Pat MurphyAround the mid-20th century, Peter Drucker was the go-to business guru. A strategically-placed copy of one of his management books graced many an office credenza, even if its contents weren’t always diligently read or put into operation.

Drucker (1909-2005) was born in Austria in the waning days of the Habsburgs. He moved to England in 1933 and from there to America in 1937. But it was in the 1940s that his career as a business thinker really blossomed, courtesy of a book emanating from a consulting stint with General Motors.

Although sometimes criticized for lack of academic rigour, Drucker was exceptionally fertile in terms of ideas, popularizing such concepts as ‘management by objectives’ and ‘the knowledge worker.’ To quote business professor James O’Toole, “It is frustratingly difficult to cite a significant modern management concept that was not first articulated, if not invented, by Drucker.”

There was, however, more to Drucker’s oeuvre than counsel for business managers. And this year marks the 40th anniversary of one of those efforts, 1976’s The Unseen Revolution: How Pension Fund Socialism Came to America.

Drucker put it this way: “Socialism came to America neither through the ballot box nor through the class struggle let alone a revolutionary uprising, neither as a result of ‘expropriating the expropriators’ nor through a ‘crisis’ brought on by the ‘contradictions of capitalism.’ Indeed, it was brought about by the most unlikely revolutionary of them all – the chief executive officer of America’s largest manufacturing company, General Motors.”

The executive in question was Charles (Engine Charlie) Wilson and the purportedly seminal event was the 1950 establishment of the company’s pension plan. To Drucker, Wilson’s innovation was significantly different from the American plans that preceded it, which had been one of two types.

Many, such as the massive plan for employees of the telephone giant Bell System, focused on fixed-income instruments like government bonds, some of which paid minimal interest. Others, like the Sears, Roebuck profit-sharing fund, were primarily invested in the stock of the sponsoring company.

Wilson wasn’t keen on either of these approaches.

If a sizable pension was to be generated, an approach largely focused on low-return bonds would be expensive. And selling the idea to the GM board precluded anything that smacked of excessive giveaway.

But following the Sears, Roebuck model by investing the funds in GM itself was tantamount to putting all the employees’ eggs in one basket. Both current (job-related) and retirement (pension-related) income would be entirely dependent on GM’s economic health. To underline his point, Wilson noted the case of the anthracite coal industry, which had been “the most profitable American industry as recently as 1925, only to vanish 15 years later.”

Wilson’s idea was that the GM fund would invest in the broader American economy, particularly in equities (common shares). That way, value – and the ability to pay good pensions – would grow with the economy’s overall trajectory. And to facilitate safety, professional independent management and asset diversification would be mandatory.

The idea caught on. Drucker says 8,000 new pension plans were written within a year of GM’s launch, all copying the Wilson model. And through this mechanism, by the mid-1970s American workers owned “more than one-third of the equity capital of American business.”

But was this really socialism?

Granted, if socialism is narrowly defined as “ownership of the means of production by the workers,” then something of that sort was clearly happening. However, it bore no relationship to notions of industrial democracy whereby workers run the operations of the entities where they work. Nor did it provide anything resembling the kind of control that a classical sole proprietor would have had.

Yes, workers stood to gain from successful investments by their fund managers. But the rules mandating diversification of risk meant that no individual fund would hold enough of any company’s capital to dictate, or even heavily influence, policy.

Rather than “pension fund socialism,” what really transpired was a form of worker capitalism. Through the medium of their asset-managing pension funds, workers were becoming indirect investors.

Mind you, that wouldn’t have been nearly as sexy a title for Drucker’s book.

Pat Murphy casts a history buff’s eye at the goings-on in our world. Never cynical – well perhaps a little bit.

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