A New Form Of Business Entity That Will Stop Companies From Behaving Badly
By David Grace (www.DavidGraceAuthor.com)
The Battle: Bad Business Behavior Vs. Expensive & Inefficient Gov’t Regulations
The conflict between Business Behaving Badly and expensive, slow and inefficient government bureaucracy created to curb that bad conduct is a bedrock problem in all industrialized societies.
Deterring Executives From Bad Conduct
In my post “Another Strategy To Avoid More Government Bureaucracy–Breaking The Cycle That Drives Government Regulations”
I suggested some penalties that could be imposed on executives to discourage them from leading their companies into abusive and sometimes illegal behavior.
In a second post on this topic, “Discouraging Big Businesses From Behaving Badly Without New Major Gov’t Regulations” I suggested further tactics that might also deter executives from indulging in bad corporate behavior in the first place.
Taking Some Of The Pain Out Of Dealing With Gov’t Regulations
Lastly, in my post, “Could This Be The New Trillion Dollar Product That Vastly Reduces Bureaucracy?” I suggested a new software system that might ameliorate the pain of dealing with the government bureaucracy that bad business behavior incites.
A Better Answer–Remove The Incentive For The Bad Behavior In The First Place
But, beyond punishing executives for “bad behavior” and lessening the pain of dealing with the regulations that bad business behavior spawns, there’s an even better solution, namely, removing executives’ motivation to engage in bad behavior in the first place.
Get rid of the incentive to engage in bad behavior and you get rid of (1) the bad behavior itself and (2) the demand for any new government rules and regulations at all.
Is There A Non-governmental Solution To Businesses Acting Badly? — Yes.
The financial meltdown of 2008 illustrates the power that a producer, leastwise an industry, has to wreck massive harm.
Simply trusting that all businesses will behave properly under the notion that they will naturally act in their prudent, long-term, intelligent, and reasonable self interest is a fool’s game.
On the other hand, attempting to codify and then enforce a comprehensive series of rules that will address and prevent every conceivable abusive act is similarly impossible, not to mention that the cost and friction of administering and enforcing massive regulations across thousands or hundreds of thousands of companies is huge.
And don’t even think about the socialist solution — “Let the government run the companies.” That’s like curing a headache by cutting off the patient’s head. Total disaster.
But there is another strategy for dealing with this inherent conflict between abusive business behavior and the costs and friction of establishing a massive bureaucracy to prevent or limit it.
What Motivates People — Money, Power, and Emotion
People and the organizations they control are energized by a three basic human drives: money, power and emotion.
Corporations want higher profits which are most easily earned through higher prices, lower quality and lower wages. If only one company in ten or in twenty resorts to the kinds of conduct we’ve seen from Mylen, Volkswagen, Wells Fargo, British Petroleum, etc. etc. etc. vast harm is done.
Problems, waste, and cost are inevitable when the lust for money or power pushes business entities in one direction while customers who suffer from those abusive or illegal tactics act through the government to push in the other.
The Inherent Conflict Between Investor Controlled Companies & Their Customers
This basic conflict exists between producers and customers because of the conflicting desires of each camp. Profit-driven producers naturally strive for lower costs and higher prices while customers want just the opposite — higher quality and lower prices. In a theoretical, pure state of free-market competition, quality can increase while prices drop but we do not live in that theoretical world as numerous examples of bad business behavior in many different industries proves.
This conflict between the desires of the producers and the desires of the customers disappears, however, if you change the form of the business organization that delivers the products.
Today, most businesses are structured as entities designed to make a profit for their owners. Founders create a production entity whose sole purpose is make as much money as possible as fast as possible for those founders, their executives and their investors.
It’s an economic model that in one form or another dates back hundreds of years.
But that’s not the only possible legal structure for a production entity.
A New, Capitalist Business Structure Where Success Is Not Measured By Profit
An entity that possesses the benefits of a for-profit corporation without its detriments is a Customer Controlled Company — a CCC.
A CCC is a privately financed, independent, capitalist entity. It competes in the marketplace for market share. In fact, it thrives on competition. The key difference between a CCC and an Investor Controlled Company (an ICC) is that the ICC’s basic drive is to lower costs and increase prices while the CCC’s basic drive is exactly the opposite, to lower prices and increase quality.
The CCC doesn’t need laws to keep it from producing shoddy or dangerous products because it does not answer to investors who want cheaper products and higher profits. Instead it answers to its customers who want just the opposite of what an ICC’s owners want. The CCC’s constituency wants better products and lower prices.
An Investor Controlled Company Vs. A Customer Controlled Company
The ICC business structure creates an inherent conflict between the producer and the customer whereas a CCC creates an inherent alliance between the producer and the customer.
The ICC’s conflict between the producer and the customer almost guarantees conduct by some companies that their customers will feel is abusive, unfair or overreaching, and that bad conduct will drive demands for more government laws, rules and regulations.
Because the CCC answers directly to its customers, the interests of the company and those of its customers are aligned. A CCC is not interested in increasing profits, or in making any profits at all. The prime goal of a CCC’s management is pleasing its customers which means delivering higher quality products at lower prices.
It’s All About How A Company Measures Success
The metrics used to measure an ICC’s success and which govern the compensation of its executives are short-term profits and the short-term stock price.
The metric used to measure a CCC’s success and which drives the compensation of its executives is customer satisfaction with the company’s products and services.
In an ICC, human nature works against the customer and in favor of potentially abusive conduct that may eventually spur the enactment of some level of government bureaucracy.
In a CCC human nature works in favor of the customer, thus eliminating the customers’ incentive to demand government action in the first place.
I can image a scenario where government regulations might even be drafted to apply only to an ICC and not to a CCC because the CCC’s management structure would be deemed to itself protect the CCC’s customers from the need for the protections afforded by those regulations.
How A CCC Would Work
In my post “A New Form Of Business Organization–Replacing The Public Corporation With A Customer Controlled Company” I lay out the details on how a CCC would be created, funded, structured, managed and governed. I also discuss a mechanism for converting an existing ICC into a CCC.
Funding A CCC
One of the funding methods I outline in the above post is a new financial instrument I call a “Profit Participation Instrument” — a PPI. In my post, “A New Financial Instrument — Not Debt — Not Equity. A Different Form Of Investment Product” I describe how a PPI would work and how it could be sold on a public market to raise capital for a Customer Controlled Company in a manner similar how shares of stock are sold on a public market to raise capital for an Investor Controlled Company.
Capitalism Without Excessive Regulation Is Possible
My point is that we can have responsible, private, competitive, capitalist business entities that are not motivated to act badly but rather that are motivated to act beneficially, to act in ways that benefit both their customers and the public at large.
We can do this without resorting to socialist schemes or abandoning the principles of competition and the free market. In fact, we can do this in a way that strengthens the ideals of free market economics, capitalism, and better products through vigorous market competition.
But to do that, we need to abandon the inherently toxic structure of the Investor Controlled Company and move on to the next evolutionary step in business organization, the Customer Controlled Company.
– David Grace (www.DavidGraceAuthor.com)
