New World, New Rules: The Changing Role of the American Corporation. - Review - book review

Business Economics, April, 2000 by Norman R. Augustine

Marina v.N. Whitman, Boston, MA: Harvard Business School Press, 1999, 161 pp., $29.95 hardcover.

"The revolution that this book explores is the transformation of the large American corporation from the secure, paternalistic, and globally dominant organization of the 1950s and 1960s to the lean, mean, and nimble global competitor of the 1990s." With these words, author Marina Whitman begins her fascinating review of the evolution of American business during the latter half of the past century.

Indeed, it would be hard to confuse the Pennsylvania Railroad of the 1950s with the General Electric of today, and even harder to relate either to "business.com" of 2010. As competitors to American firms popped up in recent decades, not just down the street but around the globe--televisions in Taiwan and software in Bangalore--market pressures intensified. Moreover, relationships that had long come to be accepted among companies and suppliers, employees and corporations, boards and managements were turned upside down. The unwritten pact between employees and corporations that had promised long-term job security in exchange for corporate loyalty could not be sustained in this new environment. Even IBM began to suffer reductions in its workforce, while Japanese firms downsized and venerable names of American business disappeared altogether. In fact, in the 1980s one of the surest ways to ensure positive media coverage as well as a boost on Wall Street was to announce a large layoff. Closing the whole plant was even better. Employee loyalty was one of the first casualties of this mixed-up way of doing business.

In her examination of these and a number of other related phenomena, Whitman has provided an extraordinarily well-documented assessment of the tectonic forces that pummeled American corporations in recent decades. She has considerable firsthand experience as a major participant in the American business scene. She was a vice president and group executive of the General Motors Corporation; a member of the President's Council of Economic Advisors; a member of the Board of Directors of major corporations such as Procter & Gamble, Alcoa, and Chase Manhattan; and--in recent years--as Professor of Business Administration and Public Policy at the University of Michigan. This experience has afforded her the opportunity to think through many of the issues that those caught up in managing the day-to-day affairs of a business stuck on fast-forward too often take for granted. And in keeping with her background, Whitman sees both the forest and trees, addressing changes that have affected the American corporation internal ly and externally, top to bottom.

Referring to Boards of Directors, she notes that "specific skills. . . are replacing social standing and personal friendship with the Chairman as criteria for board membership." The profound impact this one change has had on the American corporation is now widely recognized, but this was not always the case. Warren Buffett states the problem that had prevailed with regard to selecting directors in the following terms: "CEOs (who are usually Chairmen as well) were more prone to choose Cocker Spaniels than Dobermans." The result of this new paradigm has been the emergence of a previously unheard of phenomenon: The Board fires the CEO. In fact, the chairman of the corporation for which Whitman worked became one of the early casualties of the new trend that has now come to be known as the Boardroom Revolution.

Moving to the other end of the corporate ladder, the author states what should have been obvious to America's managers in the days of the Hudson Bay Company as well as in the era of Amazon.com . . . but sadly was not. Namely, "workers represent assets rather than simply costs." Whitman discusses the still evolving social compact between workers and their employers, drawing the important distinction between employability security and employment security; the importance of education in reducing earnings inequalities, and the declining impact of labor unions in this entrepreneurial age.

She also observes that too many politicians seem to have missed the point that as difficult as it is to have a corporation without employees, it is equally difficult to have employees without having employers.

This seemingly innocuous observation could be said to set the groundwork for the book's discussion of regulatory reform, wherein it is noted that public opinion surveys in 1964 indicated that three-fourths of Americans trusted their government to "usually" do the right thing. By 1996, however, that figure had dropped to one-fourth. This decline in confidence, coupled with the globalization of markets and the resulting intensifying of competition, has created a need to re-examine the role of regulation in business. In recent years, the gradual broadening of antitrust policy to at least recognize the existence of foreign suppliers as well as domestic ones has been but one outcome of this new calculus--yet it reflects only the beginning of the regulatory reform Whitman's work suggests.