Directors generally do not direct unless they are also big stockholders or officers; as
outsiders
they usually don't know enough about the specific situation.
Lundberg - The-Rich-and-the-Super-Rich-by-Ferdinand-Lundberg
Many Ph.
D.
s, too, have come to be awarded in ridiculous fields.
Hutchins found one granted for work in automobile driver training!
So this heavy-handed Germanizing of American scholarship traces back to an original ex parte foundation decision.
Not all foundation efforts, by any means, have had such a disputatious outcome.
Carnegie money, for example, financed Abraham Flexner's great investigation of American medical schools. The report, which appeared in 1910, found nearly all of them far below par and some to be rackets, leading to extensive reforms that drove out the worst and converted the remainder from among the worst in the world to the best.
Again, Carnegie money financed Gunnar Myrdal and associates in the monumental study of the American Negro before World War II, titled An American Dilemma. It was on the basis largely of the findings in this report that the Supreme Court rendered its epochal school desegregation decision of 1954.
Rockefeller money largely financed Dr. Alfred Kinsey and associates in the study of sexual behavior which, despite methodological and other controversies that ensued, appeared to represent a long step toward greater light in a puritanically degraded area.
As Macdonald notes, "The Rockefeller agencies made medical history with such exploits as their worldwide campaigns to control malaria and yellow fever, and their detection--and subsequent elimination--of hookworm as a drain on the vitality of rural Southerners. " 74 It is evident that there is much one can find to set up on the credit side of the foundations.
And, yet, the critics still find many serpents coiled in the garden. William H. Whyte, in Fortune (November, 1955), held it a bad thing that foundation grants went more and more to institutions or to research teams, less and less to individual workers. As Macdonald reminds us, the greatest work has been done by individuals, and in the "soft" disciplines. 75
Not only must the foundations, with an eye to the cultural vigilantes, stick to safe, tried and true areas, but they cannot support pioneers, who automatically have the animal mobs ranged against them. Had they existed in an earlier day the foundations could not have sponsored Copernicus, Galileo, Vesalius, Darwin, Pasteur, Marx, Freud or many others. These were all, by public acclaim, reprehensible men; some still are.
As recently as the 1920's they could not, owing to low-grade public opinion, support Mrs. Margaret Sanger in her timely but frustrated campaign to disseminate information about birth control. Margaret Sanger, like Socrates, fought as an individual and went to jail as an individual. The birth control movement was stalled, has been revived only recently under dire eleventh-hour necessity.
The original program of the Ford Foundation grew out of criticism by Edwin R. Embree, former president of the Julius Rosenwald Foundation, advanced in an article in Harper's Magazine in 1949 entitled "Timid Billions. " Embree held that, because foundations--mainly those of Carnegie and Rockefeller--had pioneered in medicine and health nearly fifty years before, these now highly developed fields had become placid foundation preserves, with about half of all grants going to them, another third to routine universities and colleges, and the rest to routine welfare agencies. He thought it time that new ground was broken, with the results seen in the successful know-nothing attacks on the Ford Foundation.
Embree criticized the foundations for "scatteration. " And in its more recent policy this is precisely what the Ford Foundation has come to.
The Guggenheim Foundation more conspicuously than others has awarded grants to the humanities and to individuals. Hundreds of writers and artists have received sustaining funds from this source.
As part of the favorable tax-financed public-relations image the foundations develop for corporations and founders that grew rich in questionable ways, they present the aspect of being highly civilized by proxy association with cultural heroes. Avoiding in their lifetimes creative persons like Margaret Sanger or Socrates who are invariably suspected by the ignorant multitudes of being up to no good, the foundations fondly embrace all established cultural heroes and those potential heroes working in popularly approved cultural channels. Not heroic themselves, they nevertheless exist in a soft, derived heroic light, invoking in the thoughtless gaping multitudes some feeling of being in the shadow of a cathedral. They are, on the contrary, basically demagogic; for the main thrust of their effort is not in any sense the deliverance of man but the protection of their sponsors' plantation. While this is surely narrowly intelligent of them, it is not, as I see it, something to induce public celebration.
And the fact that it is all done, really, with public money certainly puts anyone in the position of being gulled who applauds them more than mildly for good works. It should never be forgotten that if the Ford Foundation had never been founded every cent of the money would have been taken in inheritance taxes by the United States government, thus lightening the tax load for everybody. If the Fords, Dow, should achieve something humanly tremendous through their foundation they would not achieve it with their money but with our money. While not impugning the achievement, whatever it was, or the judgment that led to it, recognition of the nature of the transaction would certainly place it in a somewhat different light.
What the subsidy is in the case of any foundation of any considerable size one can readily ascertain by looking up what the estate tax rate was when it received its funds. This rate, ranging more recently up to 90 per cent, represents the portion of principal saved from taxes. Where income on the principal exceeds $100,000, the amount of taxes avoided, at present rates, is at least 70 per cent and has been as high as 91 per cent.
So, whatever good is accomplished by the foundations is largely accomplished with other people's money, a familiar finpolitan practice. And if one wishes to salute the original source of this beneficence it should be Congress, making free use of our money.
Money funneled into education has to some extent no doubt been of general benefit. However, much of this educational effort has been devoted to producing corporate personnel, with the primary mission of making profits. The Du Ponts have poured heavy sums into M. I. T. ; and Carnegie established the Carnegie Institute of Technology in Pittsburgh, a prime source of local plant and departmental managers and company officers. Even more general applications of educational funds can be shown destined primarily for the support of the corporate world.
It is a common experience in the United States for people to read in newspapers and magazines of great new medical advances and discoveries, but they little realize that most of these advances will never be available to them, will be available only to those who can afford them in a few centrally located medical centers. As I gave extended attention thirty years ago to these problems in which there has been little change since, the contemporary reader may be left to the references. 76
Scientific findings have been applied most assiduously in the amassing of corporate profits.
While it is generally gratifying to see so much human ingenuity displayed and developed, it is worth noticing that the fruits of all the effort are for the most part restricted in their distribution. The wide prevalence of slums would suggest to a visitor from another planet that there was little education, science or medicine available to anyone at all in the United States.
If it is nevertheless insisted that all this foundation effort represents philanthropic activity, then it is governmentally coerced philanthropic activity, under the threat of taking the principal in taxes if the income is not devoted to narrowly applied good works. The government, in brief, forces the rich to tend their own plantation.
Intellectual Sleight-of-Hand
I therefore cannot help seeing the entire American philanthropic movement, hailed as something unique in the world, as intellectual sleight-of-hand as far as its claimed disinterested benevolence and general distribution of benefits are concerned. There may have been some gain in allowing private dispositions of the money to be made, where it has been made in good faith, because one cannot suppose it would have been expended
more judiciously if left to run-of-the-mill pubpols. The prospect might have been far less entrancing if it had been left to the manipulation of the more self-oriented of these.
The Ford Motor Company does not claim to be philanthropic. But the Ford Foundation, which grew out of it and is the public halo of the company, is claimed to be philanthropic even though it is managed by the same people. When Henry Ford II presides over the Ford Motor Company he is nonphilanthropic, a business barracuda; but when he steps into his role as a trustee of the Ford Foundation he, like a Jekyll- Hyde, suddenly becomes a philanthropist. With the Ford Motor Company he endeavors to garner all the money possible; with the foundation he endeavors to give money--our money--away.
Is he--on balance--richer or poorer? As a result of establishing their many foundations and "giving away" hundreds of millions of dollars, are the Rockefellers and other foundation impresarios richer or poorer, more or less esteemed, more or less solidly ensconced, stronger or weaker?
The answer in every case of a surviving foundation family group is that the foundation has benefited its sponsors more than it benefited the world. Whatever benefit it has wrought for the world it has wrought, too, for the family group. For the world is their village, through which their personal interests ramify in a bewildering network. Why should they not wish to benefit the world as they, too, must live in it? And any benefit wrought, however minor, brings to them vast credit, enhances their status as exalted citizens of the world. They all rate at the highest level in mass-media esteem.
The main point I extract from this is that these are very subtly powerful people, far more powerful even than they are portrayed by a deferential press. Nor are they, despite the deft airbrush of the public relations man, especially benign, as is plainly evident in the heavy commitment to systematic extreme violence of the political system in which they have, by enormous margins, the largest stake.
Never registering opposition to any of the many wars, foreign police actions and military missions against the heathen in which the seemingly detached government engages, usually instead registering enthusiastic approval and giving full support, they must be considered integral to this way of conducting affairs. At the time of this writing this political system is using some of its vast firepower, much of its manpower, with which to establish new foreign bases, as in Vietnam. Although Vietnam is popularly accepted as an heroic dirt-level president's maximum effort, the operation has been formally and enthusiastically endorsed by Governor Nelson A. Rockefeller. It is, obviously, a venture carrying the highest finpolitan sanction. 77
While the Vietnam venture will indeed make all of us more secure against the devil of Communism (or will it? ), it is surely going to make some persons far more secure than others. To be entirely fair, we must concede that even the denizens of the slums, thanks to a foresighted president, will be made more secure in their slumminess. This boon happily works both ways: The rich and the poor are benefited by being fully protected in their respective statuses.
