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How did the emergence of a new generation of business managers change society and the economy and lead to the rise of powerful corporations?

Over time, charismatic entrepreneurs were gradually replaced by a new class of professional managers. As companies grew, it became increasingly difficult for one person to remain the owner of a significant share of stock. However, in some European countries, such as Sweden, founding families or foundations owned by them continued to retain control of large blocks of shares through legislation that allowed the issuance of new shares that counted as 10% or even 0.1% of the ordinary shares in voting. As a result of these changes, professional managers and directors began to play a key role in the management of companies, while shareholders began to play an increasingly passive role in determining business strategies. Already from the 1930s onwards, one began to speak of the emergence of managerial capitalism, in which the Victorian-era captains of industry were replaced by professional private sector bureaucrats.

However, there were growing concerns that these salaried managers were running companies in their own interests rather than in the interests of the shareholders who were the rightful owners. It was argued that the managers sought not so much to maximize profits as to increase sales, which allowed them to expand the company, enhancing their own status and influence. In some cases, they were involved in expensive and prestigious projects that satisfied their personal ambitions rather than increasing profits and stock market value. Nevertheless, some economists believed that the growing influence of professional managers was inevitable and even beneficial.

 

Predicting change and evaluating it

 

In the 1940s, Joseph Schumpeter, an Austrian-born American economist known for his theory of entrepreneurship, argued that as companies became stronger and scientific principles were introduced into research and development, the brave entrepreneurs of the past gave way to professional bureaucratic managers. Schumpeter believed that this would lead to a decline in the dynamism of capitalism, but saw this change as inevitable. In the 1950s, economist John K. Galbraith also argued that the rise of large corporations run by professional managers was inevitable. He suggested that the only way to counterbalance their influence was to increase government regulation and strengthen the role of labor unions.

In the decades that followed, proponents of private ownership were convinced that incentives for managers should be aimed at maximizing profits. Much has been done to develop motivational models, and some very brilliant minds have worked on this task. However, no perfect solution was ever found. Managers often managed to meet the formal requirements of the contract while avoiding its true essence. This was especially true in situations where shareholders could not easily assess whether low profitability was caused by a lack of managerial involvement or by objective external factors.

 

A fake solution to inefficiency

 

There was a view that professional managers should be rewarded according to the profits they were able to deliver to shareholders. To achieve this, it was suggested that they should focus on maximizing profits by ruthlessly cutting spending on payroll, capital expenditures, inventories, and middle managers and other expenses. 

To induce managers to follow this scheme, shareholders were advised to increase the proportion of company stock options in their compensation package, which would help align the interests of managers and shareholders. This idea was supported not only among shareholders but also by many corporate executives. One of the most famous adherents of this concept was Jack Welch, who was the longtime CEO of General Electric and is remembered as the author of the term “shareholder value,” which he first coined in a speech in 1981.
Soon after that speech, maximizing shareholder value became a symbol of the American business world, epitomizing an era. 

At first, the idea seemed to work perfectly well for executives and shareholders alike. The share of profits in national income, which had been trending downward since the 1960s, rose sharply in the mid-1980s, and since then shareholders have been receiving a much larger share of those profits in the form of dividends, and the value of their shares increased by nearly 60 percent between the 1950s and 1970s. 

Management compensation reached sky-high levels, but shareholders stopped questioning the size of their pay packages because they were satisfied with the steady increase in stock prices and dividends. The practice soon spread to other countries, taking root more easily in the UK, where the corporate governance structure and management culture was similar to that of the US, and more difficult in other nations.

 

Conclusion

 

The emergence of a new class of professional managers has fundamentally changed the structure and dynamics of modern capitalism. These managers, with specialized skills and knowledge, have become central figures in the management of large corporations, making shareholders more passive participants in determining business strategies. On the one hand, the introduction of the concept of shareholder value helped to increase profitability and share prices, which created an illusion of success for shareholders. On the other hand, there were fears that managers, focusing on their personal interests, might act to the detriment of the owners' interests.

Despite all efforts to create effective incentive schemes, the problem of misalignment of interests remained. This situation emphasizes the importance of further research and development in management to balance the interests of all participants in business processes. Ultimately, the transformation of governance in the corporate sector continues to have a significant impact on the economic and social structures of society, posing new challenges to modern capitalism.

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