The Future of Success (10 page)

Each of the steps I’ve described was “astonishing” the first time it happened—the first hostile takeover, the first use of junk bonds for a leveraged buyout, the first corporate executive to receive tens of millions of dollars in stock options in one year, the first major chief executive to be overtly fired by a board, the first entire board to be ousted—because each violated then-prevailing norms of stability and predictability in economic relationships. But each changed the rules thereafter by extracting more value for investors and forcing top executives to focus ever more exclusively on the price their company’s shares fetch on the stock market.

THE CONSEQUENCES

Nothing focuses the mind of a chief executive, or of anyone else for that matter, like the prospect of vast wealth and the possibility of being sacked. The increasing single-mindedness of top executives on increasing their share prices by cutting costs and improving their products is reverberating throughout the economy. The good news: American corporations have become more productive, and their goods and services dramatically better. The not-so-good news: All jobs and earnings have become less secure, and wages and benefits of routine production workers have eroded.
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Employees have always been laid off during economic downturns, but the old practice had been to rehire them when demand picked up again. That didn’t happen in the wake of the 1991–92 recession. As corporate investments in information technology soared, layoffs continued at a high pace during the economic boom of the 1990s, even as the national rate of unemployment dropped. After executive heads rolled at IBM and Xerox, both companies slashed payrolls. One financial analyst characterized Xerox’s late-1990s bloodletting as “an heroic thing”; another noted “a real paradigm shift here, from an engineering-driven company to one that really knows how to rip out infrastructure to get costs down.”
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Shortly after its new CEO took over in January 2000, Coca-Cola, which had long been known by Atlantans for its generous benefits and secure jobs, announced it would cut half of its Atlanta-based workforce. “The world in which we operate has changed dramatically,” explained the new chief, “and we must change to succeed.”
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Most of the people laid off from their jobs in recent years have found new ones fairly easily because the economy has continued to grow robustly. At this writing, the labor market is tighter than it has been in more than thirty years. In this environment, people who are fired have many other job opportunities. What they lose is a sense of economic security.

Large companies are ripping out entire bureaucracies—using computer software to streamline all billing, procurement, and inventory; shifting customer services to the Internet; renting space and equipment instead of buying them; and relying on Internet auctions to subcontract almost everything to the lowest reliable bidder. Forget the old pyramid-shaped organization. If the current trend continues, tomorrow’s enterprise will be little more than a chain of contracts, with an auction at each link designed to get the best deal for each business customer along the way. For example, Weyerhauser’s door plant in Marshfield, Wisconsin, used to consider Columbia Forest Products Company among its best suppliers of veneers—until Weyerhauser discovered over the Internet that several of Columbia’s rivals could do it cheaper and better. Weyerhauser showed Columbia the data and gave it six months to improve or Weyerhauser would buy its veneers elsewhere. Columbia got the message, and squeezed its costs and improved its quality to match or exceed its rivals—making Weyerhauser more competitive as well.
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Some transformations have been particularly abrupt. In the nineties, the 230-year-old
Encyclopaedia Britannica
reduced its famous door-to-door sales force from 2,300 to zero. The reason was simple: Why would anyone buy a thirty-two-volume encyclopedia costing $1,250 when most of the information could be found on the Internet? In 1999, the company released its entire opus—extending from “a-ak” (an ancient East Asian music) to “Zywiec” (a town in Poland)—on the Web.

Entire industries have imploded. As recently as 1980, when producing a single ton of steel required ten hours of human labor, America had 400,000 steelworkers. Two decades later, a “mini-mill” could produce a ton of steel in two hours, and less than 150,000 steelworkers remained. The value of the entire American steel industry was by then half the stock market value of a single Internet company, Amazon.com.

With greater alacrity, companies are moving or subcontracting to lower-cost foreign nations, especially in Southeast Asia and Latin America. One of General Electric CEO John F. Welch’s favorite phrases is “squeeze the lemon,” which GE has been doing by pushing its suppliers to move their operations to Mexico.
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More than a million Mexicans now work in “Maquiladoras,” trading zones along the U.S. border, up from 400,000 in 1990. Within a few years, hundreds of thousands of Indian and Chinese technicians, programmers, and software engineers will be working for American corporations over the Internet, directly from their own computers in Asia. By 2000, about 50,000 Indians were already doing the “back office” work of global corporations headquartered elsewhere: entering and retrieving Internet data, transcribing records, handling customer-service calls, and doing online accounting.

Companies are fighting more brazenly against unions, replacing strikers and firing workers who lead organizing efforts. The latter practice has been illegal since the 1930s and, until recently, rather uncommon. In 1950, there was one such illegal dismissal for every twenty union elections; by the 1990s, the National Labor Relations Board found illegal dismissals in one out of every three union elections.
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Union membership has plummeted from 30 percent of all private-sector workers in 1973 to 9.6 percent in 2000.

Where is the impetus for all this coming from? Here’s where we come full circle and arrive back home, to mine and probably to yours. Among the most vociferous investors demanding such bold cost-cutting moves are large charitable foundations, the retirement funds of university teachers, and even union pension funds. People like you and me who invest our savings in these entities are unlikely to be fully aware of this, but competition for our savings acts as a kind of flywheel for everything else. That’s how, in my own small way, I’ve forced some of these things to happen. I’m not directly aware of doing so. But if a portfolio manager in charge of my teachers’ retirement fund doesn’t get the best possible return on my savings, I’ll switch funds. I can switch more easily now than ever before. He knows that, and acts accordingly.

