Throwing Rocks at the Google Bus: How Growth Became the Enemy of Prosperity

by Douglas Rushkoff

  Using successful but contracting markets as loss leaders in order to pivot toward new opportunities is not a novel, radical approach at all. It is basic common sense, taught in any undergraduate business course. As Michael Dell explained in his SEC filing about the buyback, “These steps in Dell’s transformation are needed to restore the Company to health in the long term. In the short term, however, they are likely to lower gross margins, raise the Company’s operating expenses and raise capital expenditures, resulting in lower earnings.”60 Shareholders just won’t put up with that. Moreover, share value had become such a widely accepted metric of corporate health that if the company’s share price continued to drop, according to Michael Dell, it could hurt consumer perception and employee retention.61 Unable to take the basic steps required to save a publicly held company, Dell enlisted the help of a private-equity firm to buy it back from his shareholders.

  When the deal was done, he announced to his employees that Dell was the largest company in terms of revenue ever to go from public to private.62 He did so, at least in part, to have the freedom to strengthen the company and its future instead of futilely trying to prop up its share price for stockholders who had no real interest in the company, its employees, or its sustainability.

  Although Dell went private for purely business reasons, sometimes a company goes private to save what it sees as its soul. For example, CEO Mickey Drexler is largely credited with creating the brand magic that made the Gap synonymous with youth and effortless cool in the 1990s. Drexler accomplished this with an auteurlike sense of positioning, which he attempted to apply to the more high end J.Crew brand when he came on board there as CEO in 2003.63 But after several years, Drexler found himself in combat with shareholders who expected the company to be working on margins and efficiencies—more like Zara or H&M, whose cash registers are networked to robotic supply chains capable of replacing stock in real time. Drexler convinced his board of directors to take the company private, largely to give himself the time and breathing room he needed to build the brand into something as iconic as the Gap.64

  When a company does go private, it must select its private equity partners carefully. Otherwise, it is no guarantee against short-term pressure. As of this writing, Drexler and J.Crew are taking heat from their private equity stakeholders to go public again. It’s been almost five years now, and the investors want to cash out, as well as fund a major international expansion. The growth imperative is hard to kill.65

  Counterintuitively (at least to corporations that see their workers as expendable resources), the most patient shareholders might just be a company’s own employees. Unlike retail shareholders, employees have a stake in the company’s long-term prosperity. By becoming wholly or even partially employee owned, corporations can help ensure that business decisions reflect the best interests of the company, its employees, and their community—not distant investors or the abstract momentum of capital itself. It’s still corporate capitalism, but corporate capitalism that ensures that the primary stockholders are also real-world stakeholders in multiple facets of the enterprise.

  So far, most companies that have sold themselves to employees have done so under duress. For instance, in 1985, Amsted Industries, a heavy industrial parts manufacturer with some thirty-five plants across the U.S. and Canada, learned that corporate raider Charles Hurwitz had targeted the company for hostile takeover. That same year, Hurwitz would become famous for purchasing the Pacific Lumber Company and attempting to clear-cut the old-growth redwoods of California for a fast, onetime profit. So rather than accept its business being dismantled and sold off for its assets, Amsted opted to distribute ownership to its employees through a stock ownership plan, for a price of $529 million.66

  Thirty years later, the company is still here and still employee owned. It has endured its share of bumps and conflicts along the way, and its shareholder communications sometimes sound more like a Brooklyn food co-op meeting than a traditional quarterly report. But the company’s shift toward employee ownership attests to the possibility of similar arrangements, even for thriving companies looking to maintain prosperity instead of sacrficing it to growth.

  Many companies set themselves up this way from the start, enjoy greater stability than their shareholder-owned peers, and still grow plenty big. With roughly 160,000 employees, Publix Super Markets is the seventh-largest privately held company in the United States, and the largest corporation whose employees own a majority stake.67 Approximately 80 percent of the company stock is distributed among employees, while the rest belongs to the family of founder George W. Jenkins. Employees with a thousand hours and a year of employment receive an additional 8.5 percent of their pay in the form of stock. Stock price is set quarterly by an independent evaluator. According to Forbes, a store manager with twenty years at the company, in addition to a $100,000-plus salary, will likely own $300,000 in stock. That means that Publix employees, from the bag boy to the butcher, have no incentive to leave—especially since the company promotes almost exclusively from within.68

  That kind of investment in developing and retaining individual employees doesn’t show up on a ledger, but as Publix’s ongoing success against Walmart grocery stores in its region proves, it does provide bottom-line value in the form of engaged, knowledgeable, and, yes, happy workers. Publix is the most profitable grocery-store chain nationwide, with a margin of 5.6 percent, compared to an industry average of 1.3 percent.69

  4. Choose a New Operating System

  Of course, Publix is at an advantage because it was built from the beginning as an employee-owned company. It is anything but public, and its employee shareholders are benefiting from the largesse of their founder. His company has ended up more prosperous as a result of his willingness to work against the more extractive biases of traditional corporations, but if he were the CEO of a publicly traded company, he’d likely be in court or worse.