Proposed Foundation Reforms
Representative Wright Patman advanced concrete proposals for reforming the foundations, tightening the regulatory leash so they would not be quite so free to maneuver self-servingly as now. His recommendations were as follows:
1. Limit their life to twenty-five years, as in the voluntary cases of the Julius Rosenwald Fund and the foundation established by the late Arthur Curtiss James.
2. Prohibit them from engaging in tax-exempt business in unfair competition with taxpaying businesses.
3. Prohibit them from engaging in tax-free lending and borrowing.
4. Require them to engage in arm's length relationships--that is, prohibit them from extending intramural benefits, say, to the employees of a controlled company, a form of subtle unfair competition with others.
5. Prohibit them from soliciting or accepting contributions from suppliers to and patrons of their companies.
6. Prohibit foundations from owning more than 3 per cent of any corporation, thus shrinking them as factors in corporate control.
7. Make them conform to certain rules in the case of proxy fights in corporations where they hold stock ownership.
8. Prohibit them from trading in and out of securities in quest of capital gains.
9. Allow no tax exemption on contributions to a foundation until the money has been actually put to approved charitable use.
10. Deny tax exemption to any foundation if it has clearly been established for tax avoidance or to obtain financial benefits for the founder.
11. Compute donations of property to a foundation at cost or market value, whichever is lower, rather than on the present basis of market value which permits the evasion of taxes on appreciated assets.
12. In contributions made by corporations, let such contributions be credited to the stockholders, thus keeping untaxed contributions to present limits prescribed by law.
13. Treat all capital gains by foundations as expendable income and do not allow them to be converted into new capital.
14. Add money unreasonably accumulated by corporations controlled by a foundation under present laws to the foundation's own accumulation as if the two were one. "The use of subsidiary corporations should not be permitted to cloak actual accumulations, as is the case in the Howard Hughes Medical Institute of Miami Beach. "
15. Corporations controlled by foundations should be subject to taxes on unreasonably accumulated earnings, as prescribed by law for foundations.
16. From the base for the marital deduction there should be excluded amounts left to foundations that are henceforth untaxed. And while money given to foundations is not subject to gift and estate taxes, the rate brackets to be applied to moneys that are taxable should be the same as if the prescribed foundation portions were part of the taxable gifts or estate.
17. Regulation of the foundations by the Treasury Department should be tightened in many specifically indicated ways and the Treasury Department should be obliged by law to function actively in this area.
"These and other reforms," Mr. Patman gravely' concluded, "are vitally necessary. " 78 For what little it may be worth, I concur.
The Patman investigation has already influenced the passage of new laws regulating foundations in New York State, where most of them are chartered. The effect of these New York laws will probably be to drive many to states of easier virtue, as in the case of corporations that finally found lax regulatory states in Delaware and New Jersey. In general, regulation in any of the states, of any kind of activity, is about on a par with the
regulation of a frontier saloon, which is why entrepreneurs of all kinds prefer state to federal regulation.
Said the New York Times about the new situation in New York:
A sampling of reports filed as the result of a new law this year has shown that many purportedly charitable foundations are tax dodges, according to Attorney General Louis J. Lefkowitz. He said that the foundations were also sources of funds for the personal use of their directors.
The charitable organizations . . . operated without supervision or regulation before last January. . . .
A random sampling of 400 registrants, and examination of the 500 financial reports, has turned up numerous examples that show sufficient evidence of improper manipulation of the funds to justify the calling of an investigation, according to the Attorney General.
Often the manipulators who used the funds for their personal gain had already profited by large tax deductions based on their gifts to the foundations, he added.
. . . some charities have already received millions of dollars this year that they would not otherwise have obtained as a result of his staffs work.
Tax-free ostensible charitable funds had been used (Mr. Lefkowitz discovered tardily) for business purposes, to buy expensive paintings and sculpture for the donors' own homes, to pay salaries to relatives and for a variety of other personal accommodations- facts which anyone could have ascertained in 1937 by reading America's Sixty Families. Most of the New York foundations funded at more than $1 million--and this the authorities now thought suspicious--were set up to make distributions for charitable purposes "to be selected by the directors. "
Under the new law the attorney general of the state may at his discretion bring action to remove directors who fail to comply with the law and may compel accountings and order reimbursement for loss of funds resulting from improper activities of directors or trustees. 79
All this, however, will not lock the barn door even tardily because there are forty-nine other states.
Concluding, whatever foundations do, for good or ill, for self or humanity, they do for the most part with publicly conferred money.
Eleven
MINISTERS OF FINPOLITY: THE UPPER EXECUTIVES
Top executives of top American corporations are, after the Kremlin rulers, the most anxiously studied and written about small group of persons in the contemporary world of affairs. Each group is more sedulously and continuously scrutinized, in sober truth, than the much larger and far more crucial collection of scientists.
More numerous than Russian politicos, American upper corporation executives are nevertheless very few. If we take the elite Fortune list we have before us only 500
industrial companies, 50 commercial banks, 50 public utility companies, 50 transportation companies (rail, air, highway and water), 50 life insurance companies and 50 merchandising enterprises--750 in all. This is the cream, with assets ranging from as low as $7. 444 million (Needham Packing) to $30. 906 billion (AT&T).
Each of these enterprises glories in a chairman, a president, usually at least one executive vice president, sometimes a comptroller and always a treasurer and a secretary, the three latter rarely involved in policy formation. The array of vice presidents varies by size of enterprise but, no matter how large it is, these men are usually mere divisional or departmental managers, direct instruments of top management but not in top, management themselves.
So truly imperial is the domain of the largest finpolities such as AT&T, General Motors and Standard Oil that the executive vice-presidential function is often divided among several men, who meet as an executive committee. General Motors in 1964 had three executive vice presidents; Standard Oil of New Jersey, five; but Ford, only one.
In the ordinary case the top officers are a trio: chairman, president and executive vice president. The president's duties correspond to those of the captain of a ship, are virtually as routinely formalized; and those of the vice president correspond to the ship's executive officer.
If we allot to big management an average of five men we have 3,750 upper executives. Because some of the larger companies have more than five in top management, it may be that as many as 5,000 should be reckoned. As there are smallish fairly important companies not included in Fortune's compendium, the number of top management people may be as great as 10,000, the number set forth in Business Executives of America, published by the Institute for Research in Biography in 1950. But this total included men in Canadian as well as United States companies.
Important corporation executives certainly do not exceed 10,000. More probably there are fewer than 5,000, a restricted group. Naturally, if one looks down the entire nondemocratic para-military chain of command to junior executives and foremen, the number of executives is much greater. None of these shapes policy and few ever will. They are cogs of the order of middle-range Soviet commissars and lower bureaucrats. The system is indeed very much like the Soviet's, which was modeled after it.
Corporations generally are run by the executive vice president (or vice presidents), the president usually supervising and intervening directly only when he feels it advisable. In newer, reorganized or problematic companies the president, it is true, may be a dynamo of activity. The chairman is available for consultation on nice points of policy; only rarely if ever, one gathers, does he tell the president, unbidden, what he ought to be doing.
Within the bounds of determined policy and the nature of the business the president is a complete autocrat. Such being the case he usually acts with great restraint, like a jet pilot who knows that the slightest touch on the rudder may cause a wide deflection of course.
The chairman comes into fullest bloom at meetings of the directors, over whom he presides. These are held quarterly or semi-annually; and are mostly routine affairs. Top officers are directors, and one may ascertain who is and who is not in top management by noticing whether he is or is not a director as well as an officer, a point in elementary corporatology.
The chairman, president and executive vice presidents are invariably directors; the vice presidents sometimes are. In Ford and Standard Oil of New Jersey some vice presidents are; in General Motors at present only executive vice presidents are.
Apart from company officers, directors usually consist of officers of other friendly companies or friendly banks, of lawyers, sometimes foundation officers and college presidents, former officers and large stockholders (sometimes themselves former officers). Directors who actively question or suggest are usually owners or representatives of large blocks of stock or senior obligations. In most cases the outside members are passive, merely listening and taking note of what is reported by the executives. They evaluate what they hear in terms of their own business experience.
Except where forbidden by law, as in the case of banks, directors are usually cogs in widespread interlocks, a phenomenon abhorrent down through the years to many congressmen. Congressmen who dislike this practice of interlocking directors--that is, a few directors from a cluster of key companies spread around among a large number of satellite companies--would like it forbidden on the ground that it signals central moneybund or "Wall Street" control. They would prefer that a man be a director of only one company at a time, thereby bringing in many "unsound" outsiders.
My own objection to forbidding interlocking directors is that it would be ineffective in breaking the true interlock, which exists by prior dispensation in a small ownership coterie through blood relationships, intermarriages, private school associations and club memberships. We must not forget that the entire corporate situation directly concerns no more than 2/10ths of 1 per cent of the adult population (fewer than 200,000 people); with some 8/10ths of 1 per cent less involved; and never more than 10 per cent even infinitesimally involved except as rank-and-file employees and consumers. Abolishing corporate interlocks would not alter any basic situation, would at most provide only one more futile pseudo-reform. If it led anyone to believe some basic change had taken place, it would be grossly deceptive.
Those who oppose interlocking directorates, if they were seriously consistent in their recommendation, should call for the outlawing of intermarriage, hereditary trust funds, common schooling and common metropolitan club membership among large property holders and corporate families. One could isolate each one, incommunicado, in a private telephone booth.
