Asymmetrical Information

Twentieth Century Motor Company, anyone?

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"...there was something that happened at the plant where I worked for twenty years The Twentieth Century Motor Company.

It was when the old man died and his heirs took over. ... They let us vote on it too, and everybody -- almost everybody -- voted for it ....
The plan was that everybody in the factory would work according to his ability, but would be paid according to his need. ... they made it sound like that anyone who'd oppose the plan was a child-killer at heart and less than a human being.

... Do you know how it worked, that plan, and what it did to people? Try pouring water into a tank where there is a pipe at the bottom draining it out faster than you pour it in and each bucket you bring breaks the pipe an inch wider, and the harder you work the more is demanded of you, and you stand slinging buckets forty hours a week, then forty-eight, then fifty-six -- for your neighbor's supper -- for his wife's operation -- for his child's measles -- for his mother's wheelchair -- for his uncle's shirt -- for his nephew's schooling -- for the baby next door -- for the baby to be born -- for anyone anywhere around you -- it's theirs to receive, from diapers to dentures -- and yours to work, ... with nothing to show for it but your sweat, with nothing in sight for you but their pleasure, for the whole of your life, without rest, without hope, without end ...

Ayn Rand, Atlas Shrugged

Hm. Those "labour-controlled firms" sound remarkably like the firms who employ all our millions of public-employee union members.

I'm for the "labour-controlled firms". The evil corporations who got big tax breaks under Reagan and Bush need to give the tax cut to the employees and unions will make sure that happens. This way the greedy fat cats will be under control. By the way, who needs more than $1,000,000 in salary anyway? What could anyone NEED with a million in salary? I think anyone who earns more than a million in salary should have it confiscated to help pay for the poor. I'm tired of the rich getting richer and the poor getting poorer. Unions and confiscation are the way to go. :)

I agree, Pat. Actually, I was going to say, who needs more than $100,000? What could anyone NEED with a $100,000 in salary?? The vast majority of the people in this country get by on much less - why should a select few enjoy luxuries most of us can't afford? I'm sick and tired of watching the hundred-thousand-aire next-door fawning over his plasma TV and his new BMW, while I'm making chump change cleaning toilets.

Every CEO in the country should be stripped naked, hooded, and forced to pile on top of one another to form a pyramid.

Euro-weenie-lover that I am, allow me to note that Germany's "Mitbestimmung" system, in which labor holds seats on executive boards and helps make decisions, was the envy of the world for decades before Germany went into the toilet in recent years. Not only was labor unrest minimal, but (West) Germany's economy enjoyed fantastic growth rates.

Now it turns out Germany needs, more than anything, massive labor-market reform to make it easier to fire people. But still and all, it's worth remembering that stakeholder systems have shown promise in the past, not just in theory but in many years of practice.

You know what really sucks about the Left's adoption of language tricks? It's not enough to just say, "that is a stupid idea". In fact, that just makes you look unwilling to participate in the language game and be a team player. No, now you have to do an in-depth study to discredit it. No sh*t that when you against the profit and growth motives to further some other agenda that you profit less and grow slower. Why do I sometimes feel like I am the only one who can see that as a tautology?? Duh!! These are second place values, now don't expect to be competitive in these values against firms that take them seriously. Since they are also the fuel for everything else, don't expect to be able to do anything else if you don't pay attention to these. Don't expect grandma and grandpa, no matter how Progressive they are, to bet their retirement on your stock if your goal is to be a good guy rather than make them money!!

Yes, indeed. I remember when George said that no one needed more than $15,000 a year. That would have allowed me to quit work in August rather than pay 100% tax on the rest of my income, almost enough to get my vote.
I also believe it was George who said the middle class didn'it need a tax cut because they would just use the money for another TV set "...at the expense of the public sector..."

