In 1912, Woodrow Wilson, then on the verge of becoming president, surveyed American society with evident dismay. He lamented the rise of vast corporations, and the way that they were transforming freeborn Americans into mere cogs in the great industrial machine. “We are in the presence of a new organization of society,” he wrote. “Our life has broken away from the past.”1
The company has been deeply involved in most of the great “breaks with the past” since at least the middle of the nineteenth century. Even when it has not directed them itself, it has shown, to borrow a phrase from Henry Adams, a remarkable ability to “condense” social changes. That condensing has not just been a matter of churning out society-changing products, like the Model T or Microsoft Word, but of changing the way that people behave—by disrupting old social orders, by dictating the pace of daily life.
Throughout its history, the company has shown an equally remarkable ability to evolve: indeed, that has been the secret of its success. In the nineteenth century, the company transformed itself from an instrument of government to a “little republic” of its own, charged with running its own affairs and making its shareholders money. In the twentieth century, Wilson’s “new organization” outlived the robber barons whom he so feared, and allied itself instead with their hired servants. Company Man turned the organization into a smooth-running bureaucratic machine, but when conditions changed, he, too, was jettisoned; now the company presents itself to the world as a lean, flattened entrepreneurial creation.
There can be little doubt that such an amoebic creature will continue to change shape dramatically in the coming years—and that those changes will bring with them “breaks with the past” for all of us. Where will these changes take us? That depends on two things that have been themes throughout this book. The first is economic logic: the balance between transaction costs and hierarchy costs that decides whether companies make sense. The second is political. Companies sprang from the loins of the state. Even when they were set free in the mid-nineteenth century, they still had to secure what might be called “a franchise from society.”2 The terms of that franchise may be explicit or implicit, but when companies have appeared to break them, society in the shape of people like Woodrow Wilson has reined in companies, often crudely. “I believe in corporations,” proclaimed Wilson’s contemporary and rival, Teddy Roosevelt. “They are indispensable instruments of our modern civilization; but I believe that they should be so supervised and so regulated that they shall act for the interests of the community as a whole.” The same was said (albeit less eloquently) by virtually all the American politicians debating the Sarbanes-Oxley bill in 2002.
THREE POSSIBLE WORLDS
From the purely economic standpoint, three different futures for the company present themselves. The first—particularly popular in antiglobalization circles—holds that a handful of giant companies are engaged in a “silent takeover” of the world. The past couple of decades have seen an unprecedented spurt of mergers. The survivors, it is maintained, are the real lords of the universe today—with more economic power than most nation-states, but without any sense of responsibility or accountability.
The trouble with this view is that few facts support it. As we have seen, the idea that most of the one hundred biggest economies of the world are now companies is a gross abuse of statistics. Rather than increasing their hold over the universe, big companies have been losing ground. National markets that only thirty years ago seemed comfortable oligopolies—such as America’s television and car markets—are now squabbled over by companies from the world over. And, in general, the more futuristic the industry, the less the evidence of concentration. In computer hardware, computer software, and long-distance telephony, the market share of the top five firms in America has been declining.3
The second school of thought argues almost the opposite of the first: that companies are becoming ever less substantial. For a glimpse of the future, its proponents recommend the Monorail Corporation, which sells computers. Monorail owns no factories, warehouses, or any other tangible asset. It operates from a single floor that it leases in an office building in Atlanta. Its computers are designed by freelance workers. To place orders, customers call a toll-free number connected to Federal Express’s logistics service, which passes the orders on to a contract manufacturer that assembles the computers from various parts. FedEx then ships the computers to the customers and sends the invoices to the SunTrust Bank, Monorail’s agent. The company is not much of anything except a good idea, a handful of people in Atlanta, and a bunch of contracts.4
This minimalist school has the benefit, by and large, of having some distinguished economists on its side. If you use Ronald Coase’s premise that companies make sense when the “transaction costs” associated with buying things on the market exceed the hierarchical costs of maintaining a bureaucracy, then modern technology is generally shifting the balance of advantage away from companies and toward markets and individuals. Yet, the idea that the company will retreat to the periphery of the economy looks farfetched. Big companies, as we have seen, possess certain “core competences,” usually cultural ones, that cannot easily be purchased on the market. And even leaving culture aside, there are still market failures that persuade firms to try to do things internally rather than externally (companies will always be tempted to buy suppliers that provide goods that they cannot get elsewhere). Microsoft and Oracle may be far looser, more fragile organizations than Sloan’s General Motors, but they are still large companies, trying to get bigger.
The third forecast is an offshoot of the second: that the discrete company is no longer the basic building block of the modern economy. It will be replaced by the “network.” Some economies have long centered on webs of interlocking businesses, such as Japan’s keiretsu and South Korea’s chaebol. But the models most commonly cited are the boundaryless firms of Silicon Valley. In theory, these loose-fitting alliances are the ideal homes for Peter Drucker’s knowledge workers.
