The Five Habits of Highly Successful Companies

(Bloomberg Opinion) -- Every few decades, society has an allergic reaction to corporations. This happened in the 1890s, when companies were demonized as blood-sucking octopuses. It happened in the 1930s, when they were denounced as threats to the common good. It is happening again today.

Remember when Facebook was celebrated as an agent of global harmony? Now known as Meta Platforms Inc., it is widely reviled as a poisoner of democracy. Or when everybody agreed that governments should be run more like businesses? The world’s best-known businessman-turned-politician is Donald Trump. Polemicists compete with each other to produce the most disobliging terms to describe corporations — though the prize, in my view, still goes to Matt Taibbi’s 2009 description of Goldman Sachs as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”

This hostility to companies is no longer confined to the usual suspects on the left. Conservatives routinely denounce “woke companies” for trying to subvert democracy in the name of elite values. Some want to go further and take them on over low pay and poor conditions. The most successful example of corporate bashing in recent years was the work not of Bernie Saunders or Elizabeth Warren but of Ron DeSantis, the Republican governor of Florida who brought the Walt Disney Company to heel.

For all the billions of dollars that corporations spend on public relations, as a class they are doing a remarkably bad job of burnishing their public image. In the wake of a trifecta of crises — the 2008 financial crisis, the 2016 presidential election and the murder of George Floyd — they have collectively settled on two formulae which have now frozen into corporate dogma: ESG (environmental, social and governance) and DEI (diversity, equity and inclusion). These formulae aren’t doing anything to address the legitimacy crisis, since they alienate the Republican half of the electorate. Nor are they doing much to address the environment or diversity because they lump so many bad ideas along with good ones.

Anyone who wants to think a bit more deeply about these mighty organizations could do no better than to turn to William Magnuson’s new book, “For Profit: A History of Corporations.” (Full disclosure: I have also written a history of the company, together with John Micklethwait, the editor-in-chief of Bloomberg News). A professor of corporate law at Texas A&M University School of Law, Magnuson tells the story of the corporation through individual companies that are chosen to exemplify various themes: the Medici Bank (trust), the East India Company (shares), Ford Motor Company (the assembly line), Exxon Mobil Corporation (globalization), KKR & Company Inc. (private equity) and Facebook (start-ups). Magnuson sees the upside as well as the downside of companies, which is in itself a remarkable thing in today’s academic world, where the only two attitudes you normally come across are sanctimony and dislike. He even praises Exxon Mobil for performing engineering miracles by erecting oil platforms in the North Sea, where gale-force winds roared, and waves rose to a hundred feet.

Magnuson ends his historical tour de force with eight pieces of advice that companies and regulators need to take seriously if we are to bring out the best in companies and fend off a potentially devastating backlash. For the sake of time, let me highlight five of these before going on to offer some thoughts of my own:

Don’t overthrow the Republic. Companies can contribute to the breakdown of political systems in two ways.

They can corrupt the workings of the political system by bribing politicians, spreading disinformation or opening the door to foreign agents. The Southern Pacific Railroad (later absorbed into Union Pacific) regularly bribed or bullied California legislatures, provoking the novelist Frank Norris to denounce it as “an excrescence, a gigantic parasite fattening upon the life-blood of an entire commonwealth.” Exxon Mobil funded industry groups that tried to undermine the growing scientific consensus on climate change. Facebook was so intent on growing at breakneck speed that it allowed foreign agents to use its platform to spread lies and hate.

They can also take on excessive risk that results in bankruptcy or even social breakdown. Britain’s South Sea Company created such a crash that it discredited the corporate form for a generation. KKR and other private equity companies have encouraged utilities and even hospitals to load up on debt, increasing the chances that they will go bankrupt and thereby deprive the public of essential services.

Think long-term. The temptation to focus on the short term is greater than ever in a world of always-on stock markets, widely dispersed share ownership and performance-related pay. Companies and regulators need to construct countervailing forces such as strong fiduciary rules that oblige executives to protect the long-term interests of the company, public disclosure rules that force companies to explain why they are making their decisions and giving founders more voting rights, through special classes of shares, so that they can continue to pursue their long-term vision regardless of the whims of regular investors. 

Compete — fairly. Regulators have long been aware of the dangers of monopoly. The Sherman Anti-Trust Act (1890), inspired by the giant combinations of the Gilded Age, states plainly that anyone who monopolizes a trade is guilty of a felony. Yet companies are equally aware of the desirability of monopolies: You can charge what you want and rest on your laurels. And politicians, judges and regulators have repeatedly softened absolute bans on monopoly. In Verizon v. Trinko (2003), the late Supreme Court Justice Antonin Scalia declared that “the mere possession of monopoly power, and the concomitant charging of monopoly price, is not only not unlawful; it is an important element of the free-market system.”

The combination of judicial permissiveness and the network effects that are at the heart of social-media business models means the world is witnessing another Gilded Age in which companies not only exercise extraordinary control of markets (Google controls 90% of search for example), but also use their super profits to buy up potential competitors and lobby politicians. It’s time to stop giving potential monopolists the benefit of the doubt.

