Chapter 08:

The Ethics of Reinventing the Morally Embattled Corporation

Executive Summary

The over 125-year old economic miracle called the Corporation is suddenly shaken in its foundations. The
corporate business world is rapidly changing not only in the USA but across the globe. The front covers of
business magazines and dailies, once dominated by names and faces of “Corporate Giants,” are now being
replaced with success stories of great startups and small business entrepreneurs. The reasons for these
radical changes progressively reveal the imperfections existing in the current corporation and the business
boardroom paradigm. For over a century, huge corporate entities spawned by capitalism have established
and entrenched themselves in their respective industry arenas and have since been ruling the world,
dominating money, capital, cash and market opportunity. Once they provided solutions to people’s
employment and career needs, but have made a fortune for themselves thereby. In the course of their
evolution, the businesses have transformed into corporations, seeking people’s money for doing business and
in turn giving a share of proportionate ownership to the investor people in the form of dividends and capital
gains. Such a brilliant method of raising capital has empowered the corporations to grow and expand
beyond physical and political boundaries. Today, however, the corporations are run by the board of directors
most of whom are representing gigantic promoter investor institutions. That is, the main administrative role
is now replaced by private equity firms and hedge funds that provide the required capital but who also exert
undue pressures on CEOs to focus on short-term strategies that have massive profitability potential, thus
defying the usual business management model and paradigm the CEOs were trained for in B-Schools. The
massive CEO exodus that has migrated from the traditional corporations to newly created startups and
smaller business entrepreneurial ventures has also made the corporation an endangered species. In such a
market turbulence how do we redefine, re-design and reinvent the morally embattled corporation?
This chapter explores solutions.

Case 8.1: The Persephone Beer Company

Persephone Brewing Company (PBC) is located in picturesque Gibsons, British Columbia (BC). PBC grows
hops, food, beer and community at what is lovingly known by the locals as The Beer Farm! Named for the goddess
of spring bounty and the log salvage boat from CBC’s hit TV series The Beachcombers, Persephone operates an 11‐
acre farm and craft micro‐brewery on BC's Sunshine Coast. Producing some of the finest craft beers, the PBC
"farmhouse" approach integrates onsite farming of hops and honey while sourcing BC grown and malted barley.
Their brewery and farm is in part owned by the Sunshine Coast Association for Community Living (SCACL), a
non-profit organization providing services for people with developmental disabilities, a number of whom work at
the farm. Their annual fundraising events include the Tough Kegger adventure race and the Sunshine Coast Craft
Beer Festival, great excuses to have fun and quaff some delicious brews for a good cause.

Not content with simply making the best and freshest beer, Persephone is committed to making the
world a better place through early adoption of ecologically positive systems and working as a social
venture to employ people who need it most. PBC’s aspects of sustainability program include converting their
spent ingredients into compost, reusing waste water for irrigation, partnering with local growers and chefs to provide
a hyper-local culinary experience, and scads of community fundraisers and events that bring the community together
with visitors from afar to help them build the world we all want to live in.

Persephone was first inspired by breweries in the UK who had found success with crowd-funding, and saw an
opportunity to drive connection to their company through ownership. “We saw the real benefit in terms of investors’
engagement—not just their capital but their help to build a loyal customer base. That’s fostered its own momentum
and its own opportunity,” Smith said. “What if we had a thousand owners? Not just loyal customers but
ambassadors who would tell their families about Persephone Beer. I think this strategy to capitalize our growth
doubles as a marketing strategy in terms of spreading our brand awareness and developing that owner-customer
base.” (See Reference #2 below for this as well as other quotations in this Case)

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 Beyond creating new evangelists for their company, exploring equity crowd-funding has also helped
Persephone Beer tap into an investment market that most North American businesses haven’t even heard of.
“Crowd-sourced equity is much more mature in Europe than it is in North America; we’re on the front end of a
pretty substantial investor wave,” Smith told us. Equity crowd-funding has only been possible in Canada and the
USA for less than eighteen months. “Frontfundr is our partner here in BC. The regulations allowing for crowd-
funded equity are only about a year old in Canada, so there aren’t a lot of players in the space who are using this to
attract investors to businesses.”

