* Research Report: STEWARD OWNERSHIP. Rethinking Ownership in the 21st Century. Purpose Network
Colin Mayer on the the corporation of the future:
"There are three themes that are really emerging in the current discussions about corporations.
1. purpose, ensuring purpose,
2. ownership and the nature of ownership that‘s contributive to the delivery of that purpose and
3. governance and the way in which the management of companies is aligned to the delivery of that purpose.
Those are the three key elements that are emerging."
"This booklet is a research publication put together for entrepreneurs, business leaders, investors and anyone with an interest in building a better economy. We start with an interview with Colin Meyer, a well respected Oxford professor who sets the historical and philosophical context for our exploration into alternate ownership (Page 10). Form there, we have a brief call for ownership experimentation by Albert Wegner, a well known Venture Capitalist, advocate of Basic Income and economic thinker (Page 22).
Following that, you will find resource specifically addressing the topic of “steward-ownership” - an ownership form with a long history as a solution for companies to enshrine their purpose at their core. In this section, you will find case studies of companies that have lasted generations, weathered economic collapses and conflicts, created significant profits and continually innovated on their core businesses (Page 26).
Accompanying them you will find an interview with Thomas Bruch, the CEO in 5th generation of the German family owned company GLOBUS with 43.000 employees (Page 34). His personal experiences are powerful and pragmatic windows into the ideas presented here.
This booklet is produced by the Purpose Network, which is dedicated to helping companies stay independent and missions driven for the long term."
The booklet discusses five forms in more detail:
- Bosch 42: The Trust-Foundation Model
- Waschbär 46: The Golden Share Model
- John Lewis 50: Trust-Partnership Model
- Metis 56: Perpetual Purpose Trust and Employee Ownership
- Drogeriemarkt 60: Single-Foundation Model
These have played an important role in the creation of utilities of various kinds from grocery distribution to telephone networks. Generally the members contribute capital to build some piece of shared infrastructure.
Insurance is inherently a network effects business and many insurance companies started out as mutuals. These are similar to co-operatives and may have membership fees but tend not to require an initial contribution of capital.
Companies can own themselves in whole or in part via a trust, club or foundation. This is an ownership structure that has been quite common historically in Europe. The role of the owning foundation tends to be to uphold the longterm purpose.
With the invention of Blockchain Technology we may be able to unlock entirely new ownership structures, where there is no need for a central corporation at all and the network is directly owned by its participants."
With Colin Mayer:
* What are corporations for? Why do they exist?
Colin Mayer: Corporations exist to perform functions that benefit the customers or communities of the corporations. And that reflects the origins of corporations. The first named corporation was established in Rome to undertake public functions during the first few centuries AD. The roman concept of corporation was designed to undertake public work and it was then adopted subsequently by the Roman Catholic Church. And in each case they had a specific designed function. The public works of corporations included the building of public buildings, roads, the provision of public services. Also one of the earliest known forms of cooperation is the university.
* Public goods as we would call it today.
CM: Yes, exactly. And in the case of the catholic church it was literally to run and provide the administration. In the case of the universities it was to provide education. And in the middle-ages it was part of the formation of the guilds overtaking trading functions, providing training for people working in those guilds.
* So, by stating this, you take an opposing perspective to well-known statements such as “The purpose of a company is to maximize its own profits“. You wouldn‘t agree to this, would you?
CM: No, not at all. The purpose of a company is to perform functions that will benefit to communities, societies, customers and in the process of doing that the owners of a company generate profits but profits are not as such the objective of a corporation.
* What are profits for then?
CM: Profits are there to provide the incentives for those who put up the capital for the business to do so, it is the reward for doing so. But just as those who work for the company should be rewarded for doing so. That does not make the maximization of profits the objective of the company. The objective of the company is to deliver things that will benefit to others and just in the process to make profits."
* If we shift towards purpose-driven companies, do we stick to the current ownership structure with the shareholders or what would you say?
CM: What it means for companies is, that they are shifting their ownership. There are two changes taking place, one of which is that those that are running institutions like pension funds and life-insurance companies are increasingly realizing that the approach they have taken in the past in the century of portfolio management, holding diversified portfolios, is not beneficial for them and that actually success comes from being engaged long-term shareholders. Not hedge-fund activism, but activism in the form of being supportive of management and insuring that managing will deliver on its purpose. That is one change that is taking place in terms of the nature of the institutional investment. The other change that is taking place is, companies are increasingly realizing, that the influence of the stock market on their activities is being incredibly detrimental. And so, one of the features that is taking place during the past few years is a collapse of stock markets in the west. So, for example, over the last twenty years, the number of companies listed in the London Stock Exchange has halved from 2000 to 1000 and the same is taking place in the US. Companies are voting with their feed, private equity is rising and companies are going private. But private equity is not the solution because companies need many cases to raise capital and so what will emerge is a very different nature of ownership. Companies will be listed still on stock markets but they will have long-term committed shareholders.
* Does this mean, the change consists only in the fact that shareholders, e.g. pension funds, invest with a more long-term perspective? Who will hold the control rights?
CM: The ultimate control rights reside in those who have an interest in the delivery of the long-term purpose of the corporation. That may not necessarily be pension funds and insurance companies. The interesting feature of companies like Bertelsmann and Bosch is that they are not controlled by pension funds but by foundations and that, I think, is a very interesting alternative model that has some advantages over the pension fund – life insurance approach.
