Why big businesses are bad for business
I recently gave a talk at a big corporate conference to hundreds of delegates, without exception middle-managers from large companies. I realised as I spoke to the audience that my words about entrepreneurship were irrelevant to them – even offensive. For I was preaching the gospel of independence, freedom and risk-taking, while they were entombed in the cosy, airless coffin of big business. All of them were life-long employees of huge institutions and, to them, the struggles of running your own business were totally .
The more I thought about this disconnect, the more I realised that
all too many executives in large public companies actually have more in
common with various arms of government than they do with entrepreneurs and start-ups.
I used to believe that the great divide was between the public and the
private sector: between state and commercial interests. But in truth the
real difference is between giant and small organisations, whether they
are for profit or not; between huge bureaucracies and owner-run outfits.
Government and big business typically have close, sometimes unhealthy relationships. Corporates pay for lobbyists and
lawyers to influence legislators and regulators; politicians seek
non-executive directorships and consultancies with large banks and
suchlike when they retire from public office. Such organisations as
defence companies, builders, IT contractors, security firms and others
are vast suppliers to the public sector. Their skill set is not
innovation, but contract negotiation: they make money if they persuade
the civil servants and regulators to agree price increases.
As parts of the public sector were privatised, such as the utilities, they acquired the profit motive – but never adopted the flexible mentality of an entrepreneurial business. Most are near-monopolies, and behave much more like arms of government than the sort of companies I have owned or founded. Often their staff are unionised, with all the group-think that accompanies such burdens. Sometimes they jazz up their adverts, logos and branding, but such efforts are like putting lipstick on a pig.
In companies I own and help direct, the highest-paid executive earns between five and ten times what the lowest-paid staff member earns – and mostly, as founders, they are risking their capital, too. By contrast, in corporate empires, the CEO often earns 50 or even 100 times what the basic workers are paid – and the most they risk is losing their job. Such massive inequality leads to profound dysfunction. It arises because the rewards systems in large firms are broken. Boards become obsessed by governance, bosses become convinced of their genius, while staff feel minimal loyalty. Large businesses tend to be mature and to focus on cost-cutting, outsourcing and automation. Frequently they do not generate additional jobs, but destroy them.
I don’t believe in big government, and I’m not sure about big business. Sometimes their relationship reminds me of the finale of George Orwell’s Animal Farm, where the revolutionary pigs become as corrupt and brutal as the humans. “The creatures outside looked from pig to man, and from man to pig, and from pig to man again; but already it was impossible to say which was which.”
Of course certain sectors require huge amounts of capital, such as car manufacturing or mining. Others, like water supply, have to be monopolies. And global enterprises can achieve economies of size that they pass on to the consumer. So I readily accept that big business can be beneficial to society – and is a fact of life. But I still hope that one day the relentless tide of consolidation is reversed, and both government and industry revert to a more human scale.
lukej@riskcapitalpartners.co.uk
The writer runs Risk Capital Partners, a private equity firm, and is chairman of the Royal Society of Arts. He is the author of ‘Start It Up’
© Copyright The Financial Times Limited 2011.After all, most large corporations are international. They are likely to be publicly traded and owned by diffuse shareholders, themselves pools of institutional money managed by hired hands. Like public bodies, they suffer from the agency problem and institutional capture by managers. At least in founder-run firms, you know who the boss is. Moreover, private firms are largely local, serving customers in their immediate communities, unable to take advantage of tax manoeuvres, which the likes of Google exploit so ruthlessly. Private firms generally have loyalty to their home country, whereas multinationals are the commercial equivalent of non-doms – everything has a tendency to migrate to the lowest-cost location.
As parts of the public sector were privatised, such as the utilities, they acquired the profit motive – but never adopted the flexible mentality of an entrepreneurial business. Most are near-monopolies, and behave much more like arms of government than the sort of companies I have owned or founded. Often their staff are unionised, with all the group-think that accompanies such burdens. Sometimes they jazz up their adverts, logos and branding, but such efforts are like putting lipstick on a pig.
In companies I own and help direct, the highest-paid executive earns between five and ten times what the lowest-paid staff member earns – and mostly, as founders, they are risking their capital, too. By contrast, in corporate empires, the CEO often earns 50 or even 100 times what the basic workers are paid – and the most they risk is losing their job. Such massive inequality leads to profound dysfunction. It arises because the rewards systems in large firms are broken. Boards become obsessed by governance, bosses become convinced of their genius, while staff feel minimal loyalty. Large businesses tend to be mature and to focus on cost-cutting, outsourcing and automation. Frequently they do not generate additional jobs, but destroy them.
I don’t believe in big government, and I’m not sure about big business. Sometimes their relationship reminds me of the finale of George Orwell’s Animal Farm, where the revolutionary pigs become as corrupt and brutal as the humans. “The creatures outside looked from pig to man, and from man to pig, and from pig to man again; but already it was impossible to say which was which.”
Of course certain sectors require huge amounts of capital, such as car manufacturing or mining. Others, like water supply, have to be monopolies. And global enterprises can achieve economies of size that they pass on to the consumer. So I readily accept that big business can be beneficial to society – and is a fact of life. But I still hope that one day the relentless tide of consolidation is reversed, and both government and industry revert to a more human scale.
lukej@riskcapitalpartners.co.uk
The writer runs Risk Capital Partners, a private equity firm, and is chairman of the Royal Society of Arts. He is the author of ‘Start It Up’
Why big businesses are bad for business
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