Persephone Beer has another advantage: their B Corp story. i When law firm Drinker Biddle studied the first
companies to start raising money through regulation crowd-funding in the USA, they saw that social enterprises
were disproportionately represented. The most successful campaign so far in the USA belongs to a Pending B Corp
and benefit corporation named BetaBionics.

“I definitely think there’s a big draw from being a B Corp,” Smith confirmed. “Being a B Corp is very
indicative of the kind of company we are and helps us attract community investors.” For Smith, the principles that
apply to values-driven consumers apply just as much to this new class of investors. “People who want to use their
consumer dollars thoughtfully also want to use their investor dollars thoughtfully. Not surprising, but very
encouraging,” he said; “70-80% of our investors are in that vein.”

With the lower price point that comes with equity crowd-funding, many more of those conscious consumers
become potential investors. People can purchase shares through Persephone’s campaign on Frontfundr for only
$250 dollars. “We wanted to popularize equity investing for folks who might otherwise have had to be accredited,”
Smith said. “This is a company that’s growing fast. Our investors see opportunity in that, and it’s very accessible.”

Their investors also saw the opportunity to create positive impact. “For us, a big part of growth is not just
making more beer but having more impact on our community,” Smith said. “Last year we were at about 15-20
employees, and next year we’ll be at 30ish. A proportion of our employees are people with disabilities. I think many
of our investors and partners are thinking, ‘I’m in this for the impact, not just the financial returns, so let’s see if we
can take that B Corp model to scale. Can we take it to 500 people affected by Persephone’s work?’”

Smith sees a future in equity crowd-funding for both B Corps—both to raise capital and to change the
investment world. “It depends on the kind of business you are and the investor you’re looking for, but I think it’s
worthwhile as part of the B Corp movement to popularize equity investing through crowd-funding,” he told us.
“Equity crowd-funding helps people diversify their portfolios and become more savvy about where their money
goes, so they can keep it local or keep it cause-based, and make it more thoughtful. If we’re saying you should be a
more thoughtful consumer, you should be a more thoughtful investor too.”

Companies of all kinds are beginning to pursue equity crowd-funding, including both early stage businesses
and older companies. For Persephone Brewing Company, a three-year-old B Corporation in British Columbia,
crowd-funding their third round of investment let them capitalize on the appeal of their positive impact and use their
ownership to contribute to their social mission. “We always had the idea of democratizing our ownership model,”
said Brian Smith, Persephone’s co-founder and CEO. “Just like we knew we wanted to start an employee stock
ownership program, we knew we wanted to bring in more local ownership.”

Reference Links:
[Major Source: The BlogVoice of the B Corporation Community. Posted by: efreeburg August 24th, 2016].
https://www.bcorporation.net/community/persephone-brewing-company
https://www.facebook.com › Places › Gibsons, British Columbia › Urban Farm
https://www.tripadvisor.com/Attraction_Review-g182206-d6405750-Reviews-Perseph
https://www.yelp.ca › Food › Breweries
https://twitter.com/persephonebeer?lang=en

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Ethical and Moral Questions
1. Following Persephone Beer Company (PBC), discuss the legality, ethicality, morality and spirituality
of crowd-funding ownership for small businesses in India.
2. Following PBC, discuss the legality, ethicality, morality and spirituality of democratization of capital,
investment and ownership for your company in India.
3. PBC is not debt over- leveraged or promoter-dominated – two major threats to corporations today.
Is this a good template for reinventing the morally battered corporation of today, and why?
4. PBC shows also signs of crowd-innovation and crowd-customer-facing. How will you incorporate
these new features (see also P&G or Google or Cloud who do this) as your Corporation’s additional
strengths when battered?
5. Small is beautiful (Schumacher, 1973). PBC is small and beautiful, doable and desirable. How can
this model save the over-sized embittered corporation of today?
6. There is hardly anything that Artificial Intelligence can threaten in PBC. It is not an individual wage
job; it is a community innovative work-project, especially for the challenged. How will you emulate
these attributes in reinventing your corporation, and why?

