Women and the New Business Leadership by Peninah Thomson and Tom Lloyd_3 potx

54 BUSINESS AT A CROSSROADS
activities of multi-units. According to Chandler, this means a manage-
rial hierarchy is a “defining characteristic” of the MuBE.
This is simply using the assertion about costs in Proposition 1 to
describe an MuBE. Administrative coordination is less costly than
market coordination, but to capture such savings, an organization needs
a management hierarchy, and if it has a management hierarchy it is an
MuBE.
Modern commentary
Once again the issue here is the respective efficiencies of market and
managerial coordination. Let’s agree for the sake of argument that
managerial coordination, after taking full account of agency costs, was
more efficient than market coordination at the time of the MuBE’s
EEA in the late-19th century. The question that needs to be answered
is whether that remains the case today. It is hard to be sure, but there is
reason to believe it does not. The growth of outsourcing, for example,
which is a competitive and thus a market coordinated business, suggests
outsourcers at any rate believe it to be cheaper than insourcing.
Other things being equal, the “experience curve” suggests that a
company that does nothing but payroll management, for example, will
do it more efficiently than the payroll department of an MuBE.
The growth of joint ventures, strategic alliances, and other kinds of
business partnership, which has been such a feature of the so-called
“globalization” of business, also suggests that, thanks in no small part
to reductions in information and communication costs stemming from
advances in IT, the cost of coordinating activities between companies is
falling relative to the cost of coordination within companies.
Moreover, globalization has also added to intra-firm coordination
costs, by encouraging national tax regimes throughout the world to
introduce transfer pricing rules. These require cross-border (and some-
times within border) intra-firm prices to be arm’s length (as set by

markets) and so deny global MuBEs opportunities to optimize commer-
cial relationships between units for tax and other purposes.
Although here too, precise measurement is difficult, it also seems
likely that the agency costs associated with the MuBE’s managerial hier-
archies have increased substantially since the MuBE’s EEA and since
Chandler was writing in the 1970s, witness the executive pay explosion,
the poor record of large companies for extracting value for acquirers’
shareholders from mergers and acquisitions and, not least, the dire
consequences for shareholders of the reckless and recklessly financed
pursuit of growth that precipitated the 2008–09 global recession.
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3 THE STEAM-AGE CORPORATION 55
If it was the superiority of managerial coordination over market
coordination that “selected” (in a Darwinian sense) the MuBE, with its
species-defining managerial hierarchy, the evidence suggests that it
might not have “speciated” (emerged as a new species) today, because
the balance of advantage between managerial and market coordination
has shifted too far since the MuBE’s EEA toward the latter. There is
another question, of course. Do the differences between today’s busi-
ness environment and that of the mid-19th century require us to regard
the MuBE, and its “defining characteristic” of a managerial hierarchy,
as an endangered species?
Proposition 3
The MuBE made its appearance on the business stage when the volume
of economic activities reached the level where administrative coordina-
tion became more efficient, and more profitable, than market coordina-
tion. Chandler saw technology, and particularly the steam engine (on
railroads and in factories), as a vital catalyst in the MuBE’s evolution.
“New technology made possible an unprecedented output and move-
ment of goods” and larger markets were required “to absorb such

output.” That’s why the MuBE “first appeared, grew and continued to
flourish in those industries characterized by new and advancing tech-
nology, and by expanding markets.”
Modern commentary
This is my favorite – a beautiful idea, similar to Stuart Kauffman’s
conjecture about how life on earth began:
When the number of catalyzed reactions is about equal to the
number of chemical dots, a giant catalyzed reaction web forms, and
a collectively autocatalytic system snaps into existence. A living
metabolism crystallizes. Life emerges as a phase transition.
5
Kauffman’s idea is that life emerged when chemistry in the ancient
world passed a critical level of complexity. Chandler suggests the MuBE
emerged when the volume of business in the 19th century passed a
critical level. The MuBE was invoked. Circumstances demanded it. It
didn’t emerge gradually step by step; it snapped into existence when
James Watt’s invention “made possible an unprecedented output and
movement of goods.” The appearance of the MuBE was caused by a
phase transition in America’s economic development.
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56 BUSINESS AT A CROSSROADS
This proposition expands the first two. It says in effect that the effi-
ciency of market coordination on the one hand and managerial coordi-
nation on the other is volume-sensitive. You don’t need the latter while
the volume of activity remains below a certain level, but once it exceeds
that level, a phase transition occurs and you can’t manage without it.
The MuBE was a solution to the production and distribution challenges
created by technology-driven growth in the size and complexity of firms.
We do not see technology in the same way nowadays. It appears
more generally capable to us. By reducing costs and prices, and thereby

