On the Purpose of an Organization for the 21st Century
Last week, the CEOs of Business Roundtable issued a Statement on the Purpose of a Corporation, declaring their commitment to customers, employees, suppliers, and communities. This is a sharp departure from BRT’s long-held belief that the paramount duty of management and boards of directors is to the corporation’s shareholders. While some have been quick to praise and others skeptical, these critiques miss the point. The truth is that, even viewed most generously, bolder models for how we organize our endeavors are required if we are to meaningfully confront the myriad of existential challenges facing humanity in the 21st century.
So, Why is the BRT Statement Even Newsworthy?
In 1970, economist Milton Friedman introduced the theory that a business has one and only one responsibility — to use its resources and engage in activities designed to increase its profits. According to Friedman, companies should not concern themselves with “social causes” and, instead, forgo all but their primary mission: serving shareholders’ interests. This doctrine, echoed by many of Friedman’s contemporaries like Michael Jensen, has dominated corporate practice and ethos throughout the intervening decades. The ‘Shareholder Value’ and ‘Friedman Doctrine’ lines of thought were reactions to the prior extreme of the prevailing-wisdom pendulum, that corporations existed to serve a variety of constituencies, which, many believed, had led to a misalignment of interest between ownership (shareholders) and control (CEOs and management). It’s worth noting that the rise in executive compensation in the form of stock incentives coincided with that of the Friedman Doctrine — thus aligning the management class with the shareholder class. Business Roundtable is an industry association and lobby that represents the leaders of the largest corporations in America. BRT has been a staunch defender of the Friedman doctrine throughout its nearly 50-year history. So, for an organization that represents the interests of the CEOs of the most powerful corporations in the history of the world to support any departure from this position is, well, newsworthy.
Always Consider the Motive
Most generously, the BRT CEOs recognize the risks to society presented by unbridled Shareholder Value corporatism and are to be lauded for working to bend the corporate arc toward a more sustainable future. Certainly, the BRT CEOs know that, in some circles, any departure from a “shareholders first” policy will be deemed treasonous (for example, see the Council of Institutional Investors’ response) and perhaps they believe they can only marshal public opinion through measured, incremental steps. A more pragmatic evaluation might be that they sense a shift in public opinion and, as practiced managers of risk, are trying to get ahead of (and avoid) regulation. A critical observer might be more dubious, as Truthout’s William Rivers Pitt: they see pitchforks on the horizon, the inevitable endgame throughout history wherever and whenever economic inequality has grown so flagrantly gross. Thus, they offer this thin gruel to pretend at reform while lobbying against the public good behind walls fortified by fathomless greed and bottomless wealth. A true cynic might even see the move as a disguised revolt against activist shareholders who increasingly do their best to make corporate management slaves to quarterly targets.
On the most important level, though, it doesn’t matter whether the motivations of the BRT CEOs are pure or Machiavellian or anywhere in between. Even viewed in the most favorable light, the shift, while not insignificant, is nevertheless inadequate. The past 50 years of Friedman Doctrine in practice has permeated all facets of life on Earth to the point where the planet is at the precipice of disaster, money has so deeply influenced democratic politics as to make it quite possibly irredeemable, and the particular brutality of the system will ensure most are woefully unable to adapt to the coming tide of automation. The BRT CEOs propose doctrinal, sentimental changes with no force of law or means of meaningful implementation. The requirements of existing legal frameworks such as the business judgment rule (which, incidentally, already legally relieves CEOs of any obligation to maximize profit or shareholder value) will have enduring influence notwithstanding this change in stated sentiment. The truth is that one of the greatest risks to humanity at this dire stage is the fallacy of half-measures. It is human nature to feel like change in the right direction, albeit incremental, will produce the right ultimate result over a long enough timeline. But math is unsympathetic. It is therefore necessary that the very nature and ubiquity of the corporate vehicle must be challenged in public sentiment, alternatives capable of meeting these existential challenges identified, and the most promising placed into service.