Introduction
The over 125-year old economic miracle called the Corporation is suddenly shaken in its
foundations. The corporate business world is rapidly changing not only in the USA but across the globe.
The front covers of business magazines and dailies that were once dominated by names and faces of
“Corporate Giants” are now being replaced with success stories of great startups and small business
entrepreneurs. The reasons for these radical changes are now being discussed openly and scrutinized
objectively. Such discussions are progressively revealing the imperfections existing in the current
business paradigm and the corporation in the free enterprise capitalist system (FECS).

Imperfections in the Free Enterprise Capitalist System (FECS)-based

Corporation
The fragmentation of ownership is an unintended consequence of the rise and development of the
American public company. In the 19 th century USA, there were limits on a bank’s ability to swap or lend
restricted credit, and a strong legal system supported contractual agreement. Hence, companies began to
raise capital through direct public offerings via stock markets, and this enabled the development of the
American corporation and the American industry. But a result of this democratization of capital and
ownership there followed serious dilution of ownership and the loss of control.

Over time, however, mechanisms emerged to trade these direct offerings in regional and national
financial markets. Stock markets flourished, and joint-stock companies became models of ownership,
and the big public companies became the capitalist norm. Large corporations became akin to sovereign
entities, divorced from the influence of their “owners” by retained earnings that allowed managers to
invest as they thought fit. When companies became ever larger and more powerful (something that Adam
Smith did not foresee in 1776 when he wrote “The Wealth of Nations”), governments felt the need to
control them. Ever since the emergence of the large corporations, laws and regulations have greatly
increased, and so also the power of corporations through the “lobby” created by corporate donations. To
help investor buy-sell decisions, the corporations were mandated to disclose their operations and
performance by structured Annual Financial Statements supplemented by Annual Reports during Annual
General Body Meetings (AGBM) with shareholders.

For over a century, huge corporate entities spawned by capitalism have established and entrenched
themselves in their respective industry arenas. These entities have since been ruling the world, dominated

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money capital, cash and market opportunity. No doubt, they have provided solutions to people’s
employment and career needs, but have made a fortune for themselves thereby. In the course of their
evolution, the businesses have transformed into corporations, seeking people’s money for doing business
and in turn giving a share of proportionate ownership to the investor people. Such a brilliant method of
raising capital has empowered the corporations to grow and expand beyond physical and political
boundaries. They also provided the common man of dreaming big and ultimately making it - often from
rags to riches. That is a tremendous increase in wealth even when adjusted for inflation levels. Thus, the
mode of financing an organization completely changed, and with it the whole organizational structure
changed as well, with its vision and mission. Today, the corporations are run by the board of directors,
appointed members of which serve as CEO and chairperson. The main administrative role was taken up
by a board of directors who represented the shareholders and intended to work in their favor. The role and
the ownership of managers, therefore, have diminished in the organization. The corporation structure
became too complicated with layer upon layer added and that is where the problem started.

Growing Dissatisfaction of Corporations

Currently, there is a growing dissatisfaction with the corporation or the listed public company,
especially as it exists in the USA. The best listed companies or corporations have been remarkable
organizations thus far, mobilizing talent and capital, responsible for their quarterly results and long-term
investments that have kept them growing, and they have certainly produced a stream of talented managers
and innovative products. But after a century of market dominance, the public corporations are showing
signs of wear and tear. One reason is that top managers put their own interests first, even though the
shareholder-value revolution had incentivized them via stock options since the 1980s in the USA. Many
managers feel that their jobs depend upon and are rated by short-term goals and objectives, quarter after
quarter, rather than the long term ends the markets look for.