Except where they represent large blocks of stock or are officers of the company, directors are seldom vital to the conduct of affairs--serve mostly as window dressing. There is a school of corporate thought that contends directors should direct; but this is a minority view.
Directors generally do not direct unless they are also big stockholders or officers; as outsiders they usually don't know enough about the specific situation. Even the notion that some bring to bear an indispensable broad-gauged public point of view, valuable in preserving the corporate image as a benign entity, won't hold water because efficient public relations departments tend to this simple detail. A few directors, in fact, are invited on boards solely because they are witty or eccentrically knowledgeable fellows, thus tending to perk up otherwise dull meetings of essentially stodgy men.
In crises directors may be collectively called up to tap their general business experience. Some internal dispute over fundamental policy may be submitted to them, in which case they function as a board of judges. If they cannot resolve the dispute it will be resolved at the next meeting of stockholders, where the big shareholders will assert themselves. But such an occurrence is rare because among the directors it is known who speaks for large stockholdings. It is known where the ultimate power lies.
Despite all the devotion to voting in corporations, the process is hardly democratic because the vote, in any showdown, is by shares of stock, not by individuals. All the thousands of rag-tag stockholders in the Ford Motor Company could not outvote the Ford family. The situation is absolutely or effectively the same in every company, which means that a very large and paramountly vital part of internal American affairs is
under essentially autocratic rule, as in Russia. At variance with democratic ideology this statement surely is but nevertheless, alas, it is true, true, true.
As long as matters progress smoothly, as they ordinarily do, the point of view of the managing officers prevails at board meetings. Organizational trouble appears only if a very large stockholder, or someone speaking for large blocks of stock, seriously opposes the management.
While newspapers report from time to time on internal struggles for company control, such reports rarely involve the biggest companies. Control is seldom an issue in the big smoothly running enterprise. Whenever it is, the issue is quickly resolved, either by internal vote or by court decision.
The Executive Mystique
Corporation officers are of interest in this inquiry mainly because they are the front- line deputies of the rich and the super-rich when they are not themselves of the rich. They are the watchdogs and overseers (usually hired) of great wealth. As such, their earned take-home pay is rivaled only by that of persons in the sports and entertainment worlds who become tremendous box office attractions--home-run hitters, knock-out punchers or seducers-seductresses of the screen. Because only a handful of these fireflies maintain their box office charisma for any considerable time, as a group they are not in the income class of the executives, who even in retirement continue to be handsomely rewarded. Entertainers and athletes in general are paid little.
Just what is it that makes an upper corporation executive worth his pay, ranging on the record from $200,000 to $800,000 a year in the merely cash portions? A standard answer, part of what I shall hereafter refer to as the executive mystique, is that "the value of an upper-echelon executive lies in the decisions he makes and influences. " 1
It is made evident that the decisions for which he is rewarded so handsomely are money-making decisions. While he may at times make wrong decisions, most of his decisions (at least the big ones) must be the right ones, the winning ones. Or so it is argued.
One cannot deny that the top executives are decision makers. But this observation is not very profound because, paradoxically, not to make any decision is a decision. We are all, as it happens, decision makers. But we are not--most of us--money-making decision makers.
The kind of decision making the big executive engages in, according to theory, is as follows:
He makes one big decision (or a series of decisions) that vastly improves the relative position of his company, reflected in earnings; that slightly improves or holds steady the relative position of his company among rivals; that in any general economic decline leads his company to lose ground less rapidly than others; or that enables his company, at the bottom of a slump, to spring up again, phoenix-like, and astonish the world--or at least the editors of Fortune and the Wall Street Journal.
More exactly, he is not supposed to make those decisions by himself, out of the whole cloth, but to fit together the advice and insights of many others, like a master craftsman, and extract the winning decision.
In theory the decisions he makes must be winning decisions. Because if one is paying for decision making, as the big stockholders are supposed to be doing, one surely does not want to pay for losing decisions. And yet, highly paid executives often make momentous losing decisions, sometimes all together, sometimes in industry groups and sometimes in single companies.
In the early 1930's, the leading corporate executives all made a collectively losing decision. They decided to maintain their economic positions amid sudden price declines through cost-cutting, mainly by wholesale discharges of unprotected workers, the rank- and-file patriots. The theory was that as demand for goods was restimulated at lower price levels, business would pick up at more normalized levels than in the 1920's, workers could be rehired at lower wages as in the slump of 1920-22. Then the process of money-making could resume on a "sounder" basis.
There was no pick-up, however, because during the serial process of wholesale layoffs workers exhausted their meager savings and credit.
When prices reached low levels they continued to fall to still lower levels, except where they were "administered. " Much less business was done because many people had no money. The economy began stagnating, the Communists gloated because Marx had predicted capitalism would lose the ability to govern in one of these slumps. The Great Depression was on, produced by master minds who instead of living up to their reputation as entrepreneurs had become, turtle-like, solely interested in preserving working capital.
Ironically, surrounding conditions from a business point of view were perfect. There was no government interference with business. There had been twelve years of uninterrupted lax Republican rule under figurehead presidents. Taxes under Treasury Secretary Andrew Mellon had been brought to very low levels. Tariff walls against odious foreign goods were at record high levels. Big Business ruled the roost more fully than it did later under Lyndon B. Johnson.
If it were a fact that executives are paid as decision makers they would all have been fired. For they had all, acting according to crowd psychology as they usually do, made a general losing decision, reflected in steady corporate deficits. There never was a major winning decision in this situation in the sense of one company moving ahead of others. No corporate master mind showed himself, for the simple reason that there were no corporate master minds. The emperors were all stark naked. In national self-defense the government moved, slowly, to intervene with its own programs, amid witless cries from the corporate press of "creeping socialism. "
One often sees the same sort of collective losing decision making in an entire industry, as in the railroad industry since World War I. Suddenly faced with new competition-- from pipelines, trucks, buses and airplanes--the railroad industry down through the decades, instead of adjusting services to meet new conditions, instead of participating by one avenue or the other in new forms of transport, decided to curtail services. The industry decided, forsooth, to go out of business on the installment plan.
Where one company clearly falls behind all others in the same industry through having failed to adapt to new currents or to take advantage of some innovation, it is obvious that the chief executive (or his subalterns) has not been alert and he is, unless he is a big stockholder, usually dropped. This was the case with respect to Charles Luckman, president of Lever Brothers after World War II and widely touted as a "wonder boy. " The rest of the industry stole a march on him in the introduction of detergents in place of soap powders, and Lever Brothers underwent setbacks in the market until it tardily took up detergents. Luckman was fired.
But when Ford Motor Company lost a reported $250 million on its hapless Edsel model in the 1950's, Henry Ford II did not walk the plank. He, along with other stockholders, simply took it in the pocketbook. He could not be fired because be was a chief owner. This simple fact revealed the source of true power in an executive.
Aging Sewell Avery, a big stockholder, stubbornly held to his position at the head of Montgomery Ward and Company after World War II and decided to retrench in expectation of a resumption of the depression. Ward's arch-rival, Sears, Roebuck and Company, decided to expand in expectation of an inflationary boom, and soon passed on to astronomic heights of latter-day success. Here we have a case of a losing and a winning decision, both made by experienced managements, one rather inflexible. To argue that Avery was a poor executive because he made a less advantageous decision is like arguing that Napoleon was a bad general because he lost the battle of Waterloo.
In all the loose talk about executive decision making it is overlooked that corporate decisions are usually made collectively, more recently on the basis of a vast mass of information assembled and digested by computers. After careful sifting by low-paid technicians--statisticians, economists, mathematicians, psychologists and even at times anthropologists--a set of alternatives is laid before the executive board. If the correct data have been fed to the computers these mechanisms may themselves have the answer: Expand, branch out, retrench, stand pat, fight, submit, deny. Again, the decisions are rarely of life-and-death caliber. They are usually fairly routine and marginal.
John F. Kennedy, it is reported, faced divided counsels among his advisers on the religious issue in 1960. Some said he should avoid it, some said he should stress it, others felt he should touch on it, but lightly. The problem was put to a computer into which a mass of data was fed on the characteristics of the American population. The computer replied: Stress the issue. And this was done. While one cannot say that this is why Kennedy won, it obviously did not cause him to lose. So it was presumably the right decision-made by a computer. The masterly decision in this case was evidently to turn to the computer.
Corporation officials often face issues that arise from a set of losing decisions of long- or short-term nature. And they know they are losers. What they often do then is to make no decision, ride with the tide in the hope that something of a saving nature will turn up. They are not, then, paid primarily to make dramatic "right" decisions, although they participate in corporate serendipity and will be penalized for obviously bizarre judgments, now increasingly eliminated by expert analysts and computer technology. But corporations, their nets spread wide, are not run by ear, as the decision-making theory suggests. If they sometimes gamble, it is only in small ways. Almost never do they stake their lives on a single line of policy. They do indeed have alternative policies, sometimes all in effect in different areas at the same time. They play both ends against the middle and the middle against both ends.
