Date post: | 14-Apr-2018 |
Category: |
Documents |
Upload: | silvia-guadalupe-tapia-almazan |
View: | 226 times |
Download: | 0 times |
of 27
7/27/2019 The Drucker Vision
1/27Electronic copy available at: http://ssrn.com/abstract=1459512
TheDruckerVision:Corporations,Managers,Markets,andInnovation
RichardSmith
Universityof
California
Riverside
June2009
Abstract
This is the second of two essays on the influences of Peter Druckers exposure to proponents ofthe Austrian School of economics on his writing and philosophical views. In the first essay, Onthe Foundations of the Drucker Vision, I review the major influences that appear to have shapedmuch of his thinking, focusing mainly on post-World War I European history and the development
of the Austrian School. In this essay, I review Druckers writing with the objective of tracing thehow his views have been shaped by these influences. I focus, in particular on Druckers views ofclassical economics, the profit motive, corporate purpose, the value imperative, corporate socialresponsibility, managerial ethics, corporate purpose, innovation, pension funds, and the marketfor corporate control. The over-arching objective of both essays is to provide clearer interpretationof the meaning of some of Druckers most important and frequently misunderstood contributions.
Keywords:PeterDrucker,theAustrianSchool,Schumpeter
JELCodes:B00,B25,B29,B31,N44
CorrespondingAuthor:RichardSmith
A.GaryAndersonGraduateSchoolofManagement
UniversityofCaliforniaRiverside
900UniversityAvenue
Riverside,CA92521
9518273554
IamgratefultomyformercolleaguesattheDruckerGraduateSchoolofManagementforhavingprovidedmethe
opportunity to study the intellectual contributions of Peter Drucker, and to Drucker, himself, for the many times
whenspeaking
with
him
and
hearing
his
remarks
provoked
my
interest
in
gaining
adeeper
understanding
of
his
thinking.
7/27/2019 The Drucker Vision
2/27Electronic copy available at: http://ssrn.com/abstract=1459512
TheDruckerVision:Corporations,Managers,Markets,andInnovation
Overhisprolific live,Druckerhaswrittenenoughandon somany topics that it ispossible to
invoke passages of his writing to apparently support almost any position. Often he is quoted for the
proposition that management has responsibility to a broad set of stakeholders a social and ethical
responsibilitythattranscendstheclassicaleconomicnotionofprofitmaximizationandwheresurvivalof
theenterprise,perse,hasintrinsicvalue. ButaretheseaccuratecharacterizationsofwhatDruckersees
asthelegitimateresponsibilityofmanagement?
Ofcourse,
understanding
what
Drucker
meant
is
of
direct
interest
as
ameans
of
limiting
the
potential for the power of his written words to distort the evolutionof the dialog. My thesis is that
DruckersvisionandhismanagementprinciplesderivefromhisuncompromisingapplicationofAustrian
Schooleconomicprinciples,temperedbyabroadgraspofhistoryandbyhisexposure,earlyinhislife,to
aparticularlyturbulentsequenceofsocioeconomicevents.
Druckers views are interdependent, but some of themore central themes can be organized,
under
four
headings:
Classicaleconomicsandtheprofitmotive,
Corporatepurposeandthevalueimperative,
Corporatesocialresponsibilityandmanagerialethics,
Corporatepurposeandinnovation.
Insections IthroughV, Ireviewthethemes inDruckerswritingandrelatedthemtothehistoricaland
economicfoundationsofhisvision. SectionVIdrawsuponthewaysinwhichhistoryandeconomicshave
influencedDruckersvisiontooffersomeconjecturesastohowhemighthaveviewedthefinancialand
economiccrisisof200809. ThehistoricalandeconomicfoundationsoftheDruckervisionarereviewed
inarelatedessay,OntheFoundationsoftheDruckerVision.
I. ClassicalEconomicsandtheProfitMotive
7/27/2019 The Drucker Vision
3/27
2
OnKeynesianMacroeconomicsThroughouthis life,consistentwiththeAustrianSchoolview,Druckerwascriticalofeconomic
models that were overly mathematical and dismissive of the role of the individual. Keynes was a
particularand
recurring
target.
In
1946,
Drucker
wrote,
Keynes work was built on the realization that the fundamental assumptions of
nineteenthcenturylaissezfaireeconomicsonlongerholdtrueinanindustrialsociety.
Butitaimedattherestorationandpreservationofthebasicinstitutionsofnineteenth
century laissezfaire politics; above all at the preservation of the autonomy and
automatismofthemarket. Thetwocouldno longerbebroughttogether inarational
system;Keynesspolitics aremagic spells,formulae,and incantations, tomake the
admittedlyirrationalbehaverationally.1
Inconcedingtheviewthatlaissezfaireeconomicsdoesnotfunctioninanindustrializedsociety,Drucker
acceptsthatthepropensityoftheeconomytorestore fullemploymentthroughpriceadjustmentsmay
notholdwhentheeconomicactorsare large industrial firms, laborunions,andothers,whoarebound
through longterm contracts. He claims that policy instruments merely create the illusion of rational
behavior. Thus, itdoesnotmakesense tostimulatetheeconomybyartificially increasingdemand for
labor or tricking people into working by inflating the money supply. While he argues against the
Keynesiansolution,hedoesnotargueformoregovernmentintervention.
OntheProfitMotiveAs
of
1950,
Drucker
regarded
economic
performance
as
the
overriding
social
responsibility
of
an
enterprise.
In any society the first and overriding social function and responsibility of the
enterprise iseconomicperformance. Similarly, theenterprises survivaldependson
7/27/2019 The Drucker Vision
4/27
3
economicperformance. Thedemandsofeconomicperformancewhichsocietymakeson
theenterpriseareidenticaltothedemandoftheenterprisesselfinterest:theavoidance
ofloss Thereisnoconflictbetweenthesocialpurposeandthesurvivalinterestofthe
enterprise.Both
are
measured
at
one
and
the
same
time
on
the
same
yardstick.
2
Here,Druckerisacknowledgingthatabusinessthatisprofitableisdoingwhatsocietydemands.
Hedoessowithoutsuperimposinganynormativejudgmentaboutvaluesdifferentfromprices.Abusiness
thatisnotprofitableiswastingresourcesrelativetowhatsocietydemands. Whiletheremaybereasons
to suppress thepricemechanism,Druckerholds that it isnot the responsibilityofbusiness leaders to
makesuchchoices. This,again,isexactlytheAustrianview.
