Obituary from the future: Public Companies. 1602 – 20XX

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After a long struggle with their terminal condition, the last public companies finally passed away when the New York stock exchange – the last of its kind in the world – closed for the final time yesterday.

PLCs enjoyed an exciting life, becoming hugely more than their parents ever expected. Mr Adam Smith, a close friend of the family and a huge influence on the PLCs throughout their lives had high hopes for what the PLCs would achieve for the world. Through their relentless pursuit of profit for their owners, he saw a world made better through innovative products and services delivered to the masses.

Well the PLCs certainly delivered that and more to boot, with consumer products fulfilling every need and want imaginable. Some were clever enough to make money out of money itself without actually delivering any value at all. Those PLCs were from the Banks family. Many people were able to earn a living working for the PLCs and a few people (not the masses working for them of course) got very rich. Fantastic.

But after a happy childhood there was trouble ahead for the PLCs . They got fat. Not just the fat kids in the class, but fatter than the whole school. In fact fatter than many countries! That’s pretty fat, but that was OK because everyone was still working very hard and a lot of money was flying around, especially to the PLC’s owners on the stock markets.

The first big sign of trouble for PLCs came from those troublesome Banks adolescents. It turned out that what they had been trading was actually just hot air. Well really it was worth less than hot air because at least you can use hot air to dry your hands after washing them in the bathroom. The fat kids fell over and landed hard. Fortunately, there were some countries who were still fatter than the PLCs (other less fat countries were unfortunately squashed when they fell – oh well.)

The fat countries did the sensible thing and fed the fat kids enormous piles of sweeties to keep them really fat and get them happily up on their podgy feet again. After all they were so fat and took up so much space they if they didn’t get up then nobody in the fat countries would be able to move at all. But even with all of the free sweeties that the normal people in the fat countries paid for them to eat, they didn’t really change at all. But for a while everything looked like it was going to be OK again.

At the same time, the other PLCs were also feeling the first signs of trouble. They gradually started to realise that their masters were a group of owners who care purely about how much profit they made, and preferably QUICKLY. This was supposed to be a good thing because it kept the PLCs on their podgy toes. The owners could sell them to new masters or throw out their management if they didn’t stay fat enough. But in worrying so much about pleasing their owners, they didn’t focus on the people who mattered the most – all of those little people who actually did the work and created 100% of the value! It regrettably seems so obvious now that they’ve passed away but yes, in every PLC the employees were less important than the shareholders! And that was bad news for customers too (where 100% of their income comes from) because customers only get served the best when the employees are fully engaged.

What’s more, the focus purely on financial results turned out to not always be so good for humanity, societies and the planet. Life for many people got worse and the environment was being destroyed. They had a little go at countering this with ‘Corporate Social Responsibility’ which meant it was OK for a bank to invest several billion in a company making landmines because it allowed its employees a day off a year to paint a fence outside an orphanage for landmine victims.

The PLCs struggled on into their adult lives, but there were other leaner, fitter competitors around. These weren’t even new kids on the block, they were grown-ups too and had been around for just as long as the PLCs, but their day had finally come. These companies didn’t have to worry about shareholders pressuring them for short-term returns at the expense of the employees, because the employees WERE the shareholders. Imagine that – inmates running the asylum! And it turned out that these companies were more innovative, faster and provided better service to their customers. There was something very powerful about a business being owned by the people who actually did the work. And because the companies now existed for the benefit of people (not pension funds, hedge funds and city traders) they actually care a lot about creating value for, and not destroying societies and the environment.

One of these competitors, a guy called John from the Lewis family in England was already the most successful retailer in the UK. He was free from the pressures of the stock market and could attract and keep the best people who then delivered the best service to customers because they were owners of the business and cared the most.

These employee-owned competitors grew in number, size and power as the PLCs faltered in their later years. The best people flocked to them and they were able to think and plan long-term unlike their short-term sweetie-addicted old classmates.

Many of the smarter PLCs allowed the sensible thing to happen – they came out of the stock markets and were bought by the employees who paid for them out of future profits which were now higher because they performed better, and weren’t going to be bled out of the company to shareholders who contributed nothing.

A few tried to hang on for a bit too long and found that they just couldn’t innovate and deliver to customers as well as their more nimble employee-owned competitors. These final few were ultimately consigned to the history books when the last stock markets shut down yesterday.

I apologise because it’s wrong to speak ill of the dead, but the world is a better place now that the PLCs are gone. We now have businesses where people serve people for the benefit of everyone. And people have a conscious so now societies and the environment are better off too through their more thoughtful actions.

The slow and painful death of the PLCs surprised the pure capitalists who thought that the markets would take care of everything. In fact they actually did – the free market allowed these better competitors to make the PLCs irrelevant. And the socialists were both right and wrong too. It turned out that business wasn’t so bad after all, but they were right that things work best when the people own and control the means of production.

R.I.P.

Why do we accept giving up all of our rights at work?

I’m reading Beyond the Corporation by David Erdal at the moment and so have been thinking a lot about employee ownership. It’s making me wonder why we accept so little in the way of rights at work than we otherwise enjoy in the free and democratic societies we live in.

