First summarize in a paragraph those aspects of t

History 167cb Capitalism and Class

Report Due March 16

The two-page report works in the following fashion. Find a newspaper article or reputable blog post on a current issue relevant to this course. The article you will be writing the report on is “Starbucks Fires Memphis Workers.”

Write a two-page report that does the following. First summarize in a paragraph those aspects of the story you want to highlight. Then lay out an argument that connects the present with the past, discussing any material from the course that has given you insights into the contemporary meaning and historical background of the news event in question.

For example, if you are boning up on the history of the United Farm Workers Union, then how does that inform your understanding of why First Lady Jill Biden chose to visit the headquarters of a small and struggling union? Or if you are reading about the fissured workplace, then what does this say about a news article entitled “The Fast-Food Model Lets Corporations Escape Liability?” Likewise, some of the readings and lectures in the course that discuss why wages have stagnated in recent decades could inform a news report entitled “Most Kroger Workers are Struggling.”

Include only sources from class, that have been provided.

Put a title on your two-page report! It should announce your topic and point of view like a banner or picket sign or leaflet. Examples: “Is Amazon the Second Coming of U.S. Steel?” or “The Heirs of Cesar Chavez,” or “Starbucks Against Free Speech.”

Footnote properly.

The Rise and Fall of Finance and the End of the Society of Organizations Author(s): Gerald F. Davis Source: Academy of Management Perspectives, Vol. 23, No. 3 (Aug., 2009), pp. 27-44 Published by: Academy of Management Stable URL: https://www.jstor.org/stable/27747524 Accessed: 08-11-2018 23:39 UTC

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2009 Davis 27

ARTICLE

The Rise and Fall of Finance and the End of the

Society of Organizations by Gerald F. Davis

Executive Overview 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, and household ties to financial markets over the past three decades. I argue that all these shifts can be seen as part of an interconnected movement toward a finance-centered economy, and that the recent economic downturn can be viewed as one outcome of this broader movement.

The global economic downturn that closed the first decade of the 21st century revealed the centrality of finance to American society.

Problems with arcane securities traded by obscure financial institutions rapidly spun out of control, potentially putting global capitalism itself at risk. Like a loose thread that manages to unweave an entire sweater, the mortgage crisis evolved into a credit crisis and ultimately into an economic crisis that is rivaling the Great Depression of the 1930s.

The economic crisis in turn has forced us to grap ple with the fact that the United States is now a fully postindustrial economy. By March 2009, more

Americans were unemployed than were employed in manufacturing, and all signs pointed to further dis placement in the goods-producing sector.

The disappearance of manufacturing employ ment has corresponded to another change: large corporations have lost their place as the central

This article is largely based on my book Managed by the Markets: How Finance Reshaped America. Oxford, U.K.: Oxford University Press, 2009. 1 thank Garry Bruton and two anonymous reviewers for wise suggestions for improving the argument, and Lynn Selhat for expert editing.

pillars of American social structure. For most of the 20th century, social organization in the

United States orbited around the large corpora tion like moons around a planet. Understanding the workings of the corporation was the key to understanding our "society of organizations." Peter Drucker described this vision of society in 1949: "In the industrial enterprise the structure which actually underlies all our society can be seen.. . . It symbolizes the new organizing principle of an industrial society in the purest and clearest form, just as the perfect crystal in a mineralogical mu seum presents in perfect form the organizing prin ciple which the mineral always tends to follow in whatever shape it is found" (Drucker, 1949, pp. 28-29). But today, as this paper argues, corpora tions are no longer the organizing principle of

U.S. society. As a result, we are left to pick up the pieces of an economic crisis saddled with institu tions and a conceptual model of society suited for an era that has passed.

In this article, I describe how we got here and suggest some of the implications for management

Gerald F. Davis ([email protected]) is the Wilbur K. Pierpont Collegiate Professor of Management at the Ross School of Business, the University of Michigan.

Copyright by the Academy of Management; all rights reserved. Contents may not be copied, e-mailed, posted to a listserv, or otherwise transmitted without the copyright holder's express written permission. Users may print, download, or e-mail articles for individual use only.

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28_Academy of Management Perspedives_August

scholarship. The argument has many moving parts, and each component could be (and has been) the subject of a book-length treatment. The risk of such a 30,000-foot view is that important details are left out. But the parts are interlock ing?it is more like a novel than a short story collection. In short, I argue that the shift from an industrial to a postindustrial economy in the United

States was decisively shaped by finance, and that the ascendance of finance effectively ended the reign of the society of organizations. Societies of organiza tions still exist outside the United States, particu larly in East Asia. But I argue here that events

unfolded in the United States to favor finance at the

expense of organizations. The argument is as follows. As manufacturing

employment gave way to services and the largest employers shifted from firms such as GM to those such as Wal-Mart, the nature of the employment relation changed: The long-term mutual obliga tions of old were replaced by expectations of more temporary attachments. Changing employment ties were facilitated by the advent of relatively portable defined-contribution pensions, which provided a vast source of new investment for mu tual funds?particularly the half-dozen largest fund families that captured the bulk of these in flows. The growth of pension investment helped concentrate ownership in the hands of institu tional investors, which abetted an overriding cor porate focus on shareholder value as the ultimate measure of corporate and managerial performance. This orientation toward share price led corpora tions to restructure toward a flexible original equipment manufacturer (OEM) or network

model of corporate organization, which further encouraged more tentative employment ties.