Druckersviewofprofitderivesdirectlyfromeconomicprinciples.
Profit serves threepurposes. Itmeasures the net effectiveness and soundness of a
businesssefforts Itistheriskpremiumthatcoversthecostofstayinginbusiness
Finally,profitinsuresthesupplyoffuturecapitalforinnovationandexpansion3
Thus, in1954,Druckeraccepts the roleofprices indirectingactivityand the roleofprofit in
directingresourceallocation. Indescribingprofitastheriskpremiumthatcoversthecostofstaying in
business, Drucker articulates the Austrian School view (in direct challenge to Marx), that profit is the
returntocapital. InAustrianterms,profitcompensatesthosewhoalreadypaidforthelaborservicesthat
areembeddedincapital. Whenhesaysthatprofitinsuresthesupplyofcapitalforinnovation,Druckeris
voicingSchumpeterspremisethatcapitalisessentialforinnovationandeconomicgrowth.
WheneverDrucker
speaks
of
business
purpose,
he
does
so
in
asocial
welfare
context
and
alwaysmeans thecreationofvalue for society. Profit (i.e.,economicprofit) iswhatvalidates that the
businessisachievingitssocialobjective.
7/27/2019 The Drucker Vision
5/27
4
Businessenterprisesandpublicserviceinstitutionsareorgansofsociety. Theydo
notexistfortheirownsake,buttofulfillaspecificsocialpurposeandtosatisfyaspecific
needofasociety,acommunity,orindividuals. Theyarenotendsbutmeans
Butonlybusinesshaseconomicperformanceasitsspecificmission;itisthedefinition
of a business that it exists for the sake of economic performance. In business
enterprise,economicperformanceistherationaleandpurpose.Businessmanagement
mustalwaysputeconomicperformancefirst. Abusinessmanagementhasfailedifit
doesnotproduceeconomicresults. Ithasfailedifitdoesnotsupplygoodsandservices
desiredbytheconsumeratapricetheconsumeriswillingtopay. Ithasfailedifitdoes
not improve, or at least maintain, the wealthproducing capacity of the economic
resourcesentrustedtoit.Andthismeansresponsibilityforprofitability.4
In1946,Druckeracknowledgestheprofitmotiveasmechanismforsocialefficiency.
theprofitmotivehasa veryhigh, ifnot thehighest, social efficiency. All theother
knownforms inwhichthe lustforpowercanbeexpressed,offersatisfactionbygiving
theambitiousmandirectpoweranddominationoverhisfellowmen. Theprofitmotive
alonegivesfulfillmentthroughpoweroverthings.5
The profit motive is core to Austrian School reasoning about the importance of prices as a
mechanism forallocating resources. Unlesspeopleare focusedonprofits,pricescannotdirecthuman
activity.
Druckersantipathy
for
other
means
of
pursuing
social
efficiency
is
areference
to
central
planning,whichtheAustrianscriticizeasunworkable. Druckerhasseen,firsthand,theconsequencesof
failedattemptsatcentralplanning.
7/27/2019 The Drucker Vision
6/27
5
Buthisrespectfortheprofitmotiveinpracticegivesrisetoatensionwithhisdisdainforformal
economics. In classical economics, the profits drive an economy toward efficient use of resources.
Druckerdisagrees,andevenquestionstheveryexistenceoftheprofitmotiveasatheoreticalconstruct.
Whetherthere issuchathingasaprofitmotiveatall ishighlydoubtful. The ideawas
inventedbytheclassicaleconomiststoexplaintheeconomicrealitythattheirtheoryof
staticequilibriumcouldnotexplain. .Theprofitmotiveanditsoffspringmaximization
ofprofitsarejustas irrelevanttothefunctionofabusiness,thepurposeofabusiness,
andthejobofmanagingabusiness. Infact,theconceptisworsethanirrelevant: itdoes
harm.6
Thecontradictionbetweenthis1974viewandhisearlierview isonlyapparent. Inthefirst,his
focus is on the behavior of individuals. In the second, he uses the term more narrowly as equating
marginalcostandmarginalrevenue.
DruckersreferencetothetheoryofstaticequilibriumandtheprofitmotiveispureSchumpeter.
Schumpeterarguedthat,becausethereisnoinnovationintheclassicalmodel,classicaleconomicscannot
explaingrowthorbusinesscycles. Without innovationorotherexogenous shocks, there isnothing to
disturbtheequilibrium. Druckerbelievestheneoclassicalconceptdoesharmbecauseittakesthefocus
off of innovation. In taking this position, Drucker reiterates the view of Schumpeter in his creative
destructionparadigm.
Druckersviewsonprofitareeasytomisinterpretbecausehedrawssubtledistinctionsbetween
profitasameasureofperformanceandprofitmaximizationasabehavioralorientation. Druckersaythat
theroot
of
confusion
about
business
purpose
is
the
mistaken
belief
that
the
profit
motive
is
aguide
to
rightaction.
Theconceptofprofitmaximizationismeaningless. Thedangerintheconceptisthat
itmakesprofitabilityappearamyth.Profitandprofitabilityare,however,crucial for
7/27/2019 The Drucker Vision
7/27
6
societyevenmorethanfortheindividualbusiness. Yetprofitabilityisnotthepurposeof,
but a limitingfactor on business enterprise and business activity. Profit is not the
explanation,cause,orrationaleofbusinessbehaviorandbusinessdecisions,butrather
theirvalidity
The
root
of
the
confusion
is
the
mistaken
belief
that
the
motive
of
a
person the socalled profit motive of the businessman is an explanation of his
behaviororhisguidetorightaction.7
Thisemphasisonhumanbehavior rather thanabstractprinciples likeprofitmaximization isat
the coreofAustrianSchooleconomics. Somepeople readDruckerdonot interprethiscommentson
profitmaximization inthisway. Rather,there isatendencyto interprethimassupportingstakeholder
valuerelativetoshareholdervalue. Whathemeans,however,isonadifferentlevel. Itisconsistentwith
stakeholdervalue,butnotwithinterpretationsofstakeholdervaluethatimplymanagerscanlegitimately
make tradeoffs among stakeholder groups. In fact, Drucker argues that the emphasis on profit
maximizationleadstomisunderstandingabouttheroleofprofit,andtobadpublicpolicy.
