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In questionable company

Sun, 14th Dec 2003

THE COMPANY is an inevitable and remarkable invention. A prodigious amplifier of human effort, it is certainly 'the most important organisation in the world,' as John Mickelthwait and Adrian Wooldridge note in their brisk and entertaining The Company: A Short History of a Revolutionary Idea

It is the company, not blind market forces, that carries on the innovation and trade that push economies forward. As London Business School's Professor Sumantra Ghoshal has shown, there is a strong correlation between national prosperity and the proportion of population working in relatively large companies. We live in an organisational, not a market, economy. It is the combination of companies and markets that did for communism, not military might.

Historically, too, the company has been a force for civilisation, thriving best in conditions of trust, honesty and respect for contracts. It provides people with identity and community as well as economic livelihood.

Yet this 'unsettling organisation', as Mickelthwait and Wooldridge call it, also has a dark side. Even though the company saw off the challenge of central planning, the end of history has turned out to be more eventful than many predicted. Part of the reason for that is the contradictions at the heart of our present-day corporations.

During the past two decades the shareholder-first principle has increasingly pitched companies into conflict with societies' social and environmental priorities.

Pleading the pressure of capital markets, companies have plunged into an infernal cycle of 'asshole management': the pursuit of ever-increasing speed and efficiency in the name of shareholder value that has had the effect of dehumanising work, damaging the environment and stripping management of its moral dimension. The abuses at Enron, Tyco and WorldCom are the direct outcome of this reductionism.

Hence the paradox that although we are more dependent on the corporation than ever, and its potential for good has never been more urgently needed, it is going through a traumatic crisis of legitimacy.

Companies and those who run them have rarely been more distrusted - in polls of ethical standing, managers come out lower than politicians or journalists. Liability lawsuits - for obesity, firearms violence, even global warning - are piling up.

Does this matter? Yes, it does. With its Dr Jekyll and Mr Hyde sides struggling for supremacy, the company is standing at one of its periodic crossroads.

As Mickelthwait and Wooldridge show, this is not the first time that corporate excesses have been followed by a legal and emotional backlash. The cause of the joint-stock company may have been set back a century by the distrust engendered by the South Sea Bubble, for instance.

It wasn't until 1844 that companies were freed of the need to obtain a special charter and 1856 before limited liability was automatically granted.

This time round, companies' hasty adoption of corporate social responsibility programmes is not saving them from the increasing attention of regulators determined to limit surprise and prevent abuses.

Yet addressing the negative problem may run the danger of throwing out the positive, too. As Ghoshal points out, there is no evidence that (for example) splitting the top job or increasing the number of independent directors has any effect on company performance.

Meanwhile, these arrangements institutionalise the breakdown in trust between business and society, a trust that is at the heart of overall success and is abandoned at our peril, as Business in the Community chairman David Varney recently noted.

There is an alternative, however, which involves rejecting the determinism that lies at the heart of asshole management and returning to first principles. As history shows, the marvel of the company is that it is a separate 'legal person'. It is this entity that owns corporate assets, not shareholders, whose rights are restricted to residual cash flows.

So the company has both the right and the obligation to fix its own purpose, to which employees contribute human capital and shareholders financial capital. It can choose to be an engine of stewardship rather than expropriation, a 'collaborative' organisation in which the interests of stakeholders converge in the knowledge that human wellbeing is integral to its purpose, not a tacked-on programme.

Because purpose is shared, it can operate on distributed initiative and leader ship rather than hierarchical command and control trust rather than sharp incentives.

The choice is a poignant one, because the paths diverge. Crucially, management's starting assumptions are self-fulfilling. An organisation run on 'asshole-management' principles breeds people motivated by greed and power who don't care how they get it - in a word, 'assholes'. Enron is the locus classicus . The converse is also true.

Which company will provide the next evolutionary chapter? The odds are on the assholes, because that's where the weight of conventional theory lies. But that's not inevitable: as Mickelthwait and Wooldridge usefully remind us, legally the company was shaped by political decisions - and political decisions can reshape it as well.

The Observer, 14 December 2003


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