Is the ‘Modern Company’ New?

As a person with an interest in companies, I am often struck by how many ideas are portrayed as new and innovative, when in actual fact, either the same thing or something similar has existed elsewhere before. For example, when Dame Anita Roddick, founder of Body Shop, died in 2007 many of the obituary writers described her as the inventor of ‘ethical consumerism’. Yet Konosuke Matsushita (1894-1989) created a very similar business model in Japan in the company he formed in 1917 and which eventually became the Panasonic Corporation.

Like Roddick, Matsushita saw the purpose of the business as being greater than merely a means of making money. He saw profits as being nothing more than a mean of measuring efficiency, and that the purpose of the corporation was to provide useful products at affordable prices to consumers and meaningful employment to labour.

However, Matsushita was preceded in these ideas by the American entrepreneur James Lincoln, who founded the The Lincoln Electric Company in 1895, and he too was preceded by many of the Quaker companies whose paternalistic approach to employees was regarded as innovative in their day – such as Rowntree (1862) and Cadbury (1824).

Perhaps the reason that Body Shop was seen as being highly innovative is because at some point in history we lost sight of the true purpose of commerce. If it is possible to trace such a seismic shift back to a single point in time I would argue it was September 13, 1970. That was the day the New York Times published an article by the economist Milton Friedman.

At the time of the article Friedman was leader of the Chicago school of economics and the father of the economic philosophy known as ‘moneterism’. He won the Nobel Prize for Economics in 1976 and was described by The Economist as “the most influential economist of the second half of the 20th century…possibly of all of it”.

The central tenant of his 1970 article was that the sole purpose of the corporation was profit. Any business executives who pursued a goal other than making money were, he said, “unwitting puppets of the intellectual forces that have been undermining the basis of a free society”. They were guilty of “analytical looseness and lack of rigor.”

Like all overly-simplistic theories, his ideas were appealing. In a Forbes article in 2013 Steve Denning commented that Friedman’s ideas were appealing at the time because “private sector firms were starting to feel the first pressures of global competition and executives were looking around for ways to increase their returns. The idea of focusing totally on making money, and forgetting about any concerns for employees, customers or society seemed like a promising avenue worth exploring, regardless of the argumentation.”

Many businesses jumped on the bandwagon and made ‘shareholder value’ their sole objective. Moreover, to ensure alignment of employees to this purpose stock options became commonplace and a focus on stock market valuations became more important than long-term returns on investment.

Friedman’s ideas on monetarism also found favour towards at the end of the decade with the newly elected leaders of both the UK and the US, Margaret Thatcher in 1979 and Ronald Regan in 1980. Both of these leaders preached economic freedom and planted the seeds of consumerism that saw the massive growth in indebtedness that eventually led to the collapse of Lehman Brothers in September 2008 and the start of the current recession.

However, the 30 year period following Friedman’s article could also be seen as hugely successful – GDP in Western economies grew at a phenomenal rate, many companies prospered the monetarism appeared to have overcome the inflationary pressures that had blighted both the UK and US economies prior to the Thatcher/Regan era.

Interestingly though, if you look at General Electric as an exemplar business from that period (as Steve Denning did in his Forbes article) you can see that during the tenure of Jack Welch as CEO from 1981 to 2001 the company grew from a market capitalisation of $14bn to $484bn, becoming the most valuable company in the world. Yet in reality much of this growth came as a result of the highly risky lending being undertaken by GE Capital, which would have itself collapsed in 2008 had it not been bailed out by the US Government.

Even the legendary Jack Welsh has come to realise that the apparent success of that era was just an illusion. In an interview with Francesco Guerrera of the Financial Times in 2009 he said, “On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy… your main constituencies are your employees, your customers and your products. Managers and investors should not set share price increases as their overarching goal… Short-term profits should be allied with an increase in the long-term value of a company.”

In their excellent book Firms of Endearment, authors Raj Sisodia, David Wolfe and Jagdish Sheth describe how the most successful companies today are the ones that are in harmony with their environments – they care about their employees and their role in the environment and communities within which they operate, they are loved by their customers and shareholders alike. In short, they are the sort of businesses that look and behave exactly like the ones created all those years ago by people like Anita Roddick, Konosuke Matsushita and all the others.

The lesson that can be learnt from this is that there is very little that is truly new in life. Humans have achieved what we have on our planet as the result of an accumulation of knowledge and wisdom. But when appealing fads come along it is all too easy to jump on the bandwagon and get taken for a ride. However, the truly smart business leaders stick to their core values and do not get led astray.

About the Author
Alistair Schofield is Managing Director of Extensor Limited.