It[theprofitmotive] isamajorcauseofthemisunderstandingofthenatureofprofit
in our society and of the deepseated hostility toprofit,which are among themost
dangerous diseases of an industrial society. It is largely responsible for the worst
mistakesofpublicpolicy.whichissquarelybasedonthefailuretounderstandthe
nature,function,andpurposeofbusinessenterprise. And it is in largepartresponsible
for theprevailing belief that there is an inherent contradiction betweenprofit and a
companysabilitytomakeasocialcontribution. Actually,acompanycanmakeasocial
contributiononly
ifit
is
highly
profitable.8
ThispositionisshapedbyhisexperiencewiththerepercussionsoftheIndustrialRevolution,all
the way through the New Deal. If the public believes that shareholders profit at the expense of
employees,theywillfighttoeliminatetheprofits. Policymistakes(suchaspricecontrolsandartificialjob
7/27/2019 The Drucker Vision
8/27
7
creationprograms)deprivebusinessofwhatDrucker(andSchumpeter)believesaretheresourcestofund
realeconomicgrowth.
Here,isDruckersfamouslinethatthepurposeofbusinessistocreateacustomer.
Thereisonlyonevaliddefinitionofbusinesspurpose:tocreateacustomer.Itisthe
customerwhodetermineswhatabusinessis. Itisthecustomeralonewhosewillingness
topayforagoodconvertseconomicresourcesintowealth,thingsintogoods.9
Implicitly,his reference towillingness topay isanallusion to socialvaluecreationby selling
productsformorethantheycosttomake. Hisuseofthewordcreatebecauseabusinesscannottake
itscustomersasgivenandsimplycontinuetodothesamething. Rather,consistentwithSchumpeter,it
mustcreatethecustomerbyinnovating.
AnothersubtletythatiseasytomisconstrueisDruckersdistinctionbetweenprofitmaximization
andprofitsufficiency.
Profit isneededtopayforattainmentoftheobjectivesofthebusiness. Profit isa
conditionof survival. It is the costof thefuture, the costof staying inbusiness.A
businessthatobtainsenoughprofittosatisfyitsobjectiveshasameansofsurvival. A
business thatfallsshort isamarginalandendangeredbusiness.Profitplanning is
necessary. But it is planning for a needed minimum profitability rather than that
meaninglessshibbolethprofitmaximization. Theminimumneededmaywellturnout
tobeagooddealhigherthantheprofitgoalsofmanycompanies,letalonetheiractual
profitresults.10
TheapparentconflictiseasilyresolvedwhenDruckerpointsoutthatminimumprofitabilitymay
behigherthantheprofitgoalsofmanycompanies. Onecanbestunderstandthisfinalpartofthepassage
bykeepinginmindSchumpetersnotionofdynamiccompetition. Minimumnecessaryprofitabilitydoes
7/27/2019 The Drucker Vision
9/27
8
notmeanthatonceafirmachievesthis,itcandowhatitwantswiththerest. Theminimummustinclude
a normal return on capital, and while a firm may temporarily achieve a high return, it will not be
sustainableunlessitcontinuestoinnovatesuccessfully.
II.
CorporateSocial
Purpose
and
the
Value
Imperative
Schumpeterexpectedcapitalism to failduetothe inabilityofdemocraticprocessesto restrain
using monetary and fiscal policy to create short run benefits and because an increasingly wealth
electoratewouldfavorsocialprogramsthatwouldunderminetheentrepreneurialspirit. Inthe faceof
thehigh inflationratesofthe1970sandtheOPECoilshocks,the influenceofSchumpetersthinkingon
Druckersvisionisclear.
Schumpeter quit, convinced that stopping inflation is amatter ofpoliticalwill rather
thanofeconomic theoryorpolicy,butalsodeeplyskepticalabouttheabilityofafree
society to take thepoliticallynecessarydecisions. Hispessimisticconclusion,which
predictedthatdemocracywouldultimatelybedestroyedby its inabilitytoforegoorto
stopinflationbecauseofthelackofpoliticalwillapredictionthatalassoundsfarmore
prophetictodaythanitdidin1946wassquarelybasedonhistraumaticexperienceas
HemmessuccessorinchargeofAustrianfinancesin1922...11
EarlyViewsonthePlantCommunityIn his early writings, Drucker looked to the corporation as a solution to Schumpeters
prediction. Hearguedthatbusinessneededtocreateasenseofcommunitywithinthefirm(theplant
community) to curtail the conflict between labor and investors. In 1946, Drucker argued that every
memberof
an
enterprise
must
be
seen
as
equally
necessary
and
afforded
equal
opportunities
for
advancement.
Like every other institution which coordinates human effort to a social end, the
corporationmustbeorganizedonhierarchicallines. Butalsoeverybodyfromthebossto
7/27/2019 The Drucker Vision
10/27
9
thesweepermustbeseenasequallynecessarytothesuccessofthecommonenterprise.
At the same time the large corporation must offer equal opportunities for
advancement.12
Drucker seems tobe recalling thedehumanizing conditionsandcatastrophicconsequencesof
the IndustrialRevolution. Theappeal tomutual respectandequalopportunity reflectsaconcernwith
polarizationof societyaround themisperception that labor isnota stakeholder ina capitalist regime.
Moreover,in1950,Druckerespousestheviewthatitisimportantforworkerstobelieveintherationality
andpredictabilityoftheforcesthatcontroltheirjobs.
Insecurity leads to a search for scapegoats and culprits Only if we restore the
workersbeliefintherationalityandpredictabilityoftheforcesthatcontrolhisjob,can
weexpectanypoliciesintheindustrialenterprisetobeeffective.13
ThiswritingfollowedtheresurgenceoflaborunrestinthepostWWIIera. 1946wasthelargest
waveoflaborstrikesinUShistory. Byscapegoatsandculprits,Druckermeansmanagersandcapitalists.
He seems to have sought to foster a mentality, where workers cannot benefit unless business is
profitable. His concerns about adversarial relationships between workers and business are natural
extensionsofhisexperience.
LaterViewsonthePlantCommunityandtheNewSocietyThe plant community was essentially the model that was used in post WWII Japan, as
championed by Drucker and Deming. The model worked well as long as Japan had an absolute cost
advantagerelative
to
the
West,
and
was
supplying
products
without
competition
from
other
countries
with lower laborcost. Once competition intensified,many firms in Japan found themselvesunable to
adheretotheorganicmodelofthefirmwithlifetimeemploymentandinternalpromotion. Confronted,
inthe1990s,withthisreality,Druckerlookedforothermeansofindividualfulfillment.
