Fix Corporate Misbehavior By Giving Control To Customers Instead Of Investors
Replace Investor Controlled Companies With Customer Controlled Companies
By David Grace (www.DavidGraceAuthor.com)
When confronted with a problem, people sometimes foolishly choose an extreme response.
Communism Is An Extreme Response To The Abuses Of Capitalist Businesses
The fact that large corporations will be as abusive in the pursuit of maximum profits as the executives think they can get away with doesn’t mean that the smart response is to create a system that does away with all privately owned businesses. There are simpler, more efficient and more effective solutions to corporate misbehavior.
Piecemeal Fixes
In May of 2019 I wrote a column offering some ideas on how to reduce the abuses practiced by large corporations:
Seven Ways To Fix Capitalism. Like Any Other Powerful Tool That Is Misused, Uncontrolled Capitalism Will Cause Its Own Demise
While helpful, to some degree this approach is like applying bandages, splints and casts to a trauma patient. It will fix some of the damage, but it won’t prevent people from being injured in the first place.
Cure The Disease Instead Of Treating The Symptoms
A better response to business abuses is to understand what motivates corporations to act in ways that are harmful to customers, employees and the public and then eliminate management’s motivation for that disliked conduct.
It’s A Mistake To Assume That Businesses Always Must Be Run By Investors
From the earliest days, businesses were formed by investors as a way to make money.
The first erroneous assumption that almost everyone makes is that a company must be investor funded, investor owned and investor operated.
Investors always want more money. When a company’s overriding goal, its prime directive, is more money it is inevitable that at some point the entity is going to pursue higher profits through higher prices, lower materials’ costs, lower wages, more fees, lower levels of customer support, less concern for safety and the environment, etc.
All those behaviors are baked into the Investor Controlled Company (ICC) business structure. To eliminate the constant pursuit of more profits you have to eliminate investors as the owners and operators of the company.
In fact, you can have companies that are not owned by or controlled by investors.
Investor Controlled Companies Are Always Going To Act Contrary To The Interests Of Customers
So, if ICCs are by their very nature inevitably going to pursue more money which leads to behavior that is contrary to the interests of customers and employees then what we need to do is create companies that aren’t ICCs at all, but rather are controlled by people whose overriding desire is not to earn more profits.
A Company That Will Act In Ways That Benefit Customers Is One That Is Controlled By Customers
- Investors want higher prices. A company’s customers want lower prices.
- Investors want higher fees. Customers want lower fees.
- Investors want cheaper materials and shorter warranties. Customers want higher quality materials and longer warranties.
At almost every point, customers want a company to operate exactly the opposite of the way that investors want a company to operate.
The solution to the problem of corporate behavior that is beneficial to investors and is detrimental to customers is to replace Investor Controlled Companies (ICCs) with Customer Controlled Companies, CCCs.
But, you ask, how is that possible?
You Don’t Need To Give Investors Control Of A Company In Order To Raise Capital
To start a company you need venture capital, risk investment. To get risk capital people wrongly assume that you have to give investors ownership shares in the company.
But you don’t.
The first mistaken assumption is that all businesses must be controlled by investors when, in fact, companies can be controlled by customers.
The second mistaken assumption is that people will only invest risk capital in exchange for equity participation in the company.
In fact, there are several other possible investment instruments that do not grant an ownership interest in the company to the investors.
Raise Capital By Selling A Security That Has A Fixed Repurchase Price
For example, investment units might have a fixed repurchase price of some amount. The company would be obligated to dedicate some percentage of its cash flow, e.g. 50%, to the repurchase of these units with payments to continue until the investors have received the full agreed-upon repurchase price plus interest at the consumer price index rate over the ownership period.
The higher the risk of a long repurchase period the lower the market purchase price for each unit.
The more money the company made, the faster the units would be repurchased.
As a protective measure, the purchasers could be granted a veto power over certain of the company’s actions until the entire repurchase price was paid.
Raise Capital By Selling A Security That Pays A Percentage Of The Purchase Price Every Year
As another variation, a CCC could issue non-voting units with a guaranteed payment of a percentage of the instrument’s purchase price per year for a set number of years with any year’s payment shortfall to roll over to the following year with payments to continue until such time as the investor received some specified multiple of his/her original investment plus interest equal to the consumer price index over that period of time.
When that amount had been paid the instrument would automatically expire.
Raise Capital By Selling A Security That Pays A Percentage Of Profits For A Set Period Of Years
Another type of investment security could be a Profit Participation Instrument (PPI).
At the time of offer, the company would specify the number of PPIs being sold and the number of years that the specified percentage of profit (very carefully defined) would be distributed pro rata among the PPI holders.
For example, suppose that 1,000,000 PPI shares were issued with a payback rate of 80% of profits over the time frame of six fiscal years following the PPI issuance. The market would then set the purchase price per PPI share.
For a detailed explanation about how a PPI would work, see my column:
A New Financial Instrument — Not Debt — Not Equity. A Different Form Of Investment Product.
All these mechanisms, a repurchase of the investment instrument at some multiple of the purchase price or a right to a share of the profits for a set period of time, would be securities that the company could offer to investors that would be tradable on the public market but which would not provide the purchaser with any equity interest or voting rights in the company.
Other Security Instruments That Do Not Grant Equity Participation
There are, I’m sure, several other types of commercial instruments based on sales or profits that could be designed and issued by companies that would not grant the investors long term control of the company.
Also, a CCC could pursue funding from customers, debt funding, founder funding and crowd-sourced funding.
A CCC Is Controlled By Its Customers
Instead of investors, the primary control of a CCC would reside in its customers at the rate of 1 vote for every dollar of product purchased over the twelve month period immediately preceding the date of the vote to elect management.
Since the managers’ constituents would be the company’s customers who want lower prices, higher quality and better service, managers who wished to retain their positions would work toward those goals rather than the higher profits and higher stock prices that ICC directors elected by investors would pursue.
More Details On How A CCC Would Work
For a more in-depth discussion on how a CCC would work, see my column:
A New Form Of Business Organization. Replacing The Public Corporation With A Customer Controlled Company
Summary
Instead of trying to stop anti-consumer conduct by public corporations with endless laws, regulations, lawsuits and court proceedings, a more effective solution would be to take away the incentive for that bad conduct by installing management that is answerable to the company’s customers instead of to its investors.
–David Grace (www.DavidGraceAuthor.com)