The corporate structure and daily routine is becoming more and more undesirable and unwelcoming.
Even though the companies are trying to attract new recruits through incentives and stellar salaries, they
are still failing to retain talent. Corporations go to great lengths to attract them with strong value
propositions; but once they join, these values are nowhere to be seen. Corporations do not give employees
at all levels of the firm the ability to challenge the way things are done and propose new ways of working.
This stifles innovation in big corporations and contributes to employee turnover.

The once publicly appreciated and omnipresent public company structure is now under the radar and
is facing public scrutiny due to a multitude of legal, economic and ethical repercussions that have diluted
the position of strength that the corporation structure once enjoyed. With time, several unwanted
components have crept into the system and have played their role in destabilizing a once popular and
efficient model.

Some new consequences of the contentious public company structure are:

 Conflict of Interest: Managers today, at least the vast majority, believe in a different ideology. They
believe their sole responsibility in the organization is to maximize the wealth of their shareholders. They
do not want to extend their services beyond that. The obvious fallout of this kind of thinking is sheer
neglect of other important facets of the organization - the fact that they also have a duty to the company
and are linked to the shareholders via the company. Managers need to keep the betterment of the
company above anything else. This would lead to a holistic development of the organization and the
surrounding ecosystem.

 Quarterly Capitalism: This is a new term for ‘short-termism’ – it strategizes short-term benefits rather
than long-term objectives and investments. Over the years, the axis of concern has shifted from long-term

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 benefits to short-term gains. Focus is now on distributing money to shareholders rather than innovating
and taking risks so as to come with radical solutions to existing market and humanity problems. Corporate
executives have shortened their investment horizon, mostly to a quarter. The fast turnover of CEOs has
acted as a catalyst to incorporate quarterly capitalism as they would not be liable for the actions initiated
in the present. It has also developed an attitude that is intolerant towards failure. The top rung of the
company have slowly begun to cut down the gestation period for new and innovative projects as it might
have a negative bearing on the quarterly reports of the company. In a time where climate change is our
most important concern, the growing trend of quarterly capitalism is a harbinger of ominous times. Short-
termism is antithetical to long-term sustainable approach towards growth. Short-termism discourages and
depresses executive imagination and creativity, transformational innovation and productivity and
subsequent long-cycle innovations that result from long-term strategies.

 Regulations: Regulations have multiplied since the Enron scandal of 2001 and the financial crisis of
October 2008. Conflicting interests, short-term goals, and regulation all impose costs. The outcome of all
this is dismal: public companies are struggling to squeeze profits out of their operations. In the past 30
years profits in the S&P 500 of the big American companies have slipped to a mere eight percent growth,
and have even sunk to five percent growth in the last two quarters of 2015. The number of companies
listed on stock exchanges in the USA has fallen by half since 1996, partly because of consolidation, and
also because talented managers have moved to private companies (“Reinventing the Company,” The
Economist, October 24, 2015, p. 11). The global financial crisis of October 2008 was an eye opener. It
showed us the extent to which our capital system is fragile and has been damaged and that it is time to
introduce new changes to the system. The dot com bubble, Enron scandal, and the closer-to-home Sahara
case and the Forex scandal in the Bank of Baroda, and now the behemoth scandals in the Punjab National
Bank and its foreign branches, are also testaments to the fact that the government was provided with no
other option but to introduce stricter regulations in the system so as to curb “wealth without work,” a
capital sin that Mahatma Gandhi asked us to avoid at all costs. These regulations have resulted in erosion
of profits as it has increased red tape and also increased the clearance time required for projects. Growth
has stagnated and squeezing profits out of operations is a task in itself. This also has an adverse impact on
the consumers as firms tend to escalate prices. Stricter regulations also discourage foreign investors to
invest in an over-regulated market or country and thus send a negative image of the country. This in turn
has encouraged the concept of quarterly capitalism as firms concentrate on short term benefits rather than
going for long-term projects.

