James Summer, former vice chairman of General Mills, argues that small is not always beautiful, and he will also propose how industry can better work in the public interest. His speech was entitled, "Corporate America: New Challenges, New Responsibilities", and given at the Conference on Intermediate Technology.
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For every activity there is a certain appropriate size. That quote it seems to me says about all that needs to be said about size per se. the subject that interests me is what scale seems appropriate doctor sumac its terms appropriate to which purpose and most particularly to which institution or institutions in our society. I'm going to employ it one other quote that is. appropriate to my comments. It's on page 267. Where he says in a large-scale Enterprise private ownership is a fiction for the purpose of an enabling functionalist honors the Lil parasitically on the labor of others. In my judgment that statement. Is half correct? There is no question that the facts will support. the finding that by and large in the large-scale Enterprise The owners are functionalis. But to assert that they are parasitic. I think is going to require. Some more examination and more thought most particularly. When it is a fact. that predominantly the equity ownership in carpet America and the Fortune 500 if you will. is represented by Pension funds and the beneficial owners of these Pension funds are the wage-earners I think that establishes the test of meets the test of functionalist and that's the matter that I'm concerned with whether or not you would consider that to be / City. is something that You will have to struggle with. Peter Drucker has developed. And explain this extraordinary phenomenon of the last 25 years and a recent book. Where he calls this? phenomenon B pension fund socialism the title of my paper that I'm working on is the challenge and the opportunity for Corporate America. The greatest underdeveloped resource in the u.s. Today. Are the Fortune 500 industrial companies and the corresponding commercial and financial institutions? I will call this class of economic Enterprise Corporate America. The private interest of American society have been well-served by Corporate America and providing material wealth and by doing so in accordance with the freedom of a democratic polity. There is a natural mutually supportive relationship between an economic system that is basically private and the political system. That is basically free. I intend to demonstrate my paper at the public interests of a sector of our society the public interest sector of our society which has grown dramatically in the past 25 years has become and must be viewed as a huge Market. This public interest Market has been serviced predominantly by the government at all levels. The general quality of the governmental performance is inherently untestable without the presence of an alternative and competitive institution in the society to provide the required services. So I Would by federal legislation. Define the public interest Market in legal and policy terms and I would require Corporate America to invest in and develop this Market. The totality of the merits of the American market for products and services can be roughly but usually divided. into the public interest market and the private interest Market military police fire fighting forces are clearly in the public interest Market a particular brand of toothpaste or mouthwash or Clear Lake private interest market products. The definition becomes blurred in the center of the spectrum with such Services is Healthcare care for the agent vocational education energy and housing during the past 25 years the demand for products and protective services has exploded in the center of the spectrum. These services are colored with public interest and yet or not easily placed and either the public interest Market. Are the private interest market? So I would Define and enforce the following classifications? First is the public interest Market pursued by governmental initiative. Second is the public interest Market pursued by private initiative and the third is the private interest Market pursued by private initiative. the new boy on the Block would be private initiative pursuing the public interest. This would be a modern reformulation of Adam Smith. Private initiative in American society has historically pursued philanthropic objectives alongside its commercial activities. This is also called a proprietary and the voluntary components which is a carry-over of a traditional concept of personal ownership. Any free time to employ that ownership right as the spirit of the honor my guide him. This private initiative philanthropic Pursuit has been in great part in the public interest Market such as the United Fund the YMCA and so forth. Corporate America's Financial Devotion to a philanthropic public-interest Market is less than 1% of pre-tax profits. And a large portion of this resource goes to cultural and educational institutions. Yep, the importance of the total public interest Market can be suggested by the percent. Of those funds expanded and explore example h e w HUD + the state and local budgets / the GNP and from 1965 to 1975. This percentage is grown from 17 to 27. And is continuing to grow at the rate at percentage rate of 1% a year. governmental 27% private less than 1% It is clear that the growing public interest Market is being pursued by pup by governmental initiative while private initiative is standing aside. Where did this Market come from? It grew within the body politic and much the same way that markets grow in the body. He conomic of a free Society the government did not create the market it responded to its development. What's the process is started the market demand and the market servicer reinforce each other. There seems to be a general acceptance of the legitimacy of this expanded public-interest Market. The concern that is most evident centers on the efficiency of the system for delivering the service and on a smile but hardcore number of recipients who do not legally qualify or if they