New World, New Rules: The Changing Role of the American Corporation

Citation

(1999), "New World, New Rules: The Changing Role of the American Corporation", The Bottom Line, Vol. 12 No. 2. https://doi.org/10.1108/bl.1999.17012bad.004

New World, New Rules: The Changing Role of the American Corporation

New World, New Rules: The Changing Role of the American CorporationMarina v.N. Whitman,Harvard Business School PressBoston, MA1999

Keywords: Corporate venturing, Economics, Corporate governance, USA

It is always an intellectually stimulating experience to review a book whose author truly understands the nature and breath of change and more so when the author is analyzing the premier institution of the US economy, i.e. the American corporation, as it both adapts and leads the global economy. This book is particularly interesting in that Whitman demonstrates a breadth of vision and experience that spans four decades as an academic economist, business and governmental experience at the highest levels of government, as a member of the US president's Council of Economic Advisors, a vice president at General Motors and presently as an outside or independent director of five major corporations in five different industries.

In the first chapter, Whitman presents the reader with a precise and at the same time astute description of the evolution of the American corporation from the 1950s, through the 1960s, 1970s and 1980s. During the 1950s and into the 1970s, the "good Corporation", as Samuelson described it was one in which private institutions were endowed with multiple public purposes. Americans took it for granted that these powerful financial institutions could combine profit making with social responsibility. This scenario provided and would continue to provide stable well paid jobs, generous benefits, and support for the arts and culture. Companies would be "good corporate citizens,' and become involved in the wellbeing of their communities. Unfortunately, according to Whitman, the economic upheavals of the late 1970s and 1980s caused IBM and other large and long-established corporations to experience serious difficulties relating to profitability, falling stock prices, bankruptcy or takeover, which resulted in downsizing and layoffs of employees.

Given the economic upheavals of the 1970s and 1980s, the companies that emerged in the 1990s, whether survivors or newborns, are very different from their predecessors in their internal structure and in their external relations. The author discusses the stability that was shattered as corporations faced hostile takeovers and other external threats that forced them to alter their own internal structures. This situation resulted in flattening hierarchies, which meant eliminating multiple layers of management and eliminating the managers themselves. Rigid reporting structures were replaced with more flexible networked or matrix relationships. There is a new intensive focus on the bottom line, on cost-cutting, on efficiency, on productivity, which led to downsizing, restructuring, re-engineering, all meaning getting rid of people. These changes sharply altered attitudes on both sides toward the employer-employee relationship.

Given the aforementioned situation, Whitman segments her analysis and examines only those relationships that are important to both the viability and the profitability of American corporations and to the nature and health of American society. She assesses not only the dramatic changes in these relationships but also the new questions and challenges that these dramatic changes raise for public policy. According to the author, three sets of relationships exert particular influence on those things that are good and those that are bad in the American economy. These relationships involve the links of a large firm to its employees and their communities; links of a large firm to its shareholders and their agents; and links to society at large and the governments that presumably reflect the wishes and priorities of its citizens. Thus, "the nature of these changes, the forces that produced them, their effects good and bad on the American economy and on American society, and the issues they raise for public policy are the focus of this book."

In Chapter two, she discusses the variety of forces, which undermined the profitability and viability of American economic power in the 1970s and 1980s and have persisted in different forms in the nineties. Change was forced on the American corporation by the slowdown in global growth, greater economic volatility and enhanced competition. Whitman astutely analyzes the specific events such as globalization and the competitive pressures which it produced; domestic deregulation, technological advances, force interactions, consumer power, the changing structure of financial markets including the globalization of capital markets and the deregulation of financial institutions; the globalization of the production process; managerial mistakes and the disappearance of slack; and the dilution of managerial power. The changes wrought by these events produced both increased autonomy and expanded opportunities, while they also reduced economic security and income inequality.

Following this theme, the third chapter discusses what the author considers a significant change ­ the change in the social contract between the employer and the employee. The author contrasts the old social contract as Americans understood it with the new relationship and discusses the implications inherent in that change. Whitman states that the nature of this relationship is closely linked to the manner in which a firm responds to cyclical or structural changes relative to the demand for its products and services. The United States is an extreme example of the speed and sensitivity with which labor markets respond to changing economic signals.

The following chapters discuss the fact that traditional relationships between managers and shareholders of publicly held companies are being reshaped in ways that tend to narrow the differences between them. Within this chapter there is an interesting discussion of the implications of the conflict between Wall Street and Main Street. These implications lead to a discussion of the reshaping of the relationship between the corporation and communities in chapter five. The next few chapters cover topics such as implications for policy and the globalization of the American economy.

The central message in this book is that you cannot help to alleviate uncertainty by restoring the paternalistic role played by American corporations in the 1950s and 1960s. Worldwide convergence around the American model of capitalism and the remarkably robust performance of the American economy has made American capitalism the model for modern industrial society. However, according to Whitman, the continual rise of the American model of market capitalism confronts two major threats, one domestic and one international. That is to say, the promising economic developments and indicators of possible reversal in the decline of social capital are hopeful signs. But this situation is not grounds for complacency because it takes time to be sure those fundamental changes in direction will survive a cyclical downturn.

The author states that Americans are great risk takers. By this she means that American society has a greater tolerance for the economic insecurity and income inequality that accompany our economic dynamism than other modern industrialized nations. However, the great question is whether the American social fabric can continue to absorb the consequences of this risk-reward tradeoff without dangerous strains to the system. Because other industrialized nations have a lower risk tolerance than American society, yet accept the basic features of the American capitalistic model, the challenge is to find ways to attenuate the model's undesirable side effects. This task is complicated, according to Whitman, by the fact that economic growth and economic uncertainty both spring from the same forces: globalization, domestic deregulation and technological advances. Thus, the most serious threat to the American model of capitalism is that "American leadership will prove unequal to the challenge of a massive disruption of the international financial system that originated in Southeast Asia, but is drawing a growing number of emerging economies into its net and is causing reverberations in the securities markets around the world."

This book has our recommendation for required reading in undergraduate business and economics courses whose purpose is to discuss thoroughly the evolution of the American corporate business climate, for courses in international business and for librarians who must understand the business climate in which they work. Whitman writes in a clear and concise manner and handles complex ideas with clarity and precision. This book is an important contribution to the literature.

Kay Ann Cassell is Associate Director, Programs and Services, for the New York Library's Branch Libraries.

Marina I. Mercado is an Adjunct Faculty Member at Mercy College, New York, and a consultant in international business.