Are America’s Companies Becoming Soft?

Declining competitiveness puts long-term economic performance at risk

The competitiveness of companies in the United States, large and small, has a direct bearing on the overall economy and the quality of life. In this article, I make the argument that competitiveness is declining (and in some case for decades) and that this decline may be accelerating.

In August of 2018, Michael Moritz, one of the founders of top tier venture capital firm Sequoia Capital wrote an article in the Financial Times entitled “Silicon Valley Would Be Wise to Follow China’s Lead.” In this article he presented the stark contrast between working life in China’s technology companies and technology companies in the west. One quote from the article offers a window into the growing chasm between the two sets of companies; “In California, the blogosphere has been full of chatter about the inequities of life……many of the soul-sapping discussions seem like unwarranted distractions. In recent months, there have been complaints about the political sensibilities of speakers invited to address a corporate audience; debates over the appropriate length of paternity leave or work-life balances; and grumbling about the need for a space for musical jam sessions. These seem like the concerns of a society that is becoming unhinged. These topics are absent in China’s technology companies where the pace of work is furious.

This comparison bears a further look from a different angle. One of the foremost experts on technology companies in both the United States and China is Kai Fu Lee. In his book, AI Superpowers: China, Silicon Valley and The New World Order, he offers a clear picture of the differences in the level of competitiveness and vitality between Chinese and Silicon Valley tech companies: “Silicon Valley’s entrepreneurs have earned a reputation as some of the hardest working in America [Emphasis mine]. But I’ve spent decades deeply embedded in both Silicon Valley and China’s tech scene, working at Apple, Microsoft and Google before incubating and investing in dozens of Chinese startups. I can tell you that Silicon Valley looks downright sluggish compared to its competitor across the pacific. Every day spent in China’s startup scene is a trial by fire, like a day spent as a gladiator in the Coliseum.”

While the waning competitiveness and vitality of U.S. companies may standout greater when comparing tech companies, I would suggest that the situation is more systemic and is the result of the decline of the very individual qualities that built the United States into an economic power and that once drove the innovation and productive engine of our businesses. Rana Foroohar, writing in the Financial Times “Swamp Notes” newsletter provides evidence of this from no less a Nobel Laureate in Economics, Edmund Phelps. Ms. Foroohar titles this edition of the newsletter “Is Slow Growth a Crisis of Values?” and notes that Phelps, “Argues that the decline in growth and entrepreneurial zeal that we’ve witnessed in recent years in the US, the UK, France, Italy and several other developed countries isn’t about secular stagnation, financialization or any number of other popular and somewhat technocratic theories. He argues that it is about values. Phelps argues that the decline of innovation in Europe and America comes not from a lack of profitable investment opportunities, or a lack of public sector involvement in them, but from a decline in the modern values that sparked the desire to innovate in the first place — — he’d include in that list vitalism. ‘Do Americans love to compete as much as in the decades from, say, the 1850’s to the mid-1960’s?’ he asks. ‘Or are they fixed on the tweets coming in by the hour?’

Phelps offers a full discussion of his concepts in his books Mass Flourishing and Dynamism. It is also of considerable interest, in the context of the arguments in this paper, that he has had multiple meetings with very senior Chinese policymakers to discuss how to foster individualism (another core value necessary for innovation) and creativity. In addition he was invited to join a task force on these topics in China. Further, according to the Financial Times, “Beijing is implementing some of the recommendations around creating small business vibrancy that Phelps advocates.” This is an echo of another time of lax US companies and heightened international competition: Japan’s adoption of the teachings of W. Edwards Deming when the US ignored him. This led to a rebirth of Japanese industry and positioned Japanese companies to become far more competent than their complacent American counterparts.

There seems currently to be an acceleration of the decline in these values that are necessary for innovation and aggressive competitiveness. One example is the pronouncement in August of 2019 by the Business Roundtable of its new “stakeholder” model of corporate governance. While the current public company governance model leaves much to be desired and is really not a shareholder value maximization model, the new policy of the BRT, is a definite step in the wrong direction if the US is to have vibrant, competitive companies with where managements are held accountable for capital allocation and longer-term performance and value creation. The so-called “stakeholder” model allows for much easier board and management entrenchment as accountability to all always results in accountability to none.

And rather than a big focus on heightened competitiveness, the business world is awash not only with the “stakeholder” model of governance but also corporate social responsibility, diversity and the concept of inclusive capitalism (an oxymoron). The U.S. seems dead set on developing “fairness” rather than rising to new levels of greatness. I even had a person of one of the younger generations upbraid me in a LinkedIn discussion in which I was attempting to explain individualism which is one of the values identified by Edmund Phelps as essential to innovation. His cynical and very angry retort was that “rugged individualism is a myth borne of survivorship bias.” (First, his comment displays a lack of understanding of the concept of survivorship bias and second, if this is what is being taught in our universities no wonder there is a decline in the values and energies that drive innovation).

This is another example of the need to understand history as it will repeat if prior lessons are not learned. As briefly mentioned in an earlier paragraph, there was a time in the not so distant past with similar characteristics, especially relating to corporate governance, management accountability, and focus on social responsibility rather than competitiveness. This period was the late 1970’s/early 1980’s and was marked by imperial CEOs, weak boards of directors and with corporate social responsibility front and center for the Business Roundtable and thus. American business. According to Jeffrey Sonnenfeld of Yale and a close friend of Jack Welch, “Reginald Jones of G.E. was one of the first chief executives to champion the term ‘corporate social responsibility.’ In fact, their lofty missions were so virtuous that G.E.’s Jack Welch, a generation later, complained to me that they [Americas CEOs] had taken their eyes off the ball of their own firms’ competitiveness, preferring to work on social issues instead of parochial commercial concerns. “

Jack Welch was right. And, at the time that US companies were losing their competitive focus and edge, Japan and Germany were on the ascendant. They became a huge threat to the US due to the decline in vitality and competitiveness in our major industries and companies. Had it not been for the corporate raiders that literally scared companies out of their complacency and forced the necessary restructurings, US business would have succumbed to a serious extent to Japanese, German and other international competition. No less than Irving Shapiro, one of the founders of the Business Roundtable and former CEO of DuPont, had this to say, “The net effect [of the activity of the corporate raiders] has been to force every company to look at its productivity. Industrial America is in healthier shape in 1986 than 1976.”

Now, a similar situation exists. The zeitgeist fosters the return to a renewed focus on corporate social responsibility coupled with the increased “fairness” of the stakeholder model of corporate governance. Yet just over the horizon looms a possibly even greater competitive threat than Japan and Germany of the 1980’s. As Michael Moritz said clearly in his FT piece, “As the Chinese tech companies push ever harder outside the mainland, the habits of western companies will start to seem antique.”