* This morning, you also described the structure of the corporations within colleges like Cambridge and Oxford. The trustee you called the responsible cooperating partners. Don‘t you think, this could be a model for companies, too?
CM: So, that‘s basically like the foundations. If you like, the foundations are not quite ownless companies, but are almost ownless companies. Because the foundations themselves, are not answerable to any outside investor. So, the Oxford College model is in many respects a bit like an industrial foundation.
From the interview with Colin Mayer:
* Interestingly enough today not many people have the impression that this is the purpose of corporations that exist. How was this back in the old days in Rome? Did this work there already? Did the companies really work for the public benefit? Why so? What was different?
CM: What is different about companies of Rome and such established in middle ages was that they were established under license. So they had a fundamental purpose to fulfil those public functions. In the case of the medieval guilds it was to perform the roles in terms of the delivery of particular services. In the case of the medieval companies they got the licence from the king, the monarchy and then subsequently from parliament. So, for example corporations in the 18th and 19th century, 18th century in particular, which built railways and canals did so under licences from parliament. So the corporation up until the 19th century was essentially licenced by government or monarchies to perform its functions with a clearly defined public purpose behind them. What changed that was really the establishment of the colonies in the United States. The colonies were established as corporations. So, for example Massachusetts, Pennsylvania etc. were established as corporations. And then in turn they committed others to establish corporation within those states. And so emerged the freedom to incorporate and became a feature of corporation during the 19th century. And thereafter the distinct public function of a corporation was no longer the case.
* That‘s interesting. And during this period of licensing how was the ownership structure of these companies?
CM: So, there were public subscriptions much along the lines of what we have today. So, to take another example, the East Indian Company, which was one of the largest companies of its time in the world, had public outside subscribers and so the notion of there being shareholders was well-established. But the difference was, that those companies although they had shareholders, had to perform this public function. So, in history the fundamental purpose of the company was to fulfil its licenced condition. And as part of that, it would then generate the profits. So that‘s why I‘m saying: the underlying notion of corporations was not to maximize its profits.
Management Rights, not Ownership Rights
* Was the East Indian Company the first company that actually had shareholders in the sense, that people who did not work in the company owned it?
CM: Well, it was not the first. I mean, for example, there was the Russian Company or the Hudson Bay Company, which were established to undertake trading activities. They all had that same notion of their being a purpose and objective of the establishment of a corporation and then had shareholders who invested in them. Now, if you look at other ones, the uniSo, in history, the fundamental purpose of the company was to fulfil its licenced condition. And as part of that, it would then generate the profits. So that‘s why I‘m saying: the underlying notion of corporations was not to maximize its profits.
* If we split the term ‘ownership‘ or ‘property‘ into a bundle of rights including the ability to govern, to receive the profits, to sell it, inherit it or even destroy it, then as I understand, the college fellows inclusively hold the right to govern.
CM: Yes, they have if you like ‘management rights‘ but not ‘ownership rights‘. This particular was an important element to the corporation because what the companies like the Russian Company did was it took the notion of the guild – they had this ‚ministeric‘ role, they were just purely ministering the activities like merging or trading – but then it fused into the notion of having capital and being able to raise more capital. So the real invention behind things like The East Indian Company is to take the notion of a guild as administration and to fuse into that the notion of being able to raise capital. And that‘s what really gives rise to the distinctive feature of corporation; it is that combination of capital and administration."
* If you could design a perfect legal form for the future companies, what would it be like?
CM: I would design it in a way to encourage, as much diversity in corporate forms as possible. So, legislation should be enabling a company to choose that form which is best suited to their situation. Not being prescriptive in laying down any particular right form. For example, in some cases employee-owned companies are appropriate, in other cases industrial foundations may be appropriate. An unfortunate feature of what the European commission is trying to do is based on trying to harmonize, not recognizing the immense benefits that come in the European system from diversity.
* You started off by depicting historical elements concerning features of corporations, especially the fact that every company needed a “licence“. Who could be the ‘purpose licence-provider‘ of the future?
CM: In many of the most successful companies, the essential purpose comes from those who founded the organization. And that‘s where the advantage over public licensing comes, because you can then have a lot of individual ideas to what the purpose should be. In my book, I talk about this a bit like having lots of islands, the world is populated by islands with different purposes and people can choose which island they want to live in, buy from, work for, invest in."
* Let‘s go 50 years into the future. We have a lot of purpose driven companies. How is this going to influence the functions of economy?
CM: Well, I can illustrate that simulation to perhaps what is the most troublesome area of economy at the moment and that is the banking system, where basically, what we‘re trying to do is to insure that the objectives of banks are aligned with the public purpose, simply through regulating.
The problem with that is, that the objects of regulators in upholding the public purposes is diametrically opposed to the owners in terms of maximizing profit.
So, they do whatever they can to get round the regulations. Now, what I‘ve just been describing in terms of changing the purpose and in the case of banks ensuring the licence condition is part of the purpose that means that the fiduciary responsibilities of the directors is no longer simply to maximize profits, but to deliver on that purpose of the company. So, instead of that being a conflict between the bank and the regulator, the interest of the two becomes aligned. Through this process, that whatever is perceived to be the public interest, is actually delivered by corporations, not circumvented by them.
* … we could deregulate and still uphold the public interest.
CM: Yes. The role of the regulator would become much less intrusive than it is at present."