By Charles Skorina
Peter F. Drucker was a European intellectual, an Austrian who earned a doctorate in Germany. His monograph The Jewish Question in Germany was published in Vienna in 1936, by which time Mr. Drucker, of Jewish descent, was safely in London. His first book, The End of Economic Man: The Origins of Totalitarianism (1939), was favorably reviewed in the Times Literary Supplement by Winston Churchill, no less. In the 1940s he came to America and shifted careers. He wrote a pioneering study of management culture at General Motors: The Concept of the Corporation. GM chairman Alfred Sloan reportedly loathed the book, but it launched Drucker as a management consultant.
A friend and fellow Viennese, the economist Joseph Schumpeter, was settling in America at about the same time. From his perch at Harvard, Schumpeter wrote about the “creative destruction” implicit in capitalist economies. Drucker embraced that idea in his writings. He was a dynamist who welcomed innovation, but he tried to imagine a capitalist civilization where the creativity would eventually transcend the destruction.
He seems to have hoped that the modern corporation, under properly-enlightened professional managers, could take up wider responsibilities in the new industrial civilization. “If the managers of our major institutions,” he wrote, “and especially of business, do not take responsibility for the common good, no one else can or will.”
While he never gave up on the profit-seekers, he became increasingly interested in the rise of the non-profits and of pensions as investors. In 1976 he wrote The Unseen Revolution: How Pension Fund Socialism Came to America. Later, he said: “No book of mine was ever more on target, and no book of mine has ever been more totally ignored.”
Canadian pension guru Keith Ambachtsheer (whom we’ve paraphrased here) met Mr. Drucker shortly before his death, remembered that book, and recalled Drucker’s prescience.
The phrase “pension fund socialism” was Drucker’s ironical way of noting that, contra Marx, it was in capitalist America where the workers were steadily becoming the indirect owners of the means of production, through pension plans. He thought this had very big implications not only for the investment world, but for society at large.
By the 1980s, Drucker seemed to be hoping that the not-for-profit sector was the key to fostering a healthy society where people could not only make a living, but find a sense of belonging and civic pride. Drucker viewed nonprofits as leaders in the knowledge-driven enterprises that would characterize all economic activity in the future, and he cheered them on.
Some of Mr. Drucker’s reflections on pensions, re-stated and reconsidered in 1991, are in this Harvard Business Review article, “Reckoning With the Pension Fund Revolution.”
He declares that “The rise of pension funds as dominant owners and lenders represents one of the most startling power shifts in economic history.”
Then he asks two questions:
“For what should America’s new owners, the pension funds, hold corporate management accountable? And what is the appropriate institutional structure through which to exercise accountability?”
The boards governing America’s corporations, according to Drucker in 1991, are notoriously dysfunctional. They have power, but refuse to take responsibility for proper governance as he understands it (he thought that German banks and Japanese keiretsu were doing a better job).
He says that the pensions not only own corporate America, but they can’t sell it. To whom could a big pension sell its shares in a big corporation? Basically, just to the other pensions. As a group, they’re stuck with ownership.
He concludes that:
The pension funds are very different owners from nineteenth-century tycoons. They are not owners because they want to be owners but because they have no choice. They cannot sell. They also cannot become owner-managers. But they are owners nonetheless. As such, they have more than mere power. They have the responsibility to ensure performance and results in America’s largest and most important companies.
More than twenty years later, there is something a little fanciful about this. Some pensions, to be sure, make a certain amount of noise about improving corporate governance among firms they invest in, but they don’t seem to have done it very effectively. The notion of pension funds as the far-sighted uber-managers of American capitalism, equivalent to the German banks and Japanese keiretsu, remained a Druckerian dream, as far as we can see.
Peter Drucker liked to think of himself as a hard-headed, fact-driven analyst; not the kind of a misty-eyed European theoretician who, like Marx, wrought far more destruction than creation. But there was a lot of utopianism in him. He was always looking for that balance, sometimes in the wrong place.
But even when his predictions went awry, his moral instincts were sound. Responsibility does have to rest somewhere. We think, in the end, it doesn’t rest with a board or a Congress. It’s just us.
It’s been a weird half-decade, and a lot of that weirdness has leaked out of the financial sector.
The people I interact with every day are hard-working, honorable professionals, almost without exception. But then, there’s that “almost.”
Out of the interstices of the financial community have tumbled a depressing number of exceptions: the incompetent, the arrogant, the felonious, and even the clearly sociopathic. But we doubt that there are more of them, proportionately, than there were a hundred or a thousand years ago. And we doubt that more shrill preaching or unfathomable regulations will put an end to them.
And we don’t think they will prevail, because, in the end, there are a lot more of you than there are of them.
Charles A. Skorina & Co is retained by the boards of institutional investors and asset managers to recruit chief investment officers, portfolio managers, and financial professionals.
Charles Skorina earned an MBA at the University of Chicago and began his professional career at Chemical Bank (now JPMorgan Chase), completing the management training program then working as a credit and risk analyst in New York and Chicago. After a stint with Ernst & Young in Washington, D.C., he founded his own search firm headquartered in San Francisco, focused on the global financial services industry.