12 October 2011

California Invents a New Kind of Corporation

Here's a bit of social invention that's worth mentioning. (Thank you @Tisiwoota at Twitter for pointing me to this.)

California became the first state to legalize a Flexible Purpose Corporation and the sixth to enable the creation of a Benefit Corporation. There's a great summary by Kyle Westaway here.

Put simply, a Benefit Corporation does not have to primarily serve shareholders but can choose to balance returns to shareholders with other stakeholders, such as employees, customers, and the environment. The Flexible Purpose Corporation actually articulates a purpose or mission in its charter. It might, for instance, have a purpose of employing the poor.

We rightfully laud computers, smart phones, cars ... and tend to forget that they were enabled by an earlier social invention called the corporation. One can hardly imagine what will emerge from these new types of corporations that have even more autonomy to create what makes sense.

Why is this so cool? It will free up communities to use one of the most powerful social inventions ever (the corporation) without being bound to profit maximization. I explain it more here in an excerpt from my book, The Fourth Economy.

After the nation-state emerged as more powerful than the church, it took centuries for it to let go of the idea that its goal was the same as that of the church. The nation-state got its power from control over land, the first economy’s limit to progress. Yet for the longest time, monarchs thought it their obligation to also look after the souls of their citizenry. It would have seemed irresponsible not to. “Bloody” Mary used violence to move England towards Catholicism, and her younger sister Elizabeth used violence to move it back towards Anglicanism.
Once the nation-state became a tool for improving one’s condition in this life and not the next, once rulers gave up on dictating religion, a great deal of grief was avoided and a great deal of good could be done.
It’s probably not surprising that the newly dominant institution would think it should prove itself by meeting the goals of the previously dominant institution. Those goals become so intertwined through all of society that legitimacy depends on at least acknowledging those old goals. It is hard to imagine a Renaissance king dismissing religion as unimportant for policy, saying that he would focus on GDP growth instead, for instance. (For one thing, GDP is a measure we didn’t even have until about a century ago.)
So as the corporation emerged to compete with the bank as the most powerful institution in the West, it adopted the goals of the bank. That is, it saw its purpose as profit.
On the surface, this hardly seems problematic. It is, you might say, a fact of life. But as John Abramson points out, the purpose of pharmaceutical companies is not to maximize the health of Americans; it is, instead, to maximize profits. This is problematic. He cites a World Health Organization study that ranks the US health 15th overall in the world, a ranking that drops to 37th if that ranking adjusts for per person spending on healthcare.[1] This in spite of the fact that US healthcare costs per person are double that of any other developed nation. Maximizing profits does not automatically maximize health.
The former management gurus Peter Drucker and Russell Ackoff both have claimed that profit is to a corporation what oxygen is to a person: vital but by no means its purpose. Companies have to make profit but they don’t have to subordinate everything to it.
Robert Beyster, a man who helped to create billions in wealth, wrote that profit was a clear goal for the divisions within his company SAIC, but the goal was not profit maximization. He acknowledges that being privately held by employees exempted them from many of the pressures that publicly held companies feel to subordinate everything else to profits. (And curiously, SAIC’s performance with such an approach was such that any investor would have been lucky to hold its stock. More on this later.)
To make explicit that something other than profits should direct corporate behavior is to suggest that corporations have to define the kind of life they are trying to create for customers, investors, employees, and their community. This is – it seems – a fairly interesting starting point for any corporation.  It suggests that the corporation will more explicitly become a tool for helping the individual to create the life of his own choosing – even if that individual is not a CEO.

[1] John Abramson, MD., Overdosed America: The Broken Promise of American Medicine (HarperCollins, New York, NY, 2004) 46.

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