stimulating demand, it can create new management problems, but it
can also solve them. As Chandler acknowledged, if the U.S. railroads
had recognized the potential of the electric telegraph a few years earlier,
as their counterparts in England had done, the collision on the Western
Railroad in 1841 might have been prevented. Charles Wheatstone and
William Cooke patented the electric telegraph as an alarm system in
May 1837, and demonstrated the technology in July of that year,
between Euston and Camden stations, in London. Their invention
entered commercial use on the Great Western Railway over the 13 miles
from Paddington to West Drayton in April 1839. It was not until 1843
that Samuel Morse’s Magnetic Telegraph Company was given permis-
sion to build an experimental line along the Baltimore & Ohio Rail-
road’s right-of-way between Baltimore and Washington.
In our own time, the internet, e-mail and broadband communica-
tion have enormously increased the efficiency of market coordination
and the volume of activity small firms can handle efficiently. The digiti-
zation of information transmitted across broadband networks has trans-
formed the economics of scale in many industries, ranging from banking
to travel. The internet has made possible new forms of self-organizing
association between individuals and small firms that have already created
large and sophisticated products, such as the Linux operating system
and Wikipedia (see Chapter 7), which previously only large, integrated
MuBEs could have developed. What technology brought together
yesterday, it can rend asunder today.
Why the MuBE thrived
Propositions four to eight explain the MuBE’s growth – how and why
it survived, spread and became dominant. The extent to which these
propositions seem at odds with today’s environment, begs questions
about whether the MuBe can continue to thrive in its current form.
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3 THE STEAM-AGE CORPORATION 57
Proposition 4
Traditional partnerships were reformed or disbanded when a partner
left, but once a managerial hierarchy had been created, it became a
source of “permanence, power and continued growth,” and the MuBE
acquired “a life of its own.” The managerial hierarchy transcends indi-
viduals. When managers depart, they’re replaced. “Men came and went.
The institution and its offices remained.”
Modern commentary
This proposition is obviously true. An MuBE does acquire “a life of its
own” and a much more substantial life than that of the broom the
caretaker used for 20 years, during which time he replaced the handle
twice and the brush head six times. While managers come and go, the
MuBE accumulates its own substance in the form of tangible assets
(plant, buildings, cash, inventories, and so on), and intangible assets
(intellectual property – patents, brands, logos – and what Karl-Erik
Sveiby called “customer capital” [customer loyalty], and “structural
capital” [processes, accounting systems, and so on]).
6
In its early years the MuBE did not just accumulate substance; its
managers hungered for it, and transformed business from a project- to
a process-based activity. Production processes, for making iron and
steel, for instance, had played a vital role in the Industrial Revolution,
but it wasn’t until the age of mass production and the adoption of F. W.
Taylor’s “scientific management” approach in the early 20th century
that business itself became a continuous process rather than a set of
discrete projects.
The managerial hierarchy’s hunger for permanent substance led to a
gathering together of business activity; a great integration. Most
commentators have seen this as necessary and inevitable. Business was

at a crossroads, according to Sir John Clapham. As it became more
complex and companies became concerned with many technologies a
choice had to be made:
either there must be an elaborate fitting together of the products of
many specialised firms or single many-sided firms must do most of
the essential work themselves, as government dockyards had always
done.
7
The widespread adoption of the MuBE as the solution to the
problem of complexity added more substance to the new species by
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58 BUSINESS AT A CROSSROADS
requiring new systems and processes to replace market coordination. It
was the emergence of the MuBE, and the consequent need for infor-
mation
about transactions within organizations, that led, for example,
to the development of management accounting.
Before then, according to Thomas Johnson and Robert Kaplan, almost
all business transactions were “between an owner–entrepreneur and indi-
viduals who were not part of the organization; raw material suppliers, labor
paid by piecework, and customers.” There was no need to establish “costs”
when everything was priced by the market.
8
When managers hungry for
more substance brought previously subcontracted processes “in house,”
costs ceased to be adequately revealed by prices, and had to be identified
and managed. The task of management was created by vertical integration;
the replacement of outworkers and subcontractors by employees.
It occurred initially in only a few industries like textiles, iron and
steel making, railroads, shipbuilding and retailing. Elsewhere firms

adapted to the growing complexity by modifying rather than aban-
doning the subcontracting system. Johnson and Kaplan refer to John
Buttrick’s account of the “inside contracting” system used in the mid-
19th century by the Winchester Repeating Arms Company:
the management of a firm provided floor space and machinery,
supplied raw material and working capital, and arranged for the sale
of the finished product. The gap between raw material and finished
product, however, was filled not by paid employees arranged in the
descending hierarchy so dear to the hearts of personnel experts but
by contractors, to whom the production job was delegated. They
hired their own employees, supervised the work process, and received
a piece rate from the company for completed goods. The income of
a contractor consisted of the difference between his wage bill and his
sales to the company, plus the day pay he earned as an employee
himself. The company’s largest single expense was the amount paid
to the contractors for finished goods.
9

It was the appearance of vertically integrated MuBEs at the end of
the 19th century that turned managerial hierarchies into sources of
“permanence, power and continued growth.” These days, the case for
vertical integration is much less self-evident. There was always a risk
that, in substituting Chandler’s “visible hand” of management for
Smith’s “invisible hand” of markets, and switching management atten-
tion from price to cost, managers would come to rely too much on their
cost accounting systems, lose touch with markets and make pricing
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3 THE STEAM-AGE CORPORATION 59
mistakes. This is why the activity-based costing reform of management
accounting, advocated by Robert Kaplan and Robin Cooper

10
in the
late 1980s, caused such a stir and why today’s conventional wisdom is
that firms should focus on their “core competencies” and subcontract
or outsource all other functions to specialists.
It is generally accepted these days that in normal times no amount of
substance will guarantee the “permanence, power and continued
growth” of firms making the wrong products at the wrong price. The
“in normal times” qualification is necessary, because, as recent events
have shown, substance in the form of large numbers of jobs can induce
governments struggling to combat recession to shore up failing MuBEs
with taxpayers’ money.
Proposition 5
As the tasks of salaried managers in management hierarchies became
more technical and professional, the criteria for their selection and
promotion came to be based on training, experience and ability rather
than on kinship or money, and managers could conceive of “a lifetime
career involving a climb up the hierarchical ladder.”
Modern commentary
One of the most striking developments in corporate employment over
the past two decades or so has been the disappearance of “the job for
life.” Following the downsizings and de-layering of the early 1990s,
and the new wave of job losses during the 2009 recession, very few
managers now see climbing the same company hierarchy as a lifetime
career. Hierarchy-climbing, these days, is more diagonal than vertical;
more a matter of leaving one hierarchy and joining another at a higher
level, with a better pay package. The manager has become a mercenary
moving from company to company and industry to industry, in a
constant search for better pay and more status.
The mobility of the modern manager is partly a consequence of