There is much else, which need not detain us, to show there is little in this contention that high compensation is given for profitable decision-making. The decision-making theory is part of the executive mystique. This mystique, dubbed "Management," has been developed partly for psychological reasons: To give executives in a long chain of command down to the newest junior executive and foreman a sense of worth in essentially boring jobs. It also provides an impressive rationale for the payment of grotesque salaries. For as decision makers, most company chairmen and presidents could not fight their way out of a paper bag, as is repeatedly shown when they are dragged into full public view and subjected to searching questioning under subpoena. Then they almost invariably wilt, show themselves as very ordinary men.
This is not to say that corporation executives are without ability. They are able people, the ablest that can be found for the task. Their ability resides in a varying combination of qualities. The big factor that enters into their selection and compensation is that they are custodian-trustees and overseers of vastly valuable properties. As they are agents of
often absentee large owners, and are sometimes caught in tight situations where one decision is as bad as another or is a Hobson's choice, their pay is in part an inducement to guarantee loyalty at the beginning of a chain of command. Below the top, loyalty can be enforced by sanctions. But the initiator in the chain of command has a wider sphere of action.
Owing to their strategic position at the head of complex properties the top executives are in excellent positions for self-enrichment. They bold the combination to the office safe, know many inner company secrets. They are exactly in the positions of Rockefeller and Carnegie with their early enterprises, except that they are not the chief owners. (They usually own very little of the company. ) But, as corporate history shows, they are in a prime position to help themselves to goodies at the expense of the company and its stockholders. Many have done so, a few from time to time are still caught in the act.
Though partly a crowning reward for long service in a variety of lower positions throughout the company, their compensation is mainly, a shield against the temptation of helping themselves at the company's expense. Such temptations are guarded against in many technical ways, as by outside audits and analyses, but the basic way is to make it always evident that a sure and comparatively high earned income awaits the man who avoids the dark risks of high adventure at the company's expense.
That astronomic executive compensation has nothing whatever to do with decision making or competitive wizardry is proved by the fact that executive compensation in the noncompetitive electric utility industry is as high as, often higher than, in straining, striving industrial companies. Copious figures on the compensation drawn by executives in these utility sinecures, which could easily be filled by bright collegians, are presented for twenty pages by Senator Lee Metcalf of Montana in his Overcharge (David McKay Company, N. Y. , 1967), a study of fancy financial capers by the entire contemporary electric utility industry.
There is even more to the need for high compensation. As the company wants the top executive's undivided attention, it wants him to feel free of all the nagging worries that beset other men. As far as these problems can be met by money--big life insurance, schooling for the children, residence in soothing surroundings, a contented wife--they are met in the compensation awarded. Problems that cannot be solved by money, such as problematic wives, will cause a likely prospect to be passed over because the company cannot afford to have its affairs in the hands of a brooding man. Much has been made of the fact that an alcoholic or socially withdrawn wife will cause a man to lose the nod of advancement. But anything at all bizarre or worrisome about the wife will have the same result. It is not minded if she is a big spender, but if she overspends or in any way shows she is out of control, she will certainly jeopardize his chance. Indeed, any member of the family far out of control and thus the object of worry to the man will count heavily against his selection for a top position.
Hence the high salaries, elaborate fringe benefits and deference in the corporate press to ostensibly brilliant decision makers.
The hired top corporation man, then, as distinguished from the hereditary owner- executive, is much like the cormorant or fishing bird, still used in China. A strap is fastened around the birds neck, permitting him to breathe but not allowing him to swallow his catch. He dutifully brings the fish back to the boat. Now and again (paydays) the strap is loosened and he is allowed to swallow a fish. The bird is a percentage participant in the process, which was established by and for others. 2
It is part of the corporation mystique that the corporation executive is inherently a powerful person--that he freely and autonomously extemporizes. But if such ability
were either extensive or crucial it would be easy to shift top officials out of industries where the average net return on capital was high, such as automobiles, cosmetics or pharmaceuticals, into industries where it was low, such as coal, railroads or steamships. The wizard decision makers would then be able to make decisions that would move the lagging enterprise far above the traditional rate of return for the industry.
This is not done. Executives are not attracted from booming industries to lagging ones, from whaling and pearling to sponge fishing. When an industry hits the skids all the enterprises in it go down, some perhaps faster and further than others. No amount of experienced executive decision making in a single company is able to arrest the process.
There is in fact no consistent relationship between high executive pay and company success. Even in a company on a downhill course, paying no dividends, executives may be paid better than in more profitable companies. Thus for years Bethlehem Steel, although paying no dividends and running at deficits, paid Eugene P. Grace as president up to $800,000 a year, a record as of 1956 in cash emoluments. Somebody, including himself, apparently wanted Mr. Grace in charge of the properties.
That the British take a somewhat jaundiced view of inordinately high executive salaries was shown recently by the case of Wilfred Harvey, sixty-seven-year-old, $750,000-a-year chairman of the British Printing Corporation. Four fellow directors forced his resignation on the ground that his salary scale was "grotesque and ridiculous. " He also had a special expense account. The annual earnings of the company were those of General Motors for a single day. So exercised did the British become that acidulous editorials were written and questions were asked in Parliament. 3
The chief executives of the big companies, in addition to directing internal affairs, also represent the company vis-a-vis the world, government, labor unions and the general public. Their role is, basically, that of politicians and diplomats. As shrewd politicians some, irrespective of the prosperity of the company, are able to make a better deal for themselves than others among the various factors of major owners, small stockholders, government officials, labor leaders, banks and customers. Some are where they are because they are married to a daughter of the chief stockholder or the daughter of the banker that holds the company's notes. They may, indeed, just be a friend of the bank, which is interested only in its notes, not in record earnings.
Henry Ford II, aged twenty-five, was not spirited out of the Navy in 1943 to become vice president of Ford Motor (executive vice president the next year) because he was considered a wizard decision maker. He had failed to graduate with his class of 1940 at Yale, couldn't make the grade. Nor, years before, was his father Edsel at age twenty-six made a vice president because of any then evident great decision-making ability. Henry Ford, when he appointed Edsel, told newspapermen it showed what a remarkable country the United States was that so young a man could achieve such a high post so early. On this score Bourbon France was a far more remarkable country, for Louis XIV became king at age five.
The Power Elite according to Mills
That the top corporation executive is a person of commanding power in his own right is part of the executive mystique and is uncritically incorporated into his theory of the power elite by C. Wright Mills, the American sociologist. As originally argued by the Italian sociologist, Vilfredo Pareto, in every branch of human activity people can be given an index number on a scale. To those with the largest accumulated indices of achievements or specific qualities, in whatever category, he gave the name of elite. There is, obviously, an elite for every function and quality: barbers, violinists, scientists, bankers, seductive women, politicians.
People, too, possess powers, from zero to 100, in asserting themselves over large areas of affairs. Those able to assert their wills, thus affecting many others, perhaps even against their wills, are said to have power. And, paraphrasing Pareto, Mills said that those with the most such power are to be regarded as a Power Elite. Where Mills becomes original, or quasi-original, is in his description of what purports to be the more recent American power elite. He constantly uses the words "new" and "today," so that the situation as it stands is evidently something freshly perceived by Mills.
Although the corporate rich or big owners belong to the elite of Mills, be says their role has been reduced in phases--first by big politicians as in the New Deal and more recently by generals, admirals and corporate officials of the Warfare State. 4 The big rich are being phased out or down and are being replaced by executive types, either military or civilian. If Mills is correct, the message of these pages is somewhat passe? .
The inner core of the power elite consists, first, of those who interchange commanding roles at the top of one dominant institutional order with those in another: the admiral who is also a banker and a lawyer and who heads up an important federal commission; the corporation executive whose company was one of the two or three leading war materiel producers who is now Secretary of Defense; the wartime general who dons civilian clothes to sit on the political directorate and then becomes a member of the board of directors of a leading economic corporation. . . .
The inner core of the power elite also includes men of the higher legal and financial type from the great law factories and investment firms, who are almost professional go- betweens of economic, political and military affairs, and who thus act to unify the power elite. The corporation lawyer and the investment banker perform the functions of the "go-between" effectively and powerfully. . . .
The outermost fringes of the power elite--which change more than its core--consist of "'those who count" even though they may not be "in" on given decisions of consequence nor in their career move between the hierarchies. Each member of the power elite need not be a man who personally decides every decision that is to be ascribed to the power elite. Each member, in the decisions he does make, takes the others seriously into account. They not only make decisions in the several major areas of war and peace; they are the men who, in decisions in which they take no direct part, are taken into decisive account by those who are directly in charge.
On the fringes and below them, somewhat to the side of the lower echelons, the power elite fades off into the middle levels of power, into the rank and file of Congress, the pressure groups that are not vested in the power elite itself, as well as a multiplicity of regional and state and local interests. If all the men on the middle levels are not among those who count, they sometimes must be taken into account, handled, cajoled, broken or raised to higher circles. 5
There has in fact been accomplished a Managerial Revolution, Mills implies. Power in the United States has insensibly shifted from the owners to the managers, from property to technical function (Berle-Means, James Burnham, J. K. Galbraith). Here be echoes a long line of modem writers increasingly emboldened in what they assert. 6
According to Mills, within the new managerial grouping, power is in the flux of coalition among managers. It follows that if the Fords, Mellons, Rockefellers, Du Ponts and others still count, they count for much less than they once did. If money once talked, now it only whispers in the halls of power, hushed by the presence of the organization man.
