by Aaron Dignan
Due to technological augmentation and reduced bureaucracy, people are more creative and productive. As a result, organizations are smaller in terms of head count and generate more profit per head.
Sustainability and environmental stewardship are recognized as a fundamental part of the economic equation. Carbon neutrality is table stakes. Regenerative design and operations are increasingly where the action is.
Regulation is more Complexity Conscious—driven less by rules and compliance and more by experimentation and outcomes. Instead of “What fuel efficiency target must all automobiles meet by 2020,” the question might be “What conditions or enabling constraints lead auto manufacturers to increase fuel efficiency continuously?”
While volatility and economic swings still occur, they are less frequently the result of avoidable systemic dysfunction. Increased resilience and adaptivity in most firms and industries result in rapid sensemaking and responsiveness, mitigating the length and severity of damage.
Philanthropy and business are no longer orthogonal. More companies look like Toms or Warby Parker than like Adidas or Ray-Ban. Founders increasingly identify with Ricardo Semler’s sentiment that “if you’re giving back, you took too much.” Instead, they build social impact right into their business model.
Consumers shop locally in order to increase the flow of money in their community. This in turn puts pressure on national and global businesses to source, operate, and invest locally.
It is increasingly possible to shop locally and online. The two are no longer mutually exclusive, as local variations of many products exist and can be produced, shipped, and serviced near you by members of your own community.
Public education prepares students for jobs that don’t exist yet by focusing on creativity and complex problem solving. Students spend most of their time learning how to be part of a high-performing team. Entrepreneurial skills are prized above Ivy League admission.
New forms of universal basic income are being tested for their ability to provide for our basic human needs while also encouraging us to use and share our gifts—through entrepreneurship, service, and community.
New forms of currency and means of exchange provide alternatives to the current model of borrowing money lent at interest.
Blockchain and cryptocurrencies enable massively distributed collaboration via decentralized autonomous organizations and other alternatives to traditional incorporation or partnership.
A new type of thinking is essential if mankind is to survive and move toward higher levels.
—Albert Einstein
Is a future like that even possible? It depends who you ask. A legacy economist might scoff, but a renegade economist such as Kate Raworth would say we have no choice. Raworth is part of a new movement in economics that’s questioning whether growth is truly the solution to all our problems, or if it might be time to transform our economic OS. In her 2018 TED Talk, she addressed traditional economic theory head on. “Twentieth-century economics assured us that if growth creates inequality, don’t try to redistribute, because more growth will even things up again. If growth creates pollution, don’t try to regulate, because more growth will clean things up again. Except, it turns out, it doesn’t, and it won’t.” Growth has delivered extraordinary benefits to humanity, but at a cost. The question is: Can we lift everyone up without destroying the planet? And even if we can, what then? GDP growth can’t continue forever with finite resources.
Of course, this is not a new idea. In 1968 R. Buckminster Fuller warned us about this in his masterwork Operating Manual for Spaceship Earth. Decades earlier, philosopher Bertrand Russell offered a damning critique of our approach to abundance in his essay “In Praise of Idleness.”
Suppose that, at a given moment, a certain number of people are engaged in the manufacture of pins. They make as many pins as the world needs, working (say) eight hours a day. Someone makes an invention by which the same number of men can make twice as many pins: pins are already so cheap that hardly any more will be bought at a lower price. In a sensible world, everybody concerned in the manufacturing of pins would take to working four hours instead of eight, and everything else would go on as before. But in the actual world this would be thought demoralizing. The men still work eight hours, there are too many pins, some employers go bankrupt, and half the men previously concerned in making pins are thrown out of work. There is, in the end, just as much leisure as on the other plan, but half the men are totally idle while half are still overworked. In this way, it is insured that the unavoidable leisure shall cause misery all round instead of being a universal source of happiness. Can anything more insane be imagined?
The message has been clear for decades. We have to move from a model of eternal consumption (a chart that goes up and to the right forever) to a model that is regenerative and distributive. That doesn’t mean regressive socialism or state-controlled enterprise; it means embodying new goals. The problem isn’t free markets; it’s what we value. It’s the stories we tell ourselves. And unfortunately, we’re stuck in a loop with our economic, educational, and social operating systems. They shape us. And we make (and remake) them in our own image. To break free we need new structures and platforms built to nurture and sustain Evolutionary Organizations. Luckily, they are starting to emerge.
Building Blocks
There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things.
—Niccolò Machiavelli
Building and sustaining an Evolutionary Organization is an uphill battle when the economic OS is structured to promote growth and gains over purpose and meaning. From incorporation to funding, every piece of the business ecosystem fits together. These structural impediments are entrenched and self-reinforcing. Which is why it’s so difficult and important to create credible alternatives. Fortunately, the foundations of a new economic OS are starting to emerge, granting founders and shareholders the opportunity to change their underlying constraints.