At the same time, securitization (turning loans and other assets into tradable bonds) changed the nature of banking and finance, allowing more kinds of assets to be traded on markets and open ing new avenues for households to participate in financial markets. Households increasingly be came both investors (through pension plans and retail mutual funds) and issuers (through securi tized home mortgages, credit card debt, student loans, and insurance payoffs). As ties to particular corporate employers waned, ties to financial mar

kets waxed. The old model of the organization man was increasingly replaced by a model of the investor trading in various species of capital (fi

nancial, human, social). This model, it is safe to say, has failed, but management scholars and prac titioners are yet to fully adapt our theories or policies as business moves to its new incarnation.

The Arrival of Postindustrial Society In 1973 sociologist Daniel Bell published a book

titled The Coming of Post-Industrial Society: A Venture in Social Forecasting to speculate on the

implications of broad trends in economy and so ciety, primarily in the United States. One of the

most visible trends?and the source of the book's title?was "postindustrialism," defined most sim ply as a situation in which "the majority of the labor force is no longer engaged in agriculture or

manufacturing but in services" (Bell, 1973, p. 15). At the time he wrote the book, the United States was the only "postindustrial" society by this crite rion, with about 60% of its labor force in services; the vast majority of other countries' economies

were still dependent primarily on agriculture and natural resource extraction.

Today the transition to postindustrialism is nearly complete in the United States, as agricul ture and manufacturing account for less than 10% of the total labor force (and that percentage con tinues to fall). Figure 1 shows the relative propor tions of the nonfarm labor force engaged in retail and manufacturing and documents a continuous decline in manufacturing's share since the Second

World War, and an absolute decline in manufac turing employment since the late 1970s. The 21st century has seen an acceleration in this trend: Between December 2000 and May 2009, the United States lost 5.25 million manufacturing

jobs, or more than 30%.1 Troubling signs in du rable goods industries?particularly auto manufac turing, where two of the three U.S.-based manu facturers had fallen into bankruptcy?indicated that there was more bad news to come.

1 Labor statistics by industry and sector are available from the Bureau of Labor Statistics, http://data.bls.gov/PDQ/outside.jsp?survey=ce and http://www.bls.gov/news.release/ecopro.t01.htm. News releases on unem ployment are posted at http://www.bls.gov.

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2009 Davis 29

Figure 1 Percentage of U.S. Nonfarm Workforce in Manufacturing and Retail, 1939-2008

Manufacturing -~^~~ . Retail

Source: Bureau of Labor Statistics.

The loss of jobs in manufacturing prior to the downturn was often attributed to offshoring?the use of foreign contractors for production. There is clearly a great deal of offshoring, as the near disappearance of industries such as textiles dem onstrates. But a more fundamental source of lost

manufacturing employment is expanded produc tivity. The United States still leads the world in

manufacturing value added, with a global share of about 22%. Japan is number two, with 14%, and China trails with 11% (Hilsenrath & Buckman, 2003).2 But the manufacturing sector's productiv ity is such that relatively few employees are re quired. This became evident during the downturn, when many American manufacturers found that it was impossible to find anyone to lay off because their remaining employees accounted for such high revenues. The Wall Street Journal in March 2009 quoted the CEO of Parker Hannifin3 as saying: "Because of productivity gains, every one of my people carries more dollars in sales today [i.e., $200,000 per worker compared to $125,000 in 2000]. If I need to cut back, I have to cut back fewer people to achieve the same goal" ( Aeppel & Lahart, 2009). Like modern industrial agriculture, with which a comparatively minuscule labor force

2 Time series data on manufacturing value added by country is avail able at http://www.nationmaster.com/graph/ind_man_val_add_cur_us manufacturing-value-added-current-us.

3 Parker Hannifin is a manufacturer of motion and control technolo

gies and systems, providing precision-engineered solutions for a wide variety of mobile, industrial, and aerospace markets.

can produce all the food a nation needs, IT enabled manufacturing requires only a minimal workforce. Postindustrialism, in other words, is less about moving jobs around the globe than about the inevitable effects of productivity im provements in a capitalist economy (cf. Koll meyer, 2009).

