With the power to write the laws of the territories in which they operated, corporations did very well for themselves. So, for instance, when the Dutch East India Company began harvesting cane, local islanders supplied it with rope. This became a profitable new industry for the indigenous population. The corporation, behaving true to its programming, sought to stamp out this local value creation. It requested, and won, a new law from the king outlawing rope manufacture in the East Indies by anyone but the chartered monopoly. From then on, anyone wanting to make rope had to do it as a worker or slave of the company.3
Likewise, in the American colonies, farmers were prohibited from selling their cotton locally. By law, all of their harvest had to be sold to the British East India Company at a fixed price. It was then shipped to England, where it was fabricated into garments by another chartered monopoly, and then shipped back to America for sale to the colonists. This was not more efficient; it was simply more extractive. The American Revolution was fought as much against the mother company as the mother country.4
Finally, as the fourth part of the tetrad asks, what happens when the corporation is pushed to the extreme? What does it “flip into”? You’ve probably guessed this one already: a person. Even though the corporation and the industrial landscape may have worked to remove human beings from the value equation, there’s nothing corporations strove for more consistently than to earn the rights and privileges of people. That’s the basis of the recent Hobby Lobby case before the Supreme Court, which decided that a corporation’s personhood entitles it to deny aspects of a health plan with which it morally disagrees.5 It’s also the driving force behind the Citizens United case, in which corporations were granted the right to free speech formerly reserved for humans—but not the corresponding limitations on campaign donations. And these cases all trace back to the most hard-fought battle of all, won during Lincoln’s era, of corporate “personhood” itself.6 The objective, true to the corporation’s three other core commands, was to give railway corporations the same rights to land as that of its local human inhabitants. This way, people would no longer be able to object to railways’ seeking right of passage through their towns or property.
Of course, the corporation becomes a person only so its primary benefactor—the investor—doesn’t have to have any actual human skin in the game. The object here is for the investor, originally the king but now the shareholder, to be able to make money with his money. Instead of working or creating value, the investor provides capital to someone else—not a human being but a corporation—to go out and bring back returns. Further benefiting investors, the corporation accepts liability when something goes wrong. The investors’ liability is limited to whatever they paid for their stock. They get to keep whatever dividends they may already have drawn or profits from the shares they have already sold. (That’s where the notion of an LLC, or limited liability company, comes from.)
The function of the corporate “medium” today begins to make sense if we understand it as an expression of this original programming. This forgotten code still drives corporate behavior, angering critics and frustrating corporate boards alike. But the corporation has no choice other than to exercise the four sides of its original tetrad: extract value, squash local peer-to-peer markets, expand the empire, and seek personhood—all in order to grow pots of money, or capital.
The most successful and most loathed corporations of the last century all work this way. Walmart, for one ready example, lives by the tetrad. It extracts value from local communities, replacing their peer-to-peer economies with a single, one-way distribution point for foreign goods. Workers are paid less than they earned in their previous jobs or businesses and are often limited to part-time employment so the company can externalize the cost of health care and other benefits to local government. (Poverty rates and welfare expenses go up in regions where Walmart operates.) Understood as a medium, it amplifies the power of capital by extracting both value from labor and cash from consumers, and bringing it up and out from communities to distant shareholders.
Walmart obsolesces local trade. When it moves into a new region, it undercuts the prices of local merchants—often taking a loss on sales of locally available goods simply to put smaller merchants out of business. Even when it is not practicing predatory pricing, it can survive on lower margins by underpaying its workers and leveraging its size for discounts from its suppliers. In the long run, the store costs its consumers more in lost earnings, unemployment, a decreased local tax base, and externalized costs such as roads and pollution than it saves them in low prices.
Walmart retrieves the values of empire, where expansion is the primary aim. It has opened as many as one store a day in the United States alone.7 The company sometimes opens two stores, ten or twenty miles apart in a new region, and keeps them both open until local merchants go out of business and new consumer patterns are established. Then it closes the less popular store, forcing those consumers to travel to the other one. In the fashion of a Roman territorial war, the advancing armies leave behind only what is necessary to maintain the region.
Finally, in its flip toward personhood, Walmart has attempted to accomplish all this with a human face—quite literally. The company adopted a version of the iconic 1970s yellow smiley face as a brand personality that the company dubbed Mr. Smiley.8 Pressed to the near breaking point by anticorporate activists and an aggressive media, the company recently hired corporate-identity-makeover firm Lippincott to humanize its values and mission. Walmart’s motto went from the utilitarian and immortal “Always Low Prices” to the much more humanistic “Save Money. Live Better.” In the words of Lippincott, this “emphasizes Walmart’s famous low prices while shifting the focus beyond price to the emotional benefits of shopping at Walmart. Saving money is just the beginning—with those savings, Walmart helps customers live a better life.”9 The new logo, an asterisk dubbed “the spark,” is meant to evoke the twinkle of human ingenuity living within the brand itself. Walmart is alive.
