Aye: "The Most Sophisticated and Successful Criminal Organizations in History"

Pirate ships as efficient, democratic, incentive compatible business enterprises:

The Pirates’ Code, by James Surowiecki, The New Yorker: ...While pirates were certainly cruel and violent criminals, pirate ships were hardly the floating tyrannies of popular imagination. As a fascinating new paper by Peter Leeson, an economist at George Mason University, and “The Republic of Pirates,” a new book by Colin Woodard, make clear, pirate ships limited the power of captains and guaranteed crew members a say in the ship’s affairs. The surprising thing is that, ... pirates were, in Leeson’s words, among “the most sophisticated and successful criminal organizations in history.”

Leeson is fascinated by pirates because they flourished outside ... the law. They could not count on ... authorities to insure that people would live up to promises or obey rules. Unlike the Mafia, pirates were not bound by ethnic or family ties; crews were ... remarkably diverse... Nor were they held together primarily by violence... [P]irate ships were governed by ... simple constitutions that, in greater or lesser detail, laid out the rights and duties of crewmen, rules for the handling of disputes, and incentive and insurance payments to insure that crewmen would act bravely in battle. ... The Pirates’ Code ... was not, in that sense, a myth, although in effect each ship had its own code.

But rules alone did not suffice. Pirates also needed to limit the risk that their leaders would put individual interests ahead of the interests of the ship... Some pirates had turned to buccaneering after fleeing naval and merchant vessels, where the captain was essentially a dictator... Royal Navy and merchant captains guaranteed themselves full rations while their men went hungry, beat crew members at their whim, and treated dissent as mutinous. So pirates were familiar with the perils of autocracy.

As a result, Leeson argues, pirate ships developed ... democracies. First, pirates ... divided and limited power. Captains had total authority during battle, when debate and disagreement were ... inefficient and dangerous. Outside of battle, the quartermaster ... was in charge—responsible for food rations, discipline, and the allocation of plunder. On most ships, the distribution of booty was set down in writing, and it was relatively equal; pirate captains often received only twice as many shares as crewmen. ... The most powerful check on captains and quartermasters was that ... the crew elected them and could depose them. And when questions arose about the rules..., interpretation was left not to the captain but to a jury of crewmen. ...

Interestingly, ... most corporations since the mid-nineteenth century have behaved more like the Royal Navy, with C.E.O.s who have close to unlimited power and employees who have no say in ... the organization...

This model of C.E.O. leadership is increasingly being questioned, with a greater emphasis being placed, at least rhetorically, on the need for executives to be more responsive to employees and on the value of dividing authority (although no one is seriously considering letting ordinary employees elect the boss). ... You can take this comparison only so far... But it may be only a matter of time before someone publishes “The Management Lessons of Captain Kidd.” I’d read it.

Comments

[James Killus]

William S. Burroughs wrote extensively about pirates, most notably in Cities of the Red Night. It's been a long time since I read it though, so I can only offer the pointer.

[kthomas]

I would not read it, but I can easily see it's adherents at those meetings:

Arr, so we hurled their CEO to ye lawyerly sharks and told ye remaining managers to shut their gobs before we'd smash their timbers with cannon and musket and ravage their women, too!

[gordon]

I deduce that industrial democracy is about to be rediscovered for the ... nth time?

[Bruce Wilder]

A 17th or 18th century ship needed one critical skill, not widely shared: the ability to navigate successfully, by means of dead reckoning and celestial observation.

Pirate ships, by operating exclusively in coastal waters, within sight of familiar land, had less need of a captain, competent in celestial navigation and the rigorous keeping of a log (necessary to dead reckoning), than did a ship undertaking ocean voyages.

[Lafayette]

JS: This model of C.E.O. leadership is increasingly being questioned, with a greater emphasis being placed, at least rhetorically, on the need for executives to be more responsive to employees and on the value of dividing authority

Yes, fine, but how does one instill such in a law-based society such as ours. Employee stock ownership, I submit.

The great divide between management and both white and blue collar workers is historical, and obsolete. Americans fought (and died) against a monarchical class structure, only to go on and create a similar beast, but corporate in nature. The lower classes were considered expendable labor, to be hired and fired as necessary. Whilst corporate ownership was shared by a select few that were welcomed into "paradise" (meaning long-term employment at top management positions) by means of stock options.

More than twenty years ago, Germany led Europe in changing that archaic structure by passing legislation that allocated BoD representation by the unions for all companies above a threshold level of employees. Nice, but not enough.

The staff must be intimately tied to the well-being and destiny of the company ... at least as well linked to that destiny as is management. How do companies motivate management to think and act as ONE entity? Ownership by means of stock grants and options.

