Institutionally-speaking, decision-making here is simply too far removed from actual market events to be timely or necessarily well-informed; a new, more decentralized type of organizational structure was needed. And so the hierarchically based, or "U-firm," became the multiple profit-center or "M-firm." Here, divisional managers with knowledge of and experience in a particular industry oversaw manufacturing and marketing of particular product lines. Upper echelon management, however, retained overall control thanks in large part to advances in managerial accounting and financial-statement analysis. Anyone who had mastered both could turn raw bookkeeping entries into a revealing set of very specific performance metrics applicable to any type of business imaginable. With them, a conglomerate could also measure the extent of each division's contribution to its overall strategic agenda (Petit, 2005).

Crucially, the agenda did not always place a premium on maximizing divisional profits in the 1950s, '60s, and '70s. Indeed, losses from newer ventures might well be countenanced as a necessary investment; the reliable if unspectacular profit margins of more mature ventures welcomed for the cash they generate. The quarterly and yearly financial statement the conglomerate issued to stockholders mattered, of course, but they were not the be-all and end-all they are today. For this was the era of the small investor whose smattering of stocks meant that too many people in too many places owning a corporation could not be much of a force. And even if they did succeed in banding together, shareholders back then (as now) could only vote up or down nominees to the board of directors hand-picked by the very same senior executives they would subsequently oversee. Most of these appointees were themselves executives at other corporations and major institutions, i.e. professional managers who shared the same values, outlook, and concerns.

For all intents and purposes, control now rested squarely in the hands of professional managers. As stewards of a very large firm competing against other very large firms, they could focus all their attention on what concerned them the most: protect and further the corporation's influence in the marketplace and, by extension, their own standing in the corporation. Often that marketplace behaved like an oligopoly where very large firms vie with each other for a larger share of industry's sales but remain leery of price wars, or for that matter any other destabilizing moves. Better there be cooperation and good-will among industry stakeholders and fellow-travelers on matters of mutual interest. In effect, as custodians of their firm's elaborate techno-structure, they feared the unpredictable more than any competitor. In their eyes, any interruption of the flow of operating capital slated for reinvestment in plant and equipment threatened the firm's long-term survival and, as such, represented an unacceptable risk to the shareholder's interest.

Institutional Capitalism

Something happened in the 1980s that stood this staid world of corporate management on its head. That something was the institutional investor: the pension funds, investment trusts, insurances companies, banks, non-financial companies, and wealthy families sharing constellations of interests ("Organization, management, and control", 2003). These loose groupings accumulated enough stock to vote themselves onto the boards of major corporations and impose a radically different management philosophy neatly summarized in the phrase 'shareholder value'. One metric of management performance and one alone mattered here: the price of the corporation's stock. For, after all, isn't the amount one's prepared to pay for something the acid test of its perceived worth? A rising share-price represents a vote of confidence on the part of millions of investors large and small in a company's performance, a declining one the opposite. More to the point, a rising share-price means each and every shareholder is financially better off; which is the whole point of investing in the first place.

Management's principal objective accordingly should always be to maximize corporate profits in the short-term. Anything less would be tantamount to failing in its fiduciary responsibility to shareholders, a traditional concept subject to periodic re-interpretation. To meet this responsibility, the agency role of management must be to doggedly pursue shareholders' interests to the exclusion of all else. What exactly these interests are depends on who's using the term. So, for example, even though they pursued a diametrically opposed strategy, M-firm corporate managers can be said to have lived up to their fiduciary responsibility just as managers of today's 'lean and mean' firm (Osigweh, 1994).

What's changed in the interim is the working definition of shareholder interests. Now, interpreting the meaning of galvanizing words and slogans is one of the prerogatives of power. As the institutional investor increasingly claimed this right, shareholder value became synonymous with the financialization of the firm's priorities. The net result has been no less than a complete overhaul of the corporate business model. Less profitable product-lines are now quickly divested, any and all non-mission critical functions are outsourced to cut costs; multiple layers of middle management meanwhile have been shed in favor of a flatter organizational structure, whole operations sent 'off-shore' to take advantage of lower labor costs and looser regulatory regimes. For their troubles, senior executives were rewarded with very lucrative stock options in lieu of cash bonuses. That made them owners once again and the retreat from managerial capitalism even more of a forgone conclusion.

Welfare Capitalism

Altruism is not a virtue one normally associates with capitalism. Yet at their height the very generous employee health-insurance policies, pension funds, tuition-rebate, and other fringe benefits subsidized by the likes of Kodak, Sears, and IBM far surpassed anything the government provided. But these were not selfless acts; major corporations only stood to gain financially from having a loyal, motivated workforce ("Welfare Capitalism," 2001). Lower turnover reduced transaction costs; retention of skilled hourly- and salaried knowledge-workers fostered innovation and improved efficiency, and high quality prospective employers were more likely to seek them out. Corporations got value for their money. But they were even more enamored with what they didn't get: union organizing.

