We created a monster

We created a monster.

We grew it from seed, we gave it confidence and status.

It grew, in size and strength, and for a while it seemed to love us and nurture us.

And then one day, at a time uncertain, it was bigger than us. It was a collective of monsters that was smarter than us, and so it robbed us, enslaved us, mis-educated us, mistreated us, and then told us it was our own doing, and denied it was a part of us.

It’s still there. Alert the police and the government, but they won’t answer, for they have been enslaved too.

 

There you go, a dramatic kick off that’ll hopefully keep you reading the rest of this, or at least a bit further.

The monster I’m referring to is THE CORPORATION.

And I think I understand corporations a little bit – I work for one (as do many), and I’ve plenty of years experience of working in one as an accountant / manager / senior manager. And I read a bit, and think a bit, and try to notice stuff. But as usual on this blog I want to knit a few observations together, and try to make a point.

 

The corporation is an entirely legal construct relating to how folk deal with each other. So everything it is, everything it can be allowed to be, ought to be defined by us.

AND THIS MAY BE MY MOST IMPORTANT POINT, and if I follow my plan, I’ll get back to this at the end – THE CORPORATION IS JUST FOLK.

So a corporation is a legal construct of folk doing stuff, for other folk, with a set of assets. Once, long ago, in the baby years of corporations or firms, the assets were the property of an individual, or a small group of individuals who knew each other. They would be actively involved in the management of their assets, it was their capital, and they’d use their own knowledge, and the services of other folk, to achieve their goals – make something, grow something, create something, and then find customers for that thing.

Over time, this evolved. The corporations grew bigger, the owners more remote, the managers more professional. However this is where things started to go wrong.

As firms get larger (and more mature), the ability of single individuals to influence the outcome reduces, bureaucracy increases, the hierarchy creates incentives for individuals that diverge from those of the whole organisation (and the society at large), and the influence of the asset owners decreases dramatically. In fact, since the managers of the firm tend to know more of what’s going on than the owners do, there’s a built-in opportunity to pursue their own self-interest. This is reflected in the economic theory with contributions by the likes of Baumol, Williamson, Milgrom & Roberts.

So economists know that the activity of a corporation tends toward the negative as the corporation becomes more mature, and grows in size.

Does this happen in reality?

You betcha. Look at the wonderful culture of executive compensation. How to pay senior staff? Once the owner would have dictated how much management would receive, but since the owners now have very little to do with the management, then the management establish an arm’s-length approach, by having a committee and some consultants who are their friends & acquaintances, and probably all experienced senior executives themselves, and they tell the executives how much to pay themselves. Maybe they base it on some KPIs, indexes, etc, which gives the appearance of achievement propagating reward, but they make sure the achievement is achievable, and game-able.

There’s little doubt that the amount of cash paid out to senior executives has substantially increased, and yet the world doesn’t seem any better, and your goods and services aren’t that much more satisfying, and your brand loyalty isn’t any greater. And each corporation can’t have exactly the BEST people, because the corporation next door also has 50 of the best people etc. So ok, execs have manipulated the lack of governance from the owners to feather their nest. Funnily, I don’t think that’s the biggest problem.

Thinking of how the Corporation creates dysfunctional behaviour, consider how it creates tribalism, and competition; that can be a good thing, teams that bond work well together, shared goals etc. But it can also blind us to consideration of the world outside our tribe, which is dangerous. People in corporations are encouraged to group-think; there’s a company way of doing things, a way of considering the competition, a view on HOW to go about business, and naturally, those in power tend to be really good at following the culture, and those that rebel tend not to become powerful. The culture becomes more entrenched, more extreme.

We understand then that there’s a real shared mind-set among the executives of a corporation, and this can tend to create a very strong us vs the world point of view. In relation to the competition, this can be a useful thing, for the corporation itself, but also for the potential consumer; each firm is trying hard to differentiate itself, make stuff better, cooler, quicker etc.

But…

Business is hard to do really well

I mean, there’s a lot of competitors, or folk who can potentially compete.

It’s hard to have something different enough in good ways that folk want to buy it. It takes a hell of a lot of time, luck, ideas, failures and mistakes to get to the point where you can be a decent player in a market.

Assuming you’ve managed to get to a certain size, you can probably as a business keep things ticking over. Odds are, your competitors are pretty large and mature corporations like yours, and you regularly exchange staff. So as a senior executive, it’s relatively straight-forward. Follow the trends, copy the competition. Re-brand.

But if you’ve got a power position as a senior exec, you start thinking of your own status. You could have a nicer car, a bigger house, more wealth, increased social status. You want a photo article in a trade magazine, you want a f*cking knighthood, you desire acceptance from the other societies – media, royalty, the best restaurants. It’s not enough to know Molly at the corner cafe, you want to get the best table at Gordon Ramsey’s place. It’s not even enough to be entertained at York races, it needs to be Royal Ascot. The incentives are there to be bigger, better, faster.

This is hard to achieve. Real, genuine, status improving change and improvement are really difficult – you can go a whole career without launching a product that creates that. So you look elsewhere – where can the growth of the corporation (and implicitly your status) be accelerated?

The execs look around, and realise that the problem isn’t the team, it’s the playing field. It’s restricted in size by rules and regulations, by borders.

Regulations are what other folk have put in place to ensure that everyone behaves themselves. I like this definition by Michael Hudson.