One of the most visible manifestations of the

new postindustrial American economy is the change in the composition of the largest corporate employers. Table 1 lists the 10 largest U.S. em ployers in 1960, 1980, and 2009. In the two earlier periods, the list was dominated by a handful of large manufacturers, AT&T, and Sears. Many of these companies dated their origins to the wave of industrialization and consolidation around the

Table 1 10 Largest U.S. Corporate Employers, 1960-2009

Source: Compustat for 1960 and 1980; Form 10-K for 2009.

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30_Academy of Management Perspedives_August

turn of the 20th century. The typical workplace of these firms was both large and interconnected. Ford's famous River Rouge plant employed 75,000 workers when it was completed in 1927, and grew from there. A visitor to the Rouge in the late 1960s could have followed a shipment of iron ore from one end of the complex through its process ing into steel and ultimately into the body of a

Ford Mustang that rolled off the assembly line at the other end.

Large-scale workplaces facilitated labor organi zation, and for decades the largest firms were in the vanguard of progressive human resource man agement practices, often at the behest of unions or in an effort to forestall them. During the Second

World War, many large manufacturers attempted to skirt wage restrictions by offering expansive benefits packages to lure scarce labor. These "academy employers" set the standard for other employers with systems of internal labor markets, job security, health insurance, and retirement benefits, and thus had a substantial influence on the nature of the employment relation in the

United States (Cappelli, 1999; Jacoby, 1997). Today, the largest employers are overwhelm

ingly in retail, where wages, benefits, and tenures are substantially lower. The shift has been stark: By 2009, Wal-Mart employed about as many Americans (1.4 million) as the 20 largest U.S. manufacturers combined, and 9 of the 12 largest employers were retail chains.4 The wage and ten ure differences between the old guard and the new are striking. On average, production workers in motor vehicle manufacturing earned $27.43 per

4 I estimated the largest manufacturing employers using firms' annual 10-K statements, accessed at http://www.sec.gov. "Manufacturers" were those deriving most of their revenues from manufacturing, an increasingly uncertain determination. IBM would have been classified as a manufacturer

when most of its sales were in hardware such as mainframes, but it now

derives the large majority of its revenues from global services and software. GE derives roughly half its revenues from GE Capital Finance (36.7% in 2008) and NBC Universal (9.3%). Moreover, some firms report U.S. employment directly; others (such as GM and Ford) report North Ameri can employment?presumably including Canada and Mexico?while oth ers do not break out employment but do report revenues by geographic segment, allowing a rough approximation. Given these caveats, estimated

U.S./North American employment for the 10 largest manufacturers at year end 2008 are (in thousands) Boeing (162), Lockheed Martin (131),

Northrop Grumman (124), GM (116), Tyson (99), General Dynamics (92), Ford (89), United Technologies (78), Emerson Electric (70), and Pepsico (64). For comparison purposes, grocery chain Supervalu, number 10 on the list of largest employers, had 192,000 workers in 2008.

hour in February 2009, while those working in general merchandise retailing made $10.78. The Current Population Survey for January 2004 re ported that the median employee in auto manu facturing was 44 and had been with his current employer for 8 years, while the median worker in electrical equipment and appliance manufacturing was 46 and had 10 years' tenure. Retail employees, in contrast, averaged three years' tenure with their current employer, even though they were 38 years old on average (see Davis, 2009, p. 201 ff.).

In a retail economy, workplaces are both smaller and less overtly interdependent than in

mass-production manufacturing. Even Wal-Mart Supercenters, perhaps the largest organisms in the retail ecology, typically employ fewer than 350 people. Yet like the auto assembly line, retailers are susceptible to a postindustrial form of Taylor ism thanks to the pervasive use of information and communication technologies (ICTs) such as "workforce management" software systems. These systems automate the time-and-motion studies of Frederick Taylor's Scientific Management, track ing the minute-by-minute productivity of sales associates and monitoring how many milliseconds it takes cashiers to scan each SKU in a grocery cart. Managers in remote locations can monitor, compare, and discipline every salesperson in a retail chain with the aid of real-time standardized

comparison charts and discreet wireless headsets. Scheduling can be automated to reward the pro ductive with prime hours and punish the weak with less-desirable opening and closing times (O'Connell, 2008). With less need for direct su pervision and middle management, such retail outlets might optimistically be called a "flat" hi erarchy. But the flip side of a flat hierarchy is limited room for advancement beyond the sales floor.

Large-scale employers that provided job secu rity, career mobility through job ladders, and gen erous health and retirement benefits seem to have

been artifacts of the corporate-industrial age in the United States. Many of the so-called academy employers have explicitly renounced the former practices that tied employees to their firms, through freezing company pensions and phasing out retiree health benefits. General Motors, for

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2009_Davis_31^

instance, notified its white-collar retirees in July 2008 that in the new year they and their depen dents would no longer be covered by GM-fi nanced private health insurance because it had become too costly. Instead, they would be com pensated with a $300 increase in their monthly pension checks (Bunkley, 2008).