  As corporate law is currently structured, CEOs and their boards of directors can be held liable if they fail to do everything in their power to maximize quarterly returns for public shareholders. CEOs are not merely incentivized to pursue the short-term bottom line; they are legally obligated. Rather than liberating the corporation from such ultimately counterproductive rules, the digital age has put them on automatic, exacerbating their impact and making them appear more permanently embedded than ever. The more promising potential of the digital environment would be to revise the corporation itself to our liking. That’s the invitation here—not to digitize the corporation with technology but to approach the corporation itself from a digital perspective of redesign. The corporation’s charter can be recoded.

  For example, many are toying with the “benefit corporation” as a way of tempering the emphasis on short-term and extractive profit suffered by traditional corporations goosed up on digital systems. A benefit corporation is expected to pursue profits, but that profit motive must be secondary to a stated social or environmental mission. By law, share price must take a backseat to something else, something decidedly beneficial. These corporations must develop metrics to measure social and environmental benefit based on third-party standards and then submit an annual report to government authorities confirming their compliance.70

  Baby-food manufacturer Plum Organics is the largest certified B corp on the Inc. magazine list of the top 5,000 fastest-growing companies in America, coming in at number 253.71 Launched in 2007, Plum did not register as a benefit corporation until it was about to be acquired by Campbell Soup Company in 2013. Plum had always committed itself to high environmental standards and appropriate treatment of its employees, and feared losing this leeway under the stricter supervision of a conglomerate’s management and shareholders. By becoming a benefit corporation—the first to be acquired by a publicly traded company—Plum gave itself the insulation it needed from its new owner’s shareholders.72 Plum’s stated mission is to produce organic baby food using lightweight packaging, pay its l
owest-earning workers at least 50 percent above the living wage, and give away at least one million pouches of food to needy children per year.73 As long as Plum remains a benefit corporation, that mission will be protected from any corporate or stockholder interference. Unlike its parent corporation, Plum is legally required to prioritize its goals of social and environmental good above that of profit.

  Other companies have opted to become what are known as “flexible purpose” corporations, which allows them to emphasize pretty much any priority over profits—it doesn’t even have to be explicitly beneficial to society at large.74 Flexible purpose corporations also enjoy looser reporting standards than do benefit corporations.75 Vicarious, a tech startup based in the Bay Area, is the sort of business for which the flex corp structure works well. Vicarious operates in the field of artificial intelligence and deep learning; its most celebrated project to date is an attempt to crack CAPTCHAs (those annoying tests of whether a user is human) using AI. Vicarious claims to have succeeded, and its first Turing test demonstrations appear to back up its claim.76

  How would such a technology be deployed or monetized? Vicarious doesn’t need to worry about that just yet. As a flexible purpose corporation, Vicarious can work with the long-term, big picture, experimental approach required to innovate in a still-emerging field such as AI. Although investors including Mark Zuckerberg and Peter Thiel have invested $56 million in the company, the flexible purpose structure prevents them from exerting the sort of pressure to get to market that venture capitalists typically put on their investments. The company can’t be forced to sell out or to abandon scientific curiosity for commercial viability.

  Vicarious has freed itself from the pressures of the market without having retreated to a research university, where funding comes with strings of its own. “[We] are not constrained by publication, grant applications, or product development cycles,” one Vicarious statement reads. “At Vicarious, there is room to develop new approaches that would otherwise not be supported in academia or industry.”77 In effect, it’s hacked the venture capital process. Vicarious’s purpose is not social, per se, and not environmental either; it is the pursuit of knowledge. That purpose would not qualify the company for benefit corporation status. But by registering as a flexible purpose corporation, it can take on limitless investment while still placing exploration and experimentation above any demands for profitability that might arise.

  Finally, the “low-profit limited liability company,” or L3C, is a hybrid corporate structure first used in Vermont in 2008, tailor-made for the digital era’s socially conscious entrepreneurs. It’s a you-can-have-your-cake-and-eat-it-too approach to giving a company many of the benefits of a nonprofit charity while still offering its founders a way to raise venture capital and investors a way to cash out. An L3C works similarly to the flexible purpose corporation, in that it is not bound by the same rigorous reporting standards as the benefit corporation.78 It can solicit funds from a greater range of potential investors, including private foundations, socially conscious for-profit entities, and grants, which each invest on a different tier suited to their goals and legal requirements. However, the L3C is limited to returning only modest profits.79 That makes it a good structure for organizations such as Homeport New Orleans,80 a small volunteer organization that cleans up marinas around Louisiana, or Battle-Bro,81 a grassroots veteran-support network. It’s a simpler, less burdensome structure than a nonprofit, suited for small groups operating with minimal revenue, for which the “win” is less about cashing out than about remaining financially sustainable. To the socially conscious investor, some profit is better than no profit. But is extracting profit really the best way to capture a company’s value in a twenty-first-century digital economy?