Like the rest of corporate expansionism, Walmart is a success story—at least until its growth strategy reaches its limits. Thanks to the availability of new markets in China, the company might still be growing—but its stores are ultimately an extractive and not a contributive economic mechanism, taking value from the regions it conquers. Local wealth creation and exchange diminishes wherever the company’s model is successfully operating.10 It has to. The job of the company is to extract value from local communities and pay it up to investors. Its customer base, as well as its employee population, ultimately grows poorer.
It’s not as if the company or its board has a choice. It must respect the wishes of its shareholders—which is growth. Walmart’s main competitor, Costco, pays its workers more, hires them as full-time employees, and offers better benefits. This leads to greater employee retention, higher-skilled workers, better customer service, and arguably more favorable long-term earnings and market defensibility. Yet for years Wall Street has punished the company for violating the traditional corporate program regarding labor and has paid lower multiples for Costco’s stock than for Walmart’s.*11
Still, like Walmart, the majority of big corporations are playing a game with diminishing returns. You can extract value from a region or market segment for only so long before it has nothing left to pay with. Extractive economics is a bit like draining an aquifer faster than it can replenish itself. Yes, you end up with all the water—but after a while there’s no more left to take.
That’s the predicament in which corporations have found themselves after a pretty good run of global value extraction. Each time they ran into a wall, such as colonial resistance, they wrote new laws or fought new wars. Even great corporate losses, like the American Revolution, eventually became wins when laws were relaxed and corporatism was permitted to flourish once again. Over centuries of enterprise and expansion, it must have seemed like this could go on forever. There were always new continents of
riches to conquer and new peoples to enslave. Even today, there are many who believe we just have to wait out this digital thing long enough to find out where the new territory for expansion awaits. We made it through disruptive technologies from steam engines and mass production to automobiles and television. Why should this time be any different?
Because, in reality, the limits of corporate expansion began to reveal themselves back in the 1950s. By the mid-twentieth century, corporations had already run out of new places to conquer, while people in places like India and Africa were beginning to push back. Even in America, consumers were finding themselves overwhelmed with purchasing choices, mortgage payments, and the other trappings of a consumer society. That’s why Eisenhower and his successors turned to technology. They hoped it could become a new frontier. In essence, they were asking: could the virtual spaces of the electronic realms—TV and computers—provide new areas for corporate growth?
So far, anyway, the numbers are telling us no. Since the mid-1960s and the explosion of electronics, telephony, and the computer chip, corporate profit over net worth has been declining. This doesn’t mean that corporations have stopped making money. Profits in many sectors are still going up. But the most apparently successful companies are also sitting on more cash—real and borrowed—than ever before. Corporations have been great at extracting money from all corners of the world, but they don’t really have great ways of spending or investing it. The cash does nothing but collect, like waste in a vacuum cleaner bag, almost more a liability than an asset. That’s not what was supposed to happen, but it was an inevitable outcome of corporatism’s unrelenting spread.
In 2009, a study initiated by economic futurists at the Deloitte Center for the Edge dubbed this “the Big Shift.”12 They anticipated the conclusion to which macroeconomists are now reluctantly coming—that an economy dominated by large corporations must eventually undergo a systemwide stagnation. As the ongoing study has discovered, although some digital technology firms, such as Apple and Amazon, are doing well in the new business landscape, “they are still only a relatively small part of the overall economy,” which is losing steam over the long term.13
The study, which has been updated each year, researches detailed financial, productivity, and economic data on twenty thousand U.S. firms from 1965 to the present. In 2013, it found that while new technologies are giving companies the ability to do things better and more efficiently, the vast majority have been incapable of capturing the value from these new potentials. In other words, while per capita labor productivity is steadily improving, the core performance of the corporations themselves has been deteriorating for decades.
Note that the study does not evaluate firms in terms of return on investment, or ROI. It’s not looking at how well investors do buying the company’s stock. The metric of interest to Deloitte’s business analysts is ROA—the return on assets, or everything the company owns and owes, from cash and real estate to debt and taxes. As John Hagel, one of the authors of the study, explained in his book Shift Happens, “The return on assets for U.S. companies has steadily fallen to almost one quarter of 1965 levels.”14 This means that for the past fifty years, corporate return on assets has been declining. Corporations may still be delivering more income to shareholders, but they are not doing so by making more profits.
The economists at Deloitte blame this on corporations’ inability to capitalize on the windfall of efficiency and productivity bestowed on them by new technology. In their view, “the conclusion is inescapable: big hierarchical bureaucracies with legacy structures and managerial practices and short-term mindsets have not yet found a way to flourish in this new world.”15
But the “new world” they’re talking about is more than a half century old now and includes successive leaps in technology from transistors and solid-state through mainframes and integrated circuits to laptop computers, smartphones, and cloud computing. This is the world in which we all grew up. If corporations were going to find a way to flourish as they once did, shouldn’t they have found it already?