Why cannot the same be allocated to staff and, with the same performance criteria to which management is submitted?

If that settles the question of kind of compensation, what about its amount? CEO's are not going to accept total compensation that is merely twice that of average, but they should commit to some fixed multiple of the average. The "sky's the limit" as a rule of thumbs for executive compensation will no longer do, it being grossly unfair. (More so, however, total compensation must be approved by the owners, meaning all stock ownership - not just a malleable a "Compensation Committee".)

Finally, the rules of ownership need changing. No "golden shares" that have voting rights in multiples of "ordinary shares". And, a guaranty of at least 10% of the board chairs allocated to (duly elected) representatives of the staff - which obtain identical compensation for their Board responsibilities as other BoD members. Only when there is corporate oversight allowed to the staff, will honesty and decency be assured within corporate management. No whistle blowers, no crimes.

That has to be written into the law of the land. So, don't count on it for at least another century.

Nobody likes plutocrats, but "wishing them away" is not going to work either.

[real person from the real world]

Lafayette: OK, so if co-sharing of the boards works well, why does everyone have complaints about work systems in Europe, espcially Germany and France? In one of your write ups on some topic in these blog pages, you complained about some union guy who ranted when you moved a lamp. You've had a say on what we should do here, so just for a more balance perspective, what ARE the problems in Europe about?

[robertdfeinman]

The Zeiss Optics company was founded in 1846. After the retirement of one of its founders, Ernst Abbe, the ownership was turned over to a foundation. From then on the firm was run by the workers as the owners of the foundation. This only ended in the mid 20th Century with the rise of the Nazi's and the subsequent partition of Germany. After the war most of the original company ended up in East Germany where it was looted by the Russians and the equipment used as the basis for much of their camera and lens making equipment.

During its long period of worker control it was recognized internationally for the high quality of its products and the excellent treatment of its workers.

[btgraff]

I was watching a movie a few weeks back on TCM - "They Drive by Night" which was part of a look at the career of idea Lupino. At the end of the movie, the character played by George Raft gives his half of the trucking company to the workers, since he was given the shares as part of a plot to win his affections by Ida Lupino, and his friend, who started the company was murdered as part of the plan.

Anyway, this article made me think that that movie - which was ironic given that Warner Brthers and the other studios were pretty much dictatorships yet their movies often advocated something else.

[gordon]

I knew it! Here we go again - group decision-making, employee share schemes, flatter hierarchies, delegation, financial participation, worker ownership and cooperatives ... oh, my Gosh! I've been there before, kids, and it never lasts.

It's got no real friends, you see; employers/managers hate it for obvious reasons, and unions hate it because it doesn't fit in with the traditional union/employer adversarial bargaining situation. Politicians hate it because their supporters among employers and unions hate it. Result: no worthwhile support from anywhere.

Does it work? Very often, but that's not the point.

[Lafayette]

rp: OK, so if co-sharing of the boards works well, why does everyone have complaints about work systems in Europe, espcially Germany and France?

You tell me.

They have worked VERY WELL INDEED in assuring labor peace in Germany - and this for over thirty years. It is a matter of application - managements that do not want such "oversight" have a good reason for it - they want total freedom to do as they damn-well please.

This latter is the reason why the program has not worked as well in France.

Remember "oversight" means to oversee, which means "watch". It does not mean "decide". And, managements don't want to be hindered by unions looking over their shoulders. This is perhaps human, but it is not efficient. What happens is typically long industrial strife and a lose-lose situation for both sides.

The singular most important point of difference between America and Europe as regards dismissals is this: In Europe management must "justify" a firing, especially if it is massive. It must demonstrate that it is necessary because of deteriorating business conditions. Or, it finds itself in front of a court.

Does that mean Management cannot fire people. No, it can and it does. It simply must justify it (competition, lack of demand, etc., etc.) What makes firing punitive is the "social charges" that must be paid in case of dismissals.

This prevents firings, yes, but it stifles job creation. So, those in place continue to work, but their children run circles looking for durable employment.

The old are mortgaging the future of their children to remain employed. This is perverse.

[Lafayette]

gordon: group decision-making, employee share schemes, flatter hierarchies, delegation, financial participation, worker ownership and cooperatives ... I've been there before, kids, and it never lasts.

On total corporate compensation

Balderdash. This is an excuse at best and a lie at its worst.

If it is "made to last", it will last. Don't blame failure on lack of execution.

Labor is labor and capital is capital - and these twains should meet for all company workers and not only a select number. Just because someone ends up in the hierarchy of top management gives them no automatic right to plunder the company’s assets or profits. And yet, such is precisely what is happening. Why?