more active “head-hunting” by the executive search consultants, hired
to help their clients win the so-called “war for talent.” But the seeds of
managerial disloyalty were sown long ago. When management became
a profession, its various sub-professions, such as finance, manufacturing,
HR and marketing, became portable and dedicated to the service of
MuBEs general, rather than particular MuBEs.
As Harvard Business School professor John Kotter pointed out, the
then new MuBEs were complaining about shortages of qualified staff to
run their organizations as early as the 1860s.
11

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60 BUSINESS AT A CROSSROADS
The University of Pennsylvania responded to the new skill shortage
in 1881, by founding the Wharton School of Finance and Commerce
to offer an undergraduate management degree. Similar schools were set
up in California, Chicago, and elsewhere before the end of the 19th
century and in 1908 the Harvard Business School (HBS) was founded
to offer a masters degree in business administration (MBA).
George Baker, head of what would become Citicorp, was impressed
by the Harvard school and in 1925 gave it the money to construct an
eight-building campus. The following year, 58,000 students taught by
2,500 faculty at 132 American schools majored in business. Most of
them joined large MuBEs.
It was inevitable, given the inspiration for the schools and the desti-
nations of their graduates, that intimate relationships would develop
between “B-schools” and large firms. This was particularly true at
Harvard. The library is named after George Baker, the MBA classrooms
are Aldrich and Rockefeller (Standard Oil), the dining hall is Kresge
(K-Mart), executive programs are taught in Cumnock (J. P. Stevens)

and the faculty office building is Morgan (Morgans Guaranty and
Stanley). As Kotter explained:
Harvard received donations from big corporations to support its
programs and research. It also obtained access to study interesting
business problems and to write teaching cases. The first major piece
of social science research conducted by professors at HBS was
possible only with the cooperation of a Western Electric (AT&T)
factory in the Chicago area. In return, the School trained people to
assume managerial careers in big companies and helped those busi-
nesses to gain access to students through an on-campus lecture series
and a job placement program.
The American business schools played a vital role in the evolution of
managerial capitalism, by providing the skills Chandler’s MuBEs needed
to perfect the new system of administrative coordination. They were
and they remain the officers’ training colleges for large companies.
Harvard Business School was and remains to big business what West
Point is to the U.S. Army.
Two regrettable consequences followed from the close relationships
between big business and the B-schools.
The first is that standard management principles, philosophies and
strategies prevail throughout big business and all large companies tend
to become enamored with new management fashions, such as the focus
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3 THE STEAM-AGE CORPORATION 61
on shareholder value and financial engineering that some say was partly
responsible for the credit crisis, at the same time. If all large companies
follow the advice of an academic in a Harvard Business Review article,
and use derivatives to manage risks, for example, the entire industrial
system becomes more vulnerable than it would otherwise be to the kind
of shock it endured in 2007–08.

Philip Delves Broughton, holder of a Harvard Business School
MBA, excoriated his alma mater in an article in the Sunday Times in
March 2009. He pointed out that HBS alumni had been involved in
several pre-crash scandals, including Enron, and recalled that one HBS
case study being used while he was there was on the Royal Bank of
Scotland, a prominent U.K. casualty of the banking crisis. “Every trendy
business school idea was being implemented, it seemed, while what
really mattered – the bank’s risk assessment, cash flow and capital struc-
ture – was going to hell.”
12

The second regrettable consequence of a close relationship between
large companies and the B-schools is that the management discourse
became dominated by the concerns of big business, and very little attention
was paid to the corporate undergrowth, from where tomorrow’s indus-
tries, companies and business models are likely to emerge. As Kotter put it:
Small businesses were mostly left out of this relationship. They were
not in the job market for young managers every year. They had little
money to donate to HBS. Besides, they wanted street-smart gener-
alists more than the analytical specialists who tend to be the product
of universities.
By training the troops MuBEs needed to operate their new system
of managerial coordination, the business schools also contributed to the
MuBE’s “permanence, power and continued growth.” They became a
vital part of what I call the “CEO system” (see Chapter 6).
Proposition 6
As the MuBEs grew in size and diversity, and their managers became
more professional, management became separated from ownership.
The traditional, capitalist firm was very much a personal enterprise.
From the start the company required more managers than a family or

its associates could provide.
When a company raised new capital to finance growth, it was
common in the early 19th century for investors to put representatives
on the board and share major decisions with managers. Chandler called
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62 BUSINESS AT A CROSSROADS
this system “financial capitalism,” and saw it as a transitional stage
between “family” and true “managerial” capitalism consisting of two
symbiotic components – a characteristic institution, in the MuBE, and
a characteristic profession, in the salaried manager.
Modern commentary
Chandler’s conjecture that what he calls “financial capitalism” is an inter-
mediate stage does not specifically preclude coexistence, but it does imply
some sort of progression from a primitive to a more sophisticated capi-
talist system, an important consequence of which is the separation of
ownership from control. Control remains with owners in “family/entre-
preneurial capitalism,” is shared with investors in “financial capitalism”
and is surrendered to managers in “managerial capitalism.”
An example of this development process is provided by the story of
the British company, Vickers-Armstrongs, at the end of this chapter.
Increasing scale is the impetus behind the progression. The larger
the business and the higher the volume of transactions, the more sala-
ried managers were required to administer and coordinate, and the
thicker the wedge driven between ownership and control.
Adolf Berle and Gardiner Means had identified what they called the
“divorce of ownership and control”
13
44 years before Chandler intro-
duced his concept of “managerial capitalism.” As Berle put it later:
stockholders, though still politely called “owners,” are passive. They

