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Romney the revolutionary

Mitt Romney’s career says a lot about how American business has changed
the Economist – Jan 14th 2012 | from the print edition

IN A Republican primary field full of radicals, Mitt Romney is the establishment candidate. Yet earlier in his career he was a revolutionary. Hard though it may be to imagine Mr Romney waving a pitchfork or manning a barricade, Schumpeter is not joking. As a businessman, Mr Romney was at the heart of three revolutions.
The first was the rise of meritocracy in corporate America. In the 1950s and 1960s many people thought management was just a matter of applied common sense. Companies wanted their executives to be “well-rounded men”, not rocket scientists. But the 1960s and 1970s saw the rise of a new kind of brain-intensive company: private-equity outfits such as Kohlberg Kravis Roberts and strategy consultancies such as the Boston Consulting Group (BCG) and its stepchild Bain and Company.

These companies valued analytical skills above all else—certainly above experience or golf handicap. Bruce Henderson, BCG’s founder, recruited the smartest kids from the nation’s best business schools. Mr Romney was the archetype of this new breed: he graduated in the top 5% of his class at the Harvard Business School. The earnest young man also loved looking under the hood of companies to see how their wiring might be improved. He joined BCG in 1975 and left a couple of years later to join the even more brain-obsessed Bain and Company.
The second revolution, as Benjamin Wallace-Wells wrote in New York magazine, was the idea that a company’s purpose is to make money for shareholders. Post-war American capitalism was dominated by managers, not shareholders. These salaried sultans ruled over sprawling conglomerates with elaborate hierarchies and ornate headquarters. The three-martini lunch was de rigueur. And why not? American business was on top of the world. Wall Street was a complacent club. Japanese companies were not even on the radar.
But by the time Mr Romney came of age in the 1970s this comfortable world was crumbling. Post-war prosperity had given way to stagflation. The Japanese had started to run rings around slow American giants. And in 1976 a brilliant article by two business academics, Michael Jensen of Harvard and William Meckling of the University of Rochester, offered a radical diagnosis. Corporate America had a principal-agent problem, they said. Agents (ie, managers) were feathering their own nests rather than serving the interests of their principals (shareholders). The solution was to force managers to focus on shareholder value.
Bill Bain heartily agreed. He had left BCG because he was frustrated with a business model which hinged on consultants producing a report and then moving on to a new client. He wanted to forge more intimate relations with fewer companies. And he took this line of thinking a big step further. Why not go the whole hog and invest money in the firms you advised? Why not buy out bad managers and let your brilliant young consultants rebuild their companies from the ground up? The result was Bain Capital, a company that Mr Romney ran from 1984 to 1999, earning a fortune estimated at $200m.
Bain Capital was a wallet-bursting success. It turned $37m of capital under management in 1984 into $500m in 1994 (and $66 billion today). It kick-started businesses such as Staples (which now has 2,000 stores selling office supplies) and the Sports Authority. But it was also a symptom of a wider change. It was not just people like Mr Romney who were pushing American companies to shape up. It was also the new rigours of global competition. Firms of every description sought to squeeze out inefficiencies, sell off non-core businesses and close redundant operations, all in the name of shareholder value.
The third revolution was the shift from manufacturing to services. George Romney, Mitt’s father, made solid things for 23 years, running the American Motors Corporation for eight of them. Such careers are now unusual. Bright, ambitious young Americans seldom spend their whole lives making products with ballbearings in them. Bain Capital “re-engineered” 150 companies in a bewildering variety of industries during Mitt’s tenure. Mr Romney and his ilk have made corporate America more efficient. But for many people this has involved an upending of the natural order of things, with young men with flip-charts wandering into proud firms and telling veteran managers what to do.
As a candidate, Mr Romney trumpets his 30 years of experience in business. With the economy in such trouble, he argues, America needs a corporate troubleshooter in the White House, not a former community organiser. His opponents put it differently. Even some Republicans are painting him as a heartless corporate raider who has torn apart firms and families to make money for shareholders. Just as the 2008 election involved a debate on race relations, so the 2012 election will involve one on American capitalism. How ruthless, exactly, do voters want it to be?

