advertisement  TODAY'S MOST POPULAR • Koch Industries to Acquire Georgia-Pacific • Power-Hungry Computers Take Toll • Warren Buffett, Unplugged • The $100 Laptop Moves Closer to Reality • Detroit's Middle Class Is Threatened by Slump Personalized Home Page Setup Put headlines on your homepage about the companies, industries and topics that interest you most.

An American Sage
November 14, 2005; Page A22

The following is a selection from the writings for The Wall Street Journal of Peter F. Drucker, who died on Friday night at the age of 95.

* * *

From "The American CEO," Dec. 30, 2004, his last piece for the Journal: The CEO is an American invention -- designed first by Alexander Hamilton in the Constitution in the earliest years of the Republic, and then transferred into the private sector in the form of Hamilton's own Bank of New York and of the Second Bank of the United States in Philadelphia. There is no real counterpart to the CEO in the management of any other country. The German "Sprecher des Vorstands," the French "Administrateur Delegue," the British "Chairman," or the Japanese "President" are all quite different in their powers and in the limitations thereon.

From "The Rise, Fall and Return of Pluralism," June 1, 1999: [T]here is one essential difference between today's social pluralism and that of 800 years ago. Then, the pluralist institutions -- knights in armor, free cities, merchant guilds or "exempt" bishoprics -- were based on property and power. Today's autonomous organization -- business enterprise, labor union, university, hospital -- is based on function. It derives its capacity to perform squarely from its narrow focus on its single function. The one major attempt to restore the power monopoly of the sovereign state, Stalin's Russia, collapsed primarily because none of its institutions, being deprived of the needed autonomy, could or did function -- not even, it seems, the military, let alone businesses or hospitals.

WORDS OF WISDOM

 

• Drucker's Legacy: It's All About People
11/14/2005
 
• Review & Outlook: Drucker on Everything
11/14/2005
 

From "How to Save the Family Business," Aug. 19, 1994: Family members working in the business must be at least as able and hard-working as any unrelated employee. In a family-managed company, relatives are always "top management," whatever their official job or title. On Saturday evenings they sit at the boss's dinner table and call him "Dad" or "Uncle." Mediocre or lazy family members are therefore -- rightly -- resented by non-family co-workers, and respect for top management and the business as a whole rapidly erodes. Capable non-family people will simply not stay, and the ones who do soon become courtiers and toadies. It is much cheaper to pay a lazy nephew not to come to work than to keep him on the payroll.

From "The Five Deadly Business Sins," Oct. 21, 1993: The first and easily the most common sin is the worship of high profit margins and of "premium pricing." … GM's troubles -- and those of the entire U.S. automobile industry -- are, in large measure, also the result of the fixation on profit margin. By 1970, the Volkswagen Beetle had taken almost 10% of the American market, showing there was U.S. demand for a small and fuel-efficient car. A few years later, after the first "oil crisis," that market had become very large and was growing fast. Yet the U.S. auto makers were quite content for many years to leave it to the Japanese, as small-car profit margins appeared to be so much lower than those for big cars.

The lesson: The worship of premium pricing always creates a market for the competitor. And high profit margins do not equal maximum profits. Total profit is profit margin multiplied by turnover. Maximum profit is thus obtained by the profit margin that yields the largest total profit flow, and that is usually the profit margin that produces optimum market standing.

From "Be Data-Literate -- Know What to Know," Dec. 3, 1992: Executives have become computer-literate. The younger ones, especially, know more about the way the computer works than they know about the mechanics of the automobile or the telephone. But not many executives are information-literate. They know how to get data. But most still have to learn how to use data.

Few executives yet know how to ask: What information do I need to do my job? When do I need it? In what form? And from whom should I be getting it? Fewer still ask: What new tasks can I tackle now that I get all these data? Which old tasks should I abandon? Which tasks should I do differently? Practically no one asks: What information do I owe? To whom? When? In what form?

From "Japan: New Strategies for a New Reality," Oct. 2, 1991: The standard explanations for moving manufacturing out of Japan are "foreign protectionism" and "Japan's growing labor shortage." Both explanations are legitimate, but they are also smoke screens. The real reason is the growing conviction among Japan's business leaders . . . that manufacturing work does not belong in a developed country such as Japan.

Before youngsters can go to work on the assembly line, . . . Japan pours $100,000 in school expenses into them. And then they have to get a middle-class income, lifetime security, a pension and health care. In Bangkok or in Tijuana, youngsters require very little capital investment in their educations; and they are "middle class" if paid a 10th the wages of the U.S. or Japan. Yet their productivity after two or three years of training is as high in Tijuana or in Bangkok as it is in Nagoya or Detroit. When you figure the enormous social capital invested in them, my friends say, the return that blue-collar workers make to society in developed countries is at most 1% or 2%; in Latin America or Indonesia, it's 20 times that.