have the right to receive only. The condition of their being is that
they do not interfere in management.
14
But there was nothing new about this. As we saw in Chapter 2, Adam
Smith noted (in 1776) that owners of joint stock companies “seldom
pretend to understand anything of the business of the company … [and]
receive contentedly such half-yearly or yearly dividends as the directors
think proper to make them.” The divorce of ownership and control
should be seen, not as an important development in the early 20th
century, but as an intrinsic quality of the joint stock company, which only
became evident and worthy of comment after the joint stock company
became the dominant corporate form. In Smith’s time the Berle and
Means observation would not have been worthy of comment, because
the joint stock company played only a small part in economic life. It was
an insight of the first importance in the 1930s, however, because by the
end of that decade the joint stock company accounted for over 50 percent
of U.S. business, and over 90 percent of manufacturing output.
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3 THE STEAM-AGE CORPORATION 63
Chandler implied that the MuBE, with its characteristic managerial
hierarchy, was a culmination of some kind. New companies are still
being created by entrepreneurs, but those that survive and prosper are
destined to develop into MuBEs. As evolutionists say: ontogeny (the
development of the individual) recapitulates phylogeny (the evolution
of the species).
The corporate population of a modern economy always includes firms
at all stages of development, but those at the “entrepreneurial,” “family”
and “financial” stages are, if they survive, just passing through, Chandler
appears to suggest, on their way to the ultimate “managerial” stage.
The idea that Chandler’s MuBE is an ontogenetic and a phyloge-

netic culmination (“the end of corporate history,” to adapt Fukuyama’s
title – see Note 2, Chapter 1) was probably more plausible when Chan-
dler was writing than it seems today. Some of today’s largest companies,
such as Rupert Murdoch’s News Corporation and Sir Richard Bran-
son’s Virgin Group, seem to combine aspects of entrepreneurial and
family capitalism with those of managerial capitalism. Others that have
been, or may be acquired by private equity groups, seem to exemplify
Chandler’s financial capitalism. The enormous growth of debt financing
during the past two decades suggests financial capitalism was not, or is
no longer, as transitional as Chandler supposed, although Harvard
Business School professor, Rakesh Khurana, sees this neo-financial
variant as a new, post-managerial stage, which he calls “investor
capitalism”(see Chapter 6). The practice of paying executives with stock
options, which remains widespread despite rules that require them to
be treated as expenses in company accounts, seems like and is intended
to simulate a return to “entrepreneurial capitalism.”
This is not to suggest that Chandler’s “managerial capitalism” was a
misconception, or to deny that there is a tendency for companies to
acquire managerial hierarchies as they grow and thus to develop into
MuBEs. It’s simply to say that this pattern of development is neither
inevitable nor irreversible. Moreover, if the thickness of the wedge driven
between ownership and control is measured by the extent to which stock
ownership is dispersed – such that no single shareholder owns enough
equity to exercise effective control over managers – managerial capitalism
is only truly dominant even today in the U.S. and the U.K.
The belief, in the 1970s, that a corporate form that only began to
play a significant role in industry after 1860 and still accounted for less
than a quarter of American output in 1900 was the “end of corporate
history” may have had something to do with the role that governments
played in business over the subsequent five decades.

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64 BUSINESS AT A CROSSROADS
Chandler acknowledges that Western governments contributed to
“the spread and continued growth of modern business enterprise”
through their commitment to maintaining full employment and their
adoption of Keynesian demand-management economic policies before
and after World War II. This created the economic stability the MuBEs
needed to keep their factories busy and their supply chains full. But he
dismisses the idea that government played an important role in the two
world wars as customers of MuBEs:
The suggestion that the rise [Chandler’s emphasis] of big business has
any relation to government and military expenditures (or for that
matter to monetary and fiscal policies) has no historical substance.
Perhaps so, but the story of Vickers-Armstrongs; the role the idea of
“national champion” firms has played, and still plays in continental
Europe, in national industrial policies since World War II; and recent
job-preserving rescues of America’s “big three” automakers, demon-
strate that governments have felt obliged to ensure the survival of some
big businesses that might otherwise have failed.
Although the partial nationalizations of big banks during the 2008
crash were inspired by the need to relieve pressure on the banking
system as a whole rather than to rescue particular banking groups, they
too have had the effect of preserving large businesses at the expense of
small businesses that might otherwise have occupied the niches big
bank failures would have left vacant.
Proposition 7
When making decisions, career managers prefer policies that promote
the long-term stability and growth of their enterprises to those that
maximize current profits. For salaried managers, the survival of the
enterprise was essential. Because their goal was to assure the continuing

