MAY 1989 - VOLUME 10 - NUMBER 5
B O O K R E V I E W
Investing In the People
Managing By the Numbers is a stinging indictment of absentee ownership and professional management in the United States. The book traces the development of a new corporate culture in which classroom trained "professionals," lacking hands on experience, have abandoned the core values necessary for sustaining a dynamic business sector. Coming at a time when American industry is widely thought to have lost its competitive edge, Managing by the Numbers offers a valuable analysis of the roots of failing U.S. industry.
Absentee ownership is defined as more than just geographical distance, "but also a psychological and social distancing from the rest of the organization," which blinds management to the human element involved in any operation. In addition, it entails "an inability to understand and appreciate the fine, but often significant points of product design, manufacture, and distribution." This ignorance is attributed to the quick profit ethos which dominates professional management. Supporting this argument is a wealth of case study material from the firm, community and industry level and by much recent research on employee ownership forms and patterns.
The information presented leads to a critical appraisal of the role management professionals play in "managing by the numbers," and a call for a renewal of values and productivity through new business forms and a new "culture of ownership." The dynamics of the decline in the quality of ownership are spelled out in three case studies involving: a family business, the "Brown Corporation", a community, Jamestown; and a corporation, USX, in the context of the steel industry.
The story of the transformation of the "Brown Corporation" from a family firm created by "John Brown Sr." in 1889 (names were fictionalized) to a larger corporation run by professionals largely outside the original community of "Orangeville," introduces readers to the concepts of psychological and technical distance. As the company grows and professionals with no connection to the community are brought in, workers and management become increasingly alienated. New managers are more circumscribed by departmental boundaries and less familiar with the technical knowledge which led to the development of the company. As the psychological distance increases, workers and managers become more isolated and less attached to the company. By destroying a sense of common interest, this process weakens the bonds between the company and the local community.
The growing detachment of management and the increased emphasis on short-term financial goals make the workers and the community more vulnerable to economic downturns. "The older people feel less involved, particularly the hard working people," says an older employee of the company quoted in the book. "They don't feel that they can be involved and don't like some of the changes. They believe people are now seen as necessary casualties in management's pursuit of their objectives. They see themselves as innocent bystanders, incapable of controlling their actions and being dominated by a group of individuals whose motives they don't understand."
Professional management at the "Brown Corporation" did increase profits but at the expense of employee loyalty and corporate responsibility to the community.
The case study of the Jamestown, N.Y. community emphasizes the turbulence and labor conflicts accompanying the transition from owner-operated businesses to absentee control by larger corporations and professional management. Although the repressive labor policies of the local owners of the furniture businesses in the community had given Jamestown the reputation of being a bad labor town, the firms which hired professional managers and which were owned by outside corporations experienced longer and more intense strikes than the locally owned firms.
Class divisions increased in the community as social and economic lines between management and labor hardened and mobility decreased. As with the "Brown Corporation's" transformation a loss of a sense of common involvement weakened the ability of the community and companies to face economic adjustments.
The case study of USX and the steel industry reveals the negative aspects of professional management, focussing on how assets are juggled, while research, development and productivity are neglected. The growth in psychological and technical distance within the steel industry goes back to the turn of the century and the break-up of craft-centered union control exercised by the Amalgamated Association of Iron, Steel and Tin Workers. With the creation of U.S. Steel in 1901 by J.P. Morgan and Andrew Carnegie, "the industry moved away from an involvement in local community affairs and a commitment to regional issues toward an exclusive concern with abstract business equations." In the postwar era, foreign competition and poor adaptability have taken their toll on the U.S. steel industry. Since 1955, GNP has doubled, while steel production has risen only 17 percent. Over 140 mills have been closed and the number of steelworkers has dropped by 50 percent.
USX management strategies in the past 10 years have focused on rearranging the company's assets rather than rebuilding the company internally. "U.S. Steel's trade record of not investing in its steel enterprises is an intriguing case of capital management," write the authors. "Corporate Chairman David Roderick promised the company would act aggressively to revitalize its operations, generating a spirited public debate on the firm's sense of social responsibility. Five years later, instead of capital improvements, there were primarily mill closings." Production has steadily declined and factories continue to be shut down.
Furthermore, USX used federal tax breaks intended for modernization in an effort to buy Marathon Oil in 1981, clearly violating the spirit of such governmental initiatives. Another example of mismanagement occurred when the company closed part of Pennsylvania's Fairless Works, eliminating area jobs, while importing British steel to replace production at Fairless. USX has devoted its energies to dismantling and selling off operations in order to post an immediate profit, instead of trying to solve its real productivity and efficiency problems. The authors make a connection between this strategy and USX chairman Roderick's lack of experience in engineering or operations and his myopic financial management perspective. Under his stewardship, long term-growth has been sacrificed for short-term financial advantages.
Managing by the Numbers describes the causes of decline in American industry and offers a solution to that decline: a transformation of corporate ownership from faceless shareholders and bottom line managers to employee ownership and participation. The book draws extensively on research conducted over the past decade into employee ownership plans and on the experiences of a variety of those programs. Examples of both successful and unsuccessful employee ownership schemes show that it is not a panacea for all that ails U.S. industry, but an option which may meet needs in specific situations.
The authors discuss the potential problems of a narrow approach to sharing financial ownership of a company. In particular, the history of Peoples Express, Allied Plywood and Digital Equipment illustrates the importance of management values and the particular nature of a company's "ownership culture." If employee stock ownership is not accompanied by a knowledge of the responsibilities of that ownership, the result can be a disastrous (as in the case of Peoples Express). That company was torn apart by the conflict between the financial interests of employees, autocratic direction from its president and competition from the bigger airlines.
On the other hand, ownership of Allied Plywood was successfully transferred by its owner and founder, Ed Saunders, to an employee group, thereby saving the company from being sold to a larger company. This smooth transition was possible because the employees were given the opportunity to learn about the financial side of the company, while gradually assuming ownership responsibility. Still other examples of successful transformation of ownership are the cases of Lincoln Electric and Digital Equipment Co.
The information and analysis in this book reaffirm the values that historically have given rise to America's economic growth: enterprise, innovation and conviction. The authors present a persuasive case for new forms of employee ownership and participation, showing that such plans can foster productivity and growth in cooperation with workers and their communities rather than in suite of them.