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The Big Clash of the XXIst Century

The "class struggle" Capital vs. Talent

"Capital versus Talent - The battle that's reshaping business" is a seminal article published at Harvard Business Review (July 2003 edition), authored by Professor Roger L. Martin, dean of Joseph L. Rotman School of Management of University of Toronto, and Mihnea C. Moldoveanu, director of the Centre for Integrative Thinking at the Rotman School. "Now, before the wounds from that epic class struggle (labor against capital, of the twentieth century) have fully healed, a fresh conflict has erupted. Capital and Talent are falling out, this time over the profits from the knowledge economy", wrote Dean Rotman and Mihnea. And they pointed out that "companies cannot generate profits without ideas, skills and talent from knowledge workers, and they have to bet on people - not technologies, not factories, and certainly not capital. Gurusonline.tv interviewed Dean Roger Martin about this hot topic.

Dean Roger Martin interviewed by Jorge Nascimento Rodrigues, editor of Gurusonline.tv, August 2003

Site of Joseph L. Rotman School of Management, University of Toronto
Page of Dean R. Martin | Harvard Business Review

Some other Roger Martin's predictions
  • I predict an increase in the proportion of capital invested in private firms relative to public firms. Arguably this is happening already with the huge flows of capital into private equity.
  • Shareholders would be wise to eliminate use of stock options completely. Stock option compensation gives management the incentive to manipulate stock prices in order to make huge gains and do so in ways that don't help the shareholders.
  • Talent will crank up the stock-based compensation levels for its services as soon as the economy heats up again.
  • As the talent class clashes in on the knowledge it creates, the knowledge-creation process will become a battlefield.
  • Peter Drucker first talked about the knowledge workers and the technologists as new emergent segments of professionals that in the knowledge based society could "clash" with the owners and shareholders of companies. When you talk about the future historical "clash" between capital and talent, are you thinking in a similar approach?

    Yes I am talking about a similar phenomenon. I do believe that Drucker was the first (as he often is!) to identify the rise of a more powerful brand of workers, which he referred to as "knowledge workers". I believe that I see their clash with shareholders in perhaps more vivid terms and make more bold predictions about the nature and importance of the clash. However, I think that Peter would agree with pretty much everything in the article. (I've sent it to him but I haven't heard from him yet)

    A new phase of the managerial revolution

    It seems that you focused the future "class struggle" in the growing gap between the CEO's and the owners and shareholders. Are you thinking of a new "phase" of the managerial revolution?

    Indeed. CEO's have figured out the extent to which they manage a tollbooth between shareholders and their returns and have been cranking up the toll - seven times between 1980 and 2000 in large American companies. Shareholders are now up in arms about the toll level, but I believe the game has changed fundamentally.

    Why?

    Shareholders are beginning to understand that CEO's have shifted their thinking from "enough" to "how much". That is to say, instead of asking themselves "what is enough to be satisfied and to meet my everyday needs?" CEO's are asking themselves "How much could I get if I negotiated as hard as I could?" That is a fundamental change. The difference between "enough" and "how much" is easily an order of magnitude and maybe two.

    Most people don't begrudge Jack Welch his $900 million, even though it is "how much" more than it is "enough". They hate the payments to loser CEO's who crater their companies. But the problem is that it is hard to tell in advance and firms treat their CEO's, at least for compensation purposes, like they are going to be the next Jack Welch. Unfortunately, they are just as likely to be the next Kenneth Lay or Gary Winnick.

    All the recent media debate about the CEO's compensation packages is (was) wrong? The rebellion against the gold packages of CEO's even with companies in bankruptcy is (was) wrong?

    Absolutely not. There has been a fundamental change and shareholders are madder then hell and, as in the movie Network, they aren't going to take it anymore. So it is fodder for a great media debate - a debate that will continue. A key part of the frustration is the paying of dreadfully unsuccessful CEO's. Most people don't begrudge Jack Welch his $900 million, even though it is "how much" more than it is "enough". They hate the payments to loser CEO's who crater their companies. But the problem is that it is hard to tell in advance and firms treat their CEO's, at least for compensation purposes, like they are going to be the next Jack Welch. Unfortunately, they are just as likely to be the next Kenneth Lay (former Enron Corp. Chairman) or Gary Winnick (former Global Crossing Chairman). So the rebellion is understandable. It is just that shareholders are going to have to get past righteous indignation and take a look at how they, and their compensation consultants, are contributing to the problem.

    Do you think the problem is similar whether in private companies - family or entrepreneurial - or in public companies dominated by funds?

    Different answer to the two categories. Public companies dominated by funds are sitting ducks. There, at least until the funds wake up, the lunatics are running the asylum. CEO's don't have a countervailing force of any sort. In Canada that is changing with the Canadian Coalition for Good Governance, formed in June 2002 by 19 pension and investment funds with 350 billion USD Canadian assets. The coalition has announced that I t will use its powers to keep executive compensation in corporate Canada at "reasonable levels". Private companies have a much better shot.

