Drucker

Today's Profile in Contradiction comes to you from the foremost guru of management, Peter Drucker. Since I'm going to be joining the ranks of the management academe, I felt I should educate myself as to the musings of the great Drucker. And so, perusing his Concept of the Corporation, I came across this excerpt:

Though we have largely abandoned it in legal and political practice, the old crude fiction still lingers on which regards the corporation as nothing but the sum of the property rights of the individual shareholders. Thus, for instance, the president of a company will report to the shareholders on the state of "their" company. In this conventional formula the corporation is seen as transitory and as existing only by virtue of a legal fiction while the shareholder is regarded as permanent and actual. In the social reality of today, however, shareholders are but one of several groups of people who stand in a special relationship to the corporation. The corporation is permanent, the shareholder is transitory. It might even be said without much exaggeration that the corporation is really socially and politically a priori whereas the shareholder's position is derivative and exists only in contemplation of law.

He doesn't ever really say what makes the shareholder view "crude," but then who ever does? This "stakeholder" theory of business is old news today, and is typically paid lip service in any business ethics context. Thankfully, most of business academia is still focused on maximizing shareholder value. Which is good, because how exactly does a business exist without owners? Providing capital and getting return on investment is an indispensable element of capitalism.

Now, Drucker's not perfect, but he understands a few basic points. For one thing, he isn't exactly a stakeholder theorist in the way many closet Marxists are. He's more of a corporation theorist, basically holding that the corporation is an end in itself and all effort should be directed toward the betterment of the firm. (Incidentally, one wonders what this means if not maximizing shareholder value.) So, I feel I should present a more present quote of his from the preceding page:

Survival as an organization is the first law of the corporation as of any institution; and ability to performs its own purpose, to produce goods with the maximum economic return, is its first yardstick of achievement.

Sounds like maximizing shareholder value to me, but hell, what do I know?

Where was this the last eight years?

Congressman Paul Ryan from Wisconsin had an op-ed in the WSJ today outlining the Republicans' alternative budget for this year. Ryan's a good egg, a very small-government Republican, not perfect but a saint by Congressional standards. He is now the ranking Republican on the House Budget Committee, a position long overdue him. I'd like to see him try to run for President.

Anyway, most of the alternative budget is garbage just like Obama's budget, and keeps spending pretty constant, but there is a nice little component on tax reform:

- Tax Reform. Our budget does not raise taxes, and makes permanent the 2001 and 2003 tax laws. In fact, we cut taxes and reform the tax system. Individuals can choose to pay their federal taxes under the existing code, or move to a highly simplified system that fits on a post card, with few deductions and two rates. Specifically, couples pay 10% on their first $100,000 in income (singles on $50,000) and 25% above that. Capital gains and dividends are taxed at 15%, and the death tax is repealed. The proposal includes generous standard and personal exemptions such that a family of four earning $39,000 would not pay tax on that amount. In an effort to revive peoples' lost savings, and to create an incentive for risk-taking and investment, the budget repeals the capital gains tax through 2010 for all taxpayers.

On the business side, the budget permanently cuts the uncompetitive corporate income tax rate -- currently the second highest in the industrialized world -- to 25%. This puts American companies in a better position to lead in the global economy, promotes jobs here at home, and strengthens worker paychecks.

My, that sounds nice. Too bad Republicans these days are about as powerful as a solar-powered night light. Where the hell was this budget when you guys ran the show? Two-tiered flat tax? (Well, it's flatter than the current system) 25% corporate rate? Repealed capital gains tax? (True, only for a year, but hey, it's a start) Republicans make me sick. They only get principled when the know none of this shit will get passed.

Proposing a budget like this now when they had eight years to easily slide it through Congress is a welcome change, but it is really disingenuous considering it has -500% chance of beating Obama's budget. "A" for effort, though, boys.

