Mitt Romney’s career says a lot about how American business has changed
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 inNew 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.