Open vs. Closed Corporate Partnerships

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Discussion

An explanation by Chris Cook of the Open Capital movement:

All citations are from http://www.cooperativeintelligence.org/2004/07/cooperative_capitalism.html

THE CLOSED MODEL

"The ‘Closed’ Public Corporate

In his essay ‘Economies for Life’ (1) the Economist David C Korten characterises the PLC as a key component of a ‘Suicide Economy’:

This corporate form is legally structured to allow virtually unlimited concentration of power to the exclusive financial benefit of absentee shareholders who have no knowledge of, or liability for, the social and environmental consequences of the actions taken on their behalf. It is a legally sanctioned invitation to benefit from behavior that otherwise would be considered sociopathic—even criminal.

The problem with the ‘Closed’ Corporate - as I propose to term it due to its essentially proprietary character - is the fundamental conflict between the interests of the owners of the "closed" or Fixed Capital base – inaptly denominated ‘Equity’ – and the interests of all other stakeholders such as suppliers, customers, management, staff and in the case of major global corporates, the public at large.

The latter are essentially ‘costs’ external to the (absentee in the case of a Public Corporate) owners of the Enterprise and the resulting drive to maximise ‘Shareholder Value’ through a combination of ‘cutting costs’ and growth at any price has brought us the Wall Street/City analyst-driven management excesses typified by Enron and Global Crossing.

There is a fault-line within the ‘Closed’ Corporate. It has the characteristics of what biologists call a ‘semi-permeable membrane’ in the way that it allows Economic Value to be extracted from other stakeholders but not to pass the other way. So while Capitalism may not, as its critics aver, be ‘broken’ – Capital most certainly is and always has been - through the discontinuity between:

  • ‘Fixed’ Capital in the form of shares ie Equity; and
  • ‘Working’ Capital in the form of debt finance, credit from suppliers, prepayments by customers and obligations to staff and management.

Due to this discontinuity between permanent Capital and Capital of defined duration the exchange of Economic Value in a Closed Corporate is made difficult and the true sharing of Risk and Reward which constitutes a true partnership - rather than a joint venture, supplier/customer relationship or strategic alliance - is simply not possible.

Society is crying out for a ‘Third Way’ between the co-operative/collaborative and the competitive: the public and the private: the paradox of the modern world: that humans have never been more inter-dependent in our needs, or more individualist in our outlook. No Enterprise Model has been capable of resolving this dilemma. Until now."


THE OPEN MODEL

Open Corporate Partnerships

The UK Limited Liability Partnership ("LLP")

From 1844 onwards in the UK it has been mandatory for partnerships with more than 20 partners to be incorporated – the result being Corporate Partnerships with unlimited liability. In 1907, it became possible for Partners to limit their partnership individually rather than collectively within a UK partnership at the cost of being unable to participate in the management of the partnership. This model routinely continues in the USA where it is the normal structure for professional partnerships.

In the late 1990's UK professional partnerships, faced with the prospect of individual bankruptcy as a result of litigation against the firm, successfully lobbied for protection, which arrived in the shape of the Limited Liability Partnerships Act 2000 and came into effect on 6 April 2001. Since then over 7,000 UK LLP's have been incorporated, for the most part from conversions of partnerships previously with unlimited liability.

The UK LLP is supremely simple and remarkably flexible. The only requirements are for two "Designated Members" to complete an Application Form obtainable at the Companies House web-site and to return it with the requisite fee of £95. There is no requirement for the mandatory and arcane Victorian vintage Memorandum of Incorporation and Articles of Association – the prescriptive Contracts between Members laid down by Statute – and no need for a supplementary Shareholder Agreement tailoring these Contracts to the precise present day needs of the Members in the relevant Enterprise. All that is needed is a simple ‘Member Agreement’ – a legal protocol which sets out the Aims, Objectives. Principles of Governance, Revenue Sharing, Dispute Resolution, Transparency and any other matters which Members agree should be included. Amazingly enough, this Agreement need not even be in writing, since in the absence of a written agreement Partnership Law is applied by way of default.

While a UK LLP should be a business run "With a View to Profit" the proposed Enterprise Model redefines the relationship between stakeholders in a way that literally removes the very concept of Profit and Loss – a subject to which we will return. The ease of use and total flexibility enables the UK LLP to be utilised in a way never intended – as an ‘Open’ Corporate partnership.

The ‘Open’ Corporate Partnership

There are two innovative concepts which characterise the ‘Open’ Corporate Partnership. Firstly: the realisation that it is now possible for any stakeholder to become a Member of a UK LLP simply through signing a suitably drafted Member Agreement: this puts the ‘Open’ in the Open Corporate. So instead of a supplier signing contractual terms of business negotiated adversarially or an employee being confronted with a Contract of Employment they may instead become true Partners in the Enterprise with their interests aligned with other stakeholders. The result is that there are no ‘externalities’ in an Open Corporate Partnership, which therefore means that Economic Value may be exchanged within the Enterprise in conformance with the Member Agreement.

The second innovation is the concept of ‘Open Capital’ itself. This concept arose out of the realisation that proportional shares (such as one half, three fifths, five millionths) in an Enterprise constitute an infinitely divisible, flexible and scaleable form of Capital capable of distributing or accumulating Value organically as the Enterprise itself grows in Value or chooses to distribute it. Furthermore, proportionate shares may be sold to raise Capital either outright – for an indefinite period – or, through a Sale and Repurchase (‘Repo’) agreement, for a defined period of time – creating ‘Temporary Equity’. Where an Equity share is ‘repo'd’ in this way the investor participates in the increase in Value whether distributed as dividend or not, but retains the risk that his Equity stake may in fact decrease in Value over the period. In simple terms: Debt and Interest are replaced by Equity traded forward: the result is ‘Temporary Equity’ and the fault-line dividing the ‘Closed’ Corporate disappears."