do qualify or not deserving. A big one importance the growth of a welfare is not only the subject of the efficiency concern but of itself represents a threat to a free Democratic Society because it means increased government tire for sale. A major part of the public interest market then should be defined and declared as a market for private initiative. Correspondingly Corporate America should be required by federal legislation to enter. And to and to develop this Market private initiative must be required to pursue the public interest. private there are three resources are compliments that are necessary for a profit-making Enterprise to function. You going to Chinese? Its capital is labor and there is the market the requirement for Capital and labor or self-evident the role of the market calls for some explanation. All three are required if one or more is missing the Enterprise cannot function. Japan me of capital and labor, but it requires a market such as the us but it requires labor from the Mediterranean countries China and India may have Labor Anna Market, but they require capital. To develop a substantial profit-making enterprise economy even Capital at the level of the annual earnings of the average worker still capital is required. Government control Society is by their nature. Endeavor to control their Market both political and economic this difference between a government being the consequence of a free market and the market being a consequence of a controlling government is I believe crucial The market whether viewed as political or economic is common to the societies political and economical institutions. There is no long-term stable political institution without a stable economic institution and vice versa. The market has two parts. the consumer and the community a management integrates Capital labor in the market to create a new value. That is desirable. two leaves three resources when these three resources are viewed. has parties and interest so I would say that capital has a right to a fair return any right to influence the course of the Enterprise. Labor has a right. Do a fair wage and working conditions and a right to influence the course of the Enterprise. The market has a right to a fair product value for the consumer. Farrakhan duck for the community I know right to influence the course of the Enterprise. Up until World War II capsule was accepted as the predominant party of Interest Capital control by a small number of people through personally healthequity stock gave substance to the legitimacy of authority and control by virtue of property ownership. Labor contracted with ownership or its management agent or its compensation in terms of work, but played almost no role in influencing the course of the Enterprise. debt capital it is with the bank's contracted with ownership and was generally passive as to the course of the Enterprise. Although the relationship with property control may have been closed. Equity Capital through the instrument of the limited liability share added dramatically to Capital formation. But as played as a class almost no role in influencing the course of the Enterprise. A very small portion of the equity Hell by a small group has for many years been the primary primary power control for many companies. This may have been a family group maintaining original control. Are entrepreneurial group set up to gain control? Through the proxy mechanism this small percentage of the total Equity has exercise the power of decision. But in recent years the effective control has passed to Professional Management, which other group has no significant Equity ownership. So the market was simply there to be developed by the Enterprise. Within the framework of permissive law and quite often with the support of the government. During the past 100 years in particular late during the past 25 years. The large corporation has become established as the primary economic force in our society. The development of size is inherit. In the employment of Technology of production distribution and management control. If a bigger force can be managed in the effort will be made by management to make it bigger. management senior Executives of the large companies are driven by the necessity to grow larger. The ghost must be healthy in the full conventional sense of growth and profits and the balance sheet strength as well. As of sales and assets. This drive for growth is fundamentally compelling and pervasive. The compulsion to growth arises from the subjective test of success and a steam at the senior Executives apply to themselves that's assumed that 10% of these companies are faced with such problems at the executives or coping with preservation and survival. Assume another 10% or led by Executives. Let's see some primary objective other than growth so that 80% are 800 set the pace the standard. And call the children. the next layer of Management's m8000 executives are running hard on the hills of the top people for the same reasons. This is a fantastic resource for our society. Men and women who are driven to perform and to excel bring extraordinary skills to the challenge of guiding and controlling these very large Economic Institutions. and yet something is wrong. The finger of fault points at many different characteristics of the private for-profit system. They pointed size itself. And shake the remedy and I thought trust. They pointed technology. And seek the remedy and more and better technology. Are in the legal denial of Technology. They pointed profit itself. And seek the remedy and governmental operation. Are private not-for-profit institutions? The dominating mode of the 800 leading Executives is precise for growth and for a diversity. Importance of size and growth I think are self-evident. The increasing importance of diversity is less well-known. The conglomerate to the 1960s suffered bad economics and the bad press image, but the trend seems to me to be well established. and Justified at a well-conceived diversity can be managed and add strength to the total company. Through the stability of the mixer products and services to believe that the 800 