Shareholder Primacy Destroys Innovation

13 September, 2017 / Articles
Idea concept with row of light bulbs and glowing bulb

Most would agree that the future of the American economy depends on creativity and innovation. You can’t consistently create new jobs without the ability to bring new ideas to market. Technology is where we’ve seen the greatest burst of new ventures over the past decades, where innovations in electronics have become consumer products that change the way we live — the laptop, the smart phone, the computer tablet, and a dazzling array of medical technologies. These new industries and new products have either saved lives or enriched them. And yet, as we all know, the U.S. hasn’t been making these products itself. With that willingness to shrug off the ability to mass produce things, we’ve lost our edge in a dangerous way. It’s about more than the loss of jobs in manufacturing itself: it’s about the loss of our ability to scale up from idea to production.

The late Andy Grove, founder of Intel, warned about how our eagerness to outsource our manufacturing was an economic dead-end. Everyone is familiar with the laments about how foreign labor steals U.S. jobs — how offshore manufacturing has weakened our industrial prowess and inhibited job growth. But Grove was looking at all of this from the standpoint of what a lack of manufacturing infrastructure will do to a country’s ability to innovate — and this is a far more insidious outcome of cheap labor’s irresistible siren song.

He offered a rebuke to Thomas Friedman who had written that the U.S. didn’t need bailouts for manufacturers; it needed funding for start-ups instead. This has been our self-defeating mantra for decades: we are evolving away from manufacturing into a service economy and then into an information and knowledge economy, where we let the rest of the world do the heavy lifting while we supposedly drive our own economy with brilliant thinking and higher levels of knowledge. We do need great creative minds, but their ideas have to find embodiment in the physical world, and this is where we’ve stumbled.

For Bloomberg, Grove wrote:

The underlying problem . . . is our own misplaced faith in the power of startups to create U.S. jobs. Americans love the idea of the guys in the garage inventing something that changes the world. New York Times columnist Thomas L. Friedman recently encapsulated this view in a piece called “Start-Ups, Not Bailouts.” His argument: Let tired old companies that do commodity manufacturing die if they have to. If Washington really wants to create jobs, he wrote, it should back startups.

Friedman is wrong. Startups are a wonderful thing, but . . . equally important is what comes after that mythical moment of creation in the garage, as technology goes from prototype to mass production. This is the phase where companies scale up. The scaling process is no longer happening in the U.S. And as long as that’s the case, plowing capital into young companies that build their factories elsewhere will continue to yield a bad return in terms of American jobs.

What Grove was talking about are all the collateral, intermediate jobs that form a chain between idea and mass production. The people who work in these roles are the midwives in this birth — and the fund of experience and knowledge these workers bring to bear, through years of practice, are a crucial part of the innovation itself. Having your eureka moment in a garage somewhere is essential—it’s the inception of a new product — but a new idea is only an inkling of what’s to come.

How could the U.S. have forgotten how to scale? I believe the answer has to do with a general undervaluing of manufacturing — the idea that as long as “knowledge work” stays in the U.S., it doesn’t matter what happens to factory jobs. Not only did we lose an untold number of jobs, we broke the chain of experience that is so important in technological evolution. As happened with batteries, abandoning today’s “commodity” manufacturing can lock you out of tomorrow’s emerging industry.

Whether or not we could reverse the migration of our jobs to China or Mexico or Vietnam isn’t the question now: the issue is whether or not we could become a manufacturing power again, even if the cost of labor permitted it. Without that fund of diverse, hands-on know-how that the scaling process relies upon, we may not be able to ramp up to mass production effectively anymore. I suspect our situation is still reversible, if only we embraced a national initiative to reverse our downward spiral of dependence on foreign labor — something like the space race back in the 60s.

But first we have to realize that all of this has happened, really, for one reason: the pervasive doctrine of shareholder primacy — to eek the greatest immediate profit from any venture by any means possible. The worship of short-term profit, the elevation of shareholder interests over all other considerations in corporate governance, has driven this crippling, decades-long offshoring of jobs and skills and knowledge. Those in our C suites need to take a stand against short-term pressures and begin to think more like Grove, waking up to the fact that our business ventures depend on, as he put it, an “ecosystem” of knowledge and skills and interdependencies among a diverse network of employees. The human employee, laboring passionately and creatively on behalf of a larger effort, is the source of every venture’s success. Our greatest investment should be in the professional growth of those workers’ skills, knowledge, and motivation. No matter what business we’re in, they are the central agent for scaling your dream into a thriving business.

The science man and innovator, Fernando Fischmann, founder of Crystal Lagoons, recommends this article.

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