The Big Engine That Couldn't

Hi all. Sorry I haven't posted in a few days. I've got three exams this week, and I need to revise a paper for publication by Friday (More on that later). Today I am discussing Rick Wagoner, who last night was fired by Barack Obama from his job as Chairman and CEO of General Motors. Yes, the President asked for his resignation, and he granted it. Someone please tell me why we even have business anymore? Here's the article: demise of a douchebag.

I wish I could feel an ounce of sympathy for Wagoner, but I can't. He asked for this fate. He managed a company for eight years on the principle that profitability is a relative term (only economists actually believe that). When cash ran thin this year, he and his Detroit buddies went crawling to Mommy to bail them out. And because GM is Amer'can, whatever that means these days, it got the money. Shockingly, the money ran out, and they needed more money. Finally, the government had had enough of GM's incompetence, and last night they ousted the captain and replaced him with the first mate of the GM Titanic, the current COO. I'm sure it'll be roses and gumdrops from here on.

And sure enough, with optimism rivaling Stalin, the administration announced that it is "prepared to stand by GM throughout this process to ensure that GM emerges with a fresh start and a promising future."

We all know the political lessons to glean from this scenario, but I think the less obvious lesson is the business one that really drove the nail into GM's coffin. Other than the political pandering, the environmentalist bullshit, the labor appeasement and pacification, the financing shenanigans, the shitty, unprincipled management, and the all-around bad karma, what finally killed GM was poor cash flow management.

Lots of companies rely on short-term borrowing to fill holes in their cash inflow, so that they can meet their expenses. GM, however, tried to ride that debt horse into the credit crisis, and we know how well that turned out. Generating cash from sales is crucial for navigating rough waters like we face today, especially when you face the galactic labor costs GM does. In the auto industry, it's difficult to keep cash coming in reliably from sales, but maybe, then, a smaller, leaner auto manufacturer might be a preferable business model to the stumbling golem model we enjoy today.

Just a thought.

The Only Friendly Skies

Finally, I have found some good news in the business world to report. Amidst the game of Jenga that is the U.S. economy, it's nice to see that Southwest Airlines is still doing pretty well. Gary Kelly, CEO since 2004, is interviewed in this article and seems to have a pretty fair strategic outlook. A few encouraging remarks:

The airline's chief executive is adding flights to heavily trafficked domestic airports and seeking cross-border alliances with foreign carriers. He's also considering adding on-board Internet surfing and more-extensive wine and coffee service.

But Mr. Kelly says adding full-scale meals remains off the table. And Southwest, the largest U.S. discount carrier by revenue, remains steadfast against charging customers for checking in suitcases and using pillows, as rivals have done.

"Adding fees is not the way to grow the airline," Mr. Kelly says in an interview at the company's headquarters here. "Customers hate that stuff."

Oh, you noticed that, huh?

Last week, true to discount roots dating to 1971, Southwest launched a summer fare sale on domestic flights, with one-way prices as low as $49. As in the past, major competitors were forced to follow suit.

By keeping costs low with simple operations, Southwest has booked 36 straight years of profit and flies more passengers within the U.S. than anyone else. Southwest is the only major U.S. airline to enjoy an investment-grade credit rating.

What I love about Southwest is that they succeed repeatedly by responding to market reality, while their competitors repeatedly fail and run to either bankruptcy court or worse, the government. They foresaw the spike in oil prices last year, and hedged against them (of course, that same hedge hurt them when oil prices plummeted in the fall.)

Basically, it's just nice to see successful firms come out of what is a mind-bogglingly success-starved industry.

And Now for Something Completely Different

I've been harping on about a lot of big ticket issues: bailouts, bonuses and such. So, when I noticed a much smaller atrocity on the front page of the WSJ today, I thought I should bring it to your attention. Basically, a small businessman is attempting to get an Asian skin treatment technique to catch on in the U.S. He uses fish to defoliate people's feet. At first it sounds kind of gross, but read the article. It's not so bad. The guy bought these little dead-skin-eating fish about the size of sardines, and he constructed individual plexiglass foot baths to keep them in. And the idea is starting to spread. So, naturally, this happens:

Until Mr. Ho brought his skin-eating fish here from China last year, no salon in the U.S. had been publicly known to employ a live animal in the exfoliation of feet. The novelty factor was such that Mr. Ho became a minor celebrity. On "Good Morning America" in July, Diane Sawyer placed her feet in a tank supplied by Mr. Ho and compared the fish nibbles to "tiny little delicate kisses."

