When is smaller better?
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.
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?
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.