The Uses of Diversity. David Ellerman
of carrots in the foreground trying to get people’s attention and guide their actions. An equitable salary more geared to experience and seniority would be an example of keeping the carrot of pay in the motivational background so that other more intrinsic motives might emerge in the foreground to guide action. The tight coupling of pay with performance, as implied by agency theory, is beside the point when the pay is in the background.
These considerations are quite clear in the quality-based (e.g., “Japanese”) management methods that take organization seriously. For instance, Edward Deming’s “New Economics” recommends to “abolish incentive pay and pay based on performance” (1994, 28), for example to pay salespeople by salary rather than by commission. Deming recommends replacing a system based on close monitoring and quality bonuses with a system using (for the most part) trust based on self-esteem and pride in the quality of one’s work. This approach to quality relies not on cleverly constructed pay-for-performance schedules but on switching over to a quality system driven largely by intrinsic motivators such as self-esteem and pride in one’s work—in short, quality as a calling. Simon came to similar conclusions about organizations in general. He identifies pride in work and organizational identification as some of the most important motivators. These intrinsic motivators are not controlled by the purse strings of managers. Other influential management theorists make the same point.
“Intrinsic” rewards . . . are inherent in the activity itself; the reward is the achievement. They cannot be directly controlled externally, although characteristics of the environment can enhance or limit the individual’s opportunities to obtain them. Thus, achievement of knowledge or skill, of autonomy, of self-respect, of solutions to problems are examples. (McGregor 1966, 203–04)
Paying someone to “identify” with the organization is like trying to “buy love.” The means corrupts and falsifies the end.
Another Look at Corporations
Since the American “model” is essentially only a textbook and lawbook model, to what extent is it really a possible option? In the American model, the employees have the legal role as the outside suppliers of an input—but in fact they are the firm as an organization of people. This leads to a remarkable schizophrenia of the “two companies.” There is the firm in the eyes of the law whose members are the shareholders scattered far and wide, and who typically trade into the stock simply as an investment without any intent or capacity to play a human role in the firm. This is the firm that has a “meeting” once a year. In contrast to this de jure firm, there is the de facto firm consisting of the people who work in the firm—who have a meeting every working day to actual produce the product and conduct the business of the firm.
The large widely held American company actually works because most of those who are legally inside realize that they are really outside and act like it (absentee shareholders using logic of exit), and most of those who are legally outside the company act like they are inside it (employees identifying with the company). Thus, the actual American-style company is torn between the two logics and tends to work well only when it ignores the exit-oriented design logic and uses the logic of commitment.
In figure 2.3, the two companies were presented as a Venn diagram of two overlapping circles. There are four areas, the two parts in one circle but not the other, the overlap, and the area outside both circles. These four areas can also be represented in 2 x 2 table 2.3 of the parties in or out of the legal (de jure) firm and in or out of the de facto firm.
Table 2.3 Who’s In and Who’s Out of the Two Companies
Ordinary consciousness often reflects the de facto company. The employees are often thought of as the members of the organization. Consider the following from a perfectly standard managerial accounting textbook:
An organization can be defined as a group of people united together for some common purpose. A bank providing financial services is an organization, as is a university providing educational services, and the General Electric Company producing appliances and other products. An organization consists of people, not physical assets. Thus, a bank building is not an organization; rather, the organization consists of the people who work in the bank and who are bound together for the common purpose of providing financial services to a community. (Garrison 1979, 2)
Garrison is talking entirely about the de facto company, not the company as it exists in law. Look at the books on the business shelves in your local bookstore. Find a book that uses some expression like “members” of the company. Chances are that the author, like Garrison above, is referring to the employees (including managers) of the firm, not the far-flung shareholders who are the legal “members.”
As Anglo-American stock markets have spread shares far and wide, the idea that the stockholders are in any real sense the “owners” or “members” of a publicly traded company has become a sheer fantasy. There are several groups invested in keeping the fantasy alive. Many economists and lawyers have acquired their professional competence in mastering the legal model and the economic logic of exit behind it. Anything else falls short of the One Best Model. And there are the top managers who have mightily profited from the eclipse of the shareholders. They have every interest in keeping the fantasy of “shareholder capitalism” alive as the cover story for the reality of managerial capitalism—much as the nomenklatura of the Communist Party had every interest in keeping the fantasy of “People’s Democracy” alive.
What Berle and Means described as the “separation of ownership and control,” John Maynard Keynes described as the “euthanasia of the rentier, of the functionless investor” (Keynes 1936, 376) caused by the public equity markets. This separation of ownership and control along with the unaccountability of managers and the resulting abuses has created the “corporate governance problem.” Who is to be the new legitimate members of the company? While a few wistfully hope for the resurrection of “responsible private owners” in the form of massive institutional investors run by portfolio-managing bureaucrats, others search the horizon for various “stakeholders” who together with the regulatory agencies and law courts might create a “new accountability.” But they are searching for legitimacy in all the wrong places.
There already is a class of members who make up the firm, the de facto firm consisting of the people who work in it. In a company designed on the basis of the logic of commitment, they would be the legal members of the company. That would extend the virtues of the family firm and the family farm (both having de facto firm = de jure firm) to the large corporation.
Many parties have their interests affected by a company, and better judicial and regulatory oversight is needed to protect those legitimate outside interests. But since the staff of a company are the de facto firm, they are the ones who could actually monitor the management of their company to address the corporate governance problem directly. “The only cohesive, workable, and effective constituency within view is the corporation’s work force” (Flynn 1973, 106).
The British conservative Lord Eustice Percy put the matter well sixty years ago:
Here is the most urgent challenge to political invention ever offered to the jurist and the statesman. The human association which in fact produces and distributes wealth, the association of workmen, managers, technicians and directors, is not an association recognised by the law. The association which the law does recognise—the association of shareholders, creditors and directors—is incapable of production and is not expected by the law to perform these functions. We have to give law to the real association and withdraw meaningless privilege from the imaginary one. (Percy 1944, 38; quoted in Goyder 1961, 57)
To conclude, we cannot do better than quote the visionary corporate leader, Owen D. Young (1874–1962), founder of RCA, president and chairman of General Electric, and Time magazine Man of the Year for 1929:
Perhaps someday we may be