use of, and the flow of material to, their production facilities, they
protected sources of supply and outlets, took on new products and
services to make better use of existing resources and preferred to rein-
vest profits rather than pay dividends. “In this way the desire of the
managers to keep the organization fully employed became a continuing
force for its further growth.”
Modern commentary
A modern MuBE, the managers of which preferred growth and stability
to creating shareholder value, would become a prime candidate for
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acquisition and possible dismemberment. Although, in practice, the
corporate takeover system has been a notorious destroyer of value for
acquirers’ shareholders, the constant threat of takeover is, in theory and
also in practice, a potent curb on managers inclined to impose agency
costs on shareholders, by indulging their desires for growth and stability
at the expense of value creation.
But the takeover is a double-edged sword. Although the increase in
mergers and acquisitions (M&A) activity since Chandler wrote has
reduced agency costs at target companies, it has also allowed CEOs to
pursue acquisition-led growth strategies that have usually been at the
expense of their own shareholders. Encouraged by the tacit assumption
that the bigger the company, the more the CEO should be paid; by
their own egos; and by the urgings of transactions-driven investment
bankers peddling seductive but nonsensical maxims, such as “eat or be
eaten,” “dare to be great,” and “you can’t overpay for a strategic acqui-
sition,” CEOs frequently squander shareholder value on unprofitable
acquisitions, financed by what in retrospect often appear to be danger-
ously high levels of debt.
Managers are still imposing agency costs on shareholders, but of a

different kind. They stem not so much from the desire of managers for
“organic” growth, as from the desire of CEOs to engage in the more
glamorous and exciting, but ultimately less creative, pursuit of acquisition-
led growth. The focus of CEO attention has switched from enhancing the
profit and loss account through the hard graft of innovation, product
development and efficiency improvements, to manipulating the balance
sheet and orchestrating the new financial engineering techniques associ-
ated with M&A activity.
Proposition 8
As Chandler’s MuBEs grew and came to dominate major sectors of the
economy, “they altered the basic structure of these sectors and of the
economy as a whole.” They did not replace the market, because their
decisions were still based on estimates of demand, but they took over
the coordination of flows of goods and services. By the mid-20th
century, the salaried managers of a few large enterprises coordinated
flows of goods and resources through the processes of production and
distribution in every major U.S. industry. “By then,” Chandler
concluded “the managerial revolution in American business had been
carried out.”
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66 BUSINESS AT A CROSSROADS
Modern commentary
Chandler’s characterization of the transition from entrepreneurial to
managerial capitalism as a “revolution” implies that he saw it as a devel-
opment equivalent, in its significance and permanence, to the Industrial
Revolution that preceded it. Revolution implies more radical change
than evolution; a discontinuity rather than an adaptation.
With the benefit of hindsight, it doesn’t seem that way today. The
emergence of the MuBE and managerial capitalism seems more like an
adaptation to the circumstances of the steam age than a permanent,

irreversible revolution. It was a phase transition of a kind, but not of the
same kind or permanence as the phase transitions from no life to life, or
from pre-industrial to industrial economies. It seems more like the tran-
sition from water to ice, which can be reversed by the injection of heat.
As we will see in the next chapter the equivalent of more heat, in the
form of a politically significant increase in inequality, has been injected
in recent years into the system of which managerial capitalism is part,
even as the MuBE has extended its writ from its Anglo-Saxon birth-
place to the global economy.
Chandler’s contribution
That some of its conclusions have not in my view stood the test of time
does not alter the fact that The Visible Hand is a wonderful and important
book, and a worthy winner of both the Pulitzer and Bancroft prizes. It
was the first to address the questions of why the institution that domi-
nates the global economy emerged when it did, what qualities have
sustained it, and what advantages over the “invisible hand” of the market,
to which Adam Smith assigned the prime coordinating role, have enabled
MuBEs and their managers to achieve the dominance they enjoy today.
Chandler saw the institution he called the MuBE as far more than a
mere abstraction around and within which the invisible hand of the
market allocated resources and coordinated activity in the ways envisaged
in classical microeconomics. He saw the MuBE as a potent economic
agent, with its own beliefs, desires and intentions, and he understood
that, like elephant herds that have turned woodlands into savannah by
stripping the bark from trees, it has changed the business environment.
This is the way we need to look at companies now, as real economic
agents, rather than abstractions whose actions, practices, habits and
hungers change, for good or ill, the business environment and the wider
societies in which they operate.
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3 THE STEAM-AGE CORPORATION 67
The argument so far
Large modern companies aren’t as we would like them to be, because
they are the creatures of the business environment of the late 19th and
early 20th centuries. They are under pressure to adapt, because some of
the qualities that were their original strengths and led to their domi-
nance of business, are either less valuable today or have become weak-
nesses. The next chapter examines the greatest and most obvious of
these weaknesses – the omnipotence and enormous pay packets of Chief
Executive Officers (CEOs).
Vickers-Armstrongs
The history of U.K. shipbuilder, armaments and aircraft manufacturer Vickers-
Armstrongs exemplifies Chandler’s transition from “family-entrepreneurial,” to
“managerial” capitalism, and also illustrates the role governments have played in the
development and protection from failure of large
MuBEs.
William
A
rmstrong (1810–1900), made Baron
A
rmstrong of Cragside in 1887, was
a gifted British engineer, inventor and entrepreneur. He laid the foundations of hydro-
electric power with a water pressure wheel in 1839, and a hydroelectric machine in
1844; patented the hydraulic crane in 1846; invented a hydraulic pressure accumu-
lator in 1850; designed submarine mines in the Crimean War and developed the
rifled-bore, breech-loading gun.
N
ot content with solving the energy challenges of his own time, he is said to have
contributed to solving ours, by being the first to conceive of the idea of using solar
energy.

