Technology Could Usher in a Post-Corporate Era

By Tom Lloyd
Visiting Fellow to Northampton Business School

New technology can create problems for business, such as the added volatility of capital markets caused by ‘flash’ trading systems. But it can also help to solve problems. Flash trading systems, for example, are the forerunners of smarter algorithms that will lead, in a few years, to fully automated capital markets. This will be a boon, because it will make investment bankers redundant, and help to eliminate one of the greatest threats to the liberal-capitalist consensus - the enormous, socially-divisive pay packets of a small self-serving elite.

New technology can do more than create and solve problems - it can also invalidate our assumptions about business, and even undermine the theoretical foundations of our business institutions.

Ronald Coase argued that integrated firms had evolved, because, by suppressing the internal price system, they saved the ‘transaction costs’ that arose when markets balanced supply and demand.

Coase’s ideas were later developed into a broad theory of the firm by his former student, Oliver Williamson, winner of the 2009 Nobel Prize for economics. According to Williamson the modern company is ‘..the product of a series of organizational innovations that have had the purpose and effect of economizing on transaction costs’.

Williamson acknowledged that the reduction in transaction costs in an integrated organization must be set against the growing ‘agency costs’ of management – the tendency of senior executives to pursue their own ends, at the expense of the company’s shareholders. He, as we now know, mistakenly, saw the giant company as a solution to this problem, because its scale enabled it to capture transaction cost economies and, as he supposed, the independence of the profit centres controlled agency costs.

In his fine book, The Visible Hand, Alfred Chandler suggested that ‘multi-unit business enterprises’ (MUBEs) replaced the traditional single-unit enterprise when ‘routinizing’ of transactions reduced transaction costs, and linking production, buying and distribution reduced information costs.

If Coase, Williamson and Chandler are right, therefore, the modern company is the creature of market inefficiencies, and particularly of substantial transaction costs. These are of three kinds:

1.  Search and information costs incurred while finding the required goods or services at the lowest price.

2.  Bargaining costs incurred while reaching an agreement with the other party, drawing up contracts, etc..

3.  Policing and enforcement costs incurred while ensuring the other party sticks to the terms of the contract.
 

The implication is that, in the absence of substantial transaction costs, the evolution of enterprise since the birth of the modern company (Alfred Chandler’s MUBE) in the mid-19^th century would have followed a very different path.

Modern technology (search engines, price comparison sites, on-line auctions) have greatly reduced search and information costs in the modern era. If Chandler’s MUBE was, as Coase suggested, invoked by the superiority, in the mid-19^th century, of ‘administrative’ over market coordination of business activities, it seems possible that the reversal of this balance of advantage will invoke another more collaborative, less integrated kind of organization.

As transaction costs fall, the economics of collaboration relative to integration will improve and forming partnerships will become a better and cheaper way to assemble the components of value chains. In time communities of like-minded ‘collaborators’ could emerge in which transaction costs are close to zero.


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Whatever Happened to CSR?

By Tom Lloyd

Visiting Fellow to Northampton Business School

 

Since the dawn of the corporate social responsibility (CSR) era in the 1990s, heralded by my book, The ‘nice’ company, (Bloomsbury, 1990), a wedge has been progressively driven between companies and societies. The original idea was that companies are members of the societies and communities they operate in, have a clear interest in the well-being of those communities, and thus close, mutually-supportive relationships between corporate and human citizens will be of benefit to both. But CSR, as it is today, is a parody of the original idea. De-nuded of social content by the poisoned chalice of a TLA (three letter acronym) CSR has been incorporated into the normal calculus of business; an item on a balanced score-card; a paragraph in the annual report; a box to be ticked. The originally envisaged day-to-day connections between companies and communities are conspicuous by their absence. Today, CSR budgets are voluntary taxes, paid (or quickly cut, when times are hard) with little more thought for their beneficiaries than is given to any other tax.