The major new segment in the managerial group, according to Mills, consists of "the warlords," the military.
So this heavy-handed Germanizing of American scholarship traces back to an original ex parte foundation decision.
Not all foundation efforts, by any means, have had such a disputatious outcome.
Carnegie money, for example, financed Abraham Flexner's great investigation of American medical schools. The report, which appeared in 1910, found nearly all of them far below par and some to be rackets, leading to extensive reforms that drove out the worst and converted the remainder from among the worst in the world to the best.
Again, Carnegie money financed Gunnar Myrdal and associates in the monumental study of the American Negro before World War II, titled An American Dilemma. It was on the basis largely of the findings in this report that the Supreme Court rendered its epochal school desegregation decision of 1954.
Rockefeller money largely financed Dr. Alfred Kinsey and associates in the study of sexual behavior which, despite methodological and other controversies that ensued, appeared to represent a long step toward greater light in a puritanically degraded area.
As Macdonald notes, "The Rockefeller agencies made medical history with such exploits as their worldwide campaigns to control malaria and yellow fever, and their detection--and subsequent elimination--of hookworm as a drain on the vitality of rural Southerners. " 74 It is evident that there is much one can find to set up on the credit side of the foundations.
And, yet, the critics still find many serpents coiled in the garden. William H. Whyte, in Fortune (November, 1955), held it a bad thing that foundation grants went more and more to institutions or to research teams, less and less to individual workers. As Macdonald reminds us, the greatest work has been done by individuals, and in the "soft" disciplines. 75
Not only must the foundations, with an eye to the cultural vigilantes, stick to safe, tried and true areas, but they cannot support pioneers, who automatically have the animal mobs ranged against them. Had they existed in an earlier day the foundations could not have sponsored Copernicus, Galileo, Vesalius, Darwin, Pasteur, Marx, Freud or many others. These were all, by public acclaim, reprehensible men; some still are.
As recently as the 1920's they could not, owing to low-grade public opinion, support Mrs. Margaret Sanger in her timely but frustrated campaign to disseminate information about birth control. Margaret Sanger, like Socrates, fought as an individual and went to jail as an individual. The birth control movement was stalled, has been revived only recently under dire eleventh-hour necessity.
The original program of the Ford Foundation grew out of criticism by Edwin R. Embree, former president of the Julius Rosenwald Foundation, advanced in an article in Harper's Magazine in 1949 entitled "Timid Billions. " Embree held that, because foundations--mainly those of Carnegie and Rockefeller--had pioneered in medicine and health nearly fifty years before, these now highly developed fields had become placid foundation preserves, with about half of all grants going to them, another third to routine universities and colleges, and the rest to routine welfare agencies. He thought it time that new ground was broken, with the results seen in the successful know-nothing attacks on the Ford Foundation.
Embree criticized the foundations for "scatteration. " And in its more recent policy this is precisely what the Ford Foundation has come to.
The Guggenheim Foundation more conspicuously than others has awarded grants to the humanities and to individuals. Hundreds of writers and artists have received sustaining funds from this source.
As part of the favorable tax-financed public-relations image the foundations develop for corporations and founders that grew rich in questionable ways, they present the aspect of being highly civilized by proxy association with cultural heroes. Avoiding in their lifetimes creative persons like Margaret Sanger or Socrates who are invariably suspected by the ignorant multitudes of being up to no good, the foundations fondly embrace all established cultural heroes and those potential heroes working in popularly approved cultural channels. Not heroic themselves, they nevertheless exist in a soft, derived heroic light, invoking in the thoughtless gaping multitudes some feeling of being in the shadow of a cathedral. They are, on the contrary, basically demagogic; for the main thrust of their effort is not in any sense the deliverance of man but the protection of their sponsors' plantation. While this is surely narrowly intelligent of them, it is not, as I see it, something to induce public celebration.
And the fact that it is all done, really, with public money certainly puts anyone in the position of being gulled who applauds them more than mildly for good works. It should never be forgotten that if the Ford Foundation had never been founded every cent of the money would have been taken in inheritance taxes by the United States government, thus lightening the tax load for everybody. If the Fords, Dow, should achieve something humanly tremendous through their foundation they would not achieve it with their money but with our money. While not impugning the achievement, whatever it was, or the judgment that led to it, recognition of the nature of the transaction would certainly place it in a somewhat different light.
What the subsidy is in the case of any foundation of any considerable size one can readily ascertain by looking up what the estate tax rate was when it received its funds. This rate, ranging more recently up to 90 per cent, represents the portion of principal saved from taxes. Where income on the principal exceeds $100,000, the amount of taxes avoided, at present rates, is at least 70 per cent and has been as high as 91 per cent.
So, whatever good is accomplished by the foundations is largely accomplished with other people's money, a familiar finpolitan practice. And if one wishes to salute the original source of this beneficence it should be Congress, making free use of our money.
Money funneled into education has to some extent no doubt been of general benefit. However, much of this educational effort has been devoted to producing corporate personnel, with the primary mission of making profits. The Du Ponts have poured heavy sums into M. I. T. ; and Carnegie established the Carnegie Institute of Technology in Pittsburgh, a prime source of local plant and departmental managers and company officers. Even more general applications of educational funds can be shown destined primarily for the support of the corporate world.
It is a common experience in the United States for people to read in newspapers and magazines of great new medical advances and discoveries, but they little realize that most of these advances will never be available to them, will be available only to those who can afford them in a few centrally located medical centers. As I gave extended attention thirty years ago to these problems in which there has been little change since, the contemporary reader may be left to the references. 76
Scientific findings have been applied most assiduously in the amassing of corporate profits.
While it is generally gratifying to see so much human ingenuity displayed and developed, it is worth noticing that the fruits of all the effort are for the most part restricted in their distribution. The wide prevalence of slums would suggest to a visitor from another planet that there was little education, science or medicine available to anyone at all in the United States.
If it is nevertheless insisted that all this foundation effort represents philanthropic activity, then it is governmentally coerced philanthropic activity, under the threat of taking the principal in taxes if the income is not devoted to narrowly applied good works. The government, in brief, forces the rich to tend their own plantation.
Intellectual Sleight-of-Hand
I therefore cannot help seeing the entire American philanthropic movement, hailed as something unique in the world, as intellectual sleight-of-hand as far as its claimed disinterested benevolence and general distribution of benefits are concerned. There may have been some gain in allowing private dispositions of the money to be made, where it has been made in good faith, because one cannot suppose it would have been expended
more judiciously if left to run-of-the-mill pubpols. The prospect might have been far less entrancing if it had been left to the manipulation of the more self-oriented of these.
The Ford Motor Company does not claim to be philanthropic. But the Ford Foundation, which grew out of it and is the public halo of the company, is claimed to be philanthropic even though it is managed by the same people. When Henry Ford II presides over the Ford Motor Company he is nonphilanthropic, a business barracuda; but when he steps into his role as a trustee of the Ford Foundation he, like a Jekyll- Hyde, suddenly becomes a philanthropist. With the Ford Motor Company he endeavors to garner all the money possible; with the foundation he endeavors to give money--our money--away.
Is he--on balance--richer or poorer? As a result of establishing their many foundations and "giving away" hundreds of millions of dollars, are the Rockefellers and other foundation impresarios richer or poorer, more or less esteemed, more or less solidly ensconced, stronger or weaker?
The answer in every case of a surviving foundation family group is that the foundation has benefited its sponsors more than it benefited the world. Whatever benefit it has wrought for the world it has wrought, too, for the family group. For the world is their village, through which their personal interests ramify in a bewildering network. Why should they not wish to benefit the world as they, too, must live in it? And any benefit wrought, however minor, brings to them vast credit, enhances their status as exalted citizens of the world. They all rate at the highest level in mass-media esteem.
The main point I extract from this is that these are very subtly powerful people, far more powerful even than they are portrayed by a deferential press. Nor are they, despite the deft airbrush of the public relations man, especially benign, as is plainly evident in the heavy commitment to systematic extreme violence of the political system in which they have, by enormous margins, the largest stake.
Never registering opposition to any of the many wars, foreign police actions and military missions against the heathen in which the seemingly detached government engages, usually instead registering enthusiastic approval and giving full support, they must be considered integral to this way of conducting affairs. At the time of this writing this political system is using some of its vast firepower, much of its manpower, with which to establish new foreign bases, as in Vietnam. Although Vietnam is popularly accepted as an heroic dirt-level president's maximum effort, the operation has been formally and enthusiastically endorsed by Governor Nelson A. Rockefeller. It is, obviously, a venture carrying the highest finpolitan sanction. 77
While the Vietnam venture will indeed make all of us more secure against the devil of Communism (or will it? ), it is surely going to make some persons far more secure than others. To be entirely fair, we must concede that even the denizens of the slums, thanks to a foresighted president, will be made more secure in their slumminess. This boon happily works both ways: The rich and the poor are benefited by being fully protected in their respective statuses.
Proposed Foundation Reforms
Representative Wright Patman advanced concrete proposals for reforming the foundations, tightening the regulatory leash so they would not be quite so free to maneuver self-servingly as now. His recommendations were as follows:
1. Limit their life to twenty-five years, as in the voluntary cases of the Julius Rosenwald Fund and the foundation established by the late Arthur Curtiss James.
