Obama's Real Wall Street Scheme
The president’s shot across the banks’ bow is about much more than reining in excess. Roger Martin on the latest phase in a century-long war over who gets the goodies.
The simplest way to look at President Obama’s counterstrike at the banks—and the risky behaviors driven solely by the desire to line the pockets of their own executives—is as a response to the crushing senatorial defeat in Massachusetts. Indeed that may have catalyzed action this week vs. next month, or next year. But Thursday’s presidential action can be better understood as the latest salvo in an economic battle that has been going back and forth for over a century.
I believe we are witnessing the last gasp of the fourth phase of a great economic battle. Obama’s announcement on banking may have ended the most recent 30-year phase and started a new one, which make it a bigger deal than people may imagine. This was not really about banking; it was about the battle between capital and talent.
Talent has been on the ascendency for so long—30 years—it takes winning for granted. Was Thursday the start of the end of talent’s free ride? I think it could well have been.
The great economic battle is about and has always been about who gets to enjoy the spoils of economic activity. In the first phase, capital (i.e. the owners of companies) battled unskilled labor in the cities of America in the first several decades of the 20th Century. It was the era of the growth of large-scale manufacturing enterprises, and rural America was flocking to the cities for work in the factories. Capital held the upper hand because it owned the means of production and it drove down wages to subsistence levels in order to make the highest possible profits. Attempts to unionize to fight back were violently squashed. In that era, capital won and labor lost.
But it didn’t last forever. In 1935, Congress intervened and the Democrats passed the National Labor Relations Act and created the National Labor Relations Board. Unionization was made easy and the percentage of unionized American workers mushroomed and their pay grew dramatically. In that era, labor struck back and capital was in retreat.
• Simon Johnson: Bernanke on the Hot SeatBut that didn’t last forever, either. Around 1960, the tide turned and capital fought back successfully by moving jobs to “right-to-work” states in the South, using more technology and beginning to globalize production activities. By 1980, unionization rates were back down to exactly the same level as they were in 1935. With Reagan’s crushing of PATCO (the air traffic controllers union) in 1981, it was clear that capital was back on top and labor was in full-scale retreat.
So we had three eras: 1900-1935—capital beats labor; 1935-1960—labor beats capital; 1960-1980—capital beats labor.
But in 1980, just as capital thought it was on top for good, a different economic battle erupted. Up until that point, capital fought largely unskilled labor—assembly-line workers, truckers, etc. But in the late 1970s, talent reared its head. It happened across a number of fields all between 1975 and 1980. In baseball, the Curt Flood decision created free agency. In investment management Ted Forstmann created the “2 & 20” formula for compensation (2% of assets under management plus 20% of any upside created). George Lucas got the first big percentage deal (50% of pre-overhead, pre-marketing profits for Raiders of the Lost Ark) in the movie business, etc. And American CEOs, whose compensation per dollar of profit produced fell continuously from 1960-1980, started playing a different game, led by newly appointed Robert Goizueta at Coca-Cola and Jack Welch at GE. Like the athletes, directors, and investment managers, they demanded a share of the upside. And their compensation per dollar of profits produced doubled between 1980 and 1990 and then quadrupled over that in the following decade.
Capital had acquired a deadly new enemy in the economic battle: talent. And talent had changed the question it asked itself. The question used to be: “What is enough?” The new question was: “How much is possible?” And they started figuring out how to extract the maximum possible. Capital was mad. But it couldn’t figure out what to do. It needed talent and talent was getting smarter about value extraction and bolder about extracting.
That is how we got to here and now. Talent has been winning big and has gotten so used to winning that it has become nonchalant and self-referential: “Of course we have to pay ourselves lots—otherwise we couldn’t attract the talent. What do you expect? This is just the way it is? It may seem like a lot of money but everybody is making this kind of money.” Talent has been on the ascendency for so long—30 years—it takes winning for granted.
Was Thursday the start of the end of talent’s free ride? I think it could well have been. This feels to me not unlike the pendulum shift of 1935. Leading up to that epic year, big business had gotten ever bolder. It didn’t care that its workers were living in hovels, getting injured in dangerous factories and enjoyed no job security or pensions. It was capital and it could do whatever it damn pleased. The supreme arrogance and self-indulgence invited Congress in and it struck a devastating blow for labor backed by broad popular support.
This time, the supreme arrogance of talent and utter lack of concern for average Americans and the shareholders of their companies has invited Congress back in. But note, ironically, whose side the same Democrats are on as they’ve jumped into the battle. Last time it was for the workers—then unskilled labor—while this time it is on behalf of shareholders who need protection from their workers—now their talent.
Roger Martin is dean at the Rotman School of Management at the University of Toronto. He writes extensively on corporate strategy, executive compensation and governance, business design and integrative thinking. His most recent book is The Design of Business: Why Design Thinking is the Next Competitive Advantage (Harvard Business Press, 2009). Read more on his Web site at www.rogerlmartin.com.