Since then, cosmetology regulators have taken a less flattering view,insisting fish pedicures are unsanitary. At least 14 states, including Texas and Florida, have outlawed them. Virginia doesn't see a problem. Ohio permitted fish pedicures after a review, and other states haven't yet made up their minds. The world of foot care, meanwhile, has been plunged into a piscine uproar. Salon owners who bought fish and tanks before the bans were imposed in their states are fuming.

The issue: cosmetology regulations generally mandate that tools need to be discarded or sanitized after each use. But epidermis-eating fish are too expensive to throw away. "And there's no way to sanitize them unless you bake them for 20 minutes at 350 degrees," says Lynda Elliott, an official with the New Hampshire Board of Barbering, Cosmetology and Esthetics. The board outlawed fish pedicures in November.

I think the concept of "cosmetology regulators" pretty much sums up the absurdity of this whole scenario. Granted, Ho's original plan to keep the fish in a communal bath that people would use simultaneously sounds pretty unsanitary, but I'm guessing customer sentiment would have led him to create the individual washable tanks pretty quickly if regulators hadn't forced him. Just another example of a promising business model being trodden over by peabrained regulator thugs.

Ho, I salute you!

Book Recommendation

I just finished reading P.J. O'Rourke's Eat the Rich, and I really enjoyed it. It's a humorous introduction to economics, complete with scenes from countries at all corners of the economic landscape. He discusses what makes Wall Street different from Albania (please, hold your snide jokes until the end), Sweden from Cuba, Hong Kong from Tanzania (You've heard of Hong Kong). O'Rourke's a free-market guy with a likeable cosmopolitan wit. And he hates the Clintons, to boot. Here's a couple of my favorite exerpts.

A belief in the free market means a belief that people have an innate right to the fruits of their endeavors, and the right to dispose of the fruit the way they see fit, as long as other people don't get pasted in the face with a rotten peach or something.

Accepting the free market allows us to avoid the political abuse and financial mismanagment inherent in trying to design an economy that's fair. It also allows us to see that economies can't be designed. Economics is the measurement of how human nature affects the material world. The market is "heartless." So are clocks and yardsticks. Saying that economic problems are the result of the free market's failure is like gaining twenty pounds and calling the bathroom scale a bum.

There's a bunch more comments like these throughout the book, but I won't spoil it for you. Go out and buy it! (Incidentally, I got my copy for a dollar at a library book sale. Being poor is fun.)

What Moral Hazard? This Is News to Us.

AIG is a fantastic example of how good the government is at running corporations. The government owns 80% of inflated insurance giant AIG, a greater level of ownership than most institutional investors own in anything. As such, it has a genuine interest in seeing the firm turn profitable, right?

Oh yeah, Barney Frank doesn't care what happens to taxpayers' investments since...that tax money keeps rolling in no matter how well AIG performs. Okay, so under that paradigm, it makes sense that the government's management style consists of forking over an ass load of money, and then running in the other direction to worry about something more important, like hand out even more money, but to people who vote.

This reminds me of Alan Greenspan saying "I am so surprised that the self-interest of banks did not restrain them from taking excessive risks," when he spent half a decade telling banks "Free Risk! Free Risk! Come take my risk! Hey Nonny Nonny Hey!. What Alan Greenspan did to the markets was force feed it steroids and then say "Oh my, how did those testicles shrink like that?"

And this is basically what has been done with AIG. If Barney Frank could speak human, his words would say "We gave them tons of money for driving a once-great company into the ground, and now they've spent some of that money on bonuses. How could this have happened?"

Happy St. Patty's everyone. I need a drink.