This sounds attractive. But the networking concept has (appropriately enough) bundled together too many contradictory ideas. The older sort of networks, like the keiretsu, which were largely attempts to shield member companies from the market, are now being pulled apart by it. The networks in Silicon Valley, which rely on their sensitivity to market movements, look far more modern, but they are still built around companies. Whatever its other faults, the joint-stock company possesses both a legal personality and a system of internal accountability; networks have neither. This makes it difficult for them to make joint decisions or to divide up profits (witness the desperate attempts of Airbus to become a stand-alone company). Where a network succeeds, it is usually because a firm is driving it. Without that, a tendency to agonize over the most mundane decisions takes over.5
So none of these three futures looks inevitable. Yet, the last two visions seem more plausible than the first. The trend at the moment is for the corporation to become ever less “corporate”: for bigger organizations to break themselves down into smaller entrepreneurial units. The erosion of Coasean transaction costs will make it ever easier for small companies—or just collections of entrepreneurs—to challenge the dominance of big companies; and ever more tempting for entrepreneurs to enter into loose relationships with other entrepreneurs rather than to form long-lasting corporations.
A FRANCHISE UNDER THREAT
The trouble with all these economic forecasts is that they ignore a decisive variable: politics. A persistent theme of this book has been the jostling for power between the company and government. The balance has unquestionably swung in the company’s favor. The modern firm is not in the same position as the East India Company, which had to go cap in hand to parliament every twenty years to renew its charter. Companies have often profited from “races to the bottom” by forcing governments and American states to compete for their favors. They have also encroached on the prerogatives of nation-states and embedded themselves in the body politic: think of the effect of corporate advertising or modern corporate control of the media. Companies have sometimes been able to outfight even the most powerful governments: IBM survived the American government’s biggest antitrust case of the 1970s; Microsoft seems to have thwarted the biggest assault of the 1990s.
So the balance may have shifted, but it is far from clear that the company is now the stronger force. As we have already pointed out in our comparison of Wal-Mart and Peru, even the biggest company has few real powers to match those of a state, no matter how shambolic the latter is. Companies are also more heavily regulated and policed than ever: they may not have to justify their existence every twenty years to parliament, but they have to deal with outside inspection, from both government and the media, on a far more frequent basis than the East India Company ever did. As for races to the bottom, these are surely limited by the fact that many companies owe their success to geographical location. Companies cannot uproot themselves on a whim, because doing so means leaving behind the staff and customers they need to thrive. Microsoft never threatened to quit Seattle during its feud with the Justice Department.
To keep on doing business, the modern company still needs a franchise from society, and the terms of that franchise still matter enormously. From the company’s point of view, two clouds have gathered on the horizon: the cloud of corporate scandals and the cloud of social responsibility.
We have already described the Enron scandal (see chapter 7). Looking forward, it is worth stressing that roguery is, has been, and always will be a problem for companies, particularly during stock-market booms. It is easy to imagine the directors of Enron sitting around a table in Houston, with one eye on their share options, concluding that their real work was “the privilege of manufacturing shares.” In fact, that phrase comes from a Victorian novel, Trollope’s The Way We Live Now (1875), which was itself probably based on a real-life scam by a share-hawking finance company called Crédit Mobilier, which, like the villainous Augustus Melmotte, hailed from France. An even closer parallel to Enron is the career of Samuel Insull (1859–1938), who rose from poverty to become one of the most admired businessmen of the roaring 1920s, making Chicago Edison into the base of a gigantic pyramid of utility and transportation companies. At one point, he held sixty-five chairmanships, eighty-five directorships, and eleven presidencies. But the 1929 crash brought this pyramid tumbling down around his ears. Insull fled the country, roundly denounced as a symbol of corporate greed. He was hauled back to the United States for trial and, surprisingly, acquitted, but his fortune had gone, and he died in 1938 on the Paris subway.
Would the world be a better place if the Victorians had listened to the alarmists who suggested banning joint-stock companies after the bankruptcies of the 1860s? Would America be a richer country if the New Dealers had nationalized great chunks of corporate America? Surely not. History suggests caution in the aftermath of Enron. Most of the reforms in the Sarbanes-Oxley Act, such as stopping auditors from doubling as consultants, will surely only enhance the joint-stock company. Other fiddles are still needed: it would have been better if the Sarbanes-Oxley Act had forced a company to rotate its audit firms, not just the partners inside the firm. But the basic rules of capitalism do not need to be rewritten.
This ties into the second element that will determine the company’s franchise. Since the mid-nineteenth century, there has been a battle between two different conceptions of the company: the stakeholder ideal that holds that companies are responsible to a wide range of social groups and the shareholder ideal that holds that they are primarily responsible to their shareholders. That debate looks set to intensify, not just because of Enron, but also because the stakeholder ideal is in gradual retreat in its strongholds of Japan and continental Europe. Germany, the spiritual home of stakeholderism, has introduced more IPOs in the past five years than in the previous fifty, and there are now more German shareholders than there are trade unionists. German giants such as Daimler-Chrysler and Vodafone Mannesmann are under fire for trying to break “jobs for life” agreements. The same is happening in Japan and much of the former Communist world. In China, privatized companies are trying to shed social obligations, such as running hospitals, that the state forced on them.