In a democratic country we have the right to choose the leadership and hold them to account; we have a right to transparency and information and we have the right to speak our minds, dissent, make our voice heard and participate.

In almost all businesses the employees have no equivalent rights. The rights belong only to the owners of the business – the shareholders. The shareholders are the only people with rights to information, to appointing or removing the management and ultimately deciding what the business does. Further, the shareholders are the only people with the rights to the profit and capital gains that it generates. Shareholders can sell these rights to whoever they choose in spite of any feelings the employees may have about it. The employees in the business create all of the value that it generates, yet they are merely ‘rented’ in return for pay, like a piece of machinery.

Why is it that we accept so little in the way of rights at work that we take for granted in society? Perhaps it’s because life is generally OK and we don’t feel hugely repressed, in spite of the lack of rights. Perhaps it’s because the status quo is so deeply entrenched in our history that we accept it as ‘the way things are’ and it cannot be changed. I wonder if this the same as the burgeoning middle classes in China who have decent jobs and access to consumer goods and perhaps don’t worry too much about the fact they cannot oppose or hold their politicians to account or have access to free information. But surely we can do better than this.

I am convinced that the solution is more than just democratic organisations. It is full ownership of companies by the employees. Only by the transfer of all rights from external shareholders to employees can we have true democracy at work.

Many democratic organisations are not actually true democracies at all. Whilst there are 10 principles of democratic organisations, what sets a true democracy apart is inalienable rights, not just operating principles which can be changed at the whim of the owners.

Most ‘democratic companies’ are actually benevolent dictatorships. The company I co-founded (and have now left but am still a shareholder in), NixonMcInnes, is a classic example. The company truly buys into democracy and has been independently assessed and shown to be living by the 10 principles. There is a huge level of transparency and employee involvement, from fully open financial information to guest seats for employees to attend board meetings. Employees have a say in selecting and evaluating managers, contribute heavily to strategy and planning, and have the right to ‘dissent’ by raising their own ideas, challenging anything that they are not happy with, and know that they will be listened to. There is also a generous profit sharing scheme in place. However, none of these things are actually rights – they are the policies set by the owners and can theoretically be reversed at any time, and the owners still have the right to sell the business to anyone they like who would be free to do as they please.

At NixonMcInnes, the concept of employee ownership has been discussed at length. I remember when we first talked to the employees about the idea and all of the rights that it would give them, they weren’t as excited as I thought they would be. The reason for this was that they felt they were already enjoying a lot of the benefits through the democratic principles, and the only real difference would be a big chunk of debt to pay off the old shareholders. In other words, life was OK under the benevolent dictatorship. I had to agree that this was a fair point, but I think there is something bigger at stake here.

Perhaps I am wrong, but I can’t help thinking that there is something hugely important about concrete rights that are set in stone forever – hopefully hundreds of years in the case of NixonMcInnes and certainly beyond the lifetime of everyone working there today. Rights that cannot be eroded over time or given up to new masters who want to do things differently. I think there is a massive difference between principles and true rights.

This is all sounding very socialist which is not a notion I’m terribly comfortable with to tell you the truth. In talking to socialist friends, they often say that the solution is for workers to unionise and to force (usually begrudging) employers to give them better rights. Personally I think the goal of better rights for employees is spot on, but the further polarisation of the situation into ‘them’ and ‘us’ is incredibly negative. It actually accepts and reinforces the status quo of the shareholder-employee relationship and misses out on huge opportunities to build amazing businesses that benefit the employees as well as society and the planet as a whole.

I would like to see far more employee ownership in order to give people these enduring rights at work. Perhaps unions could work towards raising finance to buy companies outright for the employees. I would also like to see bids for public companies to be taken out of the hands of short-term investors on the stock markets and into the hands of the people who work there.

This is not just social ideology. It is actually great business sense too and this is what gets me excited as an entrepreneur. In Beyond the Corporation, the myths about the supposed flaws in employee ownership (lack of innovation, inability to make tough decisions, bureucracy, short-termism etc) are thoroughly debunked by the reality of employee-owned companies like John Lewis, Arup and Publix who consistently out-perform their peers across all traditional measures of business success. It’s clear that employee owned companies can actually be more agile, innovative and better able to cope with tough times.

There are compelling reasons why employee ownership would be a far better and fairer standard framework for business than the current shareholder model. To test this theory, imagine for a moment that employee ownership was already the standard and employees had parallel rights at work as they do in society. Would any sane person suggest that it would be a good idea to remove all of these rights and give them up to owners who don’t actually create the value within the firm? Would anyone believe that these businesses would perform better? Would anyone think it would be better for society? Of course not. The current model only hangs on by virtue of the fact that it is ‘the way things are.’ But I don’t think it should or even can hold on forever. The day of the employee-owned firm is coming.

Networks and employee ownership: The future of the corporation

I believe that the draw towards democracy in organisations will prove to be just as irresistible as the draw to freedom and democracy in dictator-led countries. Like an Arab Spring at work. Why? Because I believe that humans have a fundamental desire to be set free. Freedom unlocks our potential making individuals happier and organisations perform better.