In some ways, he was a throwback to the Industrial Revolution. He held his own
patents and had a strong sense of civic duty. He left his patent rights to the nation,
and was a generous benefactor of his home city of Ne
wcastle.
In
other ways,
Ar
mstrong was the very model of a modern industrialist.
He
built his engineering
works at
El
swick in 1847 and in 1859, the year he became “
Si
r William” and was
appointed engineer of rifled ordnance at Woolwich arsenal, he formed the
El
swick
Or
dnance Co., to make guns for the government. (
He
resigned his Woolwich
appointment in 1863, when the government returned to muzzle-loading ordnance
for a brief period.)
Armstrong decided to build ships in 1868, and in 1882 entered into a partnership
with
M
essrs.
M
itchell &

S
wan, to build warships at
E
lswick. Within a year, the new
yard launched the first iron-clad cruiser, the Esmeralda, for Chile’s navy.
I
n 1885
A
rmstrong opened a branch in
N
aples to make guns for
I
taly, and in 1897 merged his
business with Sir Joseph Whitworth’s. Armstrong died in 1900 while Armstrong-
Whitworth was entering the armored-plate business.
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68 BUSINESS AT A CROSSROADS
References
1 The Visible Hand: The Managerial Revolution in American Business, Harvard University
Press, 1977.
2 “The Nature of the Firm,” Economica, 1937.
3 “The Modern Corporation: Origins, Evolution, Attributes,” Journal of Economic Litera-
ture, 1981.
4 “The Economics of Organization: The Transaction Cost Approach,” American Journal of
Sociology, 1981.
5 At Home in the Universe, Oxford University Press, 1995.
6 The New Organizational Wealth, Berrett-Koehler, 1997.
7 An Economic History of Modern Britain, three volumes, Cambridge, 1926–38.
8 Relevance Lost: The Rise and Fall of Management Accounting, Harvard Business School
Press, 1987.

9 “The Inside Contracting System,” Journal of Economic History, Summer, 1952.
10 “Measure Costs Right: Make the Right Decisions,” Harvard Business Review, September/
October 1988, 96–103.
11 The New Rules: How to Succeed in Today’s Post-Corporate World, Free Press, 1995.
12 “Harvard’s Masters of the Apocalypse,” Sunday Times, March 1, 2009.
13 The Modern Corporation and Private Property, Macmillan, 1933.
14 Power without Property: A New Development in American Political Economy, Harcourt
Brace, 1959.
Sheffield steelmaker, Vickers, a joint stock company formed in the 1860s, made
steel for most uses, including armaments. In 1897, it acquired the Naval Construction
and A
rmaments Company at Barrow, and the
M
axim-Nordenfelt
M
achine
G
un
Company at
Erith. In 1902, it acquired the Robert Napier shipbuilding firm, builder of
the first iron-clads, and bought a share of William Beardmore’s shipbuilding company
in Glasgow.
Vickers and A
rmstrong-Whitworth both prospered during the war, but experi-
enced financial difficulties subsequently. They might have collapsed (as did Beard-
mores), had the British government not seen them as “strategically important” and
deserving of subsidy.
Partly at the government’s instigation, Armstrong-Whitworth
was bought by Vickers in 1924, to form Vickers-Armstrongs. Vickers survives in a
much truncated form as a subsidiary of the

R
olls-Royce aero engine group.
I
t was
renamed Vinters in March 2003.
9780230_230941_05_cha03.indd 68 09/09/2009 10:01
69
4 The decadent corporation
“Multi-unit business enterprise” (MuBE), the name coined by Chan-
dler to describe the new business organization that emerged in the mid-
19th century, conveyed the MuBE’s complexity, but not its shape. As
we have seen, the MuBE inherited its hierarchy from the military. This
gave it a triangular shape seen in elevation and a concentric ground-
plan. By concentric I mean that, unlike the other corporate forms it
eventually vanquished in the 20th century, and by which it is challenged
in the 21st century (see Chapter 7), it had a unique center around
which other parts are organized, and to the purposes of which all other
parts are subordinated.
It can be pictured as a laminated cone, or cone of laminated cones in
the case of a multi-divisional firm, consisting of disk-shaped layers of
management of decreasing size and increasing power piled on top of
one another. At the tip of the cone one person, the CEO, holds all the
reins of power and embodies the whole organization’s agency.
This shape has turned out, particularly in the past two decades or so,
to be inimical to the MuBE’s host political system of liberal democracy,
because pay has followed power up MuBE hierarchies, and produced
distributions of wealth that are widely seen by voters as profoundly unfair.
Some people object strongly to the baldness of this statement, and
insist that it’s very difficult to say what is “fair” in any given situation.
It’s not difficult at all.

Justice as fairness
Many people who read John Rawls or encounter his two principles of
justice for the first time, are hit by an almost visceral feeling of recog-
nition.
“Yes of course,” they immediately realize. “That’s right – that’s
what I’ve always believed, but have never been able to put into words.”
Rawls sought to answer the question: “What principles would we all
agree should form the basis of the social contract between us, if we
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70 BUSINESS AT A CROSSROADS
knew nothing of the society we were about to enter, and nothing of our
own abilities, aptitudes and inclinations?” His answer was:
All social primary goods – liberty and opportunity, income and
wealth, and the bases of self-respect – are to be distributed equally
unless an unequal distribution of any or all of these goods is to the
advantage of the least favored.
1
What could be simpler?
A fair and just society, according to Rawls, is not an egalitarian
society. Equality is the basic principle, but Rawls’s “difference principle”
permits a certain amount of inequality if and insofar as it is of benefit to
the disadvantaged. Abilities and aptitudes differ, and it would not be
fair, or in the interests of the least favored, to deny able and industrious
people the right to improve their circumstances to the best of their
abilities. Tax rates must be progressive, to ensure redistribution, but not
so progressive that those able to generate significant wealth lack the
motivation to do so or move to societies that tax them less heavily.
The sense of recognition many – I suspect, most – people feel when
they encounter Rawls’s principles suggests that his conception of “justice
as fairness,” or something very like it, lies at the root of the consensus that

