The Thoughtful Corporation


When I was starting out on AbstractOps, I drafted a set of values, based on my own personal experiences. The current (fourth) version of AO's values have evolved to fit the team today; but my original drafts capture my values best. Here are a few of them.

Two theories I utterly despise:

  • That maximizing shareholder value is a corporation's sole obligation (advanced by Milton Friedman, popularized by Jensen & Meckling's Theory of the Firm, and exemplified by Jack Welch at GE)
  • That a corporation is just a "nexus of contracts" (incredibly, this apparently also came from Jensen & Meckling's Theory of the Firm... how many terrible ideas can one paper espouse?)

In my opinion, these theories have done more to destroy the fabric of our society, undercut capitalism, and limit American exceptionalism than any antagonist could have managed. This, and heavy deregulation in the 1980s, set off a series of (value-destroying) M&A starting in the 1980s; minted generations of "vulture capitalists"; and has resulted in massive inequity that more than doubled the share of income going to the top 1% from ~10% to more than 20%.

You're probably questioning these claims (as you should) so I'll simply direct you to one of the most insightful articles on corporate incentives I've ever read: John Kay's Concept of the Corporation. It's a long, academic read, but the summary is:

I argue that this reductionist account [that corporations are a nexus of contracts] fails at a political level, giving no coherent account of the legitimacy of such corporate activity – that is, no answer to the question β€˜what gives them the right to do that?’ – and additionally that the model bears little relation to the reality of successful corporations. I describe an alternative tradition in the understanding of business, owing more to organisation theory, corporate strategy and business history, which treats the concept of corporate personality as more than a legal doctrine. In this view, corporations are social organisations: their competitive advantage is based on distinctive capabilities which are the product of their history, their internal architecture and organisational design, and the relationships with employers, customers, suppliers and commentators at large which arise from them.

In particular, he discusses a case study of German and Japanese corporations, which are incentivized and structured to serve implicit "social contracts" β€” and it's fascinating to note that the craftsmanship of those countries is recognized as elite, and that they are massive economic forces in their respective regions despite having relatively small populations. Contrast that with American craftsmanship, which has taken a nosedive in the last few decades. (Side note: I'm very curious how social contracts of Swiss, Canadian, Swedish, etc. companies would have shaken out, if John Kay had looked at those.)

In summary, I wholeheartedly subscribe to this idea β€” that corporations are social entities; that companies incentivize to behave like a nexus of contracts end up being varying degrees of evil, and ultimately bring out the pitchforks. Focusing on shareholder value destroys shareholder value. Instead, I believe companies should purely focus on creating aggregate societal value (and capturing a reasonable fraction of it), and plenty of it will make it back to your shareholders.