A new analysis argues that modern businesses operate on the basis of an outdated model of the economy
The Corporation in the 21st Century won’t introduce you to new techniques or strategies, nor help you make money. Rather, its mission is to change our understanding of the basics of business. What does it mean to ‘own’ a corporation? What is capital?
That’s a task that takes intellect, experience and credibility. John Kay, an eminent Oxford economics professor, government adviser and Financial Times contributor, fits the bill. His thesis is that our model of companies is based on Victorian ideas about land, capital and labor. The archetypal business was a steelworks or factory, owned and run by a ‘capitalist’ who provided the money for an expensive plant, and used his legal and economic advantage to exploit labor. Real men worked in heavy industry and made big things like ships.
This model persists in academia, the media and politics. It helps to explain why politicians and civil servants obsess about ‘real’ jobs in manufacturing while disregarding other, more promising opportunities for employment. As Kay argues, it is profoundly misleading.
In reality, the commanding heights of the modern economy are held by firms that make small, high-value objects like iPhones, or nothing tangible at all – think of Google or Facebook’s original businesses. Modern companies use far less material, but create vastly more value. Compared to a Victorian business, a modern corporation is hollowed out, outsourcing its premises, back-office functions, and even capital, to specialist businesses more suited to carrying out these functions efficiently.
Really successful companies have hard-to-copy capabilities, which allow them to charge a ‘rent’ well above their competitors. The value added comes from the collective intelligence embodied in the company. In this respect, social relations and cultural values are critical – which is why working from home may damage high-performing businesses in the long run. (It is also why business leaders’ behavior matters so much.)
Key concepts are fuzzier than economists and lawyers prefer to think. Although in theory shareholders own a listed company, in practice, they can exercise very few of the rights normally associated with ownership of an object: the right to sell, lend, use it, and so on. Different jurisdictions take different theoretical positions, but whether you are in America, Britain or Germany, the practical consequences are similar. A shareholder has no right to enter company premises, use or sell its assets, or require a dividend to be paid. In practice, owning a share (often indirectly via a pension fund) merely confers the right to sell the share and benefit from the uplift in price (if any). Executives exercise many rights associated with ownership, and get most of the benefits, but only while employed by the business. In practice, Kay concludes that the modern corporation is owned by no one, if ownership is understood in the traditional sense.
A similar confusion applies to the term capital – made worse by the invention of new forms, such as human capital or environmental capital. People and the environment are important, but pretending they are a form of capital is unhelpful, argues Kay. Yet modern businesses require far less capital than, say, a Victorian steelworks: in a knowledge economy, most of the value added comes from the collective intelligence of employees. Often, the initial cash injection comes from venture capital. By the time the business is floated on the stock exchange, the objective is for founders to take money out, rather than to have investors put capital in.
What does this mean for business people, employees, unions, customers, citizens and governments? What new opportunities emerge? We have to wait for Kay’s second volume to find out.
Piers Cain is a management consultant