On the Worldblu list every year there are examples of how leading companies implement democracy, and I have shared a few crazy town ideas for taking it even further. But aside from the individual democratic systems and processes, what will the organisations themselves look like?

I think that the evolution of organisational democracy will lead to two super-species which will dominate the business world.

The first type of organisation, which I touched on previously, doesn’t even have a single entity. It will be a loose connection of individuals – a network – that creates connections and works together on projects. In a network there is no hierarchy, but you still have very clear roles, responsibilities and accountability in order to get a job done. These networks will make heavy use of technology. For example LinkedIn to find new connections and keep your network of collaborators alive; Etsy.com to organise the means of production; group collaboration tools like podio.com to communicate and manage the work; and telepresence to help alleviate the need for physical proximity.

The advantages of networks are enormous. You can put together the very best team for each project, instead of being forced to use the team that you happen to employ – a dream team for each and every assignment. They can also be highly efficient too because you don’t have a huge amount of company overhead – both financial and bureaucratic getting in the way of the actual work.

For individuals, they can have the ultimate personal freedom of deciding what they work on and taking breaks between projects whenever they like. Rewards are much more directly shared, with everyone on the team benefiting directly from their work. Performance is reviewed by peers not by a boss and success will speak for itself: Do a good job and you will be more sought after for future projects. You will be able to pick and choose the most interesting projects to work on, and your rewards will increase. No political struggles for a promotion or a pay rise. The ultimate meritocracy.

In the future I think we will be surprised at the size and scope of what informal networks, outside of traditional corporate structures are able to achieve.

But what about businesses that require more capital investment such as expensive machinery, and where the work is more ongoing rather than project based? Networks my not be ideally suited in these cases (although I wouldn’t rule out what a smart group of networked individuals might be able to pull off.) I do think though that networks won’t completely replace larger corporations altogether, but these corporations might look radically different to the ones we see today.

I believe that the future of the corporation is employee ownership. It’s not a new idea, and it’s one that has already proven to be a more productive, innovative, faster moving vehicle for long-term success. For example, see John Lewis (most successful retailer in the UK), consultants Arup (leading engineers of projects like the Bird’s Nest stadium in Beijing) or supermarket chain Publix (winner of the best customer service award in the US every year since 1995.)

Despite their undoubted success, when it comes to large companies, the employee owned variety are still a very small minority in an economy dominated by large publicly listed companies. I believe it’s inevitable that this will change – the free market will force the issue.

Employee-owned companies perform better because unlike listed companies there is no pressure for short-term financial results from the markets at the expense of building long-term value. Shareholder interests are not put before employees because they’re one and the same. It’s hard to have a more engaged workforce than one that actually owns the business, and that leads to high productivity, faster innovation, better products and services and happy customers. All of this leads to better performance in traditional terms like profit and capital gain.

Employee ownership is rarely considered as an exit option for entrepreneurs starting businesses who usually opt for a trade sale or IPO but I believe this will change over time. Many economists and business advisors still shun employee ownership based on incorrect assertions in the face of the evidence. It’s hard, although not impossible right now to fund employee buy-outs (we looked into it at NixonMcInnes.) I believe that this will change as faith in public companies and the stock market declines and employee-owned companies continue to thrive.

Within employee-owned companies, the structure will look very different to traditional corporations. Power is completely subverted with the most senior executives accountable to the employees instead of external shareholders and analysts who pass power down via the directors and managers.

We may also see organisations that internally look and function more like the loose networked model. They have all of the freedoms to self organise, but the resources of a larger corporation to call upon. Just look at software company Valve who already work in this way and are enjoying enormous success.

I believe that we are set to see a bright future as the short-term profit dominated world is gradually replaced by work with people at its centre.

More on employee ownership in my next post.

The problem with capitalism

I think capitalism right now is pretty screwed. Yet I’m still a capitalist.

Huh? Speaking earlier this year, Nick Clegg, the UK’s Deputy PM said that:

“We don’t believe our problem is too much capitalism – we think it’s that too few people have capital”

He then went on to talk about creating a business environment with much more employee ownership. This is something I’m massively behind, but sadly (and please correct me in the comments if I’m wrong) the government doesn’t seem to have followed up with anything substantial following this statement.

The problem with capitalism runs far deeper than (financial) capital distribution. This is because money is just one form of capital, yet pretty much the only thing that’s valued in our current capitalist system. What’s ignored is human capital, social capital and environmental capital.

For example, consider an employee-owned company that unsustainably cuts down rainforests or monopolises natural water supplies in order to make a profit. This may lead to a fairer distribution of financial capital, and probably builds human capital to a degree by treating workers more fairly. Yet it is still destroying environmental capital that has taken thousands of years to build. As a secondary effect, it also destroys social capital as communities that rely on the environment lose natural resources that they need.

In comparison to financial capital, there is very little reporting or attention paid to these other equally important forms of capital. So Nick Clegg is right that capitalism as a concept is not the problem. More employee ownership is a great first step because employees, unlike stock markets, have much wider concerns about the world, but we need to go much further and fix the whole capitalist system.