I don’t believe this idea that a firm exists to maximize shareholder returns. If the entire economy was structured on that principle, the world would be dominated by exploitative, rent-seeking organizations even more than it is.
The reason for a firm to exist, primarily and sufficiently, is to produce goods and services that are needed or desirable in the world. There are several ways of judging and directing the firm according to this principle.
- The market is a very good indicator of what the world needs or wants, especially when it comes to the detailed and diverse wishes of individuals. It’s not sufficient, and certainly not right by definition, because the market is prone to manipulation, irrationality, and social injustice making the difference between true wishes and buying power.
- Critical opinion, commentary, or goodwill towards a firm and its activities. It’s no accident that quality consumer goods firms are held in higher regard than most banks.
- An objective analysis of the firm’s product and activities with respect to life, well-being, human fulfillment, and the environment.
- Policy. Companies need to be comissioned to create large-scale infrastructure where the market would yield lower-investment, higher use cost solutions
A second reason for a firm to exist is to provide comfortable and fulfilling employment to the people directly involved in the firm. Balance is the measure here. The firm is not a vehicle to get rich, nor is crushing, subsistence-level employment a goal.
Work should be fulfilling. Employees need to be empowered and feel free for that to be true. The interests of the firm and of customers should be seen as collective interests, and beyond this there is no virtue in austerity or self-denial at work. Fulfilment through life is just as important. Retirement isn’t a goal, but rather people should get fulfillment through work till the end of their life. Work should be fulfilling at 20 or at 80, but easier at 80. The character of work may need to change for this to be possible.
I believe a firm should be very selective about its team, and include only those who are needed for its activities and fulfil its ethos. Being lax about personnel turns the firm into a social burden. Having said that, a firm can accommodate more and less ambitious, young and old staff. A large firm is socially obliged to do so. Between them, firms need to provide income for life, although people may have to move to new firms when society’s needs and industries change. Such change is good, and resisting it is placing a burden on society.
Within the firm, compensation should scale much less than the difference in individual contribution, in effect being redistributive. Higher pay is a mark of recognition and compensation for greater commitment. It’s not a reward, and a business shouldn’t attract hose who see it as a reward. The reward for success is the power to use more of the company’s resources to achieve great things.
I believe a firm has to compete. It is essential as a form of discipline. Competition between firms is obviously in the interests of customers and everyone outside the firm. The best firms are good at taking competitive pressure early, informing everything they do. Lesser firms have to adjust to competitive shocks, or sometimes fail.
Competition is good for the firm too, and for its people. It provides an argument of the last word that can push aside inflexible thinking and bring in more relevant, more fulfilling production. Competition is good for people, physically. We evolved to better ourselves and to reach the peak of our abilities, in a constructive environment. We need competition, and find good competition thrilling.
A firm has to generate a surplus. If it makes a recurrent loss it’s either a burden to someone or it needs to wind down its activities. If it merely breaks even, the firm is putting itself irresponsibly at risk. It’s neither able to adjust to changes nor to expand to its full potential. So a surplus is good.
There are, of course, externalities that might justify a levy on the firm’s activities, such as to pay for environmental or social cost, and there are considerations that might justify subsidies. For example it may be more practically efficient or socially desirable to pay collectively rather than individually for the firm’s product. But after all these adjustments, the firm should still make a modest surplus rather than be at the mercy of bureaucracy.
What to do with a firm’s surplus is the central problem in Capitalism. I believe in most cases the firm should get first pick on its own surplus so that they can re-invest it. The surplus correlates with the firm’s success, and represents the power to further pursue the firm’s aims. It’s both fair and reasonable, in most cases, to hand that power back to the firm.
The firm should use the surplus in three ways:
- To mitigate risk and adapt to changing circumstances, for example by training staff or obtaining new equipment. The firm is obliged to look after its own health in this way.
- To expand the volume of its activities so that more people can benefit as customers or staff, to the extent that there is demand.
- To expand the range of its activities into similar products and services, so long as the firm has credible competitive competency in the new areas. If they can make great laptops, they may be able to offer great phones or music players.
Beyond this, and here is a difficult governance problem, the firm should no longer manage its surplus. It should not expand for the advantages of size, nor diversify into unrelated fields to hedge risk. Instead, the firm should bring any surplus that’s beyond its immediate competency to the investment market, so that other people may get a chance to apply it.
Venture investment is good. It takes knowledge, judgement, and vision, and it makes new products, services, or sometimes entire new human abilities possible. It deserves respect, and there’s too little of it. Rather than paying out dividends, firms should incubate ventures or participate in venture funds. Startup ventures should be selected and managed by the usual criteria, except insofar as the funding firm wants to subsidise some activities that the firms themselves see as desirable.
When they reach maturity startups should, as far as possible float bonds rather than stock. They can be long-term bonds with yield dependent on the firm’s surplus. They can have discretionary yield in exchange for a level of control over the startup, like stocks. But crucially, the firm’s obligation on its investors should eventually be discharged, so that the firm can be autonomous and substantially owned by its employees, or more broadly everyone involved in the firm. This is necessary to allow the firm to pursue its social purpose, rather than being hostage to rent-seeking shareholders.
These views should not be controversial. This is how small businesses, large industrial corporations, and any other company that actually produces relevant, wanted goods actually operate. The great majority of people in a firm, if it’s any good, care about making good product and serving customers, or alternatively they care that the work is fulfilling. Only the high-level managers care about maximizing return to shareholders. For the most part, the autonomous firm would take similar decisions to the joint stock firm, but where they differ I think the autonomous firm would be the better model.
The autonomous firm embodies the traditional and intuitive view of work and production. It’s not the way the financial world thinks, and there is the aberration. According to the financial view, a business is a private mechanism to extract rent from the life and activities of others. It can be owned, traded, and broken into arbitrary securities. It is judged only by its effectiveness at rent extraction, and its actual productive activities are seen as incidental. Its employment function is seen as a complication, at best. Privately owned stock is promoted as a replacement of social taxation. We’ve slowly, over the past few decades, come to see business through this wrong financially centered view. This is a mistake. It’s not serving us well.