sustains the liberal capitalist system. That was certainly Rawls’s belief.
Most of us accept liberal capitalism and vote for liberal capitalist govern-
ments and policies, because we believe that, by and large, they produce
fair outcomes, broadly consistent with the principles Rawls set out.
So far, the liberal capitalist consensus has proved robust, in the sense
that it tolerates – has deemed to be in the interests of the least advan-
taged – considerable inequality. But wide acceptance of the system is
not unconditional. The consensus must be maintained. If people begin
to believe the system they have supported hitherto has started to
produce outcomes that are inconsistent with Rawls’s principles, they
may lose faith in the system (and respect for its institutions), and vote
for governments and policies that offer to restore the distributive justice
they feel is being eroded.
Rawls was very conscious of this danger. In Justice as Fairness: A
Restatement,
2
published shortly before his death in 2002, he expressed
alarm at the growing inequalities and concentrations of economic
power in the hands of small elites in capitalist states. He was so worried
by the threats these posed to what he called the “social basis” of respect
that he modified the model of liberalism he had described 30 years
earlier in A Theory of Justice.
9780230_230941_06_cha04.indd 70 09/09/2009 10:01
4 THE DECADENT CORPORATION 71
Having lost his faith that liberal principles could be realized in a
“capitalist welfare state,” he suggested they could only survive in what
he called a “property owning democracy,” where ownership of “produc-
tive assets and human capital” is more widespread, or in what he called
a “liberal socialist regime,” where political power is widely shared, and
“economic power is dispersed among firms, as when, for example, a

firm’s direction and management is elected by if not directly in the
hands of its workforce.”
Before the crash, that would have been a cue for howls of derision
and the patient explanation to Rawls, the economic innocent, that a
firm would not work as a democracy, and it would be absurd if CEOs
had to be elected by employees, or had to put their strategies and
management policies to employee votes. Now such a casual dismissal of
the concerns of such a distinguished philosopher would, itself, seem
ingenuous. We are at a watershed. The status quo doesn’t work any
more. Rawls was concerned with the basis of a fair society. We should
heed his warning about the erosion of the “social basis” of respect.
I sometimes wonder if things might have turned out differently, if
Harvard Business School had asked Rawls to talk to its MBA classes
from time to time. He was only down the road after all, at Harvard
University. Perhaps he was invited. If so, he either didn’t go, or the
trainee masters of the universe took no notice of his warnings about
inequalities and concentrations of economic power.
For those of us who believe that liberal democracy and free market
capitalism constitute the best system so far devised for creating and
maintaining fair, free and prosperous societies, it would be a tragedy if
the inequalities and unfairness of our societies led to the replacement of
liberal capitalism by old-fashioned socialism.
The U.S. and the U.K. have not reached the crisis point, but they
may have come perilously close to it, and there are reasons to believe
this is partly, perhaps even largely, because today’s large companies
(modern versions of Chandler’s MuBE) have, in addition to altering
the basic structures of their industries and of their economies as a whole,
contributed to growing distributive injustice.
There are two main danger signs. Inequality has reached levels in
both countries that are unprecedented in modern times and there’s a

growing public perception, supported by plenty of evidence, that some
people are getting much more than their fair shares.
An important implication of Rawls’s “difference principle” is that
the inequality it permits should be proportionate. This means that in
addition to limiting the degree of inequality in the population as a
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72 BUSINESS AT A CROSSROADS
whole to that which is in the interests of the disadvantaged, it imposes
limits on the income of individuals. Some people can be paid more than
others, but their income can never exceed the value they create, because
any excess of pay received over value created is clearly not in the inter-
ests of the disadvantaged. (Unless, of course, one subscribes to tourna-
ment theory and sees the wealth of the few as a price worth paying for
the motivation of the many.)
Let’s look more closely at these threats to the liberal capitalist
consensus.
Growing inequality
The Gini coefficient is the most widely used measure of inequality in a
group or a population. Named after the Italian statistician, Corrado
Gini, who proposed it in 1912, it is derived from a Lorenz curve of
cumulative income distribution. A Gini coefficient of “0” (a straight
Lorenz curve 45 degrees to the axis) indicates perfect equality; everyone
has the same income. A Gini coefficient of “1” (a reverse “L” curve
tracking the horizontal axis, and then rising vertically) is perfect
inequality; one person has all the income.
National Gini coefficients are calculated by various organizations
including the United Nations (UN) and the U.S. Central Intelligence
Agency (CIA). In the following tables and analysis I have used CIA
figures, published in The World FactBook, because they are more up to
date and comprehensive.