Don’t take all the pie for yourself. The era that started in the 1980s has seen an enormous increase in inequality. CEOs have exploited (and distorted) Michael Jensen’s agency theory to increase their pay and stock options while making sure that they are well compensated if they fail. Private equity managers routinely take home tens of millions of dollars a year (in 2020, Blackstone’s top two executives earned a combined $827 million) while also imitating many of the corporate perks that they once railed against. (Jerome Kohlberg’s perks when he retired from KKR included reimbursement for a secretary and a driver and a new Lincoln Town Car every year.)

Lots of things can be done about this that have more bite than ESG.  Companies could refuse to provide failed executives with golden parachutes. The US government could revise the tax rule whereby interest payments on debt are tax deductible while dividend payments to shareholders are not. Governments in general could also do more to cooperate globally to close tax loopholes.

Don’t move too fast or break too many things. The corporation was designed as an institution to let people take risks and shoot for extraordinary targets. Limited liability is a supreme device for encouraging people to risk a bit of their capital without risking personal ruin (“everything including your cufflinks” as they used to say at Lloyds). Companies have taken awe-inspiring risks — the East India Company sailed to the other side of the world at a time when that was equivalent to traveling to the moon, for example.

But too many companies have used this as an excuse for reckless risk-taking. This is particularly the case in Silicon Valley where Mark Zuckerberg’s motto of “move fast and break things” is regarded as a piece of Platonic wisdom rather than a description of irresponsibility. Facebook has been so obsessed by increasing its number of users that it has consciously encouraged social media addiction while also skimping on internal checks that might have reduced the amount of harmful content and prevented Russian military intelligence agencies from spreading deliberately false and polarizing information. The move-fast-and-break-things culture that might have made sense when Zuckerberg was operating a laptop in his Harvard dorm room is dangerous and irresponsible now that the re-named Meta is a global network serving billions of people.

Regulators need to work harder to make sure that corporations don’t use the shield of limited liability as an excuse for irresponsible behavior. They can impose broader product-liability rules on companies and their executives (tech companies will never listen to sermons unless they are backed up by real punishments). They can do more to investigate bad behavior and impose punishments that hurt. They can develop “regulatory sandboxes” where companies considering a new technology are obliged to work closely with regulators to understand the potential consequences.

Magnuson underestimates the importance of animal spirits — spirits that, if they don’t quite operate on a Nietzschean plane beyond good and evil, at least mix virtue and vice as liberally as they mix creation and destruction. Entrepreneurs are almost always unreasonable people who succeed precisely because they are so unreasonable. They are also frequently mixtures of great virtues and horrific vices. Henry Ford was a business hero who put America on wheels and doubled the pay of his employees at a stroke. “Young man,” he once said during an argument with his son, “I invented the modern age,” and he wasn’t wrong. He was also an incorrigible anti-Semite who drove his workers at a furious pace (the one phrase that foremen had to learn in English, German, Polish and Italian was “hurry up”), spied on his employees to make sure they lived respectable lives, and unleashed his private goon squad of thugs with cauliflower ears and broken noses on trade unionists.

Magnuson also flirts with the modish idea that companies should only have licenses to operate if they commit to acting for the common good. He praises the East India Company for signing up to a bit of Elizabethan boilerplate about acting “for the Honour of this our Realm of England, as for the Increase of our navigation,” and laments the fact that, sometime in the 19th century, it became possible to acquire a corporate charter by submitting a bit of paperwork to the local authorities. “We have abandoned the founding purpose of the corporation as a tool for crafting a flourishing society.”

Companies certainly owe a general debt to society at large for the privilege of limited liability, which imposes some of the costs of failure on the public at large. But was the world really a better place in the days when company founders had to persuade a collection of politicians to grant them a charter whenever they wanted to launch a business? For the East India Company, contributing to the national interest meant enriching a group of about 200 insiders by, for example, trading in slaves and milking India of its wealth with the help of an army. And did things really take a turn for the worse when companies were given freedom to determine their own ends? The liberalization of companies from the shackles of “purpose” in the mid-19th century led to an explosion in the number of companies and with it a boost in collective prosperity.

Magnuson is nevertheless to be congratulated for writing a book that is both fresh and thought-provoking. For too long, the debate about the corporation has been dominated by three groups: neoliberals who are willing to forgive companies anything (including monopoly), left-wing activists who regard companies as spawns of the devil, and corporate reformists who have fixated on ESG and DEI while somehow turning a blind eye to carried interest. Magnuson puts forward a whole world of ideas that we should be discussing for harnessing the creative powers of corporations while also minimizing their more destructive tendencies.

More on Business From Bloomberg Opinion’s Adrian Wooldridge:

• The Accountant Shortage Threatens Capitalism’s Future 
• An Anti-Woke Warrior Has US Companies Running Scared
• If Companies Really Want to Do Some Good, They Should Unbundle ‘ESG’ and ‘DEI’

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Adrian Wooldridge is the global business columnist for Bloomberg Opinion. A former writer at the Economist, he is author, most recently, of “The Aristocracy of Talent: How Meritocracy Made the Modern World.”

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