Company leaders sit in the driver’s seat, gripping the wheel. When it’s hot, they reach for the air-con; when it’s cold, they turn on the heater; when it gets dark, they switch on the lights; when it starts to rain, they turn on the wind-screen wipers. The dashboard is the balanced score-card. If the instruments read normal and no warning lights are flashing, managers keep their eyes on the road, and follow the satnav (or should it be ‘stratnav’?) instructions. The company is separate from its environment; a capsule travelling through time on paved roads, towards a pre-determined destination.

If something resembling the original idea of CSR is to be achieved managers will have to stop, get out of their capsules and continue their journeys on foot; walking through the countryside; gazing at the view; stopping from time, to time to look at a flower; leaving the path to examine a ruin; listening to birds, insects, and a dog fox barking in the distance; chatting to fellow walkers. They will still have some sense of direction, but it will be provisional and subject to revision if circumstances change, or unexpected threats or opportunities arise. Their routes will meander, guided by the terrain, the weather and circumstance. The walk itself will be the real objective. They will not simply be passing through. They will be parts of the countryside. They will feel it, see it, smell it.

This is not, as some may suggest, a recipe for bloated CSR budgets and for managers distracted from the main business of shareholder value creation by peripheral or extraneous concerns. In a business world characterised by the ‘VUCA’ qualities (volatile, uncertain, complex, ambiguous), insensitivity to your environment, and a lack of concern for the consequences of your actions are liabilities.

A sensitive, responsive CSR programme can contribute substantially to shareholder value creation by making an organisation more alert and more adaptable. By ignoring, or by paying insufficient regard to the VUCA qualities, capsule-management can lead an organisation into serious trouble.


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Yours Sincerely, A Jobseeker

By Peter Whitehead
Editor of Financial Times Executive Appointments and the FT Non-Executive Directors' Club

My creative side as a child sometimes worried and sometimes amused my parents. But at first they were simply bemused when one day I stuck a strip of card across the bottom of our television screen upon which was written: “This man is sincere”.

It meant little with the TV switched off. But when up and running, any news programme watched with this ever-present caption was elevated to a higher plane: the motivation and credibility of every talking head (pretty much exclusively male in the 1970s) was held up to question, scrutiny and ridicule. Today, it would have the same effect beneath images of a business leader complaining about the damaging effects of a UK “talent shortage”.

Businesses, apparently, cannot find the skilled individuals they need, particularly in such fields as science, technology and engineering. What, then, are they doing about it? Mostly, it seems, they are appealing to government to serve them up a ready supply of perfect job candidates – they want well-rounded people who are fully trained in all the relevant skills they require.

A PwC global survey of more than 1,300 chief executives, for example, recently found three-quarters of UK chief executives want the government to make creating and encouraging a skilled workforce its highest priority for business. Yet when asked where skills came on its own to-do list, only a third of UK business leaders made filling talent gaps an immediate investment priority. Either things are not as bad as they claim, or businesses no longer see training and development of skills as their responsibility. I suspect the latter.

There was a time when companies would accept training and developing its people as a responsibility and duty. Perhaps this was in a day when employees moved less, before transport improvements brought the side-effect of a less rooted and loyal workforce. In this light, businesses’ reduced willingness to invest in staff development might be understandable.

It could also be that employers’ expectations have risen as the numbers attending university have been forced up. Certainly, the expectations of the massed ranks of students have been raised, making the realities of employment uninspiring. The primacy given to wealth and celebrity in society serves to complicate motivations further and lead some to get-rich-quick careers in financial services, for example.

Business has been happy to see this set of priorities develop. Now, it is unhappy that individuals are losing interest in immersing themselves in a job and are finding other priorities beyond work. But rather than offering improved rewards – whether it be salary, perks, flexibility, excitement, inspiration or fulfilment – and seeking to address the issues that affect them by investing in people, employers seem to feel let down. They almost display an equivalent sense of “rights”, entitlement and dependency as some identify in those alleged to be taking advantage of the UK’s state benefits system.  

And when government fails to deliver, business representatives commission research, issue statements and appear on telly complaining of a talent shortage. They do, of course, believe it and mean it. That’s the most worrying thing of all – they are indeed sincere.

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