As in Britain in the 1840’s, speculation ruled the stock markets in the United States in the 1920’s.
The Great War was over, and while gloom settled over Germany, optimism reigned across the Atlantic.
By the end of the “Roaring Twenties”, even austere American economists were announcing that the stock market would not fall again.
Americans piled into the stock markets; by 1929, more than 10 million individual Americans owned shares.
What information did they use to make buy and sell decisions, and how reliable was it?
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The vast majority of businesses refused to disclose their annual sales or revenues; others engaged in rampant misinformation.
Both fueled the stock market bubble, and the crash that followed.
In 1931, two years after the bubble burst in October, 1929, the value of stocks on the New York Stock Exchange were down almost 90% from their peak.
In the aftermath of the debacle, American legislators laid down the law.
Every company that issued shares to the public first had to demonstrate that they were solvent, and they had to disclose their annual sales figure, in an audited statement of profit and loss, or income statement.
The income statement and the balance sheet, along with a statement of cash flow and a statement of stockholders’ equity, comprised the set of “audited financials” that all publicly traded companies had to present, each accounting period.
Britain passed similar measures after the Second World War.
The government mandates brought the income statement to the forefront of financial reporting, and shifted auditors’ focus from detecting fraud and error to verifying the accuracy of company information presented in the financial statements.
But just as increasing numbers joined the ranks of accountants and auditors to meet the demand for their services, others left their accounting jobs to join a new class of information professionals.
The “management consultants” got their initial lease of life from yet another Federal mandate, enacted after the 1929 market crash and the Great Depression.
Concerned with the activities of banks, the U.S. Congress had instructed investment banks to obtain disinterested third party advice when arranging mergers and acquisitions for their clients.
The newly minted management consultants were happy to provide it.
Among the consultants was a young accountancy professor from Chicago, James McKinsey.
Like Luca Pacioli more than four centuries earlier, McKinsey had new ideas about how to organize and utilize financial information, and presented them in Budgetary Control, published in 1922.
McKinsey’s book was far less weighty than Pacioli’s Summa, but it's modest size and unprepossessing title belied its impact.
The railways were well aware that financial information was data to be used to make decisions, rather than simply records of assets, liabilities, costs, and profits.
McKinsey went further: he demonstrated how historical financial statements could be used to create forward-looking documents that projected company performance into the future.
These projections, or pro forma statements, could subsequently be compared to actual company performance, to inform and improve the next set of projections.
Legacy
McKinsey’s ideas were timely.
Americans were coming around to the idea, imported from Europe, that management constituted a science, with its own body of knowledge.
Harvard University had recently created a business school, in order to train managers in this new professional discipline, just as doctors and lawyers were trained.
McKinsey died at the age of 48, just before the outbreak of World War II, but the management consultants found a receptive market, and his eponymous company flourished.
Bowler-hatted McKinsey and Co. employees became a common sight in post-War American corporate offices, teaching company managers how to use historical financial information to value assets, and how to use pro forma statements to gain greater control over the future.
Shaping the future, after all, was the point of making decisions.
Management decisions became more consequential as business enterprises grew in size and scale.
No entity illustrated this trend better than the Standard Oil Trust.
Split into 14 pieces by the U.S. Supreme Court in 1911 in an effort to rein in monopoly capital, within a few decades, each one of the 14 pieces weighed in at least four times larger, in terms of number of employees, capital, or sales, than the parent company had ever been.
To manage businesses of increasing size and scale, automation was an obvious solution.
The telephone switchboard and payrolls were early targets of workplace automation, before the mainframe computer entered the business world, in the early 1950’s.
The restructuring of the workplace accelerated in the 1970’s with the arrival of the personal computer, and associated networks.
But rather than replacing people with machines, as many predicted, technology created greater demand for them.
These new workers were essentially highly specialized middle managers, with jobs structured around the flow of information through the enterprise, rather than the flow of goods or parts around the assembly plant.
They had job titles such as quality control engineer, product manager, tax accountant, managerial accountant, human resources manager, marketing manager, and so forth.
Compared to the 1940’s, an American manufacturing company in the 1970’s typically had fewer clerical staff, approximately the same number of managers, and five to 20 times more middle managers.
To run these increasingly complex, information-based enterprises, corporate managers turned to consultants for guidance.
What technology and systems to purchase and install? How to optimize processes, and structure tasks?
There were hefty consulting fees to be earned from dispensing advice, and company auditors, already familiar with their clients’ workplace and information architecture, were well-placed to earn them.
The author is a writer and researcher in Dhaka, who previously worked as an investment banker in London and New York