From "Management Lessons of Irangate," March 24, 1987: [I]n one of the most common but also most unforgivable management mistakes -- [the Reagan administration] confused delegation of authority with abdication of responsibility. A chief executive officer must delegate. Otherwise, he'll end up like Gulliver in Lilliput, ineffectual and ensnared in details, as were Lyndon Johnson and Jimmy Carter. But delegation requires greater accountability and tighter control. Delegation requires clear assignment of a specific task, clear definition of the expected results and a deadline. Above all it requires that the subordinate to whom a task is delegated keep the boss fully informed. It is the subordinate's job to alert the boss immediately to any possible "surprise" -- rather than to try to "protect" the boss against surprises, as Mr. Reagan's subordinates apparently did. If they keep surprises away from the boss, they invariably will end up making him look incompetent or not in control or a liar -- or all three.

From "Imminent Pension-Fund Problems," Dec. 9, 1981: Changed life expectancies affect independent pension plans as much as they do Social Security. Corporate plans -- at least those of most of the larger companies -- have adjusted for the increase in the proportion and number of people who reach retirement age. But few have yet adapted actuarial assumptions and pension-fund contributions to the longer life-expectancy of people in retirement -- a full 10 years longer in many cases than the actuaries calculated when the plans were established in the 1950s and 1960s. (Nor has Social Security.)

From "How Westernized Are the Japanese?" Aug. 21, 1980: There is a revival under way of the old and charming Japanese custom of having one really good piece of art serve as the sole decoration of the small and bare Japanese apartment. But what the young couples now buy when they start out in their own home is rarely Japanese art: they buy a Picasso etching, or pre-Columbian pottery from Mexico or Peru, or a miniature from Moghul India or a terracotta figurine supposedly found in an Etruscan tomb.

From "India and 'Appropriate' Technology," March 1, 1979: No one in India could tell me what the economic policy of the government is. The only governmental actions are expansions of already large government enterprises, unchecked growth of an already obese bureaucracy and more bureaucratic regulations. The cabinet cannot agree on anything and has no policy whatever. Substantial sums are being allocated to "the villages" but without programs let alone goals. But there is a pervasive rhetoric of smallness and of antitechnology…

As a reaction to the delusion of "the bigger the better," which enthralled earlier Indian governments, especially Nehru, [Prime Minister Morarji] Desai's emphasis on rural India is overdue. Earlier governments neglected the village, where 90% of India's 550 million people still live. But "small is beautiful" is just as much a delusion as "the bigger the better." What is "appropriate" is not what uses the most capital or the most labor; it is not what is "small" or "big," "pre-industrial" or a "scientific marvel." What is "appropriate" is quite simply what makes the economy's resources most productive. What is appropriate in a country of huge population and rapid population growth is what multiples productive jobs. What is "development" in a country, which like India has sizable resources of managerial and entrepreneurial skill and at the same time huge unfulfilled consumer needs, is whatever creates purchasing power.

From "Is Executive Pay Excessive?" May 23, 1977: Economically, [the] few very large executive salaries are quite unimportant. Socially, they do enormous damage. They are highly visible and highly publicized. And they are therefore taken as typical, rather than as the extreme exceptions they are.

These few very large salaries are being explained by the "need" to pay the "market price" for executives. But this is nonsense. Every executive knows perfectly well that it is the internal logic of a hierarchical structure that explains them. . . . Money is a status symbol which defines an executive's place in the corporate hierarchy. And the more levels there are the more pay does the man at the top have to get. This rewards people for creating additional levels of management. . . . Yet levels of management should be kept to the minimum…

If and when the attack on the "excessive compensation of executives" is launched -- and I very much fear that it will come soon -- business will complain about the public's "economic illiteracy" and will bemoan the public's "hostility to business." But business will have only itself to blame. It is a business responsibility, but also a business self-interest, to develop a sensible executive compensation structure that portrays economic reality and asserts and codifies the achievement of U.S. business in this century: the steady narrowing of the income gap between the "boss man" and the "working man."

From "The Delusion of Profits," Feb. 5, 1975, his first piece for the Journal: [B]usinessmen owe it to themselves and owe it to society to hammer home that there is no such thing as "profit." There are only "costs": costs of doing business and costs of staying in business; costs of labor and raw materials, and costs of capital; costs of today's jobs and costs of tomorrow's jobs and tomorrow's pensions.

There is no conflict between "profit" and "social responsibility." To earn enough to cover the genuine costs which only the so-called "profit" can cover, is economic and social responsibility -- indeed, it is the specific social and economic responsibility of business. It is not the business that earns a profit adequate to its genuine costs of capital, to the risks of tomorrow and to the needs of tomorrow's worker and pensioner that "rips off" society. It is the business that fails to do so.

	Sponsored by