Of all the business theories developing at the time, Romney and his cohort were particularly influenced by one that played to their sense of detachment from the business Establishment. In 1976, two business scholars, Harvard’s Michael Jensen and the University of Rochester’s William Meckling, published an important paper elaborating a new idea of the firm, one that would come to be called “agency theory.” Previous corporate theory had emphasized a separation of powers between shareholders (who own a company) and management (the executives who run it). This situation, Jensen and Meckling pointed out, introduces a “principal-agent” problem, in which each agent has incentives that run contrary to the shareholders’ interests and could hamper the firm’s ability to function.
If you were looking across the landscape of American business 30 years ago, you could see agency problems everywhere. In the sixties, companies had become conglomerates so frequently that 20 percent of the Fortune 500 underwent a merger or an acquisition in a three-year period. CEOs had enjoyed building empires, and their shareholders, satisfied by decent returns, had often deferred to management control. But during the stagnant seventies, CEOs seemed loath to close factories and lay off workers. By the early eighties, as growth once again seemed possible, shareholders had become more restive, and innovative thinkers on Wall Street had begun to press the case that these companies had grown inefficient and timid, that management was underperforming.
Bain consultants did what they could, during their assignments, to improve their clients’ operations, but they were often frustrated by an agent problem of their own: Bain was just a consulting firm, and “a consulting firm,” says David Dominik, an early Romney colleague, “can’t make anything happen.” But Jensen and Meckling had sketched out one potential solution: If managers could secure financing to run their own companies, they might be able to build a better corporation, one that delivered stronger returns to its owners.
You could view this idea at least two different ways. One was as a chance to change the way American business is run. Another was as a business opportunity to exploit. Romney saw both.
Every business story begins with a proposition, and the one that launched Bain Capital was the notion that the partners might do better if they stopped simply advising companies and starting buying and running the firms themselves. When Bill Bain asked Romney to run the new spinoff, in 1983, the idea made sense from the perspective of Bain & Company. The senior partners were awash in cash that they were looking to invest; its more junior partners needed something to do. The original plan was vague in the details, but a bowl was soon passed around the Bain & Company boardroom so each partner could write his first name and the amount he wanted to invest on a scrap of paper and slip it in. Romney’s reputation was strong enough that he picked up $12 million in pledges in that meeting alone.
Finding outside investors wasn’t as easy. Romney went on the road, traveling to meet with billionaire families—an investment arm of the Rockefeller fortune, a Rothschild heir—arguing that Bain’s work in consultancy had prepared them to turn businesses around themselves. But Romney and his cohort were young men in their thirties with no experience investing money or running companies, and for nearly a year the pitch kept failing. Romney finally found some takers from Latin America, most important the enormously wealthy Poma family, and by 1984, he and six consultants he’d picked were staging a photo shoot for the brochure accompanying their first fund; grinning and geeky, they posed for an outtake with dollar bills stuffed in their mouths, their sleeves, their collars.
The leveraged-buyout industry in its early days functioned as a laboratory for reinventing business. Most of the promising firms were based in New York and specialized in financial innovation—reengineering a balance sheet or making use of new tools like junk bonds. Romney’s team in Boston looked down on them as “just deal guys,” and at financial engineering as a “commodity product.” Bain Capital focused instead on the way a business runs.
Their new firm reflected some aspects of Romney’s own personality: his mania for detail and for process. He was a cautious executive. “Mitt was always worried that things weren’t going to work out—he never took big risks,” one of his colleagues told me. “Everything was very measurable. I think Mitt had a tremendous amount of insecurity and fear of failure.” Romney never worked from any particular “macro theme,” any philosophy of how the economy was moving. What he employed instead was an exhausting habit of playing devil’s advocate, proposing sequential objections to a particular project or idea, until eventually, through a kind of Darwinian process, consensus was reached. “I never viewed Mitt as very decisive,” says one of his Bain Capital colleagues. “The idea was that if there’s enough argument around an issue by bright people, ultimately the data will prevail.” Romney may have been, as another early Bain Capital partner puts it, a “very case-by-case, reactive thinker,” but he was also an extremely hard worker and an egalitarian boss. He inspired intense loyalty, and there are still members of his circle who describe him as a perfect CEO. He was prone to profuse sweating, and the imagery of the era is heavy on the CEO’s drenched, stained shirts.