Too Big to Fail versus Rightsized

The dilemma of oversized companies

 

"The real problem of our time is not ideological, but dimensional."

Leopold Kohr (1909 to 1994): Economist, social philosopher, Alternative Nobel Prize winner

 

SUMMARY

The size of the firm is an aspect of economics that is paid too little attention. Yet when economies and financial markets are in crisis, and major companies are verging on insolvency, size is suddenly of sensational importance. Then the talk is of 'systemic relevance' and unestimable collateral damage. The concept too big too fail (TBTF) is introduced: in other words, an insight that some companies are so huge they cannot be allowed to go under. Frantic attempts are made by all to save these companies – in the recent case of GM-Opel, even the German Chancellor got involved.

Oversized firms, experience shows, usually emerge when company organizations prove incapable of evolving to fit a changing environment, when power is concentrated in management hands, and can be exploited for personal advantage. Company size can have consequences for markets that enables company managements to minimize business risks and hike profits. This explains the general consensus between capital markets and corporate managements in favor of unchecked corporate growth and big companies.

Not enough attention is paid to the disadvantages big companies have for the general economy and society: such as oligopolisation of industry, alienation of employees from 'their' company, less innovation, business corporations disengaged from localities and countries in which they operate, undermining of the market economy, and the weakening of democracy.

Joseph Schumpeter, who was first to see a key role for the entrepreneur in economic theory over half a century ago, came to the following conclusion about size, "Bigness is fundamentally bad when it comes to capitalism." Today, due to globalization and weak regulation of mergers, industrialized countries have reached a worrying threshold when major companies have a million employees and their sales revenues equal the value-added of mid-sized European countries.

Setting limits to the size and growth of big companies is a long overdue practical measure to make the general economy more robust and stop competition being restricted. The credo for the future must be excellence not size. Many role models already exist in the mittelstand, particularly in Germany. The principle movers must be the companies themselves: starting by linking remuneration to long-term value-added rather than short-term targets. The state – and increasingly communities of states – must be more proactive: ruling out bail-outs, strictly regulating oligopolies including M&A activity, strengthening the personal liability of management and, if all else fails, breaking up oversized companies.

Manfred Hoefle, July 2011