  Perhaps the real problem with the corporate program has less to do with social values than with simple math. Instead of attempting to mitigate the destructive power of a now digitally charged corporation on the world by inserting a socially beneficial purpose, we may better look at the underlying financial premise: The corporation was invented to extract circulating currency from the economy and transfer it into profit. No stated social benefit is likely to compensate for the social destruction caused by the corporate model itself. In other words, even if someone like Elon Musk or Richard Branson creates an earth-shatteringly beneficial new transportation or energy technology, the corporation he creates to make and market it may itself cause more harm than it repairs. Yes, such corporations bail some water out of the sinking ship, but they are, themselves, the cause of the leak.

  In fact, none of these new corporate structures addresses the central flaw that precedes each of runaway capitalism’s social, environmental, or economic excesses: the idea that more profit equates to more prosperity. Profit might lead to more shareholder value, but it doesn’t necessarily maximize the wealth that could be generated by the enterprise over the long term and for everyone involved—even its founders.

  That’s why the not-for-profit, or NFP, might ultimately be the best model for the future of enterprise on a digital landscape.

  Many mistake the term “nonprofit” (as the not-for-profit is also called) to mean “charity” or “volunteer.” This isn’t the case. The distinction lies in what is done with profits after expenses and salaries have been paid. Publicly traded corporations direct financial surpluses back to investors, CEOs, and boards of directors. They have little incentive to churn it back into the business and, as we have seen, a great deal of incentive to maximize surpluses at the expense of employees, the environment, and even the corporation itself.82

  NFPs, on the other hand, are legally restricted from distributing surplus revenues to shareholders—stockholding investors, boards of directors, founders, worker-owners, or otherwise. An NFP must direct all surplus revenue back into the company. A not-for-profit’s employees can be paid handsome salaries and may engage in a very broad range of work—broader even than benefit corporations. But an NFP may not have owners and may not be used to benefit anyone or anything other than the stated beneficiaries of its work.83 It can make its employees wealthy and its customers happy, but no matter how successful it becomes, it can’t extract cash out of the system, and it can’t be sold.

  The most creative digital companies have begun to mix and match various corporate strategies. The Mozilla Foundation, developers of the Web browser now called Firefox and one of the most successful digital companies of our time, is a not-for-profit. The company is a success both for its widely used open-source technologies and for its leadership position in a field dominated by platform monopolies. Mozilla is actually made up of two different entities: the Mozilla Foundation, a nonprofit, and the Mozilla Corporation, which the foundation oversees. The subsidiary corporation is responsible for much of Mozilla software’s development, marketing, and distribution. It collects the massive revenue generated by Firefox,84 but it has no publicly traded stock, no dividends, and no shareholders. All profits are directed back to the nonprofit,85 which can spend them only to fulfill the Mozilla Foundation’s nonprofit mission: “To promote the development of, public access to and adoption of the open source Mozilla web browsing and Internet application software.”86 By shunting profits into a nonprofit instead of delivering them to shareholders as capital gains, Mozilla is able to maintain its distributed network of open-source volunteers and five hundred to a thousand paid employees.87 Capital is always in service of the business, its products, its employees, and its customers, never vice versa.

  Any of these structural adjustments, and many others currently emerging, give corporations a way to transcend, or at least sidestep, the growth mandate that threatens their sustainability and longevity. Instead of removing money from the economy, they end up distributing their prosperity laterally—as if through a network. The money stays in circulation, providing currency to more people and enterprises. The piles of cash no longer accumulate, and the corporate obesity conundrum improves. Profit over net
worth increases, even if only because net worth is shrinking. It’s like getting a better body-fat percentage simply by losing weight.

  But if corporations cease to grow or even get slimmer, if money is moving sideways between many people instead of upward from debtors to lenders and investors, then how does the entire economy grow? Isn’t the whole system, from the Federal Reserve on down through the banks and bonds and GNP, all dependent on some rate of growth? Don’t we always need more housing starts, more consumer activity, and increasing corporate earnings just to pay our national debt?

  Yes, because that’s the way the operating system was set up in the first place. Corporations may be the dominant players in the economic game, but that’s only because they were built to succeed within the context of a very specific set of rules. If we want to see a genuinely new type of player emerge, we must rewrite the rules of the growth game itself.

  Chapter Three

  THE SPEED OF MONEY

  COIN OF THE REALM