7/27/2019 The Drucker Vision
11/27
10
FiftyyearsagoIbelievedtheplantcommunitywouldbethesuccessorofthecommunity
ofyesterday. Iwastotallywrong.WeprovedtotallyincapableeveninJapan.14
Iargued
then
that
the
large
business
enterprise
would
have
to
be
the
community
in
whichthe individualwouldfindstatusandfunction. This,however,hasnotworked
The right answer to the question Who takes care of the social challenges of the
knowledge society? is neither the government nor the employing organization. The
answerisaseparateandnewsocialsector.15
Istillstronglymaintainthattheemployeehastobegiventhemaximumofresponsibility
andselfcontrolButindividualsneedanadditionalsphereofsociallife.16
Not daunted by having been wrong about a central tenant of his early work, Druckers
overarchingconcernremainedhowdoweavoidthedivisiveimpactsofeconomicchangethatwereso
traumaticinthefirsthalfofthe20th
century? Whentheplantcommunitymodelprovednottobeableto
withstandcompetitivepressurefromotherswhoweremoreinnovative,Druckersoughtsolutionsinother
dimensionshisnotionofengagementinthesocialsector.
OnStakeholderValueRegardingresponsibilitytosociety,Druckerseesthesocietyasthedriverandbusinesspurpose
asbeinghighlycircumscribed.
Thesocialdimensionisasurvivaldimension. The. businessenterpriseisacreatureof
asociety
and
an
economy.
The
enterprise
exists
only
as
long
as
the
society
and
the
economybelievethatitdoesanecessary,useful,andproductivejob.17
LaterViewsonPurposeandPerformance
7/27/2019 The Drucker Vision
12/27
11
In later writing, Drucker seems to equivocate on questions related to corporate purpose and
performance assessment. At least in accounting terms, he sees business as focusing too narrowly on
profitandwithtooshortrunofaview.
Neitherthequantityofoutputnorthebottomlineisbyitselfanadequatemeasureof
theperformance. Marketstanding, innovation,productivity,developmentofpeople,
quality,financialresultsallarecrucialtoanorganizationsperformanceandsurvival.18
Hisuseof terms likebottom line in thesepassages isdecidedlydifferent from thenotionof
economic profit, which he espouses as the true measure of enterprise success. Accounting profit, in
contrast,isshortrunanddoesnotprovideforcapitalcost.
Weneeddataontotalfactorproductivity. Thatexplainsthepopularityofeconomic
valueadded analysis. [W]hat we generally call profits, the money left to service
equity,isusuallynotprofitatall. Untilabusinessreturnsaprofitthatisgreaterthanits
costofcapital, itoperatesata loss. Theenterprisestill returns less to theeconomy
than itdevours inresources. Until then, itdoesnotcreatewealth, itdestroys it. By
thatmeasurementfewU.S.businesseshavebeenprofitablesinceWorldWarII.19
Ultimately, Drucker comes down squarely behind economic profit as the driver of economic
growth.
Onemay
argue
(as
Ihave)
that
the
present
concentration
on
creating
shareholder
valueasthesolemissionofthepubliclyownedbusinessenterpriseistoonarrow. But
it has resulted in improvement in these enterprises financial performance beyond
anythinganearliergenerationwouldhavethoughtpossibleandwaybeyondwhatthe
sameenterprisesproducedwhentheytriedtosatisfymultipleobjectives,that is,when
7/27/2019 The Drucker Vision
13/27
12
they were being run (as I have to admit I advocated for many years) in the best
balanced interestsofallthestakeholders,thatis,shareholders,employees,customers,
plantcommunities,andsoon.20
Druckersviewonprofitasthemeasureofwhetherabusinessisservingsocietysneedsevolved
because of his perception that accountingprofit is too shortrunand because of thepressures of the
corporate controlmarket. However, he is stillonboard with the shareholder valuemodel (economic
profit)astheevidenceoffulfillingsocialpurpose.
PensionFundsandtheMarketforCorporateControlDuring thehostile takeovereraof the1980s,Druckerexpressedconcernabout the increasing
concentrationofequityownershipinpensionfunds,andinthecontrolofinstitutionalassetmanagers.
Towhomismanagementaccountable? Andforwhat? Onwhatdoesmanagementbase
itspower? Whatgives it legitimacy? Thesearenoteconomicquestions. Theyare
politicalquestions. Yet they underlie themost seriousassaultonmanagement in its
historyafarmoreseriousassaultthananymountedbyMarxistsor laborunions:the
hostiletakeover.Whatmade itpossiblewastheemergenceoftheemployeepension
fundsasthecontrollingshareholdersofpubliclyownedcompanies.
Thepensionfunds,while legallyowners,areeconomicallyinvestors. Theyhave
nointerestintheenterpriseanditswelfare. Infact,intheUnitedStatesatleastthey
arenotsupposedtoconsideranythingbut immediatepecuniarygain. Whatunderlies
thetakeover
bid
is
the
postulate
that
the
enterprises
sole
function
is
to
provide
the
largest possible immediate gain to the shareholder. In the absence of any other
justificationfor management and enterprise, the raider prevails and often
immediately dismantles or loots the going concern, sacrificing longrange, wealth
producingcapacityforshorttermgains.21
7/27/2019 The Drucker Vision
14/27
13
The essence of Druckers concern is his perception that institutional investors have a short
horizonandthatthereisaninconsistencybetweenshortrunandlongrunvalue. Sincehisprescriptions
formanagement
are
based
on
long
run
value,
significant
ownership
by
short
run
investors
threatens
his
prescriptionthatmanagersfocusonlongrunvaluecreation.
III. SocialResponsibilityandEthics
OnResponsibilityforImpactsDruckersviewofcorporatesocialresponsibilityasthepursuitofeconomicvalueisstrained
whenthispursuitiscoupledwiththeproductionofexternalities(impacts).
.The third task of management is managing the social impacts and the social
responsibilitiesoftheenterprise. Noneofour institutionsexistsand isanend in itself.
Everyone isanorganof societyand existsfor the sakeof society. Free enterprise
cannotbejustifiedasbeinggoodforbusiness;itcanbejustifiedonlyasbeinggoodfor
society. Business exists to supply goods and services to customers, rather than to
supplyjobstoworkersandmanagers,orevendividendstostockholders.22
Howtheconflict isresolved isnotsimplyamatterofmanagersweighingstakeholder interests.
