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When is smaller better?

June 30, 2013

It’s another whimsical Sunday morning, a perfect time to re-examine assumptions, and the one I’m working on this morning is when smaller business is actually better, where by “better” I might mean from the perspective of someone inside the business or from the perspective of the public.

I came to this question by way of two articles I’ve read recently.

Women CEO’s

First up we have this article from the Wall Street Journal, written by Sharon Hadary, which is entitled, “Why Are Women-Owned Firms Smaller Than Men-Owned Ones?” and basically wrings its hands about how self-defeating women are when it comes to owning businesses, how they never dream big enough.

Hey, that seems super irrational of women! They’re so self-limiting! Don’t they know that it’s not enough to own your own business, that you should really aspire to owning a business that is really huge?

But you know what? I’ve got a new way of looking at “irrational behavior.” Namely, assume it’s totally rational and figure out what assumptions you’ve got wrong. Let’s stop here and apply this approach. From the article:

Women start businesses to be personally challenged and to integrate work and family, and they want to stay at a size where they personally can oversee all aspects of the business.

Well that was kind of too easy. Turns out that right there, in the article, there’s a rational explanation for a so-called “irrational behavior.”  Which is not to say that the writer respects that explanation, of course. Much of the rest of the article focuses how you can convince CEO women that they’re being idiots to think like that.

Of course, that mindset is not the entire story. And to the extent that women’s businesses are small against their will because of sexist behavior and being locked out of credit markets and/or big boy deals, that’s obviously bullshit.

[If I ever become a CEO, I can well imagine wanting to grow it way past the point of understanding or controlling it, because I'm all about being a big swinging dick (BSD), due to my highly robust natural testosterone levels. Because let's face it, that's what this is about.]

But if women don’t actually strive to be a BSD in a too-large-to-oversee Fortune 500 company because they’re happy running a smallish profitable business that allows them to see their kids, then why is that a sad story?

CEO pay

Now let’s move to a New York Times article, or really a series of articles, about CEO pay and how it’s big and only getting bigger. As my buddy Suresh explained to me, this is totally inevitable because, as the sizes of companies grow, the size of the CEO’s compensation grows.

Be nerdy with me for a second: if company A and company B merge, you now have a company that’s bigger than A or B, but you only have one CEO whereas you used to have two. So there’s that already, but it doesn’t completely explain it.

Think about the assets of this new company. To the extent that a CEO is supposed to be in charge of 1) not losing, and 2) actually growing these assets, they get some percentage of their “added value”, and that means they get twice as much credit for adding value in a company that’s twice as big.

Now I won’t go deeply into whether CEO’s actually add value – I think, at least in big-ass companies, and in the best-case scenario, CEO mostly they just ooze confidence and allow people to get work done. And I’m not saying this rule of thumb for a certain percentage of assets is reasonable, since it’s a cultural decision. But I do think just complaining about CEO pay being too big is missing the point.

Instead, I think we need to ask whether we think businesses are actually better off being bigger, and for whom. Economists go on and on about how you get economies of scale, but not if things are too big to understand, and not if the real economy of scale is devoted to politics and forming public policy – look at Monsanto for example.

Categories: musing
  1. Wishboom
    June 30, 2013 at 1:01 pm

    ‘I’ve got a new way of looking at “irrational behavior.” Namely, assume it’s totally rational and figure out what assumptions you’ve got wrong.’

    Awesome. Thank you. The single most effective technique for avoiding the train wreck of hubris.

  2. KCd
    June 30, 2013 at 2:22 pm

    And I thought BSD meant Birch and Swinnerton-Dyer…

  3. June 30, 2013 at 3:12 pm

    I find it fascinating that if one has a different point of view than that of ruling males (CEOs), one is labeled irrational. IMHO this is construct blocking a clear analysis of what actually might be best for business people and the economy.

  4. Becky Jaffe
    June 30, 2013 at 11:55 pm

    You might enjoy this classic defense of small-scale economies: Small Is Beautiful by Schumacher

    http://en.m.wikipedia.org/wiki/Small_Is_Beautiful

  5. Yair H.
    July 1, 2013 at 7:20 am

    Good points.

    As to the second article, even if we accept the ‘added value’ principle (which is nonsense), for the good of the company, I don’t see any reason not to pay bonuses based on outcomes which occur two, three or even five years after the BSD leaves.

  6. July 2, 2013 at 12:30 am

    For years, people noted that this was a cultural difference between Silicon Valley and Route 128 (around Boston). The SV companies were all about growing big real fast and paying off investors. The R128 companies were all about making money, doing interesting stuff and having a nice place to work. (Of course, early in the 20th century R128 companies were about growing big, and, of course, there was no Route 128 back then.)

  7. Small is Good
    July 8, 2013 at 6:56 pm

    Stumbled on your post after Googling “why is there an assumption that companies have to grow fast and big”. I own and run a profitable company that initially paid me over market rates for plying my trade. Now I have staff I don’t ply my trade – I’m learning new business skills and getting paid for it. I get the satisfaction of providing employment for four people. I don’t have some clown breathing down my neck. In general I can employ people into roles and tasks I no longer want to perform. I set work hours that enable me to share in the raising of our young child.

    Hopefully I can amass a decent enough ‘stache’ (see: http://www.mrmoneymustache.com) over the next few years before/if my endeavour is steam-rollered by a big, fast-growing company that I can buy myself the room to follow more personally rewarding pursuits all the while living within more modest means. No plaudits from the business community, no ‘high-value’ networks built with the puppet-masters of the economy and a life padded with luxury consumerism but also no pissing contests with sociopaths, stress-induced coronaries and no life-long gnawing hollow sense of unhappiness despite my ‘success’.

    It’s a pretty clear equation for me – and here’s the kicker – I’m a guy.

  1. June 30, 2013 at 1:56 pm
  2. August 14, 2013 at 7:04 am
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