Who Controls the Money
The Medici Bank was founded in Florence in 1397, and for a hundred years it was the best bank in Europe. It was cleverly built. Every branch—Venice, Rome, London, Bruges—worked as a separate partnership. The branch manager put in some of his own money and got a bigger share of the profits than his stake alone would have earned him. That was how the Medici tied an outsider to their own interest: let him think of the branch’s profit as his own.
In Bruges the branch was run by Tommaso Portinari. He was very fond of the Burgundian court, and the Burgundian court was very fond of borrowing. Under his contract Portinari had no right to lend the Duke more than a set amount. He lent him nearly three times as much. Duke Charles the Bold was killed in battle in 1477, and the debts stayed debts. The following year the Bruges branch was wound up, with losses of more than seventy thousand florins. Meanwhile the London branch had been lending generously to the King of England and lost another fifty-odd thousand. Some fifteen years later the whole bank went down.
The Medici thought about how to make the manager want profit. They didn’t think he might want to please the Duke. He did.
Other People’s Money
The oldest question in money. What happens when the money is run by someone other than the man it belongs to? Adam Smith wrote in 1776 that the directors of joint-stock companies, being managers of other people’s money rather than their own, could never be expected to watch over it with the same anxious vigilance, and that negligence and profusion would always prevail there, more or less. A hundred and fifty-six years later two Americans, Berle and Means, wrote a whole book about it. In big corporations ownership had come apart from control: the shareholders own, the managers run things, and sometimes in their own favour.
Economists call this the agency problem. I call it the problem of the capo who steals from the Don. And Gambetta, who studied the Sicilian Mafia, showed how the Mafia solves the problem. Radically. It doesn’t.
Why We Have No Managers
Gambetta writes that there’s no evidence that in mafia firms the owner and the manager are different people. And he explains why. Even if the owner wanted to shed the burden, he wouldn’t do it, because a manager could too easily take the firm away from him. To run things you have to give orders, and whoever gives the orders is in practice the owner. Gambetta quotes Machiavelli: a prince who puts himself in the hands of a very able governor will get good advice, but he won’t last long, because that governor will take the state away from him.
So, Gambetta concludes, the Mafia is full of subordinates, not managers. And even the subordinates are kept in their place, so they won’t be tempted. The boss goes to prison—the stand-in often stays for good, and when the old owner comes back, one of the commonest internal wars begins. Who gets whom. Takeovers, Gambetta writes drily, do happen, and they’re often hostile.
Hence the main limit of our trade. If the owner can only run the firm himself, it won’t grow bigger than what he can take in at a glance.
There Are No Good Managers
Joe Pistone, the FBI agent who spent almost five years living among mafiosi under the name Donnie Brasco, describes a conversation in a bar in Milwaukee, where the local boss, Frank Balistrieri, was receiving congratulations. His man Steve was urging the boss for the hundredth time to drop his own bookmaking operation. It would be simpler, he said, to put a tax on all the local bookies: a thousand dollars a week, and good luck to you. We don’t get our hands dirty. Your own book has to be run, and good managers are impossible to find these days.
A year earlier Balistrieri had tried putting in a manager, and the man hadn’t got the business going. The boss complained, as Pistone tells it, that he didn’t have time to keep an eye on everything and wanted to find someone he could trust. The trustworthy man he was offered on the spot turned out to be an FBI agent. Well, he found one.
Notice what the choice is between. You can run the business through a hired manager and risk him stealing or not coping. Or you can lease the business out for a fixed fee: a thousand a week, and how much he makes is none of your concern. Less control, and fewer headaches too. Legitimate companies solve the same problem all the time: keep the division in-house or sell a franchise?
And Pistone adds a detail that explains everything. Every Las Vegas casino the Mafia secretly owned skimmed part of its takings, and that part was collected and divided among the families. The casinos’ official owners got a report. The real ones got cash out of the count room. Feel the difference. Scorsese made a whole film about it, Casino. Fiction, but copied from life.
The Manager in the Ferrari
Sometimes the Mafia does have to trust an outsider with its money. Saviano tells the story of Pietro Nocera, who, according to the court’s verdict, looked after the bulk of the fortune of the Neapolitan Nuvoletta clan. Nocera invested the clan’s money in land and building all over Italy and even in Spain, ran a building co-operative and, as Saviano writes, drove a Ferrari and flew in a private plane. In 2005 a court seized his property and companies, worth about thirty million euros. By one estimate that was around five per cent of his economic empire.
The manager lives like the owner. How did the clan keep him in hand? Fear. And how does a shareholder keep his director in hand? He makes him report, calls in auditors, convenes the board, drags him to court and feeds him options. Fear is cheaper, but it only works as long as the owner is stronger than the manager. Accountability costs more. But it works even when the owner is a pensioner with a hundred shares.
How the Don Kept His Managers in Line
Don Vincenzo’s second laundry was run by Anna, a former presser. The Don trusted her more than many of his relatives. And he still did three things I only understood much later.
First: on top of her wages Anna got a tenth of her laundry’s profit. Not its takings—its profit. Why would she push turnover at a loss?
Second: the order book wasn’t kept by Anna but by Signora Lucia, who answered directly to the Don. Whoever spends doesn’t write it down. Ever.
Third: once a quarter, without warning, the Don came into the laundry and spent half a day on the front counter. He wasn’t checking Anna. He was just watching.
In twenty years Anna never took a cent. I asked the Don why bother with all that, then. He said: “So she never even has to think about it.” Controls don’t insult an honest person. They protect her from temptation and from gossip.
The Bottom Line
Remember Portinari: a share in the profit won’t save you if your manager would rather please someone else. And where there’s no accountability and no court, all that’s left is fear. Fear doesn’t scale well.