New Forms of Incorporation
Officers in a traditional corporation have a legal obligation, known as a fiduciary duty, to act in the best interest of their shareholders. Of course, in practice, “best interest” translates to maximizing shareholder return. The law completely sidesteps any externalities—environmental or social impacts that might occur as a result of pursuing this goal. Barring any regulations that stand in the way, corporate leadership is obligated to pollute the environment if it will provide immediate gains to shareholders, even if those shareholders will eventually drink that water or breathe that air. When it comes to their legal mandate, there’s no room for purpose beyond profit.
But that’s all about to change. Enter the public benefit corporation, a relatively new form of incorporation that allows an organization to prioritize a purpose or mission—beyond profit—that provides a benefit to society. By encoding this right and responsibility into the legal structure of the business itself, the public benefit corporation allows an organization to protect and nurture its mission, even as a publicly traded company. This fills a gap that has long existed between for-profit and nonprofit organizations. For-profits achieve far greater scale, but they lack accountability for impact. Nonprofits are purpose driven, but they lack the means and motivation to engage in critical fields such as technology, energy, healthcare, transportation, and infrastructure in a meaningful way. The public benefit corporation promises the best of both worlds: purpose and profit, scale and impact. As of this writing, thirty-four U.S. states have already passed legislation enabling this form of incorporation, and more are following suit. Some of the most progressive organizations around have already taken the leap and become public benefit corporations, including Method, Kickstarter, Plum Organics, Patagonia, and Danone North America. Good company
.
While public benefit corporations represent a legal innovation, Certified B Corporations represent an operational one. B Lab, the nonprofit that developed and promotes the model legislation for public benefit corporations, is also the creator of a set of standards for social impact that make it more tangible and measurable. The idea here is to move from intentions to outcomes. Not just what an organization values, but what it does. To become a Certified B Corporation, an organization must take the B Impact Assessment, which measures impact areas such as governance, workers, community, and environment, from the perspective of both operations and the underlying business model. Applicants that achieve an impact score above a certain threshold are certified, authorized to use the Certified B Corporation language and logo, and join a community of more than 2,600 organizations that represent sixty countries and more than 150 industries. Interestingly, many companies leverage both the public benefit corporation legal structure and the certification as a way to increase transparency and accountability in their pursuit of a new kind of performance.
Meanwhile, it’s possible that one part of the future of incorporation is actually a blast from the past. Cooperatives, which are jointly owned and democratically controlled organizations, have existed for hundreds of years, with the earliest examples emerging in the late eighteenth and early nineteenth centuries. Co-ops generally embody a set of ideals known as the Rochdale Principles: (1) voluntary and open membership, (2) democratic member control, (3) economic participation by members, (4) autonomy and independence, (5) education, training, and information, (6) cooperation among cooperatives, and (7) concern for community. These manifest in an organization that is essentially for the people, by the people. While the legal structure of cooperatives is progressive, their approach to governance can be somewhat tedious. The “one member, one vote” principle can give way to the tyranny of consensus on every issue, large and small. That’s why savvy cooperatives are beginning to experiment with models of self-management that use consent and elections to distribute authority and increase agility. And yet one study of cooperatives in Western Europe, the United States, and Latin America found that worker cooperatives are already more productive than conventional businesses.
And what if your mission is to create an organization that isn’t incorporated or centralized at all? That ambition is at the heart of an emerging class of decentralized autonomous organizations (DAOs), which leverage blockchain and cryptocurrencies to create products and services without central control. The best explanation of this controversial new form of organization comes from Cointelegraph, an independent online publication that covers the future of money. “Imagine a vending machine that not only takes money from you and gives you a snack in return but also uses that money to automatically re-order the goods. This machine also orders cleaning services and pays its rent all by itself. Moreover, as you put money into that machine, you and its other users have a say in what snacks it will order and how often it should be cleaned. It has no managers, all of those processes were pre-written into code.” Developers, leveraging what they have learned in creating cryptocurrencies such as Bitcoin and Ethereum, are pioneering a new generation of decentralized applications that allow organizations to operate like that magical vending machine. Through a series of rules called smart contracts, founders can create, fund, and operate an entire organization independent of hierarchical management. Everything, from paying contributors for their work to making decisions about investment, is managed in a distributed way. Looking for the CEO? Headquarters? You won’t find them. It’s early days for this technology and the jury is still out on issues of security, how decisions are made, and the legal liability of contributors. But something tells me we’ll be hearing more about DAOs in years to come.
New Forms of Investment
Concurrent with incorporation, every organization faces another early conundrum: how to raise the funds necessary to pursue its mission. While some businesses can be self-funded, a significant number of organizations require investment to get started and, later, to scale. Every company that takes on traditional investment is (often unwittingly) promising to grow forever in exchange for capital now. While it can be hard to imagine in the early days, the very nature of growth beyond scale is exploitative. Take Google, the paragon of iconoclastic virtue when it rose to prominence with its “Don’t be evil” slogan. You can’t “organize the world’s information” without inadvertently (or intentionally) controlling the flow of that information. Or take Facebook, the social network whose noble mission is to “bring the world closer together.” As an ad-supported business, its growth depends on capturing more and more of our attention, which means it must—at a very fundamental cognitive level—manipulate and addict us. These are companies with seemingly virtuous founders who still have board-level control of their creations. Imagine what happens when the people at the reins are just hired guns.