A Macro Perspective
We count ourselves as fortunate to be alive in this age of astounding progress. The world has never been so accessible, connected, and empowered. The last two decades alone have seen the rise of the internet, mobile technology, artificial intelligence, robotics, renewable energy, and decentralized technology. Severe poverty has fallen approximately 75% in the last quarter century, which has also seen marked improvement in life expectancy, health, sustenance, peace, and other qualities of life. Yet, we find ourselves at an inflection point. The richest 1% have more wealth than the poorest 45%. Wages have stagnated in the west for 30 years while around 30% of global growth was captured by the top 1% of the population over the same period. Political institutions are broken. Representative democracy, which held the greatest promise of a functional system that worked for most people, has proven to be hackable. Most terrifying, this year we will consume 175% of the resources that the planet can recover (up from about 100% in 1970 and climbing) and we have crossed at least four of nine planetary boundaries, the transgression of which makes it ever more likely that human activities will irreversibly drive the Earth’s systems into an ever more unhospitable state, exacerbating poverty and suffering, and threatening our very survival.
AI and Automation
For present purposes, we needn’t reach the question of strong AI as an existential threat; it’s sufficient to recognize that, even before we must confront the impact that artificial general intelligence will have on mankind, automation, robotics and narrow artificial intelligence are and will continue to displace human workers at an accelerating pace. The ability of robotics and software to perform tasks once reserved for humans is no longer the stuff of science fiction and we see this in our every-day lives from the self-checkout line to self-driving cars. This trend will continue because the increased output and higher quality realized from replacing human workers with AI and robotics already yield returns between three and ten times the cost. According to some estimates, as many as 50% of workers could be replaced by AI and robotics in the next decade or so. Technology has promised to liberate us. However, this promise has thus far largely failed to materialize. It can be realized, but only if the wealth and value created are shared throughout society, including with those displaced.
We have the tools to overcome these challenges, but it is unlikely that we will stand a chance at doing so until we are willing to identify the roots of these problems and make bold, systemic changes.
A Race to the Bottom
The phenomenon of a ‘race to the bottom’ can be found across systems, especially those influenced by corporate interests. For example, studies have shown that membership in the World Trade Organization actually leads to a lower labor-rights index. Jurisdictions try to underbid one another in lowering taxes and regulation (such as labor fairness and safety standards) in order to attract corporations. And the corporations, having no allegiance to labor, offer poorer working conditions to gain short-term advantages in competitive markets. In competition generally, a race to the bottom describes the gradual elimination of all features except those that optimize for some advantage, including qualities that might otherwise be valued. Game theory tells us that a race to the bottom can endure notwithstanding all participants’ preference against it. A well-known multi-polar trap, the Prisoner’s Dilemma, showcases this well: a captured criminal gang can achieve the best outcome only if all remain silent; however, because none can be assured that the other(s) will do the same, and because each prisoner’s outcome is far worse if they are the only one who doesn’t cooperate, the likely outcome is worse for all because each will optimize for themselves. On a broader scale, the Tragedy of the Commons describes a shared-resource system where individual users, acting like the prisoners (i.e., maximizing their own uncoordinated self-interest), behave contrary to the common good and deplete or spoil a resource which otherwise would have sustained all participants indefinitely. It’s easy to see current parallels when contemplating the state of Earth’s air, oceans, and forests.
In systems where competition is sufficiently intense, values will be traded away for greater competitiveness, lest each participant be outcompeted into oblivion. Once a competitive trait is universal (or a non-competitive value is discarded), the competitors experience no greater gratification, but the value is lost forever. Again, it’s easy to identify examples in modern society. An “entrepreneur’s dilemma” popularized by Randi Zuckerberg, sister to Facebook founder, Mark, poses: of maintaining friendships, building a great company, spending time with family, staying fit, or getting sleep, you may pick three.
Of course, free-market capitalism has been a highly successful model for growth and innovation, producing cheaper and better products and services, efficient trade and broad-spectrum growth. However, certain conditions, including competition and enforcement of standards by an empowered regulator, are required to maintain the health of a “free” market. Monopolies and cartels are anathema to true free-market capitalists. An unregulated market, assuming complex products and services as today, does not actually optimize for ‘the best products at the best price’. Think carcinogens in cookware. A strong, healthy “free” market system is well-regulated and competitive. And yet, these conditions are not favored by those in the competition. Market participants selfishly optimizing want markets with no competition and no regulation and will use influence to change the system in order to achieve it. A change in theory of the Purpose of a Corporation will not counteract these forces. As Eric Posner points out, “[b]ig corporations are islands of socialism within our market economy: Their bigness protects them from competition for customers and workers. Because investors of capital benefit when product and labor markets are monopolized, CEOs are only too happy to accommodate them.” He concludes that “the only way to stop corporations from polluting, defrauding, and monopolizing is to punish them through the law.”
