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In 2000, BusinessWeek ran a cover story called "Too Much Corporate Power?" It said that even though Big Business had "helped create unprecedented prosperity, most Americans think corporations have excessive influence over their lives."
Since then, the image of Big Business has only gotten worse, what with the misadventures of Enron Corp. and WorldCom Inc. and the erosion of "unprecedented prosperity." In some respects, big companies are more powerful than ever -- consolidating control of TV and radio, hospitals, and agribusiness; pushing their brands into classrooms; exerting influence in Washington.
But there's a surprising twist to the story of corporate power: In some important ways, corporations aren't powerful at all. The owners of corporations are forced to share their power with two essential interest groups: their own executives and their customers. Understanding their peculiar blend of power and weakness is the key to making the corporate system work better.
What is a corporation, after all? It's nothing but a legal entity formed by people who pool their money to start a business and hire others to run it. The shareholders, represented by the board of directors, could be powerful if they called the shots -- ordering around the chief executive, adopting or rejecting the latest technologies as they choose, increasing prices arbitrarily, and getting what they want from the government.
By this standard, though, many corporations are pitifully weak. The shots are called by their top executives, whose power is obvious in their ability to command lavish pay. Executives have the strongest hand in businesses like financial services where they themselves -- and the ideas locked in their heads -- are the principal assets. A preliminary compilation of the nation's 50 highest-paid executives in 2002 by Standard & Poor's COMPUSTAT as of mid-March included four executives of Lehman Brothers (LEH
), three each from Citigroup (C
) and Bear Stearns Companies (BSC
), and two from Morgan Stanley (MWD
).
For more evidence that insiders rule most corporations, consider the accounting scandals that broke out last year. Employees of Enron, WorldCom, and a host of other companies reaped big performance bonuses, having successfully concealed the companies' true financial situations from their putative bosses, the shareholders.
Corporate weakness has its benefits. It's good for well-placed employees, of course. It's also good for consumers, who win when corporations desperately seek their favor. Where competition is vigorous, even the largest companies are slaves to market forces. They must charge low prices, respond to changing consumer tastes, and embrace new technology as quickly as possible -- or fail. Think about it: Who really has more power, giant Ford Motor Co. (F
) or Ford's customers, who can buy a Lexus or a Jeep? Even mighty Microsoft Corp. (MSFT
) is being pressured by competition from the Linux operating system. And it has been decades since IBM (IBM
) could delay new generations of mainframe computers to milk profit from the old ones.
Those who fear corporate power often compare corporations' revenue with gross domestic product data to conclude, say, that Wal-Mart Stores Inc. (WMT
) is bigger than Denmark. But the comparison is bogus. Wal-Mart may have a lot of revenue, but as a retailer, it simply sells products made by others. Even a manufacturer like General Motors Corp. (GM
) buys parts from others. In contrast, Denmark's GDP excludes whatever the country buys from others -- it counts only the output of the Danes themselves. Employment is a better measure of corporations' economic heft. Yet despite history's biggest merger wave, employment of the top 100 companies, as measured by market value, rose just 10% from 1991 to 2001, according to S&P COMPUSTAT.
Large corporations do exercise considerable political power. But even in politics, their power can be blunted, because on many issues corporations oppose each other's interests. For instance, the steelmakers' win on tariffs was a loss for the steel-buying auto makers. In a recent Federal Communications Commission decision, the regulatory battle between local phone companies and long-distance carriers ended in a draw.
James K. Galbraith, the liberal University of Texas economist, argues that when corporations are weak, institutions like the labor movement suffer, because narrow profit margins leave less money for unions in pay negotiations. He urges his fellow liberals to focus less on capital vs. labor and more on the haves vs. the have-nots -- the haves being insiders who extract wealth from corporations and the have-nots being everyone else.
Efforts by the dispossessed to rein in corporations can backfire. The upshot is often re-regulation that strangles competition, raises prices, and entrenches insiders ever more deeply, say University of Chicago Graduate School of Business economists Raghuram G. Rajan and Luigi Zingales in a new book, Saving Capitalism from the Capitalists. Yes, insiders often get more than their share. But the solution is more complicated than going after "powerful corporations."
MARCH 24, 2003 |
Copyright 2003, by The McGraw-Hill Companies Inc. All rights reserved.
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