The debate will be driven by emotions, not facts. The former are easy to inflame; the latter tricky to pin down. Did Mr Romney create 100,000 jobs while at Bain Capital, as he claims, or destroy more? Without knowing what would have happened in the absence of Bain’s intervention, one can only guess. Mr Romney says he made firms more productive, thus enriching America. His rivals—even Newt Gingrich, an unlikely sans-culottes—gripe that he enriched himself.
A tale of two visions
Still, it is a debate worth having. Mr Obama wants to curb capitalism’s excesses. Mr Romney offers, in his own words, “a clear and unapologetic defence” of “the American ideals of economic freedom”. He even tried to explain the virtues of profits to an Occupy Wall Street heckler. This year’s election will not just be about Mr Obama. Voters will have their say on capitalism, too.

COMMENTS

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Calivancouver Jan 13th 2012
Corporate Raiding is all Raiding is all fine and dandy, but is it a good faith effort to increase ‘shareholder value’ when you buy half a company, load it with debt, and pay yourself huge management fees and then watch the company go bankrupt?

Jerry Mager  / Jan 13th 2012
Schumpeter: “ This year’s election will not just be about Mr Obama. Voters will have their say on capitalism, too.”
Here Schumpeter may be more right than even she/he imagines. Because capitalism and democracy once seemed so inextricably linked. This is no longer the case. Politicians, broker-financiers and businessmen are hardly to be told apart any more – who is serving or servicing whose and which interests? How can we tell? The financial crises taught us this the hard way. Both capitalism and democracy have changed rather rapidly although we still call them by their old names. I suppose that for capitalism we now also may say free-market-economy. How free is the free choice we have on the free market and how free the choice in candidates we have? Are we consumers or citizens first? Is our consent manufactured on forehand? In which way manufactured? The Walter Lippmann or the John Dewey mode for example?
Schumpeter: “He even tried to explain the virtues of profits to an Occupy Wall Street heckler.” Why? To my knowledge there is nothing wrong with profits and neither is there anything the matter with an Occupy Wall Street heckler. That is to say, as long as they both are exercising their democratic rights within legal limits. This seems as retorical a contradistinction as the one between stakeholder value (Obama) and shareholder value (Romney) would be. Or is it?

Abiezer Coppe Jan 13th 2012
Will a President Romney fix the economy because he knows so much about adventurous capitalism? Or will a President Romney fix the economy because a largely Republican House of Representatives will not unthinkingly vote no to everything he says?
If Mr. Romney fixes the economy in the same fashion that he fixed so manny of his client companies under Bain, we will see a painful short term, just as the economy was righting itself, and we will see massive profits by the shareholding classes. Those of us without mutual funds and 401k’s will be remarkably less fortunate under Mr. Romney, but then, according to his philosophy, that is our fault, not his.

jouris Jan 13th 2012
This year’s election will not just be about Mr Obama. Voters will have their say on capitalism, too.
I’m not exactly sure what Shumpeter was trying to say here. My first impression was that he mean “a say on capitalism, pro or con.” Which, notwithstanding the hysteria of occasional Republican spokesmen crying “socialism!”, is not really an issue. Americans are pro capitalism as they understand it.
But it is true that this election might be about what kind of capitalism the nation would prefer. In particular, is there more preference for “creative” or “destruction”? On that kind of question, Mr. Romney would face the difficulty of having a record in business that puts him firmly on the destruction side — as shown by the number of bankruptcies among the companies Bain took over during his tenure there.
Note that this is not to say anything about what would have happened to those companies had Bain not taken them over. But counterfactual discussions are not going to carry much weight in an election campaign. What will matter is the Romney is not doing well at making a case for his having been a net plus as a businessman.
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Mitt Romney looks like winning the Republican nomination. The party could do worse
The Economist – Jan 13th 2012 | from the print edition

http://www.economist.com/node/21542767/comments?page=9

 THE Republican primaries are meant to last six months, allowing all 50 states to have their say in the nomination of a candidate to take on Barack Obama in November. Amazingly, they may be all over only days after they started.