Intent on not ceding any control of their operations to outside unions, large industrial corporations resolved to undercut their appeal by voluntarily providing workers amenities they might or might not get in a union contract. And corporations were prepared to go to considerable lengths to ensure this stratagem's success. Among plants of 250 or more workers surveyed in New York State back in 1928, 46.9 percent offered employees group life insurance, 26.7 percent a pension plan, 25.5 percent a paid vacation, and 17.1 percent a stock-purchase program (Gitelman, 1992, p. 28).

During the Depression that followed, many were eliminated, only to be revived and greatly expanded immediately after World War II. By then, big business wanted not only to blunt the spread of unions but also to offer a private-sector alternative to the government-funded social-welfare programs of the New Deal (Stoesz & Sunders, 1999). By the 1960s, workers were convinced enough of the merits of these alternatives to make them a precondition of employment; unions' absolute musts in new contract negotiations. By the mid-1980s welfare capitalism directly funded 25 percent of all the social welfare payments made in the U.S. (Brown, 2001, p. 645). Within a decade, though, the realities of global competition on the one hand, and the demands of the institutional investor on the other, forced many of the very same companies to reverse course. And welfare capitalism's fortunes have been in decline ever since.

Conclusion

Markets organize supply and demand but it is the corporation that is the true cornerstone of capitalism. Within its four walls materials, technology, and labor physically come together to produce the goods sold in these markets. Corporations create value. But to do this they must have sufficient capital, be well-run and, most importantly of all, accommodate change. Simply put, corporate capitalism does this better than any other type of organization yet invented by man. Be it ever increasing scale and complexity, technological progress, a tilt in the balance of power within the organization in favor of its owners or its managers, the corporation adapts. And therein lies the reason for its success.

Terms & Concepts

Agency Role of Management: A theory that states management's principal obligation is to further the interest of company's owners.

Bureaucracy: An organizational structure characterized by the specialization of functions, fixed rules, and hierarchical control.

Corporation: An organization that legally has various rights and duties such as entering into and honoring contracts.

Family Capitalism: For-profit enterprises owned and operated by people related by kinship to each other.

Financialization: The management of corporations for the express purpose of generating the largest possible return on investment.

Institutional Capitalism: For-profit enterprise where ownership is shared by pension funds and other large-asset investors who exercise a fair amount of influence in matters relating to the firm's management and performance.

Managerial Capitalism: Enterprise conducted in a manner deemed prudent and profitable by a firm's senior executives and investor-owners have a largely nominal say.

'M'-Firm: An abbreviated name for a corporation organized according to product lines or profit centers, the managers of which are given considerable autonomy by senior executives.

Oligopoly: A market composed of a handful of very large competitors each of which exerts an appreciable but non-controlling influence.

Technostructure: A term used in management theory and economics to denote an industry's infrastructure: i.e., participating companies' plant, equipment, and human capital.

'U'-Firm: An abbreviated name a corporation where control is exercised in a top-down manner via a hierarchical management structure.

Welfare Capitalism: The practice of including fringe benefits that extend an employee's social safety net or improve his or her quality of life as a standard part of a corporation's remuneration package to promote workers' loyalty and commitment.

Bibliography

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Suggested Reading

Crouch, C. (2005). Models of capitalism. New Political Economy, 10, 439–456. Retrieved July 18, 2008, from EBSCO online database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=18969894&site=ehost-live

Ebbinghaus, B., & Manow, P. (2001). Chapter 1: Introduction. In Comparing Welfare Capitalism (pp. 1–24). Abingdon: Routledge. Retrieved June 28, 2008, from EBSCO online database SocINDEX with Full Text. http://search.ebscohost.com/login.aspx?direct=true&db=sih&AN=17147785&site=ehost-live

Elliott, J. (1980). Social and institutional dimensions of the theory of capitalism in classical political economy. Journal of Economic Issues, 14, 473. Retrieved June 28, 2008, from EBSCO online database SocINDEX with Full Text. http://search.ebscohost.com/login.aspx?direct=true&db=sih&AN=4684710&site=ehost-live

Elliott, J. (1984). Karl Marx's theory of socio-institutional transformation in late-stage capitalism. Journal of Economic Issues, 18, 383. Retrieved June 28, 2008, from EBSCO online database SocINDEX with Full Text. http://search.ebscohost.com/login.aspx?direct=true&db=sih&AN=4678722&site=ehost-live

Hannah, L. (2007). The 'divorce' of ownership from control from 1900 onwards: Recalibrating imagined global trends. Business History, 49, 404–438. Retrieved July 17, 2008, EBSCO online database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=25902084&site=ehost-live

Hay, C., & Wincott, D. (2012). The political economy of European welfare capitalism. New York: Palgrave Macmillan.

Picciotto, S. (2011). Regulating global corporate capitalism. Cambridge, England: Cambridge University Press.