Speaker 1: Bloomberg Audio Studios, podcasts, radio news. This is Bloomberg BusinessWeek
Speaker 1: with Carol Masser and Tim Steneveek on Bloomberg Radio.
Speaker 2: Well, the so called Magnificent seven, we talk about him
Speaker 2: each and every day. Yes, I'm gonna remind you it's Apple, Microsoft, Alphabet,
Speaker 2: Amazon and Vidio meta platforms. In Tesla as the group,
Speaker 2: they were up close to seventy percent last year, and
Speaker 2: then in twenty twenty three up one hundred and seven percent.
Speaker 2: Yet our next guest writes in his new book that
Speaker 2: quote the dominance of the seven is likely to be
Speaker 2: as transitory as that of the large business of early generations.
Speaker 2: He offers US Steel, General Motors and IBM as examples
Speaker 2: of companies who shares investors wants clamored to buy, just
Speaker 2: like these of the mag seven.
Speaker 3: Sir John Ky is a writer, professor, economist, economic consultant,
Speaker 3: a fellow at Saint John's College, Oxford, and more. He
Speaker 3: has spent years studying the interplay between business, economics and finance.
Speaker 3: This is so perfect for our audio. His new book
Speaker 3: is The Corporation in the twenty first Century Why almost
Speaker 3: everything we are told about business is wrong, which comes
Speaker 3: out in the US. Tomorrow's er Kay Joining asked him
Speaker 3: from London.
Speaker 2: Hey, so John, good to have you with us this afternoon,
Speaker 2: this evening. Thanks for joining us. As you write in
Speaker 2: the introduction, your target audience is people who would never
Speaker 2: normally pick up a business book, people who read popular
Speaker 2: science or history, but might welcome an intellectually serious, even
Speaker 2: sometimes challenging approach to a subject with whose detail they
Speaker 2: are unfamiliar. Why go for that target audience right now.
Speaker 4: Because there are a lot of people who will intelligent
Speaker 4: people who have opinions about business that are formed on
Speaker 4: the basis of very little. And as I say, there
Speaker 4: are two kinds of business books and bookshops right One
Speaker 4: of the ones that are five tips is how I
Speaker 4: run to run my business better on Monday. And the
Speaker 4: others are how awful capitalism is, and how terrible these
Speaker 4: tech titans are, and how they ought to be cut
Speaker 4: down to size, if not put in jail. And I
Speaker 4: want to write for intelligent people who take a view
Speaker 4: somewhere in between the two, or I just want to
Speaker 4: know about business the way people want to know about
Speaker 4: history or science.
Speaker 3: Well, when you look at business works, you know, sir John,
Speaker 3: when you look at businesses today, it does feel like increasingly,
Speaker 3: even though a few years ago it was all about
Speaker 3: multiple stakeholders, employees, customer companies, so on and so forth,
Speaker 3: it does feel like it is not necessarily the case,
Speaker 3: and increasingly it's about profitability and the c suite. Many
Speaker 3: would say this is that fair, and I mean would
Speaker 3: be right.
Speaker 4: Yeah, well it would be partly right. And the truth
Speaker 4: is that business is about creer eating great businesses and
Speaker 4: we were striking example of that at the moment. We
Speaker 4: have many, but one that is absolutely on your lips
Speaker 4: at the moment is Boeing. And in the second half
Speaker 4: of the twentieth century, people at Boeing built a great business,
Speaker 4: the world's dominant aviation producer, and they were clear that
Speaker 4: that was what they were doing. Bill Hallen, who was
Speaker 4: CEO of Boeing for some time, said we were here
Speaker 4: to live, eat and breathe the world about aeronautics. That
Speaker 4: was what his Boeing was about, and it built planes
Speaker 4: that came to dominate the world. Then in turn of
Speaker 4: the twentieth century there was a takeover or a merger rather,
Speaker 4: which was effectively a cultural although not a financial takeover
Speaker 4: by MacDonald Douglas of Boeing and Harvest. So In Cipher,
Speaker 4: who was CEO of became CEO of Boeing. He had
Speaker 4: been a McDonald douglas executive. He became CEO of Boeing
Speaker 4: and he said, people say this is a great engineering company.
Speaker 4: It is, but people invest in a company because they
Speaker 4: want to make money. And we know the things that
Speaker 4: followed from that, the seven three seven Max which ended
Speaker 4: in disaster, and now we have this pars of astronauts
Speaker 4: are stranded in the International Space Station waiting for Elon
Speaker 4: Musk ironically to come and rescue them. So John set
Speaker 4: up of great business. They did. Then they emphasized sharehold
Speaker 4: of value and they destroyed in the aird not only
Speaker 4: the business but the shareholder value.
