This is an excerpt from The Breakdown newspaper. To read the full article, register.
“Corporations are legal entities with owners.”
— Lynn Stout
The idea that companies should be run for the benefit of shareholders is a new one.
For most of the 20th century, American corporations were instead run according to the principle of managerial capitalism: “A type of fundraising and organizational management in which managers are the center of power.”
This was the era of the “Organization Man,” when control of the company was removed from ownership and professional managers saw themselves as managers of a stable organization, responsible for coordinating the interests of many stakeholders rather than serving only shareholders.
In most cases, the most favored stakeholders were the managers themselves.
In Outside the GateThe corporate tendency was best exemplified by the “RJR Air Force” – a fleet of private jets that CEO RJ Reynolds used for his weekend golf outings and trips to his vacation home.
In one memorable incident, the only person on board the company plane was the company’s German Shepherd (sent home early from a weekly trip to avoid the consequences of biting someone).
The rise of crony capitalism was also shown in the film Wall Streetwhen Gordon Gekko tells the shareholders of Teldar Paper that they are being exploited by the company’s management: “You are all disgusted with these government officials, with their lunches, their hunting and fishing trips, their corporate jets, and golden parachutes.”
Gekko’s message to Teldar shareholders – where they they owned the company and managers should work for them – it was rooted in the ideas of Milton Friedman, who argued in 1970. New York Times op-ed that “in his role as the head of the company, the manager is the agent of the people who own the company.”
Friedman added: “In a liberal, economic system,” added Friedman, “the CEO is an employee of the business owner. He is directly responsible to his employer.”
In the case of publicly traded companies, it was decided that the owners of the business are the ones that the management works for.
As intuitive as this sounds, Lynn Stout says it’s all wrong: “Companies have owners,” legal expert. they object“as groups of people do to themselves.”
What the owners have, he explains, is, well, parts: “a type of partnership between shareholders and a legal entity that gives the participants limited legal rights.”
Nowhere in that agreement does it say that the officers work for the shareholders. Or to favor investors over all other stakeholders, be it employees, customers, suppliers, the general public or the environment.
“The idea that corporations should be controlled to maximize shareholder value,” says Stout, “is based on false claims about the law.”
However, this is how US corporations have been run, almost universally, for thirty or four decades (since Gordon Gekko, actually).
Stout laments the short term he believes led to it, saying the cult of “shareholder primacy” has led corporations to seek long-term profits at the expense of long-term investments.
(I would argue, however, that the economic rise of AI may be countering this.)
Strong advocates instead of returning to a form of capitalism that, according to him, successfully built infrastructure such as railways and canals without regard for the profits they would make and care about how they would contribute.
“The advertisers in these early agencies were often the customers as well,” he reasoned. “They built their companies to ensure that the business would provide quality service at a reasonable cost – not to maximize returns.”
Is that how crypto protocols should be designed, too?
A recent debate in crypto is how to give token holders the kind of freedom that owners share think they have traditional money.
But if Stout is right, that would be the wrong goal.
Without ownership rights, tokens can attract investors like Gordon Gekko and like the 19th century owners who actively supported profitable railroads and canals.
Railroads and canals were networks, after all—networks that may not have been built as 19th-century companies were carefully managed to maximize profits for their shareholders.
And protocols and networks, too.
Although these protocols are often run as companies, Stout’s work shows that there are several ways to think about what type of investors should be involved.
If crypto protocols are only about increasing returns to investors, then, yes, token holders should be given the rights that make them owners of Gordon Gekko.
But if cryptocurrencies are to become a new form of shared payment, it may be more profitable to offer token holders. a few freedom.
Or maybe not at all.
Instead of providing the legal protection that would attract profiteers, protocols can be relied upon users support their development.
This would allow them to transform into something completely different from the profit making businesses.
Obviously, that would be a very useful guarantee for token investors, too: Investors who also use it can be better served than investors who are sole proprietors.
When the customer and the capitalist are one, the only way to increase profits all of them investors and users and build a product that works.
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