Regulation: From semantic roots meaning to rule. A ruler or government sets rules for the economy, creating a regulatory system that, in principle, is supposed to maximize welfare and prosperity. Every economy and society is regulated in one form or another. In practice, deregulation by government relinquishes the regulatory power to the financial and property sector – primarily finance in today’s world. Although this mode of regulation tends to be more centralized than public regulation, it has much narrower goals (rewarding rentiers, with the effect of polarizing society). Advocates of regulation of the economy by the FIRE sector call it deregulation.

You have to pay folk at least this much, and provide a pension, and pay tax (your staff and customers need hospitals, police, sewers, ports, roads, education for which the corporation is supposed to contribute). The regulations are there so you don’t upset other folk doing their business, and don’t hurt people, and don’t leave a stinking mess behind..

This is a bit of a pain for the corporate execs. All this stuff restricts your ability to make a name for yourself and improve your status. However, if they could only get the regulations changed or removed, then whole new ways of “demonstrating improved performance”, and hence, improving your status and rewards are available.

You can drive down wages, cut pensions, make your human capital work longer, harder, for less. It probably won’t help to innovate, but it’ll make what you already do look cheaper, which might improve turnover and profits in the short-term. that’s a serious win.

Or, maybe you could alter the regulations that state what quality and type of goods or services you could sell? – Bingo – new markets.

Or maybe you could then sell these into another country? Especially one that doesn’t have as much competition, especially if it doesn’t have as much regulation.

Or maybe, you could persuade a country to reduce the “tax burden” on the business, or failing that, shift the tax burden to another nation entirely.

In order to do any of this, you’d need to persuade the government of the absolute need to do this. You’d also need to get support from your industry regulator, your corporate financiers. This is hard work – but if you do it right it’s more likely to yield returns that blindly trying to develop stuff that people want.

And importantly, the long-view doesn’t matter. Achieve 4,5 quarters of record turnover, record profits, and then maybe capitalise on your credentials and get another role elsewhere. Boom – another step-change in wealth, income, status.

I reckon it’s worth a note here about the middlemen. These are the other corporates, desperately looking for new markets, new revenue streams. Chief among these would be your friendly auditors and bankers, happy enough to take a few quid for the advertised service, but realising that they’re in a privileged position, and with their own army of senior execs trying to improve their own status. And they’re just that little bit closer to the regulators, so there’s a real chance they can help swing it for you – for a fee. They become advisors, middlemen. They encourage the execs to bid for other corporations, which means you can double your status in one go, and boost your (and their) wealth in the process. And they pay the think-tanks and provide “studies” that demonstrate that this is what’s needed, and the press helpfully print it all, so the politicians have an easy ride.

For every goal, there’s an academic theory that fits – here various economists have obliged with important seeming analyses and interpretations that can be used to provide the infrastructure to legitimise the process. Free markets are better, barriers to entry are bad, the market can provide everything, efficiently, which is better for everyone. Conveniently here, they assume away the bits of economics mentioned above about how corporations tend not to work too well (for society) without regulation.

And as business becomes more complicated, then the regulators need to understand it better. So the corporate execs get jobs as regulators. But crucially, they’re still tainted by the culture that nurtured them as successful executives. They’re more sympathetic to the markets they’re supposed to regulate, they’re not considering the social impacts, the societal effects, the long-view.

And this is where we ended up. The regulations were re-written. The social contracts torn-up. Governments of professional politicians have fallen over themselves to flatter the “business leaders”, and draft the laws, and create the trade agreements, in order to give the corporate executives what they needed.

The regulatory bodies living at arm’s length from government, the watchdogs, the standard setters, the consumer protectors, have all been populated with the spawn of corporate hierarchies, and still have the same goals, the same shared learning and culture. They have ceased to question.

And so, the educators, the protectors, the governors, all fall in line with the corporate execs, there’s no thought for the society at large, there’s no consideration of the future. We need growth, profits, GDP, not at some distant time, but now. It doesn’t matter if nothing is achieved, if the “Product” of GDP is just a pot of debt accumulated by the folk of the land, if the tax-attracting wealth is off-shored, screw it.

That ugly beast we created, the corporation, has self-replicated, and thrown off the responsibilities of being a member of society, it has become a sprawling, confused monster, where the head doesn’t recognise the tail, where it cares not for the filth and destitution that it sees around it.

 

We created the monster – and we must understand that it’s not its own fault – it’s not necessarily the fault of “capitalism”. It’s a basic well understood and totally manageable flaw in the nature of (some) folk, and how the firm evolves. And the regulations were there as a muzzle on the bite of the monster. There’s no perfect system of managing and controlling our dealings with each other, this one’s as good as any, but only when the rules are in place. We haven’t changed the rules to allow folk to hurt and intimidate each other, but somehow we allowed the rules to be changed so that corporations can hurt us.

But corporations are just folk, mostly decent ones, trying to do stuff for other folk. Unfortunately corporations also serve as a vehicle for social status, and in that, they bring out the worst in some folk.

And I write this in the hope that some of you who read it might for once ignore the red team/ blue team split, and think twice about what we are as a species, and ask the politicians why we let the monster off the leash, why behaviour that would be unacceptable in the street is ok in the world of trade and business.

(ps – it seems to me that the more the folk in the savage head of the monster, the senior execs, ignore the mess around them, which is the lot of normal, well-balanced folk in the rump, then the monster will have to consume itself, or maybe that’s taking an analogy too far, which I’m very prone to do).

 

Further reading / viewing

http://www.theguardian.com/commentisfree/2014/apr/06/money-bought-elections-us-donation-rules

The Corporation – a video https://www.youtube.com/watch?v=Y888wVY5hzw

 

 

 

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