Speaker 2: Well, it sounds like that's a case of incentives not
Speaker 2: necessarily being aligned here. And I know as an economist
Speaker 2: you study incentives. Are the incentives of the structure that
Speaker 2: we have that exists today, are they misaligned? Because companies
Speaker 2: are rewarded for what they're able to do on the
Speaker 2: top line and what they're able to do on the
Speaker 2: bottom line, that's what they're rewarded for. Is that the
Speaker 2: wrong thing for them to be rewarded for.
Speaker 4: They're not really rewarded on what they do on the
Speaker 4: top line. They're rewarded on a basis of some three
Speaker 4: year metrics and what happens to the stock price. They're
Speaker 4: not rewarded for creating shareholder value in the long run,
Speaker 4: which is what these twentieth century Boeing executives actually did.
Speaker 4: The way you create shareholder value actually is you build
Speaker 4: a great business, and if you build a great business,
Speaker 4: sharehold sharehold of value follows from that. It's that way round.
Speaker 4: I was interested that one of the reviewers of my
Speaker 4: book was someone who had been an English Test international cricketer,
Speaker 4: and he drew my attention to the by football coach
Speaker 4: Bill Walsh that says the score takes care of itself,
Speaker 4: and that's the message. If you build a great business,
Speaker 4: shareholder value follows from that. Maybe the guys who took
Speaker 4: over Boeing in the twenty first century created shareholder value.
Speaker 4: They certainly paid it quite a lot back to shareholders
Speaker 4: in the twenty tens, but they did a damage irrevocably.
Speaker 4: I suspect the reputation of the.
Speaker 3: Business, Sir John's part of the problem. You know, my husband,
Speaker 3: I talk about this all the time, is that we
Speaker 3: don't make a lot of stuff anymore. We're such a
Speaker 3: service led economy, and I don't know if that has
Speaker 3: changed the dynamics within companies and leaders and so on
Speaker 3: and so forth, And I'm just curious. I'd love to
Speaker 3: have you weigh in on that. Is that part of
Speaker 3: the problem.
Speaker 4: It certainly has happened, but I don't think it's part
Speaker 4: of the problem. And it's almost the opposite of their problem,
Speaker 4: because it used to be that businesses were created by capitalists,
Speaker 4: by rich men who spent some of their fortunes on
Speaker 4: building seal mills and textile plants and so on, and
Speaker 4: employed typically rather unskilled workers to work in them. The
Speaker 4: great businesses now are groups of highly qualified, technically proficient people,
Speaker 4: and the business of running the business is to put
Speaker 4: together the right combinations of people. So we've had that change,
Speaker 4: which has happened so that the means of production are
Speaker 4: now the people, not the plant. But on the other
Speaker 4: side of that, we've had, basically since the nineteen seventies,
Speaker 4: the growth of this idea that the purpose of a
Speaker 4: company is to make money for shareholders, the shareholder value
Speaker 4: CREED and these two things have been pulling in opposite
Speaker 4: directions in ways which I think, in the end dam
Speaker 4: to the legitimacy of the whole market economy as we've
Speaker 4: known it.
Speaker 5: So what is the purpose of a company?
Speaker 4: The purpose of a company is to satisfy a whole
Speaker 4: range of stakeholders. The reason we allow companies to exist
Speaker 4: is that they do a lot of things we want done,
Speaker 4: to produce a great product, to give people satisfying jobs,
Speaker 4: to make money for shareholders. It isn't any one of
Speaker 4: these things. And if you try to make any emphasize
Speaker 4: any one of these things, you do so at the
Speaker 4: expense of totality. And the people who break built great businesses,
Speaker 4: whether we're talking about Sloan at General Motors, whether we're
Speaker 4: talking about Alan Others at Boeing, or whether we're talking
Speaker 4: about the people who built the Magnificent Seven, the tech
Speaker 4: companies we all talk about now, they didn't set out
Speaker 4: I want to make as much money as possible I
Speaker 4: want to make They certainly didn't say it's set out
Speaker 4: to say I want to make a lot of money
Speaker 4: for shareholders. They said I want to build a great business,
Speaker 4: and they did, and the course of doing that, they
Speaker 4: made a lot of money for shareholders. And that's the
Speaker 4: way around it is the sure the score takes care
Speaker 4: of itself.