2. Prohibit them from engaging in tax-exempt business in unfair competition with taxpaying businesses.
3. Prohibit them from engaging in tax-free lending and borrowing.
4. Require them to engage in arm's length relationships--that is, prohibit them from extending intramural benefits, say, to the employees of a controlled company, a form of subtle unfair competition with others.
5. Prohibit them from soliciting or accepting contributions from suppliers to and patrons of their companies.
6. Prohibit foundations from owning more than 3 per cent of any corporation, thus shrinking them as factors in corporate control.
7. Make them conform to certain rules in the case of proxy fights in corporations where they hold stock ownership.
8. Prohibit them from trading in and out of securities in quest of capital gains.
9. Allow no tax exemption on contributions to a foundation until the money has been actually put to approved charitable use.
10. Deny tax exemption to any foundation if it has clearly been established for tax avoidance or to obtain financial benefits for the founder.
11. Compute donations of property to a foundation at cost or market value, whichever is lower, rather than on the present basis of market value which permits the evasion of taxes on appreciated assets.
12. In contributions made by corporations, let such contributions be credited to the stockholders, thus keeping untaxed contributions to present limits prescribed by law.
13. Treat all capital gains by foundations as expendable income and do not allow them to be converted into new capital.
14. Add money unreasonably accumulated by corporations controlled by a foundation under present laws to the foundation's own accumulation as if the two were one. "The use of subsidiary corporations should not be permitted to cloak actual accumulations, as is the case in the Howard Hughes Medical Institute of Miami Beach. "
15. Corporations controlled by foundations should be subject to taxes on unreasonably accumulated earnings, as prescribed by law for foundations.
16. From the base for the marital deduction there should be excluded amounts left to foundations that are henceforth untaxed. And while money given to foundations is not subject to gift and estate taxes, the rate brackets to be applied to moneys that are taxable should be the same as if the prescribed foundation portions were part of the taxable gifts or estate.
17. Regulation of the foundations by the Treasury Department should be tightened in many specifically indicated ways and the Treasury Department should be obliged by law to function actively in this area.
"These and other reforms," Mr. Patman gravely' concluded, "are vitally necessary. " 78 For what little it may be worth, I concur.
The Patman investigation has already influenced the passage of new laws regulating foundations in New York State, where most of them are chartered. The effect of these New York laws will probably be to drive many to states of easier virtue, as in the case of corporations that finally found lax regulatory states in Delaware and New Jersey. In general, regulation in any of the states, of any kind of activity, is about on a par with the
regulation of a frontier saloon, which is why entrepreneurs of all kinds prefer state to federal regulation.
Said the New York Times about the new situation in New York:
A sampling of reports filed as the result of a new law this year has shown that many purportedly charitable foundations are tax dodges, according to Attorney General Louis J. Lefkowitz. He said that the foundations were also sources of funds for the personal use of their directors.
The charitable organizations . . . operated without supervision or regulation before last January. . . .
A random sampling of 400 registrants, and examination of the 500 financial reports, has turned up numerous examples that show sufficient evidence of improper manipulation of the funds to justify the calling of an investigation, according to the Attorney General.
Often the manipulators who used the funds for their personal gain had already profited by large tax deductions based on their gifts to the foundations, he added.
. . . some charities have already received millions of dollars this year that they would not otherwise have obtained as a result of his staffs work.
Tax-free ostensible charitable funds had been used (Mr. Lefkowitz discovered tardily) for business purposes, to buy expensive paintings and sculpture for the donors' own homes, to pay salaries to relatives and for a variety of other personal accommodations- facts which anyone could have ascertained in 1937 by reading America's Sixty Families. Most of the New York foundations funded at more than $1 million--and this the authorities now thought suspicious--were set up to make distributions for charitable purposes "to be selected by the directors. "
Under the new law the attorney general of the state may at his discretion bring action to remove directors who fail to comply with the law and may compel accountings and order reimbursement for loss of funds resulting from improper activities of directors or trustees. 79
All this, however, will not lock the barn door even tardily because there are forty-nine other states.
Concluding, whatever foundations do, for good or ill, for self or humanity, they do for the most part with publicly conferred money.
Eleven
MINISTERS OF FINPOLITY: THE UPPER EXECUTIVES
Top executives of top American corporations are, after the Kremlin rulers, the most anxiously studied and written about small group of persons in the contemporary world of affairs. Each group is more sedulously and continuously scrutinized, in sober truth, than the much larger and far more crucial collection of scientists.
More numerous than Russian politicos, American upper corporation executives are nevertheless very few. If we take the elite Fortune list we have before us only 500
industrial companies, 50 commercial banks, 50 public utility companies, 50 transportation companies (rail, air, highway and water), 50 life insurance companies and 50 merchandising enterprises--750 in all. This is the cream, with assets ranging from as low as $7. 444 million (Needham Packing) to $30. 906 billion (AT&T).
Each of these enterprises glories in a chairman, a president, usually at least one executive vice president, sometimes a comptroller and always a treasurer and a secretary, the three latter rarely involved in policy formation. The array of vice presidents varies by size of enterprise but, no matter how large it is, these men are usually mere divisional or departmental managers, direct instruments of top management but not in top, management themselves.
So truly imperial is the domain of the largest finpolities such as AT&T, General Motors and Standard Oil that the executive vice-presidential function is often divided among several men, who meet as an executive committee. General Motors in 1964 had three executive vice presidents; Standard Oil of New Jersey, five; but Ford, only one.
In the ordinary case the top officers are a trio: chairman, president and executive vice president. The president's duties correspond to those of the captain of a ship, are virtually as routinely formalized; and those of the vice president correspond to the ship's executive officer.
If we allot to big management an average of five men we have 3,750 upper executives. Because some of the larger companies have more than five in top management, it may be that as many as 5,000 should be reckoned. As there are smallish fairly important companies not included in Fortune's compendium, the number of top management people may be as great as 10,000, the number set forth in Business Executives of America, published by the Institute for Research in Biography in 1950. But this total included men in Canadian as well as United States companies.
Important corporation executives certainly do not exceed 10,000. More probably there are fewer than 5,000, a restricted group. Naturally, if one looks down the entire nondemocratic para-military chain of command to junior executives and foremen, the number of executives is much greater. None of these shapes policy and few ever will. They are cogs of the order of middle-range Soviet commissars and lower bureaucrats. The system is indeed very much like the Soviet's, which was modeled after it.
Corporations generally are run by the executive vice president (or vice presidents), the president usually supervising and intervening directly only when he feels it advisable. In newer, reorganized or problematic companies the president, it is true, may be a dynamo of activity. The chairman is available for consultation on nice points of policy; only rarely if ever, one gathers, does he tell the president, unbidden, what he ought to be doing.
Within the bounds of determined policy and the nature of the business the president is a complete autocrat. Such being the case he usually acts with great restraint, like a jet pilot who knows that the slightest touch on the rudder may cause a wide deflection of course.
The chairman comes into fullest bloom at meetings of the directors, over whom he presides. These are held quarterly or semi-annually; and are mostly routine affairs. Top officers are directors, and one may ascertain who is and who is not in top management by noticing whether he is or is not a director as well as an officer, a point in elementary corporatology.
The chairman, president and executive vice presidents are invariably directors; the vice presidents sometimes are. In Ford and Standard Oil of New Jersey some vice presidents are; in General Motors at present only executive vice presidents are.
Apart from company officers, directors usually consist of officers of other friendly companies or friendly banks, of lawyers, sometimes foundation officers and college presidents, former officers and large stockholders (sometimes themselves former officers). Directors who actively question or suggest are usually owners or representatives of large blocks of stock or senior obligations. In most cases the outside members are passive, merely listening and taking note of what is reported by the executives. They evaluate what they hear in terms of their own business experience.
Except where forbidden by law, as in the case of banks, directors are usually cogs in widespread interlocks, a phenomenon abhorrent down through the years to many congressmen. Congressmen who dislike this practice of interlocking directors--that is, a few directors from a cluster of key companies spread around among a large number of satellite companies--would like it forbidden on the ground that it signals central moneybund or "Wall Street" control. They would prefer that a man be a director of only one company at a time, thereby bringing in many "unsound" outsiders.
My own objection to forbidding interlocking directors is that it would be ineffective in breaking the true interlock, which exists by prior dispensation in a small ownership coterie through blood relationships, intermarriages, private school associations and club memberships. We must not forget that the entire corporate situation directly concerns no more than 2/10ths of 1 per cent of the adult population (fewer than 200,000 people); with some 8/10ths of 1 per cent less involved; and never more than 10 per cent even infinitesimally involved except as rank-and-file employees and consumers. Abolishing corporate interlocks would not alter any basic situation, would at most provide only one more futile pseudo-reform. If it led anyone to believe some basic change had taken place, it would be grossly deceptive.
Those who oppose interlocking directorates, if they were seriously consistent in their recommendation, should call for the outlawing of intermarriage, hereditary trust funds, common schooling and common metropolitan club membership among large property holders and corporate families. One could isolate each one, incommunicado, in a private telephone booth.