I haven't read the paper yet, and I will if I find time today, but while I agree with the general point Mindles, such studies usually have an overriding flaw. Companies which cede a lot of control to labor are generally firms which are in some sort of difficulty, so it isn't surprising to see them do less well on average. Statistically, it's damn hard to find a data set which controls for this sort of backward causality. And, to respond to the point above, it really isn't clear why firms in which labor has a strong ownership stale should do worse. Holding constant mangement skill (another almost impossible statisdtical task) it's hard to argue that making the shareholders more informed about their company (which they are if they work there)makes the company perform worse. indeed, if you believed that, why would you encourage (force) management to hold shares?

I haven't read the paper yet, and I will if I find time today, but while I agree with the general point Mindles, such studies usually have an overriding flaw. Companies which cede a lot of control to labor are generally firms which are in some sort of difficulty, so it isn't surprising to see them do less well on average. Statistically, it's damn hard to find a data set which controls for this sort of backward causality. And, to respond to the point above, it really isn't clear why firms in which labor has a strong ownership stake should do worse. Holding constant mangement skill (another almost impossible statistical task) it's hard to argue that making the shareholders more informed about their company (which they are if they work there)makes the company perform worse. indeed, if you believed that, why would you encourage (force) management to hold shares? We generally think people perform better if they have more of a stake in the outcome. Labor already has a large stake irrespective of share ownership, but it is an empirical question whether or not they would do better with a shareholding interest as well.

Jonathan,

It is extremely easy to explain. Companies where labor is part of management become very risk adverse. Such companies will not innovate, will not conduct R&D, and definitely will not transform themselves of a routine basis. Such companies will do everything they can to maintain the status quo.

The only way such companies can work is if every company in that industry is organized the same way and the industry has large barriers to entry. A risk adverse compnay could survive in that situation but at no other time.

Every CEO in the country should be stripped naked, hooded, and forced to pile on top of one another to form a pyramid.

Oh so you’ve been to a few board meetings, I see . .

First, sorry for the double post before. But Superdestroyer, your answer doesn't make a lot of sense. If risk-averse companies don't survive, then why would the workers sow the seeds of their own destruction by taking their risk-aversion to a whole new level? Their ownership of the company, remember, has given them more incentive to make profit... we believe that, right? Sure, workers are risk-averse... so are some investors. I'm not saying you're wrong, but the argument that worker ownership will drive companies into the ground just isn't as simple as you make it out to be. Again, look at my last point... if it is good for management to own stock (and just about everyone thinks so) and if we don't think that more ownership turns them more risk-averse, what's different about the other workers?

Haven't read the paper either, though I did read Bainbridge's post.

Jonathan may have a point about the underlying state of the company when labor gets to finally become a stakeholder. Also, Contributor A is right to point out the growth rate of Germany until the 90's.

However, extrapolating from Europe in general, the companies which do have a high labor ownership contingent probably do innovate somewhat less, produce fewer new jobs, and bring less sharholder returns. Like Europe, the worker-owners of these companies may value job security and other benefits over high growth. Job security, if you are an employee/owner, may pay enough dividends to make up for the lower overall return on your stock in the company.

I guess my last post did not have much of a point; more or less, I was trying to say, "So what?" (Not that Jane particularly makes a value judgment for or against stakeholder capitalism).

If the pareto efficient frontier for a company to indeed maximize all stakeholder value (employee, customer, sharholder) includes, say, less growth but more job security than one maximizing sharholder value alone, that would not intrinsically be a bad thing (unless you are short term sharholder with immediate growth needs).

This is just the question of acceptable risk vs. reward. Within a company, if the decision maker is not likely to lose their job even if things go badly, they are going to take more risks than one that is, or identifies better with those that will. Fiduciary decisions pose similar tradeoffs -- do I put this money that I won in Vegas into CDs, or into the Nasdaq? What about this retirement account my mother asked me to manage for her? What about this money a random client gave me? There is some agreement on optimum behavior in the fiduciary case, so what about the corporate case? It's not meaningful to consider it from a single-company perspective. Taking the simplest possible view from a macroeconomic perspective, if net societal costs of job transition for one employee are X, where is the optimum point on the risk curve for corporate governance so that society benefits the most? But how do you measure the latter? GDP? How about the societal costs of transition? That's where the differences are likely to lie, even if you ignore subjective costs.