Voters in capitalist democracies have no real power (except for wealthy voters) and rights are contracting. The aim of a democracy ought to be the enhancement of participation — and therefore influence — of the citizenry, in quality and quantity, in sophistication and degree. Yet, a race to the bottom in a corporatist society plays out, ironically, in simultaneously undermining the free market and representative democracy, where the best interests of the citizenry are decoupled from the electability of politicians who must continuously raise money to remain in office. Studies have found that in America, ostensibly the poster child for representative democracy, the impact of the preferences of average citizens on legislation and government policy is near zero (a score of .03 out of 1), compared to the substantial impact of the preferences of the top 10% of earners (.76 out of 1). It is unlikely, therefore, that even democratic government can be relied on to implement the changes needed to solve the challenges we will face in the coming years to the extent that they conflict with the prevailing preferences of corporations and economic elites.
We know that when wealth is concentrated in the upper strata the overall health of a society declines to the detriment of all including, in the long term, economic elites. High poverty and a weak middle class depress prices and profits, stifle economic growth, increase welfare costs, increase crime and associated costs, and increase political instability, to name a few outcomes. When systems are implemented that prioritize the equitable distribution of wealth and reinvestment in society, the opposite is observed. In the post-war pre-Friedman Doctrine United States, expansion of workers’ rights, minimum wage and hour policies, public investment in infrastructure, progressive taxes, social welfare, and education programs brought about a sustained period of broadly-shared prosperity. Unfortunately, there are many reasons why the solutions of the past will not work in meeting the challenges of the future. For one, the extraction, production and consumption model that delivered progress in the 20th century came at an extraordinary ecological cost. For another, they were conceived for a time of innovation cycles measured in centuries, not decades or, as the law of accelerating returns tells us, even increasingly shorter periods. Our modern techno-civilization needs new models that comport with our increasingly digital society and are capable of keeping pace with rapid innovation.
In order to design sustainable models for the future, first some basic truths must be confronted. Economies and business models do not exist in vacuums. Rather, they form parts of greater systems where resources are mostly finite, waste accumulates, and societal well-being depends on, at a minimum, meeting the basic needs of all its members. Models for the 21st century and beyond must consider human well-being, resource conservation and waste minimization as ends which are as important as, if not prerequisites for, success in economic terms. This means maintaining the foundations of a healthy society: education, social equity, health & wellness, social connectivity & cohesion, and environmental quality, as well as innovation. These indicators must be the benchmarks of true growth, rather than GDP. Changing the dialogue to focus on these outcomes allows us to engage in a discourse about what the purpose of an economy should be, and who it should serve.
Universal Basic Income and Alternatives
The challenges facing humanity in the 21st Century are unlike those we have encountered in the past, and therefore call for radical, 21st Century solutions. Although not new in principle, one option being explored by a growing number of thought leaders as a means to offset the decreased opportunity that will undoubtedly result from automation and artificial intelligence is a universal basic income. The concept of a universal basic income is rooted not only in fairness and equity — recognizing that individuals ought not bear the full burden for the lack of opportunity in an economic system — but also as a device for improving the outlook and opportunities of those experiencing economic instability. In fact, when freed from the risk of failing to pay rent or feed a family, recipients are far more likely to take steps to improve their own condition, such as starting a business or pursuing higher education. There are pilots of basic income experiments running in various places, and early results are promising; however, there is a related program that we can look to for indications of success: direct giving.
A variety of sources have been suggested for funding such a program, including taxes levied on the firms displacing human workers and multinational tax avoiders, but there is another logical source: resources of the commons. Commons resources are defined to varying degrees under different sociopolitical systems across a spectrum; however, the term has been applied to the broadcast spectrum, land, water, air, minerals, knowledge and, more recently, digital commons. The internet itself is a digital commons. Wikis, free and open-source software repos, and the creative commons are also examples with varying attributes along the spectrum.
Alternative Organizations
There are a variety of organizational structures that are better suited than the conventional corporation to humanity’s future needs. Generally, they attempt to remedy certain failings of conventional governance, seek broader stakeholder inclusion, and include a commitment to a mission that is as important to the organization, if not more important, than profit making.
Benefit Companies
These are companies with various legal structures that “balance purpose and profit [and] are legally required to consider the impact of their decisions on their workers, customers, suppliers, community, and the environment.” For example, Patagonia, an outdoor apparel supplier with annual revenues around a billion dollars, proudly proclaims, “we’re in business to save our home planet”. Patagonia’s core values include seeking to build the best products while limiting ecological impacts and using their business and resources to protect nature. And they have lived up to these values, committing 1% of gross sales revenue to environmental protection initiatives, redirecting its ten million dollar tax cut windfall to grassroots environmental activism, fighting to protect national monuments, and many other initiatives. As it turns out, Patagonia’s dedication to its mission has also been very good for business.