While economic value is the yardstick, business does not exist narrowly to provide returns to
stockholders. Rather,itmustprovidereturnstostockholdersbyproducingwhatsocietyvalues.Thisisa
subtlepoint. Whatthisimpliesformanagementiswherethingsbecomeconfused.
Oneis
responsible
for
ones
impacts.
The
first
job
of
management
is,
therefore,
to
identifyandtoanticipateimpacts.Wherevertheimpactcanbeeliminatedbydropping
the activity that causes it, that is therefore the best solution. Inmost cases the
activity cannot be eliminated. The ideal approach is tomake the elimination of
impactsintoaprofitablebusiness. Moreofteneliminatinganimpactmeansincreasing
7/27/2019 The Drucker Vision
15/27
14
the costs. It thereforebecomesa competitive disadvantageunless everybody in the
industry accepts the same rule. And this, in most cases, can be done only by
regulation.
Wheneverabusinesshasdisregardedthelimitationofeconomicperformanceandhas
assumedsocialresponsibilitiesthatitcouldnotsupporteconomically,ithassoongotten
into trouble. This, tobesure, isaveryunpopularposition to take. It ismuchmore
popular tobeprogressive. Butmanagersarenotbeingpaid tobeheroes in the
popularpress. They are beingpaidforperformance and responsibility. To take on
tasksforwhichonelackscompetenceisirresponsiblebehavior.23
Thus,Druckersviewof responsibility formanaging impacts ishighlycircumscribed. Theonly
realissue,ifeliminatinganimpactwouldbecostly,isthateliminatingitunilaterallywouldmakethefirm
noncompetitive. Here,theonlyviablesolutioniscartelizationthroughregulationthatrequireseveryone
to stoppolluting. Druckersviewof limitedgovernmentclashesat timeswithhisargumenthere. For
example,therearebetterwaystoencourageuseofethanolthanbysubsidizingfarmersandmandating
ethanoluse,bothofwhichdistortpricesandobfuscatetheevidenceofwhetherbusinessesareproducing
socialvalue.
OntheSocialResponsibilityandEthicsofManagersHere,thefocusshiftstomanagerialresponsibilityfordealingwithsocialproblems. Accordingto
Drucker, the manager is responsible for business success not for activities that detract from it. A
managerwhodevotesefforttononbusinessactivitiesistakingresourcesfromthefirmanddistortingthe
profitmeasure
of
the
firms
success.
Themangerwhousesapositiontobecomeapublicfigureandtotakeleadership
withrespecttosocialproblemsisirresponsibleandfalsetohistrust.Theinstitutions
performance isalsosocietysfirstneedand interest. Societydoesnotstandtogain
7/27/2019 The Drucker Vision
16/27
15
buttoloseiftheperformancecapacityoftheinstitution isdiminished. Performance
of itsfunction is the institutionsfirst social responsibility. Unless it discharges its
responsibility,itcannotdischargeanythingelse. Abankruptbusinessisunlikelytobea
goodneighbor
.
Nor
will
it
create
the
capital
for
tomorrows
jobs
and
the
opportunities
fortomorrowsworkers.
Butwherebusiness isaskedtoassumesocialresponsibilityfortheproblemsorills
ofsociety,managementneedstothinkthroughwhethertheauthorityimpliedbythe
responsibility is legitimate. Otherwise it isusurpationand irresponsible. Every time
thedemand ismade thatbusiness take responsibilityfor thisor that,one shouldask,
Doesbusinesshave theauthorityand should ithave it? Ifbusinessdoesnot then
responsibilityonthepartofbusinessshouldbetreatedwithgravesuspicion. It isnot
responsibility; it is lustforpower. Managementmustresistresponsibilityforasocial
problemthatwouldcompromiseorimpairtheperformancecapacityofitsbusiness. It
must resistwhen thedemandgoesbeyond itsown competence. Itmust resistwhen
responsibilitywouldbeillegitimateauthority.24
Druckerisconcernedwithmanagementlosingfocusonitsresponsibilitytosocietyandwiththe
competency of managers to deal with problems that are beyond their expertise. His concern with
legitimacyisshapedbyhisexperienceswithillegitimateuseofpowerinEuropeandtheUS.
Druckerseesethicsasimportant,butdoesnotseebusinessinvolvinguniqueethicalchoices.
Countlesssermons
have
been
preached
on
the
ethics
of
business.
Most
have
nothing
todowithbusinessandlittletodowithethics. Theproblemisoneofmoralvaluesand
moral education. But neither is there a separate ethics of business, nor is one
needed. All that isneeded is tometeoutstiffpunishments to thosewhoyield to
temptation.
7/27/2019 The Drucker Vision
17/27
16
[m]anagers,weare told,haveanethical responsibility togive their time to
communityactivities,andsoon. Suchactivitiesshould,however,neverbeforcedon
them,nor
should
managers
be
appraised,
rewarded,
or
promoted
according
to
their
participation in voluntary activities. It is the contribution of an individual in his
capacity as a neighbor or citizen. And lies outside the managers job and
responsibility.25
TheAustrianSchoolview,justaswith impacts, isthat intensecompetitionpreventsabusiness
fromadheringtoahigherethicalstandardthanitsrivals. Insuchanenvironment,onlylegalrestrictions
withappropriatepunishmentcanalignbusinessconductwithethicalnorms.
IV. CorporatePurposeandInnovation
OntheImportanceofInnovationtotheEnterpriseIn his first model, Schumpeter saw innovation as resulting is continuous displacement of old
businesses by new ones. He later focused on the businesses are renewing themselves through
innovation. Drucker, isattractedtothesecondview,butalsowiththeaspirationthatsuch innovations
willalignwiththeinterestsofemployees.
Becauseitspurposeistocreateacustomer,thebusinessenterprisehastwobasic
functions:marketingand innovation. It isnotenoughtoprovidejustanyeconomic
goodsandservices;itmustprovidebetterandmoreeconomicalones.
Sooneror
later
even
the
most
successful
answer
to
the
question,
What
is
our
business?
becomesobsolete. InaskingWhatisourbusiness?managementthereforealsoneeds
toadd,Andwhatwillitbe? ....