On January 10th, a week after his victory in conservative Iowa, Mitt Romney trounced his six opponents in liberal New Hampshire, winning nearly twice the share of his nearest rival (see article). The polls predict a victory for him inSouth Carolina on January 21st, and another inFlorida on the 31st. Even if the race staggers on beyond that, he has raised as much money and built a bigger organisation than the rest of the Republican field combined. Barring an upset, Mr Romney is likely to win the nomination. The polls suggest that, should he do so, he has a real chance of ousting a president who has squandered much of his standing with the political centre.
But he has a lot of work to do. At the moment many Americans find him a bit of an enigma: a flip-flopper on some big issues, wooden in public, and a committed member of one of the world’s odder religions. None of that is entirely unfair, but it is exaggerated and incomplete (see article). At his best, Mr Romney should be able to offerAmerica a competent centre-right alternative to Mr Obama (and drag the latter back towards the ignored middle). But he must do a better job than he so far has of capitalising on his advantages and mitigating his weaknesses.

Paint it grey
Start with the advantages. The most important fact about Mr Romney is that he is a non-ideological man who did something thatAmericaneeds a lot more of. In 2002 he was elected to governMassachusetts, normally a Democratic stronghold. He passed a version of health-care reform that is at once his proudest achievement and his biggest liability. Back then a system based on obliging everyone to buy private health insurance was a conservative idea, and Mr Romney did a good job of working with a hostile legislature to get it passed. (Today, his party viscerally opposes Mr Obama’s health reforms, which are closely modelled on Mr Romney’s; such are the twists of politics.) He also turned roundMassachusetts’s finances, just as he had earlier righted the Salt Lake City Winter Olympics. Mr Romney needs to make these successes count for more than they have so far. Once the primaries are over, andAmerica’s independents rather than the Republican Party faithful become the electorate to win over, he may be able to.

Second, Mr Romney has something that the president and his Republican rivals sorely lack: business experience. For 25 years he made himself and the management consultancies BCG and Bain a lot of money by making companies more efficient which, yes, sometimes means firing people, but also drives economic growth (see article). So far, Mr Romney has done a poor job of defending himself against attacks which are really aimed at the creative destruction which is the essence of capitalism itself. He says he created a net 100,000 jobs during his time at Bain. That figure is impossible to prove, but he could do more to argue that the benefits outweigh the costs. His task has not been helped by disgraceful attacks from fellow-Republicans on corporate restructuring.

Third, Mr Romney seems sure-footed. It is hard to think of a single misstep in this campaign. He may be wooden, but no scandal has ever attached to him. His family life is impeccably monogamous and progenitive. Those who have worked closely with him tend to admire him. On both the economic and the foreign-policy sides, he has already put together impressive and above all sensibly moderate teams.

The debit side of the ledger
A useful list, to be sure: but can it outweigh the negatives? Mr Romney’s pragmatism has an inconvenient flip side: no one is quite sure where he stands. The Republican base does not think he is reliable on such things as gay rights and abortion. That will not matter so much to independents (who will probably also accept that any Republican has to say a few mad things to win a nomination). But people have to trust a president on the main issues, and, despite publishing a long economic manifesto, Mr Romney remains vague over how a lot of it is to be accomplished.

