Michael Medved and The 5 Big Lies About American Business (part 7)

By Nick Slepko - January 23, 2012 | Tickers: GD | 0 Comments

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[Continued from Lie #5: Government is More Fair and Reliable Than Business.]

Lie #6: The Entrepreneur is the Hero, the Company Man is the Villain

Companies that refute the Lie: Berkshire Hathaway Inc. (NYSE: BRK-B), General Dynamics (NYSE: GD), National Grid plc (NYSE: NGG)

Movies that challenge the Lie: In Good Company (2004), The Dark Knight (2008), Iron Man 2 (2010), Captain America (2011)

In the literary equivalent of a DVD Easter Egg, a reader may find “Lie #6: The Entrepreneur is the Hero, the Company Man is the Villain.”

In 5 Big Lies, Medved spends a lot of words undermining the popular idea of the heroic entrepreneur. He points out that “one-year-old firms create less than 7 percent of new jobs,” and he quotes from other research that describes a typical entrepreneur as:

Not a special person with hidden psychological powers that allow him to build great companies or great wealth; he’s a middle-aged white guy who just wants to earn a living and doesn’t want to work for somebody else. The typical entrepreneur could be your next door neighbor – and he might not be your most successful neighbor. People are more likely to start businesses if they are unemployed, have changed jobs often, and have made less money in their previous employment…'Our myths about entrepreneurship, and the policies we have developed in response to them, are leading too many people to become entrepreneurs, causing financial hardship for many, and hindering our economic well-being.' Aside from the consistently sobering data on outcomes for new businesses, common sense dictates that smaller firms will always play a less significant role in the economy than their older, bigger brothers.

Muhammed Yunus, the Nobel Laureate who won for his work with microfinance, also helps puts the situation in perspective:

[Economists] consider wide spread self-employment as a symptom of underdevelopment. In many third world countries, the overwhelming majority of people make a living through self-employment…Critics had predicted that microcredit would have trouble in the United States because whereas Bangladesh has a long tradition of self-employment, less than 10% of Americans work for themselves.

Medved’s numbers give an even more precise picture:

[T]he national workforce is split almost precisely between firms with fewer than 500 employees (60,223,710) and those with more than 500 (59,693,425). These statistics also seem somewhat misleading, since most people might classify a business with more than 400 people as “big” or at least “medium-sized,” rather than small. Unequivocally minor firms (those with fewer than twenty-five employees) engage less than 21 percent of the total workforce, while very large companies, with more than a thousand on payroll, employ fully 44 percent of all U.S. workers.

Research shows that many corporations benefit from structuring their departments into units that can retain and further develop entrepreneurial talent, and that most successful entrepreneurs that strike out on their own frequently come from backgrounds in large organizations (be they a Big 4 accounting firm or a larger manufacturing enterprise). Medved illustrates the reality of new jobs at new companies and new jobs at old corporations:

An unusually successful start-up may double its payroll after just five years, going from five employees to ten and adding five new jobs. Meanwhile, the big company up the street, with a thousand employees, will expand its workforce only 5 percent and still add ten times the number of new positions—fifty—as the little guy. The stability, security, and benefits of those jobs in big business will almost certainly offer more, including a vastly greater likelihood of receiving generous health care coverage. On another contentious contemporary issue, bigger companies will also prove far more likely to conform to social and legal norms.

Just as microfinance is often adopted by intellectuals that are afraid of full-blown capitalism with all its nuances, idolizing the entrepreneur is an extension of a popular culture that is often uncomfortable with large undertakings which they do not understand, and this leads to a resentment of people that do. Medved believes that:

The nostalgic yearning for simpler, sweeter, more intimate associations has become a ubiquitous response to the demands and complexities of twenty-first-century life, fueling idealized notions of small farms, small towns, and even small business. The glorification of struggling start-ups and other new and modest enterprises has become nearly as misleading as the one-dimensional demonization of big multinational corporations. In the end, small businesses won’t single-handedly save our world any more than big businesses will destroy it.

As with all the other Big Lies, Hollywood is at the forefront of maligning the simpering Company Man and elevating the scrappy Entrepreneur. However, the 2004 film In Good Company presents the story of a middle-aged, family man selling sports advertising in a good, and ultimately, fulfilling light. (Of course, the movie still finds time to slam the flashy, corporate raider, but that’s another canard for another day.)

Comic book movies are also a surprising well-spring of challenges to this lie as well. While Captain America, Iron Man, and other heroes in the Avengers series rely on large government agencies, both are indebted to advances made by the defense conglomerate Stark Industries represented in the films by either Howard Stark or his son Tony Stark.

It is not hard to see how David Medved toiling away on missile defense projects in Southern California for General Dynamics is not far off from the Company Man-Superhero archetype. In fact, as the Motley Fool has recently illustrated, General Dynamics has stayed pretty consistent and reliable while innovating for the last sixty years with “consistent earnings and free cash flow,” “high returns on equity,” and solid management.

While also heavily involved in the defense industry in certain iterations of the Batman mythos, Wayne Industries is often shown in a strong humanitarian light, and is involved in a number of transportation and utility interests – leading some observers to wonder if most entertainment writers’ economics backgrounds are limited to the game Monopoly.

Nevertheless, an enterprise like National Grid, a multinational electricity and gas utility, is not only one of the largest investor-owned energy companies in the world, but has provided a steady stream of dividends and reliable growth expected from boring old utilities. As Seth Jayson at Motley Fool writes, “Healthy margins often separate pretenders from the best stocks in the market…[and] With recent TTM operating margins exceeding historical averages, National Grid looks like it is doing fine.”

As Kingston Cassidy, a Seattle-based consultant, points out, “Batman is the ultimate Republican superhero.” Todd Seavey, a libertarian writer in New York City agrees:

Like most popular characters, Batman's politically ambiguous, but I think it's fair to call a rich vigilante sort of a libertarian – and even vaguely analogous to Bush in the movie The Dark Knight, what with him resorting to violence in interrogating the Joker and massive surveillance of the citizenry (but stopping it once the case was over).

I think the most interesting recent such case, though, was Tony Stark in Iron Man 2 telling a congressional committee that wanted to monopolize the Iron Man weaponry: “You want my property? You can't have it.”

While in the real world the Company Man is often thought of as less inspirational than a super hero, a trip to Omaha in May for the annual meeting of Berkshire Hathaway can go a long way in reversing that assumption. Warren Buffet and Charlie Munger are definitely the dynamic duo of mundane boring businesses that generate lots of dependable cash flows. Pick most any stock in the Berkshire portfolio and it will likely be a textbook example of how the loyal, humble, and virtuous triumph.

Steve Rogers (Captain America): Big man in a suit of armor – take that away, what are you?
Tony Stark (Iron Man): Ahh, genius, billionaire, playboy, philanthropist.
                                                                                         -- The Avengers (2012)

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