Dear Friends,
It seems to me, there is a huge opportunity for economic innovation. This opportunity is not only game changing, in the way it could lower the overall cost to run a company, but the efficiency that would be gained in reacting to new opportunities, agility that could enable much larger companies to have such nimbleness, would increase the longevity and profitability of any company. This game changing, fountain of youth for corporations, could stabilize and drive stock markets to paying a larger percentage of profits out as dividends, instead of bonuses. This innovation stands at the very edge, within our reach, but at the very limit of our grasp… it is, innovation in corporate governance. It would generate as much growth as the internal combustion engine or the transistor.
There is not a one who is reading this, who has not heard of a family business or solely owned company that was sold to Wall Street, and shortly after went into bankruptcy. Stories abound of this business or that firm who made the best wing wang there ever was. The owners were called stupid and the management style of the founders was universally criticized. Then, the owner retired or died, and the company went public. The buyers immediately take out a huge loan in the business name and give them selves a fat bonus. Some then move directly on, leaving the business and stockholders, with the debt for their bonus. A few years later, struggling to cover the loan debt for the bonuses, the company fails, the stockholders loose their hard earned money and the workers loose their jobs.
A few of the companies that come to mind, IBM, Apple, Digital, and Orrick, along with thousands of others. They were run by families and entrepreneurs. The founders were ridiculed by the apparatchiks of finance and business, all of the firms were profitable and grew extrinsically, by getting new customers and intrinsically, by meeting those customer’s needs more efficiently. When each of those companies was sold to Wall Street they were run into the ground. In the case of Apple, when the founder came back, he took the company from bankruptcy to the most valuable company in the World, IBM only just survived total collapse, Digital is history.
Since this paradigm plays out over and over in the corporate cycle it would seem a logical place for innovation. The underlying problem is… the principle agent dilemma. The principles, the stockholders, own the company, the agents, the managers of the company, are supposed to work in the agent/owner’s, the stockholder’s, interests. They often don’t. The individual stockholder is limited in his or her knowledge of the company, how it is run, the direction the senior management is taking etc… and thus his or her power to protect their own interests. Due, legitimately, for protection of the company’s assets, this necessarially sets up a further problem… asynchronous knowledge.
Even if the individual stockholder has such knowledge and seeks to make change he or she sees fit, it is exceedingly difficult because each of their voices is very small, due to the widely distributed ownership. Unless a sufficiently large group of them get together, their voices are irrelevant. Moreover, the system as it now exists is set up so that a small group of people can give themselves fat bonuses, at someone else’s expense. The incentives in this system, are for those that are profiting by it to keep it in place, at all costs.
The next clear opportunity in today’s system, ripe for innovation, is how to run the company, after it is sold into the public market. Assuming the company has not been looted because of some other new innovation in corporate governance, or even if it has… the people who take over at the top always come in with big ideas. Well, I am a big believer in big ideas, but they are only big ideas if you yourself are willing to put your own hide at risk, like the founders did. When gambling with someone else’s money one’s risk tolerance goes up considerably. At the same time as big ideas are implemented, rigid structures are put in place, to shore up the sloppy ones that existed before. The one two punch is devastating to the corporate ecosystem, and in the case of where the firm was looted beforehand and has a high debt load, the third punch is a sure knockout blow.
This problem translates into lost jobs, lost opportunities, and the lost earned wages that make up most of people’s retirement funds. Everyone in corporate governance knows the problems, but no one seems to be fond of catching the wrath of the power brokers, who get fat from the system. Remember, under a truly capitalist system, anyone who is making overly high profits quickly meets equally high competition for those profits. In cases where this does not happen, it is usually government regulation that stands in the way. Regulation that was supposed to fix some other problem, that was caused by other regulation that was supposed to fix some other problem, and on and on… Adding a regulatory element to the question. Perhaps what is needed, is not more regulation but… a company constitution for new firms? What do you think it should say?
Sincerely,
John Pepin