GM was simply following the path blazed by some of its peers. GE's former CEO Jack Welch earned the nickname "Neutron Jack" in the early 1980s by shrinking GE's payroll of ^0,000 by

more than one-quarter. In 2001, Welch summa rized the new employment compact he had helped usher in for a group of Harvard MBA students: "If there's one thing you'll learn?and dot-coms have learned it in the last year?is no one can guaran tee lifetime employment.. . . You can give life time employability by training people, by making them adaptable, making them mobile to go other places to do other things. But you can't guarantee lifetime employment" (Lagace, 2001, p. 1). And if corporate employers have abandoned the vestiges of long-term employment as anachronistic, so too have employees. Contemporary workers are too sophisticated to invest in developing firm-specific skills for a company that might go from good to great to liquidation, as Circuit City did. In a service economy, it's best to keep one's skills suf ficiently generic so that one is "mobile to go other places to do other things"?say, selling sweaters instead of cell phones.

The result of the shift from manufacturing to service, in short, has been a disaggregation of employment in which the attachments of workers to particular firms is more tenuous, expected ten ures are shorter, and workplaces themselves are often on a smaller scale. The traditional rationale

for maintaining long-term employment relations was in part to encourage the development of in vestments in firm-specific skills. Greater employee mobility thus goes hand in hand with lower firm specific investments.

The Rise of Institutional Investment The disaggregation of employment that accom

panied postindustrialism had another, less ob vious effect, namely, the promotion of greater

aggregation in corporate ownership by financial

intermediaries. This happened through a change in pension financing that channeled a large por tion of household savings into a very small num ber of mutual fund complexes, which ultimately ended up holding concentrated ownership posi tions in hundreds of U.S. corporations.

Most companies that provided pensions prior to the early 1980s did so through so-called "de fined-benefit" plans that paid retirees benefits ac cording to their tenure with the company. In a defined-benefit plan, the employer is responsible for creating an investment pool sufficient to fund the stream of pension income promised to its employees when they retire. Defined-benefit plans provided employees strong incentives to spend their careers with particular employers. With the advent of the 401 (k) in the early 1980s, however, the large majority of employers that still provided pensions began a shift toward funding relatively portable plans in which employees and firms both contribute to an individually owned pension that can be rolled over if the employee changes jobs. These "defined-contribution" plans effectively transferred risk from employers to workers, who

were now responsible for making sensible invest ment choices on their own behalf from among the options offered by their employer (see Cobb, 2008; Hacker, 2006). Although employers were

motivated in part by cost considerations, the ef fect was to loosen the ties that bound employees to firms, further reinforcing the trends described in the previous section.

The growth in defined-contribution pension plans helped fuel the growth of the mutual fund industry. Those 401 (k) plans most commonly in vest in mutual funds. Some plans offer options other than mutual funds?Enron famously matched its employee contributions with Enron stock that employees were forbidden to shift to other investments?but mutual funds are perhaps the dominant destination for employee contribu tions. The mutual fund industry thus grew enor

mously during the 1980s and 1990s, both through 401 (k)s and through retail investment, as house holds found mutual funds to offer better returns

than other savings vehicles. The Investment Company Institute reported that there were 564 mutual funds in 1980, 3,079 in 1990, and 8,155 in

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32_Academy of Management Perspectives_August

2000. Assets under management increased from $135 billion in 1980 to $12 trillion in 2007. And where only 6% of households were invested in mutual funds in 1980, 45% were in 2008. Inflows were particularly pronounced in the 1990s: Ac cording to author and historian Steve Fraser: "More was invested in institutional funds be tween 1991 and 1994 than in all the years since 1939" (Fraser, 2005, p. 583). The bull market and investment by households were mutually reinforcing during the subsequent decade, as retail investors are typically "momentum inves tors" (putting money into the stock market in the wake of price increases). By 2001, according to the Federal Reserve, 52% of households owned stock?the highest proportion in U.S. history?and most did so directly or indirectly through mutual funds.5

The broad spread of stock ownership among the American populace left some commentators rapturous about the new "democratization of own ership" and its potential benefits (e.g., Duca, 2001; Hall, 2000). An electorate attuned to the financial markets had incentives to become more

economically literate and might be more readily persuaded by fiscal arguments that appealed to their interests as shareholders. But the democra

tization of ownership is clearly a representative democracy, channeled through intermediaries. Fewer than one in five households owned shares

directly in companies in 2007, about the same rate as three decades earlier. Moreover, the value of the average family's portfolio in 2009 was under $23,000 (see Bucks et al, 2009, p. A27). Stock ownership was broad but not deep among the

American populace. The real significance of this movement was in its effect on the structure of corporat

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