It’s no surprise that several Scandinavian countries appear in the top
ten most equal countries or that sub-Saharan African countries domi-
nate the bottom ten (high Gini) positions.
The CIA is interested in Gini coefficients, because high Ginis are
good predictors of civil unrest. The agency’s Gini “danger line,” above
which public disturbances, protests, riots, revolt and civil war become
increasingly likely, is 0.45.
The alleged link between increasing inequality and civil unrest is
corroborated by political instability and civil unrest in several high-Gini
countries, including (at the time of writing) Zimbabwe, Bolivia and
Haiti. Much the most discussed Gini coefficient on the web is China’s
0.47. It is significantly above the CIA danger line and many people,
including many Chinese, are worried about it.
According to official People’s Republic of China (PRC) figures the
number of “public order disturbances” in the PRC soared by nearly 50
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4 THE DECADENT CORPORATION 73
percent in two years, from 58,000 incidents in 2003, to 87,000 in
2005. A 2006 U.S. Congressional Research Services study citing these
figures noted that social unrest among Chinese farmers and workers
had been reported since the early 1990s, but that “recent protest activi-
ties have been broader in scope, larger in average size, greater in
frequency, and more brash, than those of a decade ago.”
3
Table 4.1 National equality rankings – top 10 and bottom 10
Top 10 Bottom 10
Country Gini year Country Gini year
Sweden 0.23 2005 Namibia 0.71 2003
Denmark 0.24 2005 South Africa 0.65 2005
Slovenia 0.24 2005 Botswana 0.63 1993

Iceland 0.25 2005 Lesotho 0.63 1995
Norway 0.25 2008 Sierra Leone 0.63 1989
Austria 0.26 2007 C. African Rep. 0.61 1993
Czech Republic 0.26 2005 Bolivia 0.59 2006
Malta 0.26 2007 Haiti 0.59 2001
Albania 0.27 2005 Brazil 0.57 2005
Germany 0.27 2006 Paraguay 0.57 2008
Source: CIA, The World FactBook, updated April 2, 2009.
In major disturbances in Xinjiang province in western China during
the Beijing Olympics in summer 2008 over 30 people died in three
separate attacks on police and government buildings. In one of the inci-
dents, in Kuqa, more than a dozen bombs exploded before dawn in
what appeared to be a coordinated attack. Ethnic tensions were said to
be the proximate causes of the violence, but the perceived lack of back-
ground fairness in modern China created fertile ground for turning
festering resentments into violent action.
4
Some are sanguine about China’s high Gini coefficient. They expect it
to fall and civil unrest to abate over the next decade or so as China’s
economy matures. This is predicted by a theory of economic development
proposed by Nobel laureate economist, Simon Kuznets, in 1955. According
to the Kuznets hypothesis, economic inequality tends to increase as a
country develops and then, after a critical average income is reached, begins
to fall. The Kuznets curve, with time, economic development, or per capita
income on the horizontal axis and some inequality measure, such as the
Gini coefficient, on the vertical axis, is an inverted “U.”
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74 BUSINESS AT A CROSSROADS
In the initial stages of economic development workers migrate from
agriculture to industry and from rural areas to the towns. Because

industry pays better than agriculture, inequality rises, but falls thereafter
if growth continues because industry’s hunger for ever more educated
workers requires mass education normally accompanied by other
income redistribution processes.
China’s dangerously high Gini coefficient of 0.47, which according
to an Asian Development Bank Institute estimate compares with a
very low Gini of 0.16 before China launched its reform and opening
policies in 1978, is, therefore, temporary. China’s Gini will fall as the
economy matures.
Something of this sort occurred during the economic development
of the U.S. In the late 18th century the top 1 percent of Americans are
thought to have owned about 15 percent of the wealth. By 1855 the
figure had risen to 30 percent, according to the U.S. Census. Inequality
reached a peak around 1935, when the top 1 percent owned 45 percent
of the national wealth and then began to fall to civil-war levels from
World War II to the 1970s.
But the end of the Kuznets curve is not the end of the story. From
the 1970s inequality began rising again. By the time of Kuznets’s death
in 1985 it was close to its putative development peak in the late 1930s,
and it has kept on rising. The same is true of the U.K. Inequality has
been rising steadily, apart from a brief dip in the late 1990s, and is
currently at a historic high.
As the table below of OECD and other selected Ginis shows, not all
mature economies have Scandinavian-style equality.
Table 4.2 Gini coefficients for OECD and other countries
Country OECD Gini Year
Brazil 0.57 2005
Argentina 0.49 2007
Mexico yes 0.48 2006
China 0.47 2007

United States yes 0.45 2007
Iran 0.45 2006
Kenya 0.45 1997
CIA Danger Line
Turkey yes 0.44 2003
Russia 0.42 2008
Israel 0.39 2005
9780230_230941_06_cha04.indd 74 09/09/2009 10:01
4 THE DECADENT CORPORATION 75
Portugal yes 0.39 2007
Japan yes 0.38 2002
India 0.37 2004
New Zealand yes 0.36 1997
Poland yes 0.35 2005
United Kingdom yes 0.34 2005
Switzerland yes 0.34 2008
Greece yes 0.33 2005
France yes 0.33 2008
Italy yes 0.32 2006
Canada yes 0.32 2005
Spain yes 0.32 2005
Ireland yes 0.32 2005
Australia yes 0.31 2006
South Korea yes 0.31 2007
Netherlands yes 0.31 2007
European Union 0.31 2005
Finland yes 0.30 2007
Belgium yes 0.28 2005
Hungary yes 0.28 2005
Germany yes 0.27 2006

Luxembourg yes 0.26 2005
Austria yes 0.26 2007
Slovakia yes 0.26 2005
Czech Republic yes 0.26 2005
Norway yes 0.25 2008
Iceland yes 0.25 2005
Denmark yes 0.24 2005
Sweden yes 0.23 2005
Source: CIA, The World FactBook, updated April 2, 2009.
The table suggests the Kuznets hypothesis is probably true as far as
it goes (economic development does increase inequality), but other
factors also drive inequality and seem to remain active long after
economic maturity is reached. Since the U.S. and the U.K. are arguably
the most mature liberal capitalist economies, it is cause for some concern
that, among OECD countries, only Mexico has a higher Gini than the
U.S. and that, among European OECD countries, only Portugal and
Poland have higher Ginis than the U.K.
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