You and I are also, unwittingly, pushing for all of this in our role as consumers. We’re not aware that we’re demanding wage cuts and fighting unions, but that’s often the effect we have when we choose the cheapest product or service. Companies can’t pass on to us and to other consumers wage increases in the form of higher prices as easily as they could in the old industrial economy (with its accompanying oligopolies, regulations, and trade barriers). We have more choices now, and don’t have to pay the higher wages embedded in what we buy. We can choose cheaper products made wholly or partially by people around the world who receive lower wages than Americans, or offered by nonunionized workers in the United States, or produced by automated machine tools and robots. You and I and other consumers may not
want
to bust unions or exert downward pressure on the wages of people doing routine operations, but by exercising our wider choices and greater ease of switching to better deals, this is what we’re doing. We’re making the nonunionized sectors of the economy grow faster than the unionized sectors, and indirectly encouraging companies to fight unions more ardently than they did in the era of oligopolies and large-scale production.
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Some of us might change our ways as consumers and investors if we had better information about the consequences of our choices. We could, for example, “look for the union label.” We might demand assurance from a seller that a particular product wasn’t made by a six-year-old child working all day, seven days a week, in Southeast Asia. We could confine our investments to “socially responsible” mutual funds that invest solely in companies that behave in ways we consider acceptable. We might choose to take all these steps and many others even if, as a result, we had to pay slightly more or get a somewhat lower return on our investment. (In fact, some “socially responsible” investment funds have been outperforming regular mutual funds in recent years.) We might simply think the sacrifice worth it. If the social consequence of choosing a particular product or investment was thought especially heinous, we might even join with other citizens and seek to pass legislation making it illegal for
anyone
to do so. After all, we don’t allow child labor in the United States, for example, and we don’t trade with or invest in rogue states around the world, even if such restrictions may bar us from some good deals. There’s no constitutional right to the best or cheapest product or the highest return on an investment. But any such limitation on choice is likely to cost us
something.
The question, again, is whether the sacrifice is worth it.

WHAT YOU AND I ARE DOING ABROAD

Even in cultures where traditional bonds between companies, employees, and communities have been strong—in much of continental Europe, Japan, and Southeast Asia—they’re coming apart because global investors (like me, and probably you) are, in effect, demanding it. Foreign-based companies need American capital, and American investors are eager to diversify their portfolios around the globe. During the 1990s, American holdings of foreign stocks soared from 6 percent of total U.S. equity investments to almost 10 percent.
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America’s large institutional investors are quietly in the lead. Klaus Pohle, chief financial officer of the German drugmaker Shering AG, told a Berlin audience recently how he makes decisions: “I go to Boston and visit Mrs. Firestone [a portfolio manager at Fidelity Investments]. She tells me what to do.”
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When in 1998 Alcatel, a mostly French-owned telecommunications company, announced that its annual profit would be less than had been forecast, its share price dropped 55 percent. It bounced back six months later, in no small part because of extensive cost-cutting, including the loss of some 12,000 jobs—prompting French President Jacques Chirac to explain, in his 1999 Bastille Day address, what triggered the sequence of events: “California retirees suddenly decided to sell Alcatel,” he noted testily, referring to California’s giant public-employees’ retirement fund.

California’s public retirees—tens of thousands of gentle, elderly people who spent their careers working for the state and are thus improbably cast as rabid promoters of free-market capitalism—have their savings in a giant pension fund that is busily severing bonds between companies, employees, and communities around the world. When the fund recently complained that a German utility company, RWE, gave the cities it served too much control over its board and thus diminished the value of RWE shares owned by California public retirees, the utility argued that the share structure established an important bond between it and its customers. But when the fund, evidently unimpressed, then threatened to dump its RWE shares, the company promptly scrapped its system of city representation.
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Don’t blame American investors entirely. European investors are following closely behind, similarly moving their savings to where they can earn the best return. These investors are also prodding European companies down the American road—mounting unfriendly takeovers, firing executives who fail to maximize share prices, and moving operations to lower-wage nations. High labor costs in Germany have spurred German firms to move to Asia and even South Carolina, where BMW has set up shop. Sweden’s telecommunications giant (and biggest employer) Ericsson moved its world headquarters out of high-cost Sweden to lower-cost London. In 1999, the new president of Daimler-Chrysler, a transatlantic hybrid, boldly declared that his most important objective was “maximizing shareholder value,” and duly closed some German plants and switched to Asian suppliers. Soon thereafter, Edouard Michelin, the scion of the French tire manufacturer, did the unthinkable—announcing plans to shed 7,500 jobs in Europe over three years, even though Michelin’s profits had just risen 20 percent during the preceding six months. Talented European executives, meanwhile, are being lured to American companies that offer far better pay. “If the politicians don’t act quickly,” warned Jean-René Fourtou, chairman of Rhône-Poulenc SA, a French chemicals and pharmaceuticals giant, “companies will leave Europe.         .         .         . [S]tep by step they will move investments outside of Europe.”
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Japanese companies are also becoming more dependent on global investors who pay attention to credit ratings and returns on investment. So even the Japanese are starting to do what seemed impossible just a few years ago: cutting payrolls, subcontracting to lower-cost producers in Southeast Asia, and ending the practice of “lifetime employment.” At the close of 1999, Nissan announced cuts of 21,000 jobs, mostly in Japan. NEC and Sony announced layoffs of 15,000 and 17,000, respectively.
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Do not assume that this trend is inevitable everywhere. Any society might still choose to maintain old jobs, keep venerable companies rooted within traditional communities, or prevent global capital from moving as quickly or being as demanding as it has become. But such a society would pay a price. Its pace of innovation would be slower than in less bonded societies. And its people would no longer have as ready access to better products or to global capital. I do not want to portray this choice too starkly; there are many gradations between preserving the old and embracing the new with abandon. Nor, at this juncture, do I want to get ahead of myself. I will return to this basic issue later.