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The challenge of hidden profits: reducing corporate bureaucracy and waste

The challenge of hidden profits: reducing corporate bureaucracy and waste

Bill Cunningham

The Challenge of Hidden Profits: Reducing Corporate Bureaucracy and Waste

Green and Berry document an enormous amount of waste, fraud and abuse in the corporate sector costing consumers an estimated $862 billion annually, a figure more than six times the size of the oft-cited Grace Commission estimate of governemnt waste. They note that while government spending has undergone close scrutiny for waste, the much larger corporate sector has received scant attention. One analyst is cited estimating corporate waste commonly at 10 percent of a firm’s costs and another estimates that waste may range as high as 30 or 40 percent in some firms.

Green and Berry charge that corporate leaders often concoct shallow arguments blaming government spending, government regulations and workers for their problems instead of coming to terms with the cause of waste and taking steps to increase efficiency.

The major sources of corporate waste are redundant staffing of a bloated middle-management bureaucracy, excessive compensation, price fixing, payoff and kickback arrangements, and pollution of the environment.

Examples are given of wasteful growth of bureaucracy in corporations. In one company, 221 committees had to pore over reports and the write their own reports beofre a new product could be marketed. Not surprisingly, it is noted, very few new products actually made it to market.

It is found that managers create bureaucracy in part through the desire to avoid the responsibility of making decisions. No one person is to blame when something goes wrong, if a large number of committees participates in decision making. It is clear from the discussion that managers must be willing to take responsibility for decisions if a company is to function efficiently.

One result of the shortsightedness of corporations, pointed out in the book, is the sale of technology by American firms to foreign companies for a quick profit which later helps fuel a flood of imports. According to quoted sources, between 1950 and 1980, the Japanese acquired almost all the world’s available advanced technology by signing at least 30,000 licensing or technical agreements with western, mainly American, companies. The Japanese received the technology at fire-sale prices paying about $10 billion, which is only about 20 percent of a single year’s R&D spending in the United States.

Green and Berry found that corporate bureaucracies are often headed by managers with legal or financial backgrounds with little knowledge or interest in manufacturing. Coupled with the goal of short-term profits, such managers often emphasize mergers, acquisitions and spinoffs of factories and other assets rather than investment in new plants and modernization of old ones. The authors show further that in pursuing the acquisition and spinoff strategy, firms rarely show any regard for the effects on communities, employees or the productivity of the overall economy. Examples are given of billions of dollars spent joining companies whose managements had no clear visiion of what would happen after the acquisition.

The authors criticize the soaring increase in executive salaries. Top executives often appoint the committees that set their salaries, or may themselves set their salaries with little or no opposition from board members. It is shown that the salaries of top executives bear no relationship to the performance of the companies and greatly exceed reasonable incentives needed to do a good job.

A great deal of evidence is presented showing that fraud and abuse are endemic to corporate activity. Four-fifths of respondents to a poll thought that some accepted practices of the corporations they worked for were unethical. A Gallup poll found that four in ten business people said a superior had asked them to do something unethical; one in ten said he or she had been asked to do something illegal.

Several recommendations are made to discourage corporate mergers including banning “greenmail,” whereby a person trying to buy control of a company agrees to withdraw in return for a substantial amount of money. And the authors urge the removal of tax rules that are in incentive to mergers.

To deal with unethical and illegal conduct, the authors recommend that corporations establish codes of conduct, and that the government gather information on business social performance to make the public aware of corporations committing the most abuses. Other recommendations are that penalties be made more severe for illegal activity, supervisors be legally responsible to report hazardous production activities, and employees who report illegal activities be protected by law from retaliation and firing.

Green and Berry recognize the danger of industrial decline and the hardship workers face from imports wiping out domestic production. They recommend import restraints conditioned on companies spending more for modernizing plant and equipment. They also recommend an import policy to penalize countries that pay extremely low wages.

The book may leave the incorrect impression that corporations are entirely to blame for the current economic problems. Clearly, the major causes of the depressed economy are beyond the control of corporations. Corporations have been buffeted by the rapid rise in energy costs and unstable conditions of the 1970s and the 1981-82 recession, which was the deepest and longest since the depression of the 1930s.

High interest rates have directly hurt investment opportunities and raised the value of the dollar 68 percent against major U.S. competitors from July 1981 to July 1985. A U.S. manufacturer roughly competitive with imports in 1981 might be at a 68 percent disadvantage in 1985 due solely to the rise in value of the dollar.

Overall, this book is an interesting and informative critique of corporations and ably discusses many issues raised in recent years.


COPYRIGHT 2004 Gale Group