The likelihood is that the Anglo-Saxon model will continue to gain ground, if only because it is more flexible. But is the shareholder model really as heartless and socially irresponsible as its critics claim? You don’t have to be a hard-core opponent of globalization to worry about corporate heartlessness. There is a widespread feeling that companies have not fulfilled their part of the social contract: people have been sacked or fear that they are about to be sacked; they work longer hours, see less of their families—all for institutions that Edward Coke castigated four hundred years ago for having no souls.
The broad answer is that although Anglo-Saxon companies may not have souls, they do have brains. Companies now operate in a blaze of publicity; they are more answerable than ever before to their shareholders. By any reasonable measure, they pillage the Third World less than they used to, and they offer more opportunities to women and minorities.
But their defense should not just be based on renouncing bad habits. From the first, Anglo-Saxon companies have generally been willing to take on social obligations without the prompting of governments. The souls of their founders may have had something to do with this. Max Weber famously pointed to the connection between the rise of capitalism and the Protestant ethic. The Quaker businesspeople who founded so many of Britain’s banks and confectionery firms had regular meetings in which they justified their business affairs to their peers.6 The robber barons built much of America’s educational and health infrastructure. Companies have become increasingly explicit about their social goals. Silicon Valley’s oldest company, Hewlett-Packard, has been arguing that profit is not the main point of its business for more than half a century—and insisting that the HP way is the core of its commercial success. IBM now describes itself as a strategic investor in education, Merck has plowed millions into AIDS eradication, Avon is one of the world’s biggest investors in breast cancer research.
Many critics of companies will identify selfish reasons for doing all of this: cosmetics companies want to be seen as sympathetic to women, just as Philadelphia’s robber barons wanted to use charity to worm their way into the Whitemarsh Valley Hunt Club. The cynics miss the point. Throughout history, as long as they are making money, companies have repeatedly pursued aims other than simply maximizing their short-term profits. There are plenty of hard-nosed reasons why the corporate sector has a vested interest in being seen to do good.
Consider two reasons that are increasing in importance. The first is trust. Trust gives companies the benefit of the doubt when dealing with customers, workers, and even regulators. The value of acting in a responsible way during a crisis—such as Johnson & Johnson’s reaction to cyanide poisoning in Tylenol in 1982 (the drug firm, at great expense, withdrew the product immediately)—has now been drummed into capitalists. By contrast, companies that treat their environments badly forfeit trust. General Electric has lost far more money in terms of publicity and goodwill through polluting the Hudson River than it ever saved by letting waste into the river in the first place. The second reason is the “war for talent.” Southwest Airlines is one of the most considerate employers in its business: it was the only American airline not to lay people off after September 11. In 2001, the company received 120,000 applications for 3,000 jobs. The decaffeinated “niceness” of Starbucks has also been a competitive advantage: its employee turnover rate of 50 percent compares with an average of about 250 percent in the fast-food industry.
These achievements are real, but drawing up long lists of when companies have acted responsibly (and when they have not) risks missing the biggest point. Henry Ford’s $5 wage was a force for good; but his cheap cars helped change the lives of the poor in ways that socialists could only dream about. Boeing has spent millions of dollars financing good works in Seattle, but the real boost to the region has been the jobs that it has provided. Johnson & Johnson’s behavior with Tylenol was exemplary—but its main contribution to American well-being has been all the pills and profits that it has made. The central good of the joint-stock company is that it is the key to productivity growth in the private sector: the best and easiest structure for individuals to pool capital, to refine skills, and to pass them on. We are all richer as a result.
The problems in the future may stem less from what companies do to society than from what society does to companies. Governments may have deregulated markets, but they are regulating companies more enthusiastically than ever. Company oversight that began as a mixture of accident prevention (workplace safety rules) and administrative convenience (organizing pensions through companies) has sprawled. In America, the cumulative effect of laws on everything from disabled people to greenhouse gas amounts to a domestic version of the European Union’s Social Chapter, which formally codifies workers’ rights. Multinationals are now seen as tools, via fair-trade regulations, for sorting out the evils of Third World poverty. The numbers and the obligations are likely to get larger as politicians discover that it is far cheaper (both in financial and electoral terms) to get companies to do their work for them.
For the burgeoning corporate responsibility movement, this has been all well and good. And, in one way, they have history on their side: for better or worse, the fate of Robert Lowe’s “Little Republics” has always been wound up with the state that originally set them free. But the other lesson from history is that both government and companies have generally prospered most when the line between them has been fairly thick. The foremost contribution of the company to society has been through economic progress. It has an obligation to obey the law. But it is designed to make money.
This debate has continued under different guises for centuries. The twist to the current version is that, while the company in general has never seemed more vibrant, individual companies have never seemed more fragile and insubstantial. The East India Company lasted for 258 years; it would be remarkable if Microsoft reached a quarter of that life span. In a world of limitless choice, no company can rely on a secure future.
Will society find a successful way of exploiting an organization that has become collectively indispensable, yet individually unpredictable? That question should be at the heart of the debate about the future of the corporation. In the meantime, the joint-stock company has plenty to be proud of. The organization that Gilbert and Sullivan celebrated in Utopia Limited deserves at least a round of applause for what it has achieved so far.