Except where they represent large blocks of stock or are officers of the company, directors are seldom vital to the conduct of affairs--serve mostly as window dressing. There is a school of corporate thought that contends directors should direct; but this is a minority view.
Directors generally do not direct unless they are also big stockholders or officers; as outsiders they usually don't know enough about the specific situation. Even the notion that some bring to bear an indispensable broad-gauged public point of view, valuable in preserving the corporate image as a benign entity, won't hold water because efficient public relations departments tend to this simple detail. A few directors, in fact, are invited on boards solely because they are witty or eccentrically knowledgeable fellows, thus tending to perk up otherwise dull meetings of essentially stodgy men.
In crises directors may be collectively called up to tap their general business experience. Some internal dispute over fundamental policy may be submitted to them, in which case they function as a board of judges. If they cannot resolve the dispute it will be resolved at the next meeting of stockholders, where the big shareholders will assert themselves. But such an occurrence is rare because among the directors it is known who speaks for large stockholdings. It is known where the ultimate power lies.
Despite all the devotion to voting in corporations, the process is hardly democratic because the vote, in any showdown, is by shares of stock, not by individuals. All the thousands of rag-tag stockholders in the Ford Motor Company could not outvote the Ford family. The situation is absolutely or effectively the same in every company, which means that a very large and paramountly vital part of internal American affairs is
under essentially autocratic rule, as in Russia. At variance with democratic ideology this statement surely is but nevertheless, alas, it is true, true, true.
As long as matters progress smoothly, as they ordinarily do, the point of view of the managing officers prevails at board meetings. Organizational trouble appears only if a very large stockholder, or someone speaking for large blocks of stock, seriously opposes the management.
While newspapers report from time to time on internal struggles for company control, such reports rarely involve the biggest companies. Control is seldom an issue in the big smoothly running enterprise. Whenever it is, the issue is quickly resolved, either by internal vote or by court decision.
The Executive Mystique
Corporation officers are of interest in this inquiry mainly because they are the front- line deputies of the rich and the super-rich when they are not themselves of the rich. They are the watchdogs and overseers (usually hired) of great wealth. As such, their earned take-home pay is rivaled only by that of persons in the sports and entertainment worlds who become tremendous box office attractions--home-run hitters, knock-out punchers or seducers-seductresses of the screen. Because only a handful of these fireflies maintain their box office charisma for any considerable time, as a group they are not in the income class of the executives, who even in retirement continue to be handsomely rewarded. Entertainers and athletes in general are paid little.
Just what is it that makes an upper corporation executive worth his pay, ranging on the record from $200,000 to $800,000 a year in the merely cash portions? A standard answer, part of what I shall hereafter refer to as the executive mystique, is that "the value of an upper-echelon executive lies in the decisions he makes and influences. " 1
It is made evident that the decisions for which he is rewarded so handsomely are money-making decisions. While he may at times make wrong decisions, most of his decisions (at least the big ones) must be the right ones, the winning ones. Or so it is argued.
One cannot deny that the top executives are decision makers. But this observation is not very profound because, paradoxically, not to make any decision is a decision. We are all, as it happens, decision makers. But we are not--most of us--money-making decision makers.
The kind of decision making the big executive engages in, according to theory, is as follows:
He makes one big decision (or a series of decisions) that vastly improves the relative position of his company, reflected in earnings; that slightly improves or holds steady the relative position of his company among rivals; that in any general economic decline leads his company to lose ground less rapidly than others; or that enables his company, at the bottom of a slump, to spring up again, phoenix-like, and astonish the world--or at least the editors of Fortune and the Wall Street Journal.
More exactly, he is not supposed to make those decisions by himself, out of the whole cloth, but to fit together the advice and insights of many others, like a master craftsman, and extract the winning decision.
In theory the decisions he makes must be winning decisions. Because if one is paying for decision making, as the big stockholders are supposed to be doing, one surely does not want to pay for losing decisions. And yet, highly paid executives often make momentous losing decisions, sometimes all together, sometimes in industry groups and sometimes in single companies.
In the early 1930's, the leading corporate executives all made a collectively losing decision. They decided to maintain their economic positions amid sudden price declines through cost-cutting, mainly by wholesale discharges of unprotected workers, the rank- and-file patriots. The theory was that as demand for goods was restimulated at lower price levels, business would pick up at more normalized levels than in the 1920's, workers could be rehired at lower wages as in the slump of 1920-22. Then the process of money-making could resume on a "sounder" basis.
There was no pick-up, however, because during the serial process of wholesale layoffs workers exhausted their meager savings and credit.
When prices reached low levels they continued to fall to still lower levels, except where they were "administered. " Much less business was done because many people had no money. The economy began stagnating, the Communists gloated because Marx had predicted capitalism would lose the ability to govern in one of these slumps. The Great Depression was on, produced by master minds who instead of living up to their reputation as entrepreneurs had become, turtle-like, solely interested in preserving working capital.
Ironically, surrounding conditions from a business point of view were perfect. There was no government interference with business. There had been twelve years of uninterrupted lax Republican rule under figurehead presidents. Taxes under Treasury Secretary Andrew Mellon had been brought to very low levels. Tariff walls against odious foreign goods were at record high levels. Big Business ruled the roost more fully than it did later under Lyndon B. Johnson.
If it were a fact that executives are paid as decision makers they would all have been fired. For they had all, acting according to crowd psychology as they usually do, made a general losing decision, reflected in steady corporate deficits. There never was a major winning decision in this situation in the sense of one company moving ahead of others. No corporate master mind showed himself, for the simple reason that there were no corporate master minds. The emperors were all stark naked. In national self-defense the government moved, slowly, to intervene with its own programs, amid witless cries from the corporate press of "creeping socialism. "
One often sees the same sort of collective losing decision making in an entire industry, as in the railroad industry since World War I. Suddenly faced with new competition-- from pipelines, trucks, buses and airplanes--the railroad industry down through the decades, instead of adjusting services to meet new conditions, instead of participating by one avenue or the other in new forms of transport, decided to curtail services. The industry decided, forsooth, to go out of business on the installment plan.
Where one company clearly falls behind all others in the same industry through having failed to adapt to new currents or to take advantage of some innovation, it is obvious that the chief executive (or his subalterns) has not been alert and he is, unless he is a big stockholder, usually dropped. This was the case with respect to Charles Luckman, president of Lever Brothers after World War II and widely touted as a "wonder boy. " The rest of the industry stole a march on him in the introduction of detergents in place of soap powders, and Lever Brothers underwent setbacks in the market until it tardily took up detergents. Luckman was fired.
But when Ford Motor Company lost a reported $250 million on its hapless Edsel model in the 1950's, Henry Ford II did not walk the plank. He, along with other stockholders, simply took it in the pocketbook. He could not be fired because be was a chief owner. This simple fact revealed the source of true power in an executive.
Aging Sewell Avery, a big stockholder, stubbornly held to his position at the head of Montgomery Ward and Company after World War II and decided to retrench in expectation of a resumption of the depression. Ward's arch-rival, Sears, Roebuck and Company, decided to expand in expectation of an inflationary boom, and soon passed on to astronomic heights of latter-day success. Here we have a case of a losing and a winning decision, both made by experienced managements, one rather inflexible. To argue that Avery was a poor executive because he made a less advantageous decision is like arguing that Napoleon was a bad general because he lost the battle of Waterloo.
In all the loose talk about executive decision making it is overlooked that corporate decisions are usually made collectively, more recently on the basis of a vast mass of information assembled and digested by computers. After careful sifting by low-paid technicians--statisticians, economists, mathematicians, psychologists and even at times anthropologists--a set of alternatives is laid before the executive board. If the correct data have been fed to the computers these mechanisms may themselves have the answer: Expand, branch out, retrench, stand pat, fight, submit, deny. Again, the decisions are rarely of life-and-death caliber. They are usually fairly routine and marginal.
John F. Kennedy, it is reported, faced divided counsels among his advisers on the religious issue in 1960. Some said he should avoid it, some said he should stress it, others felt he should touch on it, but lightly. The problem was put to a computer into which a mass of data was fed on the characteristics of the American population. The computer replied: Stress the issue. And this was done. While one cannot say that this is why Kennedy won, it obviously did not cause him to lose. So it was presumably the right decision-made by a computer. The masterly decision in this case was evidently to turn to the computer.
Corporation officials often face issues that arise from a set of losing decisions of long- or short-term nature. And they know they are losers. What they often do then is to make no decision, ride with the tide in the hope that something of a saving nature will turn up. They are not, then, paid primarily to make dramatic "right" decisions, although they participate in corporate serendipity and will be penalized for obviously bizarre judgments, now increasingly eliminated by expert analysts and computer technology. But corporations, their nets spread wide, are not run by ear, as the decision-making theory suggests. If they sometimes gamble, it is only in small ways. Almost never do they stake their lives on a single line of policy. They do indeed have alternative policies, sometimes all in effect in different areas at the same time. They play both ends against the middle and the middle against both ends.
There is much else, which need not detain us, to show there is little in this contention that high compensation is given for profitable decision-making. The decision-making theory is part of the executive mystique. This mystique, dubbed "Management," has been developed partly for psychological reasons: To give executives in a long chain of command down to the newest junior executive and foreman a sense of worth in essentially boring jobs. It also provides an impressive rationale for the payment of grotesque salaries. For as decision makers, most company chairmen and presidents could not fight their way out of a paper bag, as is repeatedly shown when they are dragged into full public view and subjected to searching questioning under subpoena. Then they almost invariably wilt, show themselves as very ordinary men.