What we’re witnessing may be less the failure of corporations to thrive in a digital environment than the limits of the corporate model in any environment—and the acceleration of this decline with each new technological leap. Corporations have successfully captured the value that exists out there and converted it into static cash. They just don’t know where to put this new money to work. Under the conditions of a free market, small businesses and individuals would then pick up the slack, creating new value. They might even be bought by big corporations, which would then grow even more. But the soil for such economic activity has itself been rendered fallow by aggressive corporate activity and regulation.
Incapable of raising the top line through organic growth, corporations turn to managerial and financial tricks to please shareholders. More often than not, this means that the corporation must cannibalize itself to deliver higher share prices or dividends. Boards incentivize CEOs to increase short-term profits by any means necessary, even if this means defunding research and development labs and personnel whose value creation may be a few years off.
It works, putting more cash on the positive side of the balance sheet temporarily. But that only makes the ROA problem worse; companies end up burdened with more unspent cash and a bigger block of dead, unproductive assets. Incapable of stoking innovation from the remaining employees, they go on a shopping spree for acquisitions—buying the growth they can’t create themselves. Big pharmaceutical companies now depend almost entirely on tiny upstarts for new drugs.16 Even digital companies that have grown too wealthy and unwieldy, such as Facebook and Google, now innovate through acquisition of startups—for which they pay a king’s ransom. Google has turned itself into a holding company, Alphabet, as if to better reflect its new role as the purchaser of other firms’ ideas. Standard accounting practice encourages it, because acquisitions are treated as capital expenditures, while real R & D counts as an expense against earnings. Once the new acquisition is absorbed, however, it is subjected to the same sorts of cost cutting that befell the parent. The expected “synergies” never quite pan out, which is why 80 percent of mergers and acquisitions end up reducing profit on both sides of the deal.17
Other companies attempt to lower expenses by outsourcing core competencies. Offshoring allows corporations to utilize workforces as they did back in the good old days of colonial exploitation. Finding employees overseas to work for almost nothing is easy. Indebted nations make the easiest targets. Forced to service their loans by exporting their local crops and resources, such countries can no longer offer subsistence farming opportunities to their citizens. So foreign multinational corporations end up with monopolies on employment and trade very similar to the kinds they enjoyed back in the 1600s. In newly industrializing nations, such as China and Singapore, former peasants migrate to the cities to become part of the manufacturing middle class—the low cost of their wages on the global market almost entirely dependent on artificially devalued currency.
Even if these inequities and manipulations could be sustained indefinitely, outsourcing is still not an enduring growth strategy. It’s a way to cut corners, repeatedly, until there’s nothing left at all.
Almost a decade ago, I got a call from the CEO of what he called “an American television brand,” asking me to help him make his marketing more “transparent.” Problem is, there are no televisions manufactured in the United States. As he admitted to me, his manufacturing, design, marketing, and fulfillment were all accomplished “out of house.” So what would transparency reveal? His company was an administrative shell—a few accountants working spreadsheets of a bunch of outsourced activities. Following the corporate program may have cost less in the short run, but there was now no company left at all. The big new thing they needed to integrate into their corporate DNA was not Facebook, Twitter, or even big data but basic competency. They needed to find or hire some expertise, people who cou
ld innovate or who could add something to the product or brand that justified higher margins from consumers. What was the company’s value-added? Their competency was not being challenged by new technology at all but by the underlying bias of corporatism away from creating any value. Besides, actually doing something well pays off in a longer-term timescale than most CEOs are incentivized to consider. And it means creating value for someone else, in the form of a good job or product.
Instead, companies look to deliver returns by lowering their costs—no matter what it means for top-line growth or long-term profitability. The CFO of an American office equipment manufacturer once proudly told me that he was going to invest over $100 million to build a factory in Vietnam. The facility would save an estimated tens of millions per annum in labor. I tried to explain to him that his calculations were based on variable geopolitical relationships, commodities prices, and exchange rates over which his company had no control. But he could only see how lowering costs would make his share price go up. The company was considered a growth stock, after all.
Sadly but predictably, the project was an abject failure. Office equipment manufacturers are not as good at global exchange arbitrage as the investment bankers watching their every move. For every company that thinks it can outsmart global capitalism by leveraging exchange rates and commodities futures, there are traders who know these markets better—and are already discounting the currencies and commodities involved (utilizing dark trading pools that office equipment manufacturers don’t even know about). In the case of the factory, hedge funds neutralized the arbitrage before construction was even finished. The plant was closed just a couple of years later—before it was fully functioning—and written off as nearly a billion-dollar loss.
Throwing Rocks at the Google Bus: How Growth Became the Enemy of Prosperity Page 9