Cooperatives
Cooperatives are owned and democratically managed by workers, customers, or the community. According to writer Robert R. Raymond, “in allowing workers to share in the profits that they themselves generate, as well as giving them a say in the decisions that shape their work life, worker cooperatives bring democracy into a realm of life where it is normally absent. Moreover, according to a recent paper by economist Virginie Pérotin, worker cooperatives actually tend to be more productive, longer lasting and more efficient than traditional capitalist firms.” But while co-ops do put capital to work for labor, they are not immune from other failings of conventional corporations if they do not also make commitments to community. An example of an effective co-op model is Equal Exchange, one of the largest democratic worker cooperatives in the US, which also has a mission to “build long-term trade partnerships that are economically just and environmentally sound.”
Not-for-Profit and Capped Profit Companies
Not-for-profit structures should not be ignored. Some undertakings are best kept separate from profit-making altogether. Nevertheless, these organizations can thrive, employ many people, and contribute in numerous ways from advancement in technology to academia. But some of these endeavors require large investment which may not be obtainable without providing a return. For example, OpenAI recently migrated some of its efforts from not-for-profit to capped profit company. This move was not met without some deserved criticism; however, if managed properly, the capped profit structure under a non-profit umbrella can prove an attractive option under the right circumstances.
Decentralized Autonomous Organizations (DAOs)
A DAO is a set of rules preprogrammed in code. It functions autonomously but is coordinated by stakeholders through a consensus protocol. Some blockchain and cryptocurrency projects, like Dash, can be considered DAOs. DAOs are experimental, and, because rules are hard coded in pure DAOs, they are not without certain risks. More data is being generated on DAOs through successes and failures, but to some extent the jury is still out on the right situations and levels of full automation for success.
Foundations
Some jurisdictions, like the Cayman Islands, provide for highly-flexible foundation structures, including permitting beneficiaries to hold interests and maintain the right and participate in governance. Structured properly, the foundation company can form the basis of a highly inclusive and participatory association that has no owners, where assets are held for the benefit of a broad base of members, value created is equitably shared, and governance is distributed among all stakeholders.
What We’re Doing at AVA
At AVA, we’re adopting a revolutionary approach to association, value sharing, and inclusion.
We believe that real change, on the order necessary to combat climate change, restore economic equality, and prepare humanity for the change AI and automation will bring, can only be achieved by fundamentally adapting the core functions of organizations, including how they’re structured and governed, and who they serve by their very nature. The AVA Foundation blends many of the best constructs of Benefit Companies, Cooperatives, Non-Profits, and DAOs. We start with the principal that value generated should be shared equitably with all participants, and, importantly, also with charitable organizations that are experienced in and dedicated to, among other philanthropic endeavors, protection of the environment and the vulnerable. The latter is achieved by seamlessly incorporating charitable giving as a foundational principle, rather than an afterthought. Community members are empowered to earn while improving themselves, their communities, and the planet. AVA Foundation’s assets are held as a digital commons on behalf of its community. While not a universal basic income, our goal is for the value generated in the AVA ecosystem to be available as a supplement or, at maturity, an alternative.
Under the umbrella of community-controlled foundation governed as a technological commonwealth, all of AVA’s stakeholders are afforded an equitable voice through decentralized authority and distributed influence. Incorporating features of DAOs, AVA Foundation employs a digital voting system with relative voting power based on unique contributions to the collective mission, preventing centralization of authority & influence by members and groups.
At scale, we believe the AVA platform can enable meaningful improvement in the lives of individuals and communities while supporting solutions to the world’s most pressing challenges. We’ll be releasing more details about the AVA Foundation, its model, and governance soon. In the meantime, visit our website and sign up for updates.
Why We Must Not Wait
Importantly, unlike government programs like universal basic income, we needn’t wait for an immobile political apparatus to act; we can do this now, together. We needn’t wait for the tech giants to manifest a conscience and change their business models. We needn’t wait for captured regulators, like those who think that free market forces in a monopolized broadband market will deliver a freer, more open internet. We have the technology, motive, and means, and we must act.
And the fact is that we cannot wait. We have already waited too long. We can show the world how community can organize for the benefit of all. We can be the test case that catalyzes change. We invite you to join us.