top corporate Executives cannot successfully manage. The requirements for Effective diversity is the mess one of the most powerful achievements of management science during the past 20 years. This capacity is already present in good measure and will increase technology during the past 75 years. The employment of technology has required scale to achieve economic efficiency of true put the marriage of capital and Technology the marriage of capital and technology has driven down the unit cost of the gallon to pound. product and of the communicated word or pictorial impression But there are two concepts of size that must be understood. One concept I will call vertical to represent the very large power plant that is efficient because of his producing throughput cost per unit of output. I guess I would say efficient by nominal economic determination. Other examples would be a chemical plant a large computer or paper plant or surface mining operation vertical size when the demand for the output is at capacity and a stable when the demand. Is at capacity of the plant and its stable second concept of size. I will call her zainal to represent the case of many small computers and a large Network are several smaller power plants that are connected to a grid the total power produced is large, but the technology of size is associated with the network. examples of the Bell System are the TV system gas transmission lines or the interstate highway system, the interconnecting or infrastructure systems are no less dependent on technology for distribution efficiency van is production. We are going to live besides and with large size of one for my another whether we like it or not. I couldn't help but noticing and they slide on the intermediate technology of that smiles new tractor that I think it does run probably run on petroleum products. And I think that any petroleum-based system must necessarily be backed up by a very very large. Technical Capital Constructors, in order to service the requirements of that intermediate technology the two have to go together. You can't have the intermediate technology standing alone. prophet it is only one really important function and it is all important. It is a discipline that causes the monetary cost of an operation to be continually compared to the monetary revenues. The revenues are greater than the cost. You can all make life goes on in China India or the us if the revenues are less than the cost. You can all make life stocks. It is the discipline of the quick and the dead Profit is called other things such as a reward for risk the surplus of the wealth generating power and the attraction to Capitol. Also, it is called a measuring stick. It is all these things but these descriptions refer to the degree of profit. The degree of profit can vary or can be redefined to meet new or better understood real elements of cost. the discipline of absolute profit Must be the Bedrock. I've already conomic system. I believe that the combined effect of Market discipline competition and profit discipline within the company can achieve a growth economy will lay low and acceptable rate of inflation. It can achieve a full employment policy. It can achieve a tolerable equity and the distribution of created wealth of the society to all of its citizens. The tolerable Equity is the political condition of a free Society. When the tensions of any quality or tolerated by all the citizens because they believe in the legitimacy of the political and Economic Institutions. So I would propose that based on the criteria. We conomic size the largest 200 or if you will 300 to 500 industrial companies and the financial and Commercial institutions be brought under a federal Charter and this Charter would be fine their Authority if we rockets and their duties and their principal new duties would be One to provide job security to their employees in their private sector activities be to invest a percentage of their assets and public interest activities. And see to regulate their own private interests activities in accordance with the broad standards and rules set forth by federal government by the shorter. It seems that liberal politicians when there aren't are go to considerable lengths to reassure big business of their fundamental belief and the free enterprise system and you seen evidence of that recently. The concern is that without this insurance. The executive will like the self-confidence that is necessary to make the investment to create the growth of jobs that comes with an expanding economy. The experience of the past 10 years has sober to thinking of liberal politicians about the effectiveness of government intervention. The Experience among countries from Britain to Japan or Germany has mixed meanings, but the farmer confidence has eroded and their many thoughtful leaders of American Business who speak out and offer advice if taxes were reduced or modified if regulations were reduced that the federal budget was balanced then the business Community with sore and it's confidence. Leadership is Imagination couple with risk-taking and by this test there is no business leadership on the national scene. But I believe there is a tremendous latent capacity for leadership. There are many communities where local business leadership has made a difference. But almost without exception the end of vegetables have had prominent ownership positions in their company. The responsibility of ownership in a good man is a powerful force. The time is past when American Business leadership can bootstrap. It's on self confidence. An executive professional executive cannot decide to invest significant company Assets in a risky public interest area without a severe penalty two is company in the Capital Market. so the most important thing that the government can do is to bring about to bring about a Resurgence of confidence of the business executive is to create for him and you market and which we can operate with competitive efficiency and with clear knowledge that his efforts are in the National interest this knowledge What brain self-respect? and from self-respect self-confidence flows in full measure