The rise of pension funds as dominant owners represents one of the most startling shifts in economic history.
Even the largest U.S. pension fund holds much too small a fraction of any one company’s capital to control it. Not being businesses, the funds have no access to in-depth commercial or business information. They are not business-focused, nor could they be. They are asset managers. Yet they need in-depth business analysis of the companies they collectively own. And they need an institutional structure in which management accountability is embedded.
I suspect that in the end we shall develop a formal business-audit practice, analogous perhaps to the financial-audit practice of independent professional accounting firms. For while the business audit need not be conducted every year—every three years may be enough in most cases—it needs to be based upon predetermined standards and go through a systematic evaluation of business performance: starting with mission and strategy, through marketing, innovation, productivity, people development, community relations, all the way to profitability.
Penalties on capital formation are a luxury that a society under pension-fund socialism can ill afford.
We have so far given almost no thought in this country to the ways in which capital formation could be increased to offset the actual “dis-saving” resulting from the rise of pension costs, which springs in turn from the growth in the number of older retired people whose consumption has to be financed out of the “pseudo-savings” of employed workers. Only one thing can be said with certainty: obstacles to, and penalties on, capital formation are a luxury that a society under pension-fund socialism—and a society in which a large number of older people have to be supported in retirement—can ill afford. But one can say definitely that capital formation rather than consumption will of necessity become the central problem of domestic economic policy in the years ahead, and the acid test of the economic viability of America’s pension-fund socialism.
Capital market decisions are shifting from the people who are supposed to invest in the future to the people who have to follow the “prudent man rule.”
The capital market decisions are effectively shifting from the “entrepreneurs” to the “trustees,” from the people who are supposed to invest in the future to the people who have to follow the “prudent man rule,” which means, in effect, investing in past performance. Herein lies a danger of starving the new, the young, the small, the growing business. But this is happening at a time when the need for new businesses is particularly urgent, whether they are based on new technology or engaged in converting social and economic needs into business opportunities.
It requires quite different skills and different rules to invest in the old and existing as opposed to the new ventures. The person who is investing in what already exists is, in effect, trying to minimize risk. He invests in established trends and markets, in proven technology and management performance. The entrepreneurial investor must operate on the assumption that out of ten investments, seven will go sour and have to be liquidated with more or less a total loss. There is no way to judge in advance which of the ten investments in the young and the new will turn out failures and which will succeed. The entrepreneurial skill does not lie in “picking investments.” It lies in knowing what to abandon because it fails to pan out, and what to push and support with full force because it “looks right” despite some initial setbacks.
The regulation of pension funds, and their protection against looting, will remain a challenge.
For most people over forty-five in developed countries, their stake in a pension fund is one of their largest single assets. During the nineteenth century, the biggest financial need of common people was for life insurance to protect their families in the event of their early death. With life expectancies now almost double those of the nineteenth century, the biggest need of common people today is protection against the threat of living too long. The nineteenth-century “life insurance” was really “death insurance.” The pension fund is “old-age” insurance. It is an essential institution in a society in which most people can expect to outlive their working lives by many years.
The regulation of pension funds, and their protection against looting, will remain a challenge to policy makers and lawmakers for years to come. In all likelihood, the challenge will only be met after we have had a few nasty scandals.
Short-term results and long-term performance are not irreconcilable, but are different, and will have to be balanced.
The new corporation will have to balance short-term performance with the long-term interests of pension-fund shareholders. Maximizing short-term performance will jeopardize the interests of pension-fund stockholders.
Significantly, the claim of the absolute primacy of business gains that made a shareholder sovereignty possible has also highlighted the importance of the corporation’s social function. The new shareholders whose emergence since 1960 or 1970 produced shareholder sovereignty are not “capitalists” in the traditional sense. They are employees who own a stake in the business through their retirement and pension funds. By 2000, pension funds and mutual funds in the U.S. had come to own the majority of the share capital of America’s large companies. This has given shareholders the power to demand short-term rewards. But the need for a secure retirement income will increasingly focus people’s minds on the future value of the investment. Corporations, therefore, will have to pay attention both to their short-term business results and to their long-term performance as providers of retirement benefits. The two are not irreconcilable, but they are different, and they will have to be balanced.
In attracting and holding knowledge workers, we already know what does not work: bribery.
Attracting and holding knowledge workers have become two of the central tasks of people management. We already know what does not work: bribery. In the past ten or fifteen years many businesses in America have used bonuses or stock options to attract and keep knowledge workers. It always fails when falling profits eliminate the bonus or falling stock prices make the option worthless. Then both the employee and the spouse feel bitter and betrayed. Of course knowledge workers need to be satisfied with their pay, because dissatisfaction with income and benefits is a powerful disincentive. The incentives, however, are different.
Knowledge workers know they can leave. They have both mobility and self-confidence. This means they have to be treated and managed as volunteers, in the same way as volunteers who work for not-for-profit organizations. The first thing such people want to know is what the company is trying to do and where it is going. Next, they are interested in personal achievement and personal responsibility—which means they have to be put in the right job. Knowledge workers expect continuous learning and continuous training. Above all, they want respect, not so much for themselves, but for their area of knowledge. Knowledge workers expect to make the decisions in their own area.
Management courses for people without a few years of management experience are a waste of time.
What I would like to see—and what I have practiced now for many years in my own teaching—is:
Management education only for already successful people. I believe management courses for people without a few years of management experience are a waste of time.
Management education for people from the private, the public, and the not-for-profit sectors together.
Planned, systematic work by the students while at school in real work assignments in real organizations—the equivalent to the MD residency.
Far more emphasis on government, society, history, and the political process.
Teachers with real management experience and enough of a consulting practice to know real challenges.
Major emphasis on the nonquantifiable areas that are the real challenges—and especially on the nonquantifiable areas outside the business—at the same time much greater quantitative skills, that is, in understanding both the limitations of the available numbers and how to use numbers.
To develop yourself, you have to be doing the right work in the right kind of organization. The basic question is: “Where do I belong as a person?” This requires understanding what kind of work environment you need to do your best: A big organization or a small one? Working with people or alone? In situations of uncertainty or not? Under pressures of deadlines?
If the thoughtful answer to the question “Where do I belong?” is that you don’t belong where you currently work, the next question is why? Is it because you can’t accept the values of the organization? Is the organization corrupt? That will certainly damage you, because you become cynical and contemptuous of yourself if you find yourself in a situation where the values are incompatible with your own. Or you might find yourself working for a boss who corrupts because he’s a politician or because he’s concerned only with his career. Or—most tricky of all—a boss whom you admire fails in the crucial duty of a boss: to support, foster, and promote capable subordinates. The right decision is to quit if you are in the wrong place, if it is basically corrupt, or if your performance is not being recognized.