For example, did the portion of the cost savings realized by GM through layoffs in Flint Michigan that stayed in the U.S. outweigh the costs of what happened in Flint (crime, decreased education levels, opportunity losses due to inefficiencies in labor movement, etc.)?

"If risk-averse companies don't survive, then why would the workers sow the seeds of their own destruction by taking their risk-aversion to a whole new level? Their ownership of the company, remember, has given them more incentive to make profit..."

Shareholding workers are workers first, shareholders (distant) second. We would expect their interests as workers to dominate their interests as shareholders. If you could eliminate the companies R&D budget, expand at a slower rate, and take fewer risks, thereby reducing the company's competitive advantage but freeing up enough money to give you (and everyone else) a substantial pay raise, would you vote for it?

I would predict that "stakeholding" workers would use their partial control in this manner. Their shareholders' incentive to maximize profit is quite simply eclipsed by their workers' incentives to improve their pay, benefits, and conditions. Furthermore, as company insiders without perspective or information of the firm's operations, their perspective will be distorted. They won't be inclined to take risks or invest heavily because from the workers' perspective those things never seem to pay off, particularly not compared to what could have been done with that money in the short run.

Not only will a worker who is a shareholder not take risks, he will take short term gains that hurt other. Look at how unions handle cut backs. If a unionized company needs to reduce payroll costs by 10% it can either lay people off or take pay cuts. Unions always support layoffs. Why? Because the people left, all still union members will be happy to keep the same level of pay, while those laid off are no longer union members and thus are not around to complain.

The example of Southwest Airlines may indicate that a straight-forward profit-sharing agreement with a labor force is the best way to align worker's interests with management's, owners', and society's.

stakeholder company's results depend highly on the type of company, its size, and how stakeholders hold their stakes...

individuals who hold the stock tend to be more loyal and work harder for the company, especially if they are high-value, high-importance workers or if their shareholdings represent a significant proportion of their net-worth or may do so in the near future.

Law firms, accountancies, consultancies, and other professional services firms where senior firm members own substantial stakes in the firm perform very well and can derive heroic efforts from their employees. The future opportunities to become/increase shareholdings produce heroic efforts from junior employees (hello 100 hour work weeks on wall street, at white shoe firms and in consulting & technology).

Old line manufacturing firms, with lots of low value "hourly" workers (i.e. not recent grads who you can bill out at $300/hour in consulting or law...) have more problems, as individuals have less control over results and their production is more dependent on others (you staying till 2am isn't effective if the rest of the line goes home)

You get negative value when the holdings are through a union, whose executive's interests may not be the same as your workers (more morried about how they appear to the rest of the industry rather than saving the jobs of the people that work for your firm), who are apt to have a low opinion of shareholder capitalism, and are likely to myopically focus on net benefits to employees (again, usually as a function of improving negotiating strength at other companies). The airline industry has even seen unions on the board force the ouster of executives that were too cost conscious and who had the best chance of turning the company around but pissed off the unions. Air Canada recently lost a bailout after the unions refused to go along with it as the execs would have gotten too much money, screwing over everyone else and the employees just so that the union leadership would look tough in other negotiations.

but, this isn't a reason to opppose giving employees stakes, it's a reason to oppose this evil collectivism that forces them to work through a union to express their will

"Every CEO in the country should be stripped naked, hooded, and forced to pile on top of one another to form a pyramid."

I think this suffers from a sqaure-cube law failure. Maybe just the CEOs of the top dozen companies...

Bainbridge must work for the department of obvious conclusions.

I mean, who wou'da thunk that if you managed a corporation to generate the best aggregate outcome for investors, and labor, that this " often pushes corporate policies away from, rather than towards, shareholder value maximization."

Of course, this moves away from "shareholder value maximization". That's what it's designed to do. :rolleyes:

Now, the real question is do we get better outcomes for the society as a whole when we do stakeholder capitalism?

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