This is not to say that corporation executives are without ability. They are able people, the ablest that can be found for the task. Their ability resides in a varying combination of qualities. The big factor that enters into their selection and compensation is that they are custodian-trustees and overseers of vastly valuable properties. As they are agents of
often absentee large owners, and are sometimes caught in tight situations where one decision is as bad as another or is a Hobson's choice, their pay is in part an inducement to guarantee loyalty at the beginning of a chain of command. Below the top, loyalty can be enforced by sanctions. But the initiator in the chain of command has a wider sphere of action.
Owing to their strategic position at the head of complex properties the top executives are in excellent positions for self-enrichment. They bold the combination to the office safe, know many inner company secrets. They are exactly in the positions of Rockefeller and Carnegie with their early enterprises, except that they are not the chief owners. (They usually own very little of the company. ) But, as corporate history shows, they are in a prime position to help themselves to goodies at the expense of the company and its stockholders. Many have done so, a few from time to time are still caught in the act.
Though partly a crowning reward for long service in a variety of lower positions throughout the company, their compensation is mainly, a shield against the temptation of helping themselves at the company's expense. Such temptations are guarded against in many technical ways, as by outside audits and analyses, but the basic way is to make it always evident that a sure and comparatively high earned income awaits the man who avoids the dark risks of high adventure at the company's expense.
That astronomic executive compensation has nothing whatever to do with decision making or competitive wizardry is proved by the fact that executive compensation in the noncompetitive electric utility industry is as high as, often higher than, in straining, striving industrial companies. Copious figures on the compensation drawn by executives in these utility sinecures, which could easily be filled by bright collegians, are presented for twenty pages by Senator Lee Metcalf of Montana in his Overcharge (David McKay Company, N. Y. , 1967), a study of fancy financial capers by the entire contemporary electric utility industry.
There is even more to the need for high compensation. As the company wants the top executive's undivided attention, it wants him to feel free of all the nagging worries that beset other men. As far as these problems can be met by money--big life insurance, schooling for the children, residence in soothing surroundings, a contented wife--they are met in the compensation awarded. Problems that cannot be solved by money, such as problematic wives, will cause a likely prospect to be passed over because the company cannot afford to have its affairs in the hands of a brooding man. Much has been made of the fact that an alcoholic or socially withdrawn wife will cause a man to lose the nod of advancement. But anything at all bizarre or worrisome about the wife will have the same result. It is not minded if she is a big spender, but if she overspends or in any way shows she is out of control, she will certainly jeopardize his chance. Indeed, any member of the family far out of control and thus the object of worry to the man will count heavily against his selection for a top position.
Hence the high salaries, elaborate fringe benefits and deference in the corporate press to ostensibly brilliant decision makers.
The hired top corporation man, then, as distinguished from the hereditary owner- executive, is much like the cormorant or fishing bird, still used in China. A strap is fastened around the birds neck, permitting him to breathe but not allowing him to swallow his catch. He dutifully brings the fish back to the boat. Now and again (paydays) the strap is loosened and he is allowed to swallow a fish. The bird is a percentage participant in the process, which was established by and for others. 2
It is part of the corporation mystique that the corporation executive is inherently a powerful person--that he freely and autonomously extemporizes. But if such ability
were either extensive or crucial it would be easy to shift top officials out of industries where the average net return on capital was high, such as automobiles, cosmetics or pharmaceuticals, into industries where it was low, such as coal, railroads or steamships. The wizard decision makers would then be able to make decisions that would move the lagging enterprise far above the traditional rate of return for the industry.
This is not done. Executives are not attracted from booming industries to lagging ones, from whaling and pearling to sponge fishing. When an industry hits the skids all the enterprises in it go down, some perhaps faster and further than others. No amount of experienced executive decision making in a single company is able to arrest the process.
There is in fact no consistent relationship between high executive pay and company success. Even in a company on a downhill course, paying no dividends, executives may be paid better than in more profitable companies. Thus for years Bethlehem Steel, although paying no dividends and running at deficits, paid Eugene P. Grace as president up to $800,000 a year, a record as of 1956 in cash emoluments. Somebody, including himself, apparently wanted Mr. Grace in charge of the properties.
That the British take a somewhat jaundiced view of inordinately high executive salaries was shown recently by the case of Wilfred Harvey, sixty-seven-year-old, $750,000-a-year chairman of the British Printing Corporation. Four fellow directors forced his resignation on the ground that his salary scale was "grotesque and ridiculous. " He also had a special expense account. The annual earnings of the company were those of General Motors for a single day. So exercised did the British become that acidulous editorials were written and questions were asked in Parliament. 3
The chief executives of the big companies, in addition to directing internal affairs, also represent the company vis-a-vis the world, government, labor unions and the general public. Their role is, basically, that of politicians and diplomats. As shrewd politicians some, irrespective of the prosperity of the company, are able to make a better deal for themselves than others among the various factors of major owners, small stockholders, government officials, labor leaders, banks and customers. Some are where they are because they are married to a daughter of the chief stockholder or the daughter of the banker that holds the company's notes. They may, indeed, just be a friend of the bank, which is interested only in its notes, not in record earnings.
Henry Ford II, aged twenty-five, was not spirited out of the Navy in 1943 to become vice president of Ford Motor (executive vice president the next year) because he was considered a wizard decision maker. He had failed to graduate with his class of 1940 at Yale, couldn't make the grade. Nor, years before, was his father Edsel at age twenty-six made a vice president because of any then evident great decision-making ability. Henry Ford, when he appointed Edsel, told newspapermen it showed what a remarkable country the United States was that so young a man could achieve such a high post so early. On this score Bourbon France was a far more remarkable country, for Louis XIV became king at age five.
The Power Elite according to Mills
That the top corporation executive is a person of commanding power in his own right is part of the executive mystique and is uncritically incorporated into his theory of the power elite by C. Wright Mills, the American sociologist. As originally argued by the Italian sociologist, Vilfredo Pareto, in every branch of human activity people can be given an index number on a scale. To those with the largest accumulated indices of achievements or specific qualities, in whatever category, he gave the name of elite. There is, obviously, an elite for every function and quality: barbers, violinists, scientists, bankers, seductive women, politicians.
People, too, possess powers, from zero to 100, in asserting themselves over large areas of affairs. Those able to assert their wills, thus affecting many others, perhaps even against their wills, are said to have power. And, paraphrasing Pareto, Mills said that those with the most such power are to be regarded as a Power Elite. Where Mills becomes original, or quasi-original, is in his description of what purports to be the more recent American power elite. He constantly uses the words "new" and "today," so that the situation as it stands is evidently something freshly perceived by Mills.
Although the corporate rich or big owners belong to the elite of Mills, be says their role has been reduced in phases--first by big politicians as in the New Deal and more recently by generals, admirals and corporate officials of the Warfare State. 4 The big rich are being phased out or down and are being replaced by executive types, either military or civilian. If Mills is correct, the message of these pages is somewhat passe? .
The inner core of the power elite consists, first, of those who interchange commanding roles at the top of one dominant institutional order with those in another: the admiral who is also a banker and a lawyer and who heads up an important federal commission; the corporation executive whose company was one of the two or three leading war materiel producers who is now Secretary of Defense; the wartime general who dons civilian clothes to sit on the political directorate and then becomes a member of the board of directors of a leading economic corporation. . . .
The inner core of the power elite also includes men of the higher legal and financial type from the great law factories and investment firms, who are almost professional go- betweens of economic, political and military affairs, and who thus act to unify the power elite. The corporation lawyer and the investment banker perform the functions of the "go-between" effectively and powerfully. . . .
The outermost fringes of the power elite--which change more than its core--consist of "'those who count" even though they may not be "in" on given decisions of consequence nor in their career move between the hierarchies. Each member of the power elite need not be a man who personally decides every decision that is to be ascribed to the power elite. Each member, in the decisions he does make, takes the others seriously into account. They not only make decisions in the several major areas of war and peace; they are the men who, in decisions in which they take no direct part, are taken into decisive account by those who are directly in charge.
On the fringes and below them, somewhat to the side of the lower echelons, the power elite fades off into the middle levels of power, into the rank and file of Congress, the pressure groups that are not vested in the power elite itself, as well as a multiplicity of regional and state and local interests. If all the men on the middle levels are not among those who count, they sometimes must be taken into account, handled, cajoled, broken or raised to higher circles. 5
There has in fact been accomplished a Managerial Revolution, Mills implies. Power in the United States has insensibly shifted from the owners to the managers, from property to technical function (Berle-Means, James Burnham, J. K. Galbraith). Here be echoes a long line of modem writers increasingly emboldened in what they assert. 6
According to Mills, within the new managerial grouping, power is in the flux of coalition among managers. It follows that if the Fords, Mellons, Rockefellers, Du Ponts and others still count, they count for much less than they once did. If money once talked, now it only whispers in the halls of power, hushed by the presence of the organization man.
The major new segment in the managerial group, according to Mills, consists of "the warlords," the military.