    In private companies, cash flow not stock price is what matters. In this world, stock-based compensation is less of a distraction. In addition, talent and capital are often fused. They are often one and the same. The worst time for capital in the emerging world is when it is "uninvolved", as with a mutual fund.

    And why?

    In private companies, cash flow not stock price is what matters. In this world, stock-based compensation is less of a distraction. In addition, talent and capital are often fused. They are often one and the same. The worst time for capital in the emerging world is when it is "uninvolved", as with a mutual fund. There, the capital provider "dumps" his or her capital into a vehicle - a mutual fund - and has no further involvement. It depends totally on layers of talent - the fund manager, the senior management of the invested companies, etc. - to work in its favour, which they just don't do. In private firms, you typically have "involved capital". The owners often are key members of the talent pool. In this situation, the talent shows stewardship for the capital because they are one and the same. I predict an increase in the proportion of capital invested in private firms relative to public firms. Arguably this is happening already with the huge flows of capital into private equity.

    Stock Options will continue to be a good "carrot" for CEO's, knowledge workers and professionals - for talent in general?

    It depends entirely on what you mean by "good". Stock options are fabulous for talent. Read my HBR article, "Taking Stock" (HBR January 2003), which discusses how management talent uses stock options to extract value from the shareholders. They are, however, crummy for capital providers. Shareholders would be wise to eliminate use of stock options completely. Stock option compensation gives management the incentive to manipulate stock prices in order to make huge gains and do so in ways that don't help the shareholders.

    The counter-revolution from the Pension Funds - like what happened in Canada with CCGG - have conditions to stop the CEO's strategic interests? And do you see other signals in other countries?

    I haven't seen it yet but I expect a CCGG-type organization in the US very soon. Pension funds are getting mad and they will figure out that collectivization is pretty much of an unalloyed good for them.

    You refer the Buffet's Mistake in the Salomon case. Have you other examples?

    Sure, Edgar Bronfman Junior is a good example. A few short years ago, his family owned control of Seagrams, which owned 20% of DuPont. Both of those are firms in which the power of talent is fairly restrained. The brands have already been built at Seagrams and Dupont is a firm in which capital is still a critical asset. However, Junior thought these businesses were boring and essentially traded them for Universal Studies and Polygram Records. These are two of the most talent-dominated industries on the face of the planet. In the movie and record businesses, the talent just hangs around waiting for the capital providers to show up and then fleeces them for everything they have. This was one of the worst trades in corporate history. Just because the movie and record businesses are sexy and cool doesn't mean they are hospitable places for capital. The Bronfman family stake in Vivendi - the temporary home of the Universal assets - is worth a small fraction of what its stakes in boring old Seagrams and DuPont.

    The Political Shift

    You wrote that "the talent class might be the modern equivalent of the "people" class, but its members are part of the richest segment of society. Thus the Right will back the talent class". Have you any signals that the political right will support the talents "class" revolution?

    Sure. The Republicans (in the US) are dragging their feet in forcing the expensing of stock options because the talent in Silicon Valley are against it. Notice, it is only the talent that is telling horror stories about what will happen in the wake of expensing stock options, not the pension funds and institutional investors that own the public companies of Silicon Valley. In 20th century politics, we would have expected to see the Republicans jump to the aid of capital on such an issue.

    The Republicans (in the US) are dragging their feet in forcing the expensing of stock options because the talent in Silicon Valley are against it. Notice, it is only the talent that is telling horror stories about what will happen in the wake of expensing stock options, not the pension funds and institutional investors that own the public companies of Silicon Valley. In 20th century politics, we would have expected to see the Republicans jump to the aid of capital on such an issue.

    With a new up-trend in economy in 2005 or after, with new technology and new businesses as a new catalyst in this decade, is not probable that the talent "class" will enter in a new entrepreneurial frenzy?

    Absolutely. And talent will crank up the stock-based compensation levels for its services as soon as the economy heats up again.

    Do you think there's a difference between North America and Europe on this potential "clash"?

    Talent has the greatest leverage in America because there capital is the most plentiful. So I suspect that in Europe, capital will be better positioned for the clash. However, I believe it will be relatively fierce on both continents. In many respects I see American talent as being quicker to make the shift I referred to earlier from "enough" to "how much" and that may also contribute to the intensity of the clash in America.

    The Buffet's Mistake
    Roger Martin mention in the HBR article that Buffet could not make much headway when he joined the battle against talent, when he invested 700 million USD in 1987 in Salomon investment bank. When Buffet became Chairman in 1991 he slashed the employee bonus pool and boosted returns to shareholders. That turns out to be a hollow victory. Soon afterward, those hotshot investment bankers left Salomon in droves and, without them, the company's fortunes fell. Salomon merged with Smith Barney, was bought by Travelers, then was absorbed by Citigroup - and eventually disappeared when this last one did away with the use of the Salomon brand in April this year (2003).
     
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