The modern company model is broken

The capitalist publicly quoted company model is not fit for purpose. We need to find a better way and here is why.

1. The tyranny of short-term thinking

Publicly quoted companies are driven by share price. Every quarter your company is assessed by some spotty MBA in the back room of a large finance house. S/He does not care about your long term future plans for expansion. S/He does not care about how you treat your people. S/He only looks at how your sales and profit figures performed in the last three months. On the basis of this assessment your share price will rise or fall or stabilise. CEOs in public companies live and die on quarterly reports. As a result they are always focused on the quarter, then the year, and in a very distant third place is the three year plan.

Great companies are not built on three month plans. Great companies are built on dreams that take decades to realise. If you want to build a great company you can’t float it on the stock exchange. Short term investor decisions will prevent you from making long term decisions for the future of the company.

2. Tragedy of the commons

Back when we were all ape men and hunted mammoths nobody owned anything. Everything was “commons”. People did not own land, and did not own animals. If you killed a mammoth then your tribe survived and your neighbours might starve. Darwinian selection determined that the tribes with the sustainable advantages survived. If you invented better spears then you out-hunted the other tribes. But one day there were no mammoths left and mankind had to invent farming.

Public companies treat the resources of the planet the way ape men treated mammoths. They imagine an everlasting supply. When you are focused on quarterly performance you don’t invest in a 20 year plan to eliminate oil consumption in your company. You just buy the cheapest available fuel until it runs out. You use up the resources that should be carefully shepherded for the future benefit of mankind.

3. Care of people
Many traditional limited companies were built up on the British Model as an extension of the concept of the feudal estate. Back in the old days the landed gentry had large estates. The peasants worked on the estates and got a living from the estate. When you were too old to work the lord would make sure that you had a little cottage and a bit of food. If you had no family then the ladies of the parish would call in and make sure you were cared for.  OK, sometimes this model did not work, but much of the time it did. The concept was that you would be “looked after” for your years of faithful service.
When companies were established this duty of care was reflected in the provision of a pension fund. Many of these old established companies had fantastic pension funds, planned out in the long term, to make sure workers were cared for.
Then, in the 1970’s a group of financial sharks arrived on the scene in London. They were called the Mayfair Set. They saw that some of these old companies had built up huge and valuable assets and pension funds, but were not particularly efficient at generating current earnings. They swooped on these companies, bought up a majority of shares, turfed out the management, broke up and sold off the valuable parts of the companies. The Mayfair Set got rich. The workers were left with worthless pensions. The concept of “Duty of Care” was broken.
Margaret Thatcher recruited the Mayfair Set to determine British Industrial Policy in the 1980’s. They introduced a dog-eat-dog form of capitalism that has driven markets ever since. It is not a pretty thing.
At the same time Ronald Regan was doing the same in the USA, and in Japan the feudal loyalty system represented by the “salaryman” also broke down.
I now frequently hear senior company managers use the line “the company does not owe these people a living”. I beg to differ. If you want staff commitment, effort, devotion and all those “company values” you harp on about then yes, you owe them a living. Quid pro quo!

4. War Chest
The Mayfair Set also targeted companies with a large cash or asset reserve that they could use to fund long term investment. The “modern” company abhors redundant assets, it focuses on “just in time” delivery and inventory reduction. This carries into concepts such as planned obsolescence.
The modern company does not save up the money it needs to embark on a new enterprise. That would be far too prudent and safe. The modern company uses gearing and leverage to borrow money on financial markets to fund activities. The more successful you are in gearing your operations the more attractive you make yourself as an accountant. The best accountants in the world figured out a whole new way to fund a company called Enron. Remember Enron?
Well, when Enron went bust, those accountants went to work in other companies. They geared the hell out of companies and borrowed mega-stacks to fund new ventures. If you want to look at the roots of the 2008 recession you need to backtrack to Enron accounting systems, and to Mortgage Securitization by Goldman Sachs as far back as the 1980’s.
The US treasury is now jokingly referred to as the “Goldman Sachs Dept” due to the number of secretaries of the treasury who have come from finance houses. We are running our countries in the same way we are running our public companies. All thinking is short term. Everything focused on the next quarter, the next 100 days, the next election.
At the global level we are creating an unjust, unequal society which is in a race to consume the limited resources of our planet. This thinking is coming from the way we operate businesses on a day to day basis. We need to change the model.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s