Friday, 23 August 2013

Joint Stock Companies - What's the problem?

The current state of the art in the organisation of human labour is the Joint Stock Company.  Almost every company in the world is organised along roughly the same lines.

Investors buy Shares and elect a Board of Directors to run the company.  That Board of Directors handles the day to day operations and hires employees as they see fit.

Unfortunately, Investors are that class of people who possess Stock but lack the knowledge to act as an Entrepreneur and use that Stock to improve Production and generate a profit.  They are therefore singularly unsuited to running a Company or to selecting those that can.

This has resulted in a situation where almost all Companies are managed by Boards of Directors chosen by people no more qualified to select that Board than a Raccoon is to orchestrate a Shuttle launch.

Election to a Board of Directors has become a popularity contest amongst a select group that are perceived as being members of an exclusive club who are qualified to be Directors.  There is naturally a great degree of Nepotism that has only been magnified by Institutional Investors allowing their Boards to control the Votes attached to the Shares they purchase on behalf of their Investors and/or customers.

It is a natural emergent property of such a system that control of vast amounts of human Capital has fallen under the sway of a very small number of incompetent people who control an ad-hoc Guild where membership entitles one to be elected to a Board of Directors and whose leadership is nebulous and vastly influential.

I don't necessarily believe that these are by any means bad people, they are just people doing the things that people do.  They give jobs to people that they know and trust, they pay themselves as much as they can get away with, they do as little as possible and overestimate their own competence.

One of the things they do is to avoid taking responsibility for their actions.  They do this by taking very few substantive individual decisions, always having a secret escape route and employing a vast panoply of minions to take the fall should the faeces strike the rotating blades.

These minions are cast very much in the mould of their masters and mirror their behaviour within the employment structure of the Company.  They employ vast numbers of their 'friends from Uni', they expend vast amounts of effort doing almost nothing whilst taking home a disproportionate percentage of the Company's pay packet and they fire their sub-ordinates when things go wrong.

This all results in Companies that are extremely top heavy.  They have vast numbers of redundant managers who are being paid North of 60% of the wages but who actually achieve very little other than to create substantial inertia that makes it difficult to innovate or react to a changing marketplace in a timely fashion.

When times are bad they react by downsizing the only employees that actually do anything productive within the Company and apportion the work out amongst the remainder.  This necessarily drives down the quality of the Companies employees whilst failing to achieve any substantial savings in wages.

To give two examples, since the financial crisis, RBS has shed 40% of its employees but has only cut its wages bill by 25%.  This means that everyone they sacked was earning substantially below the average wage for an RBS employee.  As these were all employees that directly did something useful, that the bank could not operate without, they cannot have gotten rid of any more than about half of them and still been able to function as a retail bank.  At a conservative estimate therefore, no more than 20% of RBS employees earn 50% of the wages.  It is entirely probable that targeted redundancies that focused on employees that were overpaid and under-employed might have turned those numbers on their heads.  They might have trimmed away 25% of the staff and saved 40% of the wages.

Similarly, since the ascension of Stephen Elop as CEO, Nokia has been compelled to shed 16% of its staff but has miraculously managed to only reduce its wages bill by approximately 4.5%.  I dare not speculate about what percentage of the useful employees that represents but it is clear that Nokia has a substantially worse problem with 'management-bloat' than even the RBS has.

What does all this mean?

Whilst Joint Stock Companies are mankind's most effective method of organising Production there is clearly much room for improvement.  Many of the world's Companies are bloated whales just waiting to be harpooned.  A smaller, more agile, more efficiently organised Company would be the proverbial cat amongst the pigeons.

I believe that cat to be the Hybrid Stock Company.

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