7/27/2019 The Drucker Vision
18/27
17
Justasimportantasthedecisiononwhatnewanddifferentthingstodo,isplanned,
systematic abandonment of the old that no longer conveys satisfaction to the
customerorcustomers,nolongermakesasuperiorcontribution.26
Schumpeter,asatheorist,isinterestedinthedislocationscausedbyinnovativeactivity. Drucker,
who is much closer toactualmanagement, sees the economicdownturns thatderive from innovative
wavesasproblematic. Druckerhopesforaworldwheretheinnovativeeffortsofexistingbusinessescan
mitigate the negative impacts of dislocation caused by innovation. If so, then possibly some of the
divisivenessthatfollowedtheIndustrialRevolutioncanbeavoided.
OntheRoleofProfitinInnovationDrucker,likeSchumpeter,emphasizesthatprofitisessentialtothepursuitofinnovation,but
thatinnovativeactivityisguidedmorebyperceivedopportunitytocreatevaluethanbythepursuitof
profit,perse.
Schumpeters innovatorwith his creative destruction is the only theory sofar to
explainwhythereissomethingwecallprofit. Theclassicaleconomistsverywellknew
that their theory did not give any rationale for profit. Indeed, in the equilibrium
economics of a closed economic system there is no place for profit. If profit is,
however,agenuinecost,andtheonlywaytomaintainjobsandtocreatenewones,
then capitalism becomes again a moral system As soon as one shifts to
Schumpetersdynamic,growing,moving,changingeconomy,what iscalledprofit
becomesamoralimperative.27
Forsomethingascentralasprofitability,wehavenorealtoolsatalltodetermine
how much profitability is necessary. In respect to innovation and, even more, to
productivity,wehardlyknowmorethanthatsomethingoughttobedone.28
7/27/2019 The Drucker Vision
19/27
18
Inoneofhis latesteffortstostrikeabalancebetweencorporateobjectivesand individualwell
being, Drucker ties economic progress and social wellbeing to the presence of entrepreneurial
management in largeorganizationsandattributesdifferences ingrowthacrossnationstodifferences in
theentrepreneurial
orientation
of
management.
[W]hat actually happened in theUnited States and inGermany in thefifty years
between1873andWorldWarIdoesnotfittheKondratieffcycle. ThefirstKondratieff
cycle,basedon the railwayboom,came toanendwiththecrashof theViennaStock
Exchange in1873. GreatBritainandFrancedid thenentera longperiodduring
which the new emerging technologies could not create enoughjobs to offset the
stagnation in theold industries. But thisdidnothappen in theUnited Statesor in
Germany,norindeedinAustria.
Whatexplainstheirdifferenteconomicbehaviorwasonefactor:theentrepreneur.
InGermany,thesinglemostimportanteconomiceventintheyearsbetween1870and
1914wassurelythecreationoftheUniversalBank. Thefirstofthesewasfounded
withthespecificmissionoffindingentrepreneurs, financingentrepreneurs, andforcing
uponthemorganized,disciplinedmanagement. IntheUnitedStatestheentrepreneurial
bankerssuchasJ.P.MorganinNewYorkplayedasimilarrole.29
.Anyexistingorganizationgoesdownfast if itdoesnot innovate. Conversely,any
neworganizationcollapses if it isnotmanaged. Notto innovate isthesingle largest
reasonfor
the
decline
of
existing
organizations.
Not
to
know
how
to
manage
is
the
singlelargestreasonforthefailureofnewventure.30
Every institution must build into its daytoday management four entrepreneurial
activitiesthatruninparallel. Oneistheorganizedabandonmentofproducts,,andso
7/27/2019 The Drucker Vision
20/27
19
on thatareno longeranoptimalallocationof resources Thenany institutionmust
organize for systematic, continuing improvement Then it has to organize for
systematicandcontinuousexploitation,especiallyofitssuccesses Andfinally,ithasto
organizesystematic
innovation,
that
is,
to
create
the
different
tomorrow
that
makes
obsoleteandreplaceseventhemostsuccessfulproductsoftoday.31
DrawinguponSchumpeter,Druckerrecognizesthatcreativedestructioneventuallywillmakethe
currentbusinessof theenterpriseobsolete. BasedonSchumpeters secondmodelofentrepreneurial
activitywhereimportantinnovationstendtooccurwithinlargefirmsbecauseoftheiraccesstocapital
heemphasizessystematicinnovationaspartoftheresponsibilityofthebusiness. Hecreditscontinuous
innovation for enabling firms and economies to avoid the very long economic downturns that were
focusedonbySchumpeter.
Schumpeterargued that theprocessofcreativedestruction iswhatdriveseconomicgrowth
and prosperity. The economy necessarily goes through periods of rapid growth precipitated by
transformational innovation, followed by economic downturns are inevitable duringperiods when the
rateofinnovationslows. DruckeracceptedSchumpetersviewthatimportantinnovationswerelikelyto
bedevelopedby largecorporationsthathaveaccesstothecapitalnecessarytosupportthe innovative
activity. Byemphasizinginnovationasaresponsibilityofmanagement,Druckerhopedforaconstructive
meansofdampeningeconomicdownturns. Heacceptedthenotionofcreativedestruction,butstillsaw
thecorporationashavingsurvivalvalue if,throughinnovation,itcouldmitigatetheimpactofeconomic
downturnsonitsemployees.
V. Recap
Drawingon
economic
principles,
Drucker
concludes
that
the
social
responsibility
of
business
is
to
producegoodsand services thatare valuedby societyatmore than the costsof the inputs,and that
economicprofitisthebestmeasureofwhetherabusinessisachievingwhatsocietydemandsofit.
7/27/2019 The Drucker Vision
21/27
20
Based on the Austrian Schools praxeological approach, Drucker advances the view that
economic reasoningandpredictionsofbehaviormustbeginwitha focuson the individual rather than
withabstractconceptslikeprofitmaximization.
Basedon
economic
principles
and
on
his
views
of
power,
authority,
and
legitimacy,
Drucker
take
the position that a business managers purpose is to focus on achieving the profit objectives of the
business by creating value for consumers, and not on solving social problems that exist outside the
organization. Heemphasizeslegalandpoliticalapproachestodealingwithexternalities.
Druckerregardsethicsasacharacteristicofpeople,notofbusinesses. Inthefaceofcompetitive
pressure,abusinesscannotmakeethicalchoices that involvecosts forsomestakeholderandgains for
othersagainheappealstolawandpenalties.
