The US economy would benefit enormously if the values and self-discipline commonly associated with the owners of private family-owned businesses could somehow be implanted in the upper reaches of management of all publicly owned corporations. I don’t have any magic solutions except to suggest that the big boys should be required to have “skin in the game”: a significant personal stake in the companies they run.
Americans are familiar with the celebrity CEOs who manage very large, far-flung public corporations—highfliers who collect huge bonuses even when these companies don’t do so well. The other, largely uncelebrated kind of capitalists—developers, contractors, suppliers, manufacturers, auto dealers and many others—manage enterprises closer to home. They don’t have to answer to shareholders or stock market analysts because they own the companies, often businesses they started from scratch and built to success. For the past fifteen years, I have advised these entrepreneurs on how to exit their businesses and preserve and transfer their personal wealth.
The differences between these two types of capitalism says a lot about what’s wrong with our economy. The system basically allows the most powerful players to evade personal responsibility for their decisions while the homegrown capitalists pay dearly for their mistakes, sometimes with harsh consequences. These entrepreneurs enjoy the risk-taking and seem to have a knack for doing business. Their work clearly fosters a broader sense of personal responsibility that’s focused on self-interest and family but also on employees and the wider community where they operate.
Successful CEOs and CFOs obviously deal with far more complex risks, but they also know they can move on in a few years. Their talents are portable, like traveling gunslingers. Even if they get bounced out of the job, their employment contracts typically ensure a very rich severance.
Homegrown capitalists are, by choice, in for the long haul. Entrepreneurs can’t easily walk away because for them, family wealth is directly tied to company success. If the company fails, the family loses its wealth. If the owner quits, the company likely loses its value. In short, they have skin in the game. This definitely encourages a different management style: more cautious in some ways, because the family nest egg is at stake in big decisions, but also gutsier and more patient in adverse circumstances, more willing to tough it out in hard times.
During the recession, I saw clients make moves that might seem overly sentimental to a business school professor, like waiting too long to lay off veteran employees. But these owners are practical-minded managers. They were trying to conserve the company’s intrinsic value—reflected in the experienced workers—until better times returned. They also knew the workers and knew the consequences of layoffs. Other firms scrambled for scarce credit as their sales fell and the banks held back on making new loans. When some pledged family homes as collateral, that made the risk very real, because their line of credit was running out. In one instance, an owner had just extracted substantial capital from the family business by selling a majority share of ownership. When the company became imperiled by the economic downturn, the owner pumped the capital back into the firm. He lost several million dollars in the transaction but saved the company—a wise deal in his judgment.
There’s a valuable lesson here for public shareholders interested in long-term gains. But it’s not one hotshot CEOs will learn voluntarily. Instead of being handed overly generous employment contracts, new executives should be compelled by law to put a big chunk of their own financial assets in escrow for five or ten years. If the company loses value in that time, the CEO forfeits some or all of that money. If the CEO’s performance improved the corporation, the deposit comes back with a big bonus. Deferring the rewards in this way would discourage short-term thinking and make corporate executives more responsible for the results of their management.
Read the next proposal in the “Reimagining Capitalism” series, “Open Source Politics: Safeguarding the Free Flow of Information,” by Joe Costello.