Welcome to the world of Karl Marx

"Welcome to the world of Karl Marx" is Arie de Geus' greeting to corporate leaders. "Capital is a commodity. Human talent is not."

Here are my notes from the Don'tStop01 Business Innovation Conference we are holding here in Copenhagen. Arie de Geus was head of Shell Oil's Planning Unit for 38 years.

People have little loyalty to companies:

New MBAs stay in their jobs less than 5 years
CEOs stay about 2-3 years.
Shareholders hold their shares about a year

This isn't loyalty.

Why is this? What does it mean.

It's certainly very contrary to the view that I have of what constitutes a successful company. My view is very different... my view is based on some interesting things we learned at Shell.

In the 70s, we asked ourselves "who should be our example?" What companies should we look up to?

We made a study. We asked a team to go out into the world, and find companies that were older than Shell, more than 100 years old, who were leaders in their industry, and who still had their corporate identies intact.

27 companies met the definition.

Siemens, more than 150 years old
Dupont, more than 200 years old
Mitui, 300
Sumitomo, 400
Stora, 700 years old

What characterizes these old companies? What let's them survive. It's clearly not "cultural" because we have American, Swedish, German, and Japanese companies on the list.

We found they shared these traits:

1) Financially conservative. This is bad news for investment bankers. These companies want to keep their own money in their own pockets, and don't want someone else's money. Surviving for centuries means never having a banker pull the rug out from under you.

2) The leaders of these companies are sensitve to the world around them. Leaders were outward looking people, and are often highly active in the society around the company. Dupont has produced generations of US senators. If your leaders are out there in the world, active, they will note changes in society and keep asking "what will this mean for the company?"

3) Strong sense of cohesion and company idenity. Leaders and staff know what the company stands for, and are happy to identify with those values.

4) Management style of tolerance. Lots of space on the margins for new or different activities.

That led me to my definition of a corporation: a good firm is financially conservative, has staff that identifies with the company values, and has management that is tolerant and sensitive to the world in which they live.

That's not what they taught me in the economics department when I was in university in Rotterdam. There we were taught that  companies are institutions that produce goods and services for which other people are prepared to pay a price. The successful company combines labor, capital and land in an optimal way: Minimize cost, maximize price, maximize profit.

This is still taught.

Three definitions. Three different implications.

1. Where there is no loyal relationship to the company, it's every man for himself. It becomes the tragedy of the commons. The measure of success is maximation of  shareholder value.

2. If we accept the classic definition, the one still taught, we must accept the company as an economic machine. The measure? Efficiency and maximization of profit at short notice.

3. And my definition: human work community aimed at continuity from generation to generation. Goal is survival and self-development in a changing world. Measurement is life expectancy.

Which is the right definition? Which company would you want to work for? If you lead a company, which would you want to create?

Let's think about three things.

1) A study done at Stanford in the early 1990s showed that long-living companies produced, on average, 15 times more profits over 60 years than the stock market average. Human work community meets the goals of life expectancy, profits, and shareholder value.

2) When we look at the oldest companies, we must remember the hundreds of thousands of companies that died. The average life expectancy of a company is less than 17 years -- as low as 4 years according to a recent UK study. If you have to choose what sort of comapny you want to create, your choice is quite stark. Choose wrongly, and your company will be dead before you are.

And let's not say "oh, that's just survival of the fittest, that's the market at work." The death of a company is not gratuitous. People suffer. And if we accept that companies are like people -- they get wiser and better as they grow older -- then the death of a company is a tragic loss of knowledge and wisdom.

You may say "survival of the fittes, free markets". But I cannot believe the death of a company is gratuitous. People suffer. And don't companies get better as they get older, much as we do in life.

3) Finally, we are in an age of fundamental change. Capital is now a commodity; it is no longer a scarce production input. This is enormously significant: in the last 50 years, we have had near constant GNP growth, and we have saved 20% to 30% of this a year. Our world is simply awash with capital. Capital is no longer dominant.

In fact, capital is a commodity -- the capital market is a buyer's market, not a seller's market. So if you are choosing what business to create, why on earth would you structure it to maximize the return to the supplier of capital, the shareholders? That is very short sighted.

No, today, labor -- human talent -- is the scarce production factor. And if you would succeed you must have a management style that makes the most of that human talent. 

Corporate leaders: you live in the world of Karl Marx. Your core asset, the asset that is the value of your company, goes out the door every day. I really wonder how you sleep at night, because you have no idea if they will come back. So you better create the conditions so that they do.

Technorati: business innovation, dontstop01, Arie de Geus

Posted by Allan Jenkins on March 15, 2006 at 11:35 AM in Business, Conferences, Copenhagen, Corporate Governance, Corporate Management, Management | Permalink

Comments

Man, now THAT'S a post! I'm forwarding this on to a whole stack of folks I know. Nice one, tiger!

Posted by: Lee | Mar 15, 2006 8:32:03 PM

Glad the note-taking is of value!

Allan

Posted by: Allan Jenkins | Mar 15, 2006 9:57:34 PM

Allan: you gave me an insight for my talk tomorrow at YPO - will refer to your pithy & thought-provoking blog... thanks to Lee for my finding you.

Posted by: Kare Anderson | Mar 16, 2006 1:13:21 AM

Allan,
So well put - I'll just link to you!
Thanks for the insigts.

I missed out on something I see, but I was too busy to go.

Let's have a beer soon!

Posted by: Gunnar Langemark | Mar 16, 2006 9:49:58 AM

What an interesting view. I concur and perhaps you offer a further proof for research.

The relationship value model I have built suggests that there is value in relationships of two kinds. First is a token. It is, if you, like share price. The second is the community built on cultural values associated with tokens, such as share optimisation but with a many more values in attendance. It is impossible to measure a company through its share price or dividend but it is possible to measure a company by its culture and the effect it has on the culture that supports it.

Posted by: David Phillips | Mar 16, 2006 4:11:08 PM

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