The case for reconsidering the nature of the corporation
There is a strong and growing ambition to reconsider and reinterpret the nature of the corporation, especially in terms of enabling better alignment between business and public interests. History tells us there is nothing radical in this and demonstrates that it has been commonplace in many manifestations of the corporate form[1].
Tensions caused by technology and evolving corporate forms are not new either. Technology is once again the driving force behind the need for an evolution in the corporate form. Increasing technological change is pushing corporations to adapt business models and management practices in order to survive. But institutions and regulations are adapting too slowly and the situation calls for a robust new framework for business that recognises the importance of both corporate and public interests[2].
A basis in history for corporate purpose
Throughout its 4,000-year history from the Code of Hammurabi in Babylonia, through the Roman Republic to the East India Company and the Industrial Revolution, business enterprise has been motivated by a strong element of public purpose.[3] The corporation was established In Roman Law to perform public functions of minting coins, collecting taxes, looking after public buildings and undertaking public works. It was then used in the governance of municipalities in Europe, the creation of the first universities and the establishment of the Roman Catholic Church.
The corporation was also the basis of the emergence of the merchant trading companies, most notably the East India Company, and then the companies that built the railroads and canals. With freedom of incorporation in the 19th century came the private company, which was the backbone of the rise of manufacturing industry, service companies and transnational corporations.
It is only over the last 60 years that the drive to equate corporate purpose with increasing profit has become so acute. This has resulted from the emergence of markets in corporate control — the takeover market — in the 1950s and more recently hedge fund activism. It was encapsulated in what became the conventional conceptualisation of the corporation in modern times — the Friedman Doctrine, as first described in Milton Friedman’s book Capitalism and Freedom in 1962 — that “the one and only social responsibility of business is to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game”[4]. It is the basis of business education and practice and the formulation of laws and regulation towards business around the world.
The reason why this happened was the changing nature of ownership of corporations that occurred through the 20th century and the consequence of this for their governance. After freedom of incorporation was first introduced in the 19th century, families and founders were initially the owners of predominantly private companies. However, during the first half of the 20th century ownership became increasingly dispersed in the hands of first individual and then institutional shareholders, such as life insurance companies, pension funds and mutual funds.
This created a problem of the separation of ownership of companies from their management and the concern described by Berle and Means that large corporations were increasingly being run by management that was accountable to no one. [5] The response was a focus on how to align the interests of management with those of shareholders through incentives and markets for corporate control.
It is at this point that our research suggests the nature of the corporation erred.[6] While it was right to be concerned about the lack of accountability of management, it was wrong to see its resolution in control by one party to the firm. The reason why this happened was that the rights of shareholders were equated with the property rights of owners. Shareholders bore the risks and rewards of the success and failure of business and so had corresponding rights to control it.
But shareholders are not in many cases owners in any meaningful sense of the word and do not aspire to act as owners. This misconception and preoccupation with one single party to the firm rather than a wider constituency has been the cause of mounting environmental concerns, social tensions and political backlash. These have become particularly acute since the 2007–8 Financial Crisis, as many of the defects of the conventional wisdom were laid bare.
The case for change does not only come from looking backwards at the origins of the corporation and its original foundation in public purpose, but more significantly from looking forward to the forces that are shaping the corporation of the future.
Accelerating and disruptive technological change
Disruptive innovation has always been part of the corporate landscape. [7] The Industrial Revolution marked the demise of many institutions, corporate structures, labour practices, social and political norms and laws, but the birth of others. That continuing process of renewal raises complex and inter-linked economic, social and political questions.[8]
Technological innovation has, in large part, driven globalisation, prompting growing tensions between digitally skilled, location-agnostic commercial corporations and the constraints of nation-based political and legal systems.[9] More specifically, the digital age is bypassing traditional authorities and changing the world of work[10]. Smart technologies are global, networked, intuitive, learning and automated. They rely heavily on trust and trustworthiness of all participants and transform how people and corporations relate to each other. Amongst the most disruptive innovations are artificial intelligence (AI), blockchain, quantum computing and 3D printing, but there are others not yet formed or publicised.[11] Such technologies, many based on data mining and manipulation, are already impacting economic activity, from new ‘clean’ energy to personal communications, medicine and bio-engineering.[12]
Recent analysis suggests that technological innovation may increase incremental profits for first movers, but also reduce innovation incentives for laggards. [13] What is already clear is that the world’s highest value corporations are based around digital ecosystems. [14] Cloud-based, platform businesses rely on global networks of connectivity of both producers and consumers, rather than the single-location, hierarchical, linear structures of the past. The CEOs and board members of the future may have to be as adept at the selection of high-quality algorithms as they are at the management of staff.
The rate of technological change appears to be increasing over time and becoming less predictable[15]. The pace of change exceeds the ability of policy makers and regulators to respond to it. Instead business itself needs to be better placed to manage it with a greater clarity of purpose and an enabling culture to accommodate it.
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[1] Davoudi, L., McKenna, C. and Olegario, R. (2018) The Historical Role of the Corporation in Society. British Academy (FOTC Paper 1)
[2] Buckley, P. (2018) Can Corporations contribute directly to society or only through regulated behaviour? British Academy (FOTC Paper 13)
[3] This section primarily summarises findings from Davoudi, L., McKenna, C. and Olegario, R. (2018) The Historical Role of the Corporation in Society. British Academy (FOTC Paper 1). Any assertions or findings presented which are more specific are referenced separately.
[4] Friedman, M. (1962) Capitalism and Freedom, The University of Chicago Press
[5] Berle, A. and Means, G. (1932), The Modern Corporation and Private Property, New York: Harcourt, Brace & World
[6] Davoudi, L., McKenna, C. and Olegario, R. (2018) The Historical Role of the Corporation in Society. British Academy (FOTC Paper 1)
[7] ‘Disruptive innovation’ was coined by Bower, J. L. & Christensen, C. M. (1995), Disruptive Technologies: Catching the Wave, Harvard Business Review, January–February 1995
[8] This section primarily references Armour, J., Enriques, L., Ezrachi, A., Vella, A. (2018) Regulation and Law: The Role of Corporate, Competition and Tax Law. British Academy. (FOTC Paper 10), Birkinshaw, J. (2018) How is Technological Change Affecting the Nature of the Corporation? British Academy (FOTC Paper 8) and Belenzon, S., Hamdani, A., Kandel, E., Hashai, N., Yafeh, Y. (2018) Technological Progress and the Future of the Corporation. British Academy (FOTC Paper 7). Any assertions or findings presented which are more specific are referenced separately.
[9] Belenzon, S., Hamdani, A., Kandel, E., Hashai, N., Yafeh, Y. (2018) Technological Progress and the Future of the Corporation. British Academy (FOTC Paper 7)
[10] The British Academy and The Royal Society (2018) The impact of artificial intelligence on work
[11] Belenzon, S., Hamdani, A., Kandel, E., Hashai, N., Yafeh, Y. (2018) Technological Progress and the Future of the Corporation. British Academy (FOTC Paper 7) p4
[12] Ibid, p12
[13] Armour, J., Enriques, L., Ezrachi, A., Vella, A. (2018) Regulation and Law: The Role of Corporate, Competition and Tax Law. British Academy. (FOTC Paper 10) p3
[14] Birkinshaw, J. (2018) How is Technological Change Affecting the Nature of the Corporation? British Academy (FOTC Paper 8)
[15] Belenzon, S., Hamdani, A., Kandel, E., Hashai, N., Yafeh, Y. (2018) Technological Progress and the Future of the Corporation. British Academy (FOTC Paper 7)