Because there is NO regulation of executive powers in terms of compensation. Each company decides its own guidelines and moral decency be damned.

If it is not right that a disproportionate part of the return on capital, then what is? Here's a possible answer: If the average salary in a company is, say, thirty-thousand dollars a year. Then what multiple of that should be the cap on "total compensation"?

Ten times the average? Nope, lacks incentive. A hundred times the average? Hmmmn, three megabucks, that's not bad. A thousand times the average? No way! Three billion dollars? Outrageous!

So the cap on total compensation is somewhere in the range of 3 million dollars per year, maybe $10M, which is three times as much. That's not sufficient incentive -- REGARDLESS of corporate profits -- of billions of dollars?

And, the next head-hunter who tells you they cannot find "good talent" at that "price", throw them out the window. They're lying to you and defenestration is a salutary example for the rest of them.

[Lafayette]

gordon: group decision-making, employee share schemes, flatter hierarchies, delegation, financial participation, worker ownership and cooperatives ... I've been there before, kids, and it never lasts.

On “worker-ownership” or, profit sharing

What is worker ownership, if not equity participation? What is equity participation if not stocks?

If stock-options are "equity participation" that bind corporate managers to the company in order to assure performance, why not every one else in the company?

Why cannot stock bonuses for managers motivate other employees as well. What are the rest of us … chopped meat?

It is ALL a question of fair compensation. No doubt, the more responsibility a person manages, the more they should be compensated (meaning paid and incentivated). Fair compensation is simply a matter of “how much”, is it not?

And a Fair Compensation Schedule that determines corporate management salary and incentives (whether monetary or “in kind”) is possible once one has settled on the cap (the maximum amount as some multiple of the average). If management has performance criteria, then why not other employees as part of their Job Description and Appraisal/Salary Review. From the top all the way down the corporate ladder to the very bottom.

This is NOT rocket-science. In fact, rocket science is a LOT harder. And, it goes a long way to making employment a great deal more decent for all.

[Lafayette]

gordon: group decision-making, employee share schemes, flatter hierarchies, delegation, financial participation, worker ownership and cooperatives ... I've been there before, kids, and it never lasts.

On group decision-making

Yes, group decisions don't work. As the saying goes, "A camel is a horse designed by a committee".

But, group input to decision making towards building consensus DOES work. The challenge is to provoke and permit management to give its opinion -- and then a collegial decision is made by top management. Collegial means that differing proposals and points-of-view are made in collective consultation and a consensus is achieved.

That consensus is then implemented as corporate policy. This is normally central to a corporate planning cycle, wherein strategic objectives are identified and budgets decided (meaning trade-offs made).

What happens in most companies is that management does NOT have the talent to do the above ... which does erquire some competence at inter-personal relationships and planning discipline. So, those who lack these talents, simply opt for a non-consensual dictatorial style of executive management. (It's MY way ... or the highway!)

If top management wants consultation (and feed-back) to be an integral part of the corporate culture, they should be prepared to know how to manage the process. It's amazing how many don't know ... and are well-paid anyway.

At least till the company hits a brick wall.

[gordon]

I've got to admit that I'm glad Lafayette has taken up the cudgels on behalf of more democratic organisation. For a while there I thought I'd killed this thread stone dead. I never said they didn't work - in many cases they do. And perhaps every generation has got to rediscover these things for itself. The landmark publication for the last cycle in the US was Work in America (1973), which was actually a Fed. Govt.-commissioned report and which appends a number of case studies.

[Lafayette]

gordon: I never said they didn't work - in many cases they do.

In most cases they (consultative management techniques) do not work because ... it is not even employed.

Most management systems in place within corporate America are mindless copycats of military organization. As we all know, the military does not tolerate "consultation" ... you can be dead before a consensus regarding action can be decided. You execute orders, no/few questions asked.

Few companies really try to manage consensus because it is VERY difficult indeed. It is an integral part of the planning cycle, where strategic objectives must be decided upon. It's an ongoing process, whereby most Corporate Plans are put on a bookshelf to gather dust as soon as they are written.

But, consultative management's great advantage is that, once the strategic objective is decided, at least those parts of the organization concerned have been consulted. That is, they have had the opportunity to feedback, meaning they can ask for the more manpower, the skills set necessary and a say on the timing.

A corporate plan that is disseminated through an organization as if it were the Bible is practically doomed to either mediocrity or failure.

Serves them right ... in a manner, it weeds out the companies run by nitwits. (No cudgels necessary. ;^)