Even firms that just borrow money are on the treadmill. The Federal Reserve System and privately held commercial banks create and lend money at interest, which creates a cascade of expected return for all lenders. Thus, businesses that borrow must recover that initial capital and then some in order to break even. Interestingly, at different points in the last century some economists have flirted with the idea of negative interest—a demurrage charge—as a way to encourage the flow of money in society. If you think back to the original forms of value storage—bread, grain, fruit, livestock—they all decayed over time. Sitting on a mountain of grain for years wouldn’t make you rich; it would all go to waste and you’d be left with nothing. Instead you’d lend it out, at 0 percent interest or even less, in the hopes that you’d be paid back later when you needed it. In this model, surplus becomes valuable when it moves. When the same dollar is spent ten times in a community rather than just once, prosperity follows. We’re a long way from deploying this at scale, but in times of crisis such as the Great Depression, communities have launched similar concepts with great success. Unsurprisingly, these experiments were quickly shuttered by the governments presiding over the recessions that triggered them.
In this century, for new forms of incorporation that prioritize purpose and public benefit to work, we need new investors and investment vehicles that align with our values. Rising to meet that challenge, impact investing reflects a growing desire among investors to generate returns through investments that provide a public benefit. As concepts such as corporate social responsibility and triple bottom line (social, environmental, economic) have become more well known, the market has grown into a $250 billion industry on its way to half a trillion or more in the next decade. Private equity firm TPG recently launched the Rise Fund, the largest fund of its kind thus far, with more than $2 billion in committed capital and a founder’s board that includes U2 frontman Bono, producer/philanthropist Jeff Skoll, Richard Branson, and Reid Hoffman. Even Bain Capital is in on the fun, with its $390 million Double Impact Fund.
Venture capital is also experiencing an awakening. Firms such as Better Ventures, Impact Engine, and Notley Ventures are putting their money where their mouth is without compromising their ability to generate significant returns. New York–based Social Impact Capital thinks beyond its investment to consider the robustness of its portfolio companies. In an interview with Crunchbase, managing partner Sarah Cone said, “One way I test [their concept] before investing is to ask myself, ‘What if the most evil company in the world acquired this company? Could they end the social good component without killing the business entirely?’ If the answer is yes, then we wouldn’t invest.” What a powerful filter.
While not explicitly focused on social impact per se, Indie.vc is attacking the venture capital model itself. Rather than searching for the one unicorn that will make its portfolio profitable, the firm focuses on investing in “real” businesses that will generate revenue and profit early on. It offers some unusual terms to match. Instead of taking equity up front, it takes an equity option that conver
ts into equity if, and only if, you raise money later on or get acquired. Otherwise Indie.vc is paid back through profit sharing, capped at three times its initial investment. The manifesto on its website reads, “Scaling a business through happy customers and revenue is no harder than breaking the addiction of spending other people’s money. The freedom and benefits of that focus are manifest in every aspect of a company’s culture. Startups bleed red, real businesses bleed black.” That’s smart money.
And what about those organizations that need to go public to realize their vision? They face a situation so unappealing that today’s hottest startups are avoiding an initial public offering (IPO) for as long as they possibly can. The average number of companies who choose an IPO each year is one third what it was prior to 2000. Uber and Airbnb, valued at more than $60 billion and $30 billion respectively, are roughly a decade old and worth more than United Airlines. But they’re not listed yet. By comparison, when Amazon went public it had a market value of just $438 million. When companies don’t go public, only elite investors get to enjoy the climb. Yet all that’s waiting for leadership on the other side of the IPO rainbow is the constant scrutiny and pressure of a bunch of spectators. The CEO who seeks to invest in long-term success (or, gasp, purpose and impact) is met with outcries from activist investors, while algorithmic high-frequency traders create and profit from short-term volatility.
Eric Ries, the best-selling author of The Lean Startup and The Startup Way, has a better idea. A much better idea. Over the last five years he’s been quietly developing an alternative called the Long-Term Stock Exchange (LTSE). There are several key differences between the LTSE and a traditional stock exchange. First, shareholder voting power will be based on tenure. The longer you hold a stock, the more influence you’ll have. Second, the exchange will require that listed companies have specific ties between executive pay and long-term performance. And finally, additional disclosure requirements will increase transparency in both directions between shareholders and management. The net effect? Organizations that go public on the LTSE will be set up for what Airbnb cofounder Brian Chesky calls an “infinite time horizon.” No more trading the future for the quarter, my friends. We’re in this for the long haul. Based on recent filings with the SEC, the LTSE will initially attempt to piggyback on the Investors Exchange (IEX) to offer IPOs on its platform and then submit an application to become an independent exchange in the near future. Eric’s renegade startup is learning and pivoting in precisely the way you’d expect, given his pedigree. But we can rest a little easier knowing that a shot has been fired across the bow of the stock market status quo.