Speaker 2: So let's go back to the Magnificent Seven into the
Speaker 2: way that we open this, because you do argue in
Speaker 2: the introduction of the book that the mag seven, even
Speaker 2: though people are clamoring to buy the shares of those companies,
Speaker 2: they're going to be just as transient as some of
Speaker 2: those large businesses of earlier generations.
Speaker 4: Why is that, Well, they may even be more transient
Speaker 4: because there's strength lies in their people rather than their plant,
Speaker 4: whereas a Carnegie or Ford or General Motives it was
Speaker 4: a plant that determined the business. These dominance is are
Speaker 4: always almost always transient. Thirty years ago, when people understood
Speaker 4: that information technology was going to be a big thing,
Speaker 4: it was IBM, who as sure as they bought, they
Speaker 4: made that the most valuable company in the world. Now,
Speaker 4: Facebook and Meta are top of many people's lists. I
Speaker 4: know that Facebook. My grandchildren now think that's something for
Speaker 4: people of my age that's not.
Speaker 2: Something we maybe not Instagram and that's and WhatsApp, and
Speaker 2: that's what has been their saving grace.
Speaker 4: Right well, And there's an issue there that we need
Speaker 4: to talk about which is the nature of antitrust policy.
Speaker 4: And we allowed mistakenly, in my view, companies like Meta
Speaker 4: to take over Instagram and WhatsApp, whereas the whole strength
Speaker 4: of the market economy comes from people to new things
Speaker 4: to take the place of the things that went before. Actually,
Speaker 4: Facebook took over from MySpace, which was the predecessor of
Speaker 4: Facebook and providing the kind of space services that Facebook does.
Speaker 4: People have forgotten about MySpace now. Interestingly MySpace and I
Speaker 4: talked to executives there as to why things had gone wrong.
Speaker 4: They said because it was bought by News Corp and
Speaker 4: read group of murder who were mainly interested in creating
Speaker 4: shareholder value.
Speaker 5: That's interesting.
Speaker 3: So, John, one thing I want to ask you is
Speaker 3: if you know your title is why almost everything we
Speaker 3: are told about business is wrong. So if that's the case,
Speaker 3: I am wondering in terms of academic research consultants that
Speaker 3: abound in terms of you know, trying to figure out
Speaker 3: or try to tell or do tell companies what to do.
Speaker 3: If we were getting it wrong, what's the outcome of that?
Speaker 3: And if we don't get it right, if we don't
Speaker 3: maybe perhaps change the academic research about how we think
Speaker 3: about companies. If we don't do that, what's the outcome.
Speaker 4: I think the outcome is that we get things wrong
Speaker 4: in a pretty fundamental way. And in the first half
Speaker 4: of the twentieth century, people saw themselves as trying to
Speaker 4: create a profession of management, which was a respected profession
Speaker 4: like law or medicine or the priesthood or whatever. When
Speaker 4: people were called to do that and derived a lot
Speaker 4: of the satisfaction of their job, not just from what
Speaker 4: they were paid, but from the feeling that they were
Speaker 4: doing contributing something worthwhile to society. We've lost a lot
Speaker 4: of that, and I think it's made business a good
Speaker 4: deal worse as a result. And we can see the
Speaker 4: kind of loss of legitimacy followed. The murder of Brian
Speaker 4: Thompson three or four weeks ago is a pretty good
Speaker 4: example of that. The fact that almost forty percent of
Speaker 4: respondents to a pole suggested that that murder was at
Speaker 4: least partly justified. It seems to me a terrible commentary
Speaker 4: on the way business is now regarded among a large
Speaker 4: section of the population, particularly the young population.
Speaker 2: Is that a commentary on business or is it a
Speaker 2: commentary on the structure of healthcare in the United States,
Speaker 2: which is a result of decisions that politicians have made.
Speaker 4: It's a combination of both. I mean that health care.
Speaker 4: Healthcare is the forefront of that because again, go back
Speaker 4: to into the twentieth century and you see how healthcare
Speaker 4: created antibiotics and vaccines and other drugs that saved lives
Speaker 4: and made a great deal of money for the companies
Speaker 4: that produced them. We've now moved from a health to
Speaker 4: a healthcare sector that is largely people see it as
Speaker 4: being rather there to make as much money from us
Speaker 4: as possible from our need from healthcare. And that's why
Speaker 4: people seem to approve of the murder of Thompson, who
Speaker 4: fifty years ago would have been appalled by it, as
Speaker 4: they should be.
Speaker 3: So where do we go or again, I want to
Speaker 3: kind of dig to, you know, the repercussions, and I
Speaker 3: do actually think about how politics fits into all of
Speaker 3: this of a society that doesn't feel like they're represented anymore.