BasedonhisexperiencewiththedisruptionsofthepostIndustrialRevolution,andnottrusting
government to be able to address the problems, Drucker envisioned the possibility of aligning value
creationwithacultureofbelonging. Eventuallyhewas forcedtoabandonthisview,butcontinued to
seekthesameobjectivesthroughhisemphasisoncorporateentrepreneurshipandhisdiscussionsofthe
newsocialreality.
Finally,Drucker seesbusinesscommitment to innovationas the importantdriverofeconomic
growthandrapidrecoveryfromdislocation.
VI. AConjectureonDruckersViewoftheEconomicCollapseof200809.
Based on the CaseSchiller Index, U.S. housing values increased by 123% from 2000 through
2006.32
Drivingthe increase,twoU.S.governmentsponsoredenterprises,FannieMaeandFreddieMac,
alongwithotherinstitutions,aggressivelyexpandedtheavailabilityoffundsforhomemortgageloans. In
efforts to reduce their exposure to the housing market risks; primary lenders, investment banks, and
insurancecompanies
engaged
in
acomplex
array
of
risk
shifting
tactics,
including
securitization
of
mortgage pools, insurance of credit risk, creation of special purpose entities that would invest in
mortgagebackedsecurities,andtheuseofcreditdefaultswaps.
The complex arrangements worked as long as housing prices were rising and homeowners
continuedtomaketheirpayments. However,inthetwoyearsfrommid2006throughmid2008,housing
7/27/2019 The Drucker Vision
22/27
21
valuesdeclinedby21%nationally. Thedeclineswereenoughtomorethanwipeoutthehomeowners
equityinmanymarkets,evenforconformingloans.
Faced with rising defaults, the failures of some counterparties to be able to honor their
commitments,and
similar
repercussions
of
the
decline,
some
banks
were
confronted
with
losses
of
regulatorycapitalthatforcedthemtodramatically curtaillendingactivities. Thehousingsectordeclines
andthefinancialcontractionofthebankingsectorprecipitatedaglobaleconomicdownturn.
Government in the U.S. responded in a variety of ways, including capital infusions for some
financial institutions, purchases underperforming assets to restore banks ability to lend, revisions of
marktomarket rules, infusions to support troubled firms in the automobile industry, and aggressive
governmentspendingtooffsettheperceivedunwillingnessofconsumerstospend.
It is natural to ponder what Peter Drucker would have had to say about the financial and
economiccollapse. Whileconjecture isopen toeasycriticism,conjecturebasedon the foundationsof
history,economics,andDruckersownwritings isnotfundamentallydifferentfromthemethodologyof
economic forecasting. While the forecast iscertain tobewrong in itsdetails,butmaybehelpfulasa
guidetoaction.
It seems likely that Drucker would see the collapse as a failure of both management and
government. Concerningmanagement,hemight reiteratehisconcernthat the incentivesofmanagers
are too shortrun to align their decisions with the objective of longrun value creation, which would
benefitnotonlyshareholders,butalsocustomersandsubordinateemployees. Concerninggovernment,
he might fault policymakers for overreaching in ways that created incentives for the managers of
financialfirmstofocustheirlendingdecisionsinwaysthatwouldnotbeeconomicallysustainable.
Government,accordingtoDrucker, isbest if it is limitedtoprovidingan infrastructureofrules
andenforcement
that
can
enable
economic
enterprises
to
thrive
by
offering
products
and
services
that
customersdemand. Even thoughDruckerwas frustrated inhissearch foreconomicenterprisemodels
thatcouldachievetheharmonyofcustomerserviceandemployeesatisfaction,heneverproposedthat
governmenthasa legitimate role in tradingoff labormarketand consumermarket interests. In fact,
7/27/2019 The Drucker Vision
23/27
22
basedonhisexperiencewith the riseof totalitarianism inEurope,Druckerwas fearfulofgovernment
usurpationofeconomicpower.
Basedonhiscritiquesofeconomicmodels thatarenotgrounded inhumanbehavior,Drucker
probablywould
have
been
critical
of
financial
engineering
models
that
were
based
on
statistical
arbitrage
anddisconnectedfromsuchbasicquestionsas:Howmuchoftheeconomicvalueofsocietiescapitalcan
reasonably be sustained in the form of investments in housing? How will people respond if housing
valuesdeclineandmortgagepaymentsare sharply increasing forsome? Andwhatwillhappen to the
financialsectorifdeclininghousingvaluesandrisingunemploymentleadtosignificantdefaults? Drucker
mightargue that if thehousingmarketwereviewed through the lensofunderlyingdemographicsand
householdconsumptionandinvestmentchoices,ratherthanthelensofquantitativestatisticalmodels,it
wouldnothavebeendifficulttoanticipatethehousingmarketdeclineandtopredict its impactonthe
financialsector.
Drucker,asaproponentoftheruleof law,didnotfavorthedirectgovernment intervention in
thesurvivaloffinancialfirmsorspecificindustrialfirms. Thenotionoftoobigtofailmighthavecarried
littleweightwithhim. Aslongastheinterestsofconsumersandcounterpartiescouldbeprotected,there
seems to be little merit to the argument that government should become involved in protecting the
wealthofthosewhochosetobeartheriskofinvestinginfinancialfirms.
It seems likely that Drucker would argue, along the lines of Schumpeter, that some U.S.
automobile producers have failed the market test. Nothing suggests that these firms are capable of
generating theeconomic returns thatarenecessary tocompensate investors forcontinuing tosupport
them. Assuch,perhapstheyshouldbepermittedtofailquicklysothattheresourcescanberedeployed
toactivitiesthatsocietyvaluesmorehighly.
Basedon
his
experience
in
Austria,
Drucker
might
be
concerned
about
the
growth
of
government. Hemightalsohavechallengedtheefficacyoftheregulatorybodiesthatweresupposedto
bepreventing the crisis in the firstplace. TheSEC,whichpushed forpassageofSarbanesOxleyafter
Enron,permittedthesameoffbalancesheetexposurestodefaulttoariseinthefinancialsector. Mark
tomarket accounting, which was championed by regulators in the interest of transparency, actually
7/27/2019 The Drucker Vision
24/27
23
magnified the impact of the defaults that occurred. Based on his exposure to the Austrian School,
Druckermightobservethatparticipantsinthecompetitivemarketswillalwaysfindtheweaknessesofany
regulatoryinfrastructure,sothatunintendedconsequencesare inevitableanargumentofsimplicityin
theuse
regulation
to
direct
economic
activity.