It is not at all clear how he would reformAmerica’s ruinously expensive health-care and pensions systems. His views on what he wants to do aboutAmerica’s 12m illegal immigrants are also unsettlingly gnomic. And where he has been clear, he has sometimes been wrong: his insistence that, on day one of his presidency, he will brandChinaas a currency manipulator represents dangerous pandering to populists. His pledge to cut federal spending to no more than 20% of GDP, a sop to his party’s fiscal extremists, would also be dangerous if applied as quickly as he implies.
Mr Romney will have other problems in wooing the electorate. He would be the richest candidate ever to win a big-party nomination and he reeks of privilege. His father was a governor as well, and he himself studied law at Harvard. On the other hand, Mr Obama is a millionaire several times over, can give a fair impression of having come from the planet Vulcan, and also studied law at Harvard. Mr Romney’s lack of charisma is a problem; but perhapsAmericawants fewer soaring speeches and more pragmatic restructuring plans.
Mr Romney’s last difficulty is one that should not be a problem at all. He is a Mormon and, despite Mormons’ protestations to the contrary, a third of Americans do not consider them to be Christians. There is not much Mr Romney can do about this. He could explain the Mormons’ extraordinary missionary work, but he can hardly risk saying that it is not really any more incredible that God communicated His plans to man in upstateNew Yorkin 1820 than He did inPalestinein 0AD. We recall, however, thatAmericawas for decades “not ready” for a Catholic president, or for a black one. Eventually, Americans thought better of those attitudes. Prejudice would be a silly reason for the Republicans to reject a man who offers their best chance of beating Mr Obama.

http://www.economist.com/node/21542767/comments?page=9

COMMENTS

Jerry Mager   /  Jan 13th 2012

Hear Hear! Spectacularj1 Jan 12th 2012 17:07 GMT : “Hopefully the comparisons of government to a business will cease. The government is not a business, does not have the same objectives as a business, and is not meant to be run like a business. Running the government as a business makes about as much sense as running a business like a government.”
But I am afraid it falls on deaf ears. So do read this article with tongue in cheek, please. It’s much more fun.
Start with the title: Mr. Romney as America’ s next CEO. And then: the party (i.e. Republican) can do worse. Mind you: the party. How about the rest of the USA? Well, I suppose that part needs a hefty “restructuring”, a lot of downsizing perhaps and if necessary: they all together are to be fired. For the Good of All.
The Economist: “Start with the advantages. The most important fact about Mr. Romney is that he is a non-ideological man ….” which comes in handy nowadays, but …. “ …. but can it outweigh the negatives? Mr. Romney’s pragmatism has an inconvenient flip side: no one is quite sure where he stands.” Which is convenient for a CEO to be: keep them in the dark and feed them shit (excusez le mot), is the motto.

There is a very apposite article by David Runciman in the London Review of Books
of 5th January 2012: “Will we be all right in the end? “ see http://www.lrb.co.uk/v34/n01/david-runciman/will-we-be-all-right-in-the-end .
Mr. Runciman writes about the depoliticizing of politics in Europe, after the American model and example, I would say. He remarks on the crisis in the eurozone that it is not at all about politics nor about visions, ideas or ideology:
“ One of the most striking things about this crisis is that the basic divide it has revealed is not between fundamentally different political views of the future, but simply between optimists and pessimists. (….)The current argument between the optimists and the pessimists has all the hallmarks of an ideological dispute but without any of the content.“
I dare say that is exactly what is going in the USA now. Politics has been effectively gutted some time ago over there. We only go on referring to it as something to do with politics because that is what we are supposed to do. We simply have no other vocabulary for the hullabaloos.

To my opinion the best recent analysis of what has been going in the USA for some time now is by Sheldon Wolin with: “Democracy Incorporated: Managed Democracy and the Specter of Inverted Totalitarianism.”
see: http://press.princeton.edu/titles/8606.html : “But what if the country is no longer a democracy at all? In Democracy Incorporated, Sheldon Wolin considers the unthinkable: has America unwittingly morphed into a new and strange kind of political hybrid, one where economic and state powers are conjoined and virtually unbridled? Can the nation check its descent into what the author terms “inverted totalitarianism”?”
Well, being a successful CEO, mr. Romney should not find the trick of “ turn-around-management” to difficult a thing to pull. Or isn’t that the thing professor Wolin means by ‘to invert’ at all?

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