Speaker 3: I mean, if you've got you know, I think this
Speaker 3: is from your own website, you know, the widening gap
Speaker 3: between executives and employees is destabilizing our societies. Facebook and
Speaker 3: Google have more customers than any companies in history, but
Speaker 3: are widely reviled. So I do wonder, I don't know,
Speaker 3: is there a realization and and we come out on
Speaker 3: a different side, a different view of the relationship between
Speaker 3: employee and employer, Like where does this all go in
Speaker 3: your view? Or how does it? What's the dark scenario?
Speaker 5: Yeah, go ahead.
Speaker 4: We've had a culture change in the last fifty years
Speaker 4: in the wrong direction. I described how in the first
Speaker 4: half of the twentieth century through to nineteen seventies and eighties,
Speaker 4: we had the idea that we were trying to create
Speaker 4: a professional management and people who were employed in large
Speaker 4: companies were there to create great businesses. The shareholder value
Speaker 4: idea that businesses are just about making money has got
Speaker 4: in the way of that now. And this is not
Speaker 4: to say businesses are not there to make money. They
Speaker 4: are there to make money, but they're not just there
Speaker 4: to make money. And if they're just there to make money,
Speaker 4: they're not that successful even at making money. I think
Speaker 4: Percerns famously had about a sign saying we make nothing
Speaker 4: but money, and it's interesting that they ended up not
Speaker 4: making any of that. Is there a.
Speaker 3: Company and we're just got about a minute or so
Speaker 3: that you look at and say, Okay, they've got to
Speaker 3: kind of right the relationship between employer and employee. That
Speaker 3: maybe is a model for the way forward.
Speaker 4: Perhaps I think there's not a model in that sense
Speaker 4: because people cannot talk the right rhetoric. But if I
Speaker 4: go back to the twentieth century, if I go back
Speaker 4: to General Motors and IBM and as they were in
Speaker 4: the years we've talked about the people who were working
Speaker 4: in them, the people who were running them, the people
Speaker 4: who worked for them, knew that they were there to
Speaker 4: create businesses, great businesses, and if you create great businesses,
Speaker 4: you make a lot of money for stockholders. That's the
Speaker 4: way round it is, and that's the most important point
Speaker 4: to get across.
Speaker 5: So then what was the result of their down Why
Speaker 5: did they have a downfall? What happened?
Speaker 4: I think it was a set of social changes that
Speaker 4: happened as a result of the nineteen sixties. We can
Speaker 4: I talk about this at some length in the book
Speaker 4: money Can't Buy Me Love, Can't buy you Love, which
Speaker 4: was the great be Beatles song of the sixties. And
Speaker 4: then I say, well, perhaps it can. And that's about
Speaker 4: the academic work that followed from that. It's easy to
Speaker 4: date it to Freedman's article in nineteen seventy it said
Speaker 4: the social responsibility of a company is to maximize it profits.
Speaker 4: Perhaps more significant was the Powell Memorandum, written by Lewis Powell,
Speaker 4: who became a Supreme Court judge, which tried to persuade
Speaker 4: business that the way they made themselves more legitimate was
Speaker 4: to sponsor the right kind of academic research. And they're
Speaker 4: very successful in that. And the Cato Institute and Theage
Speaker 4: Heritage Foundation, the Business Roundtable or was set up in
Speaker 4: the nineteen seventies in response to this kind of thing,
Speaker 4: and we can see that in the end it hasn't
Speaker 4: made business more legitimate, it's being made it less.
Speaker 3: So think about Peter Goodman's book, right, we were talking
Speaker 3: about this.
Speaker 5: In the world ran out of everything.
Speaker 3: Right, in the role of consultants, many things at play,
Speaker 3: but you know, everybody outsourcing looking to kind of do
Speaker 3: things in a more efficient way, or so in the
Speaker 3: supply chains that moved outside the United States.
Speaker 2: And the Business Roundtable back in twenty nineteen with that
Speaker 2: letter that you know, that statement of purpose of a
Speaker 2: corporation that tried to sort of redefine the purpose.
Speaker 5: Of a company that was what six years ago at
Speaker 5: this point.
Speaker 3: Well, sir John K, you gave us a lot to
Speaker 3: think about, so appreciate your time and good luck with
Speaker 3: the book. Really appreciate it.
Speaker 4: Things measure to joak to you.
Speaker 2: The new book, The Corporation in the twenty first Century,
Speaker 2: Why almost everything we are told about business is wrong,
Speaker 2: comes out in the United States tomorrow