In business, size matters. But maybe not the way you think it does. An overlooked, but obvious common denominator in the numerous ‘bail-outs’ of late is in the sheer size of the companies involved. They are all big. Huge actually. Perhaps we should take a closer look at that. Perhaps size is a problem in itself?
A common taxpayer response to the bail-outs has been why? Why should our tax dollars be used to prop up a badly managed, failing company, or worse, a company who brought the situation upon themselves? Just because they are big? Small and medium-sized business owners in particular are annoyed; many of them could use help too. But they don’t qualify for bail-out cash because, in the big scheme, they don’t matter. And they don’t matter because they are not big. To qualify for bail-out funds, your failure has to be perceived as potentially catastrophic. And for that you need to be big. Really big.
Growth. Expansion. Globalization. Getting bigger, almost in and of itself, is a central goal of Management. Boards encourage growth. And getting bigger often rewards shareholders. So CEO’s compensation plans reward growth over most other metrics. But is big good for the rest of us? From a consumer’s perspective, quality goods and services at a reasonable price is what really matters. Sometimes being bigger helps a firm to deliver on this, sometimes not.
Consider the case of small and medium-sized businesses (SMBs). In Canada and the U.S., SMBs employ over 50% of the workforce, create 8 out of 10 new jobs and grow at a much faster pace than big business. If SMBs are the driver of growth and jobs, and big businesses pose huge financial and job loss risks, wouldn’t it be better if all companies were SMBs?
Really big companies employ tens, sometimes hundreds, of thousands of people. If they fail, a lot of jobs are lost. Enough to make headlines. Politicians don’t like those kinds of headlines. And a failure of a company employing that many people causes a lot of personal devastation, often within a smaller community. Placing a physical limit on the size of companies would reduce or eliminate a lot of these problems.
We have long known that distributed systems in other fields are better than centralized ones. They are more robust, less prone to failure, and easier to fix if damaged than centralized systems. Google uses tens of thousands of PC-like machines to respond to search queries rather than just a few super-computers, the failure of any one of which could be disastrous to their business. It’s the same basic reason that the Internet doesn’t fail. There are small failures throughout the internet (probably every day) but they have little or no effect, as the system itself never fails.
Why would we, as a society, organize ourselves to allow so much wealth, power, and employment concentrated in just a few companies? It creates fragility in the economic system in the same way that a few large supercomputers would for Google.
Lest you think that limiting the size of companies is somehow counter-capitalistic, remember that we already do limit the size of companies. And we do it for good reason: to limit unfair competition.
In the 60’s, the Department of Justice broke up the Telco monopoly held by At&T precisely because they were too large, and consequently had too great a power to set unfair prices for their products and services (remember how much long distance used to cost?). More recently a proposed Yahoo / Google deal fell apart as it would have been properly opposed and likely defeated by the Department of Justice for the same reason.
So limiting any one company’s size to protect society is not without precedent. Why not limit size to create a more distributed and robust economic system?
This observation, that large companies pose a real risk to the financial system when they fail, may or may not help us to figure out how to prevent another economic meltdown, but limiting the size of companies would limit the devastation. No bail-out cash required.