BasedonhisexposuretoSchumpeterandexperiencewithandstudyoftheGreatDepression,
DruckerwouldbecriticalofKeynesianstyleattempts tousegovernmentspending to restarteconomic
activity. Government inevitably acts politically, and trying to deal with economic downturns with
governmentspendingretardstheincentivesandabilityoftheeconomytorecoverthroughinnovation.
AlongwithSchumpeter,andother leadersof theAustrianSchool,Druckermightbecriticalof
governmenteffortsto influencethecourseof innovationthroughdirect involvement insuchmattersas
theenvironment. Whilegovernmentmayprovide incentivestohelpdealwithrecognizedexternalities,
there is littleevidence to indicate thatgovernment isveryeffectasanentrepreneur. Incontrast, the
venturecapitalindustry,whichatitshighestpoint,investedonlyabout$100billioninasingleyearandis
only about 30 years old , is linked to economic enterprises that, as of 2007, accounted for 10% of
nongovernmentjobsand17%ofU.S.GDP.33
7/27/2019 The Drucker Vision
25/27
24
1 Peter F. Drucker, The Ecological Vision: Reflections on the American Condition (New Brunswick :
TransactionPublishers,1993):119.
2PeterF.Drucker,TheNewSociety(NewYork:Harper&Row,1962)63.
3PeterF.Drucker,ThePracticeofManagement(NewYork:Harper,1954):77.
4PeterF.Drucker,Management,Tasks,Responsibilities,Practices(NewYork:HarperCollins,1974).
5PeterF.Drucker,TheConceptoftheCorporation(NewYork:NewAmericanLibrary,1964).
6Ibid.(note4).
.7Ibid.(note4).
8Ibid.(note4).
9Ibid.(note4).
10Ibid.(note4).
11PeterF.Drucker,AdventuresofaBystander(NewYork:HarperandRow,1979): 28.
12Ibid(note5).
13Ibid.(note2,pages200201).
14PeterF.Drucker,QuotedfromaninterviewinTheBusinessoftheKingdom,1999.
15
Peter
F.
Drucker,
How
Knowledge
Works,
The
Atlantic
Monthly
Nov
1994,
75.
16PeterF.Drucker,PostCapitalistSociety(NewYork:HarperBusiness,1993):4.
17Ibid.(note4).
18PeterF.Drucker,TheNewRealities:InGovernmentAndPolitics,InEconomicsAndBusiness,InSociety
AndWorldView(NewYork:Harper&Row,1989).
19PeterF.Drucker,ManaginginaTimeofGreatChange(NewYork:TrumanTalleyBooks/Dutton,1995).
20PeterF.Drucker,TheNewPluralism,LeadertoLeaderFall1999,22.
21Ibid.(note18).
22Ibid.(note4).
23Ibid.(note4).
24Ibid.(note4).
7/27/2019 The Drucker Vision
26/27
25
25Ibid.(note4).
26Ibid.(note4).
27PeterF.Drucker,Schumpetervs.Keynes,ForbesMay1983,127.
53Ibid.(note4).
29PeterF.Drucker,InnovationAndEntrepreneurship:PracticeAndPrinciples(NewYork:Harper&Row,
1985).
30Ibid.(note18).
31PeterF.Drucker,ManagementsNewParadigms,ForbesOctober5,1998,174.
32StandardandPoor,s,S&P/CaseShillerHomePrice Indices2008,AYear InReview, January13,2009,
availableat
http://www2.standardandpoors.com/spf/pdf/index/CaseShiller_Housing_Whitepaper_YearinReview.pdf.
33GlobalInsight(2007),Venture impact:Theeconomic importanceofventurecapitalbackedcompanies
totheU.S.economy.
7/27/2019 The Drucker Vision
27/27
Bibliography
Drucker,PeterF.,AdventuresofaBystander(NewYork:HarperandRow,1979).
Drucker,PeterF.,TheConceptoftheCorporation(NewYork:NewAmericanLibrary,1964).
Drucker,Peter
F.,
The
Ecological
Vision:
Reflections
on
the
American
Condition
(New
Brunswick
:TransactionPublishers,1993).
Drucker,PeterF.,HowKnowledgeWorks,TheAtlanticMonthlyNov1994.
Drucker,PeterF., InnovationAndEntrepreneurship :PracticeAndPrinciples (NewYork :Harper&Row,
1985).
Drucker,PeterF.Management,Tasks,Responsibilities,Practices(NewYork:HarperCollins,1974).
Drucker,PeterF.,ManagementsNewParadigms,ForbesOctober5,1998.
Drucker,PeterF.,ManaginginaTimeofGreatChange(NewYork:TrumanTalleyBooks/Dutton,1995).
Drucker,PeterF.,TheNewPluralism,LeadertoLeaderFall1999.
Drucker,PeterF.,TheNewRealities : InGovernmentAndPolitics, InEconomicsAndBusiness, InSociety
AndWorldView(NewYork:Harper&Row,1989).
Drucker,PeterF.,TheNewSociety(NewYork:Harper&Row,1962).
Drucker,PeterF.,ThePracticeofManagement(NewYork:Harper,1954).
Drucker,PeterF.,PostCapitalistSociety(NewYork:HarperBusiness,1993).
Drucker,Peter
F.,
Quoted
from
an
interview
in
The
Business
of
the
Kingdom,
1999.
Drucker,PeterF.,Schumpetervs.Keynes,ForbesMay1983.
GlobalInsight(2007),Ventureimpact:Theeconomicimportanceofventurecapitalbackedcompaniesto
theU.S.economy,availableathttp://www.globalinsight.com/PressRelease/PressReleaseDetail8726.htm
Schumpeter,JosephAlois,Capitalism,Socialism,andDemocracy(NewYork:Harper,1950).
Schumpeter, JosephAlois,TheTheoryofEconomicDevelopment:An Inquiry intoProfits,Capital,Credit,
Interest,andtheBusinessCycle(Cambridge,MA:HarvardUniversityPress,1934).
Smith,Richard,OntheFoundationsoftheDruckerVision,thisvolume(McGrawHill:NewYork,2009).
StandardandPoors,S&P/CaseShillerHomePrice Indices2008,AYear InReview, January13,2009,
availableat
http://www2.standardandpoors.com/spf/pdf/index/CaseShiller_Housing_Whitepaper_YearinReview.pdf.