The Corporate Form of Organization Is Nearing the End of Its Useful Life

Corporations have become the primary organizational form for business. It’s hard for us to conceive of alternative forms of economic organization that are not socialist, or collectivist, or government or political parties. What would an economy without corporations look like? A network of independent entrepreneurs? Or a swarm of project teams constantly interacting and interconnecting as needed to complete their projects? Or a collection of non-profit entities organized for a different purpose than the one pursued by corporations. We can’t know because it is not granted to us to see the future from our perch in history, which is frozen behind us and can’t be mined for insights into which of many possible futures might emerge.

What we can determine, however, is that the current form of corporate organization of business is exhibiting the signs of decline and entropy which can quickly open up opportunities for alternatives. Here is a partial list.

Losing support of customers.

In a recent book, Aberrant Capitalism, which I co-authored with Steve Denning, who is a research expert who has delved deeply into long term analysis of corporate behavior and corporate structure, we observe that young people are becoming critical of capitalism. In a recent Pew Research survey, only a minority of 18-29 year olds were willing to express a positive attitude towards capitalism. Corporations are the primary protagonists of modern capitalism - we employ the term Corporate Capitalism in the book - and it turns out that young people are critics of corporations more than they are critics of the economic system we call capitalism. They criticize how corporations distribute rewards to employees, managers, and shareholders. How corporations dehumanize work. How corporations produce waste and environmental degradation. How corporations create antagonistic relationships with customers through tracking and surveillance, and interrupt and annoy their customers with advertising.

Young people are the customers of capitalism. The economic system should produce greater and more widely distributed feelings of well-being. When your customers are critical of your behavior, there’s something fundamentally wrong.

Confusing the purposes of production

It’s well-established that the purpose of business is to create value for customers. Value lies in customer experiences that are evaluated highly by them - what economists call subjective value. The customer’s search for value – better experiences – is the energy of civilization. A firm that generates or facilitates greater value for customers will receive the rewards of the marketplace, especially in the form of revenues that reflect customer delight in being able to pay for experiences they enjoy. From this cash flow, firms can generate profit, dividends, reinvestment in research and development and all the functions of business health.?

When corporations adopt the purpose of maximizing what they refer to as shareholder value, which has become the driver of business activity and business performance assessment, they are abandoning the customer. Of course, firms must still generate revenues, but customer well-being is no longer the sole or primary purpose. Many aspects of the customer relationship (such as front-line customer care for tech corporations) are viewed as costs rather than as aspects of customer experience value. The corporate mindset has shifted. They’re confused about their purpose.

Creating dysfunctional systems

Systems work well when there is harmonized effort towards a shared purpose. Often, corporate organization and processes result in disharmony. The recent debacle at Google concerning its Gemini A.I. image generation technology is a case in point. The software engineers building the A.I. capability were aiming to fulfill Google’s mission of organizing the world’s information in a new, high value manner, enabling customers with new functionality. The DEI team within Google were aiming in a different place, to interpret the information not on a functional assessment but on a political one, to avoid transgressing what they saw as new social norms regarding communication that involves questions of race. There was disharmony of effort between the teams, that spilled over into the marketplace as a value-destructive experience for customers. The organizational structure and its clashing authorities proved to be dysfunctional for the value creation process.

This is not necessarily unusual for corporations and may in fact be the norm. Whenever feedback from the market is compromised - in the sense of understanding what customers want and need - then non-market influences will prevail. This is corporate failure, and may sometimes precede corporate death.

Concentrating power

Corporations are concentrations of power in a world and a time that is discovering the importance of decentralization, openness and free flow of information and knowledge. Centralization is an old-fashioned idea associated with the worst of human history: totalitarianism, monarchy, empire, command-and-control. Twentieth century corporations evolved into monuments to centralization, with their strategic planning regimes, hierarchical management structures, and rigid budget controls. Many of them demonstrated the errors of centralization when they proved unable to keep pace with changes in markets; they were too slow to respond, and agile innovators passed them by. Companies like IBM and GE, despite, or maybe because of, their super-sophisticated central planning units, conceded market share and influence to faster paced, more entrepreneurial firms. The newcomers were called disruptive, because they disturbed the sense of order and predictability that the planners had falsely claimed to be able to deliver.

Concentrated power is always challenged by the speed of change, and that speed is accelerating today. If corporations can’t keep up, they’ll be replaced.

Subservience to financial markets

Financial markets do not have the same goals as economic markets. The finance sector does not produce, rather it trades on derivatives of production, whether those are stocks and bonds or commercial loans or the esoterica of options and puts and calls. In Aberrant Capitalism, we use data from both the IMF and the World Bank to show that the growth of the financial sector of the economy is a drag on the growth of the productive sector. Corporations have a submissive attitude to financial markets; for example, the requirement for reporting of quarterly earnings and for a consistent and predictable rise in those earnings comes from institutional investors and runs contrary to the normal ebb and flow of results from exploratory and uncertain investments in new capital and innovation. Consequently, spending on long term uncertain R&D and innovation projects is discouraged, and corporations focus on building moats and defending market share.?

Entanglement with government

The very concept of free market capitalism - or Customer Capitalism - is based on an economic structure in which corporate activity is strictly separated from government. In this model, corporate activity to serve markets precedes the taxation that government levies on profits in order to redistribute the rewards of the market as they see fit. Those days are long gone. Corporations are entangled with government before the act of value creation, not after it. Entanglement extends from lobbying to create new regulations and legislation that corporations think will be favorable to them in restricting free market competition, to participation in government contracts (for national defense, for surveillance systems, for IT and cloud computing systems, for infrastructure projects, etc). At least 36% of GDP (Bureau of Economic Analysis Q3 2023) is reportedly accounted for by government, either as direct spending or contracted spending, and it may be as much as half. Whatever the accurate number, the degree of entanglement of corporations with government is increasing not decreasing, to the detriment of the market economy, and therefore to the detriment of consumers. The entire corporate tax code is an entanglement.

Corporations have served consumers and the nation well over time, but they are turning away from us.

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