But this shareholder-centric model has also contributed over the years to what former Citigroup CEO John Reed has called the “iron triangle of short-term pressures” — hedge funds, stock options, and stock analysts — that keeps companies narrowly focused on quarterly profits.
The financial meltdown of 2008 was a direct result of the pursuit of immediate profit by investment bankers and mortgage brokers who disregarded the impact of their actions on customers, on the larger economy, and indeed on stockholders and the company itself in the long term. Those who wanted to operate with integrity found it difficult. They were constrained by a corporate design that reinforced the need to “make the numbers” by any means possible — a design that bestowed the greatest governance power on short-term shareholders, the stakeholders with the least interest in long-term performance or the external community. Conventional methods for preventing abuses, such as regulation and criminalizing egregious behavior, are only partially effective. In the long run, the best way to get to the root of the problem will be for corporate ownership and governance design itself to evolve.
If the idea of creating alternative forms of corporate ownership and governance is unfamiliar in conversations about the meltdown (or other business abuses), it’s because the prevailing form of corporate design is generally taken as a given. Under the laws of most countries, it’s difficult for corporations to adopt any other form. But against the odds, tender green shoots of new company designs are emerging today, and existing alternatives are being adapted. Some emerging models are as likely to be profitable as more conventional companies, and all are more adept at pursuing goals that conventional for-profit companies usually fail to reach: treating customers fairly, protecting the environment, creating a healthy workplace, and supporting the communities in which they operate.
Richard Nelson, an economics professor at Columbia University who cofounded the field of evolutionary economics, observes that social systems evolve because of two kinds of innovation: advances in physical technologies (such as new environmental and energy technologies), and advances in social technologies (such as new forms of organization). As these two types of innovation influence each other, the governance models that emerge, such as microfinance-related structures, take their place alongside older, more established alternative models, such as cooperatives, employee-owned firms, and government-sponsored enterprises. These designs can be thought of as emergent new organizational species, occupying a new sector of society that is a greenhouse of design experimentation in which the future of our economy may be growing.
One helpful way of thinking about these designs is as representing a hybrid between the traditional for-profit archetype, which has profit at its nucleus, and the traditional nonprofit archetype, which has social mission at its nucleus. This type of hybrid has been dubbed the “for-benefit enterprise” by Heerad Sabeti, CEO of the TransForms Corporation — a North Carolina–based manufacturer of wall decorations with about $2 million in revenues, which routinely employs people with disabilities and invests heavily in developing its workforce. Sabeti is one of several people who have begun to explore the parameters of this new archetype. (Another source of exploration is the Corporation 20/20 initiative, organized by Allen White and me at the Tellus Institute in Boston.) All of these initiatives conceive the new type of organization with a blended purpose at its core: serving a living mission and making a profit in the process. The essential framework of such a company — its ownership, governance, capitalization, and compensation structures — are designed to support this dual mission. And it is this design that enables companies to escape the pressure to maximize short-term profits and instead to fulfill a more fundamental purpose of economic activity: to meet human needs and be of benefit to life.