 The Agency Problem: In the traditional publicly listed corporations interests are misaligned along the
entire chain of owners, investors, managers, and employees. The distinction between these parties is not
well defined and often denied in many ways. Capitalists have become owners, and managers have lost
their freedom to create, imagine and innovate. For instance, an employer running a 401K selects a
committee which selects an investment provider which in turn selects fund managers who select
companies whose (selected) board members appoint managers. Each step is swathed in regulation that,
even if well-intentioned, is shaped by lobbyists to benefit one or other of the parties rather than the system
as a whole” (The Economist, October 24, 2015, pp. 23-24). This layered management provides ample
scope for mischief, fraud, corruption, and bribe. The main problem identified is termed as “The Agency
Problem.” This simply translates to the conflict of interest problem which exists in such a situation
involving managers and shareholders. The shareholders appoint the top manager (as CEO or managing
director MD) and they want the manager to maximize the returns for the shareholders. On the other hand,
the manager’s role is actually to manage the business; that is, taking into consideration both the long-term
goals and short-term goals. The manager must act in the interest of the organization, but is always under
the scanner and pressure of getting higher returns for the shareholders. When this pressure builds up it
terminates into unwarranted actions taken by the manager which harms the organization and therefore the
shareholders.

 Fraudulent Practices: Nowadays managers have to deal with anonymous or ghost owners as companies
are swamped with them. The managers interact with funds managers who represent these anonymous
owners. These funds managers buy and sell stocks on the stock exchange. This results in a long chain of
intermediaries – the latter creates an environment for financial leakages. Intermediaries at different levels

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 would have their own self-interests thus making life difficult for managers. The practice of insider trading
has also reared its ugly head. Since the financial institutions yield significant power, they can use insider
trading to fuel short term earnings of the company and hence, indulge in quarterly capitalism. This would
push the value of stocks in the market thus coalescing funds from the market.

 Crony capitalism is also a consequence of the current structure of public companies. Since there are
very high power centers in the organization, power does not get distributed. Insider trading can be one
way to encourage crony capitalism as sensitive information can be shared so as to ensure heightened
benefits.

Promoter Dominance Paralyzes the Corporation

Individuals were buyers and sellers of shares for decades. But in their place investment banks have
emerged and have expanded relentlessly. Big sovereign financial hegemonies like BlackRock, Vanguard,
and JP Morgan Chase that own over 70% of the value of shares in the American stock markets are
dominating the traditional corporation. Their sheer size and ubiquity gives them tremendous influence,
and the managers of these institutional giants may not share the interests of the small shareholders nor of
the corporation managers. This has created what John Bogle, founder of Vanguard, calls a “double
agency” society in which the assets owned nominally by millions of individuals are in the hands of a
small group of corporate executives and investment managers whose concerns could differ from those of
the masses.

The other aspect of the problem is the lack of ownership on the part of managers in the organization.
There have been several methods adopted to incentivize these individuals to act proactively bringing
benefits to the organizations and its shareholders, but self-interest compels them to adopt means to
maximize their own income without caring for the unseen consequences of such action. This ultimately
backfires for both the company and the shareholders. Thus, with such a structure, the owners are actually
not having the control of their own organization, the managers fail to perform their duties in a sound way,
and ultimately the corporation fails both in its business model and structure.

Thus, the different interests of the different layers impose large and inescapable costs. For instance,
fees such as those charged by mutual funds are unavoidable at every level. Most insidious is the “agency
problem” that arises from conflicts of interest between people who provide money (e.g., promoter
investors) and all the parties through which it travels to and from investments. The link between the
interests of the forced capitalists in 401Ks (and federal government pension schemes that are broadly
similar) and the management of assets they seemingly own is, at best, compromised. The experience of
ownership of a company no longer accords with the traditional concept of ownership. The allocation of
rights in a public company has become unarticulated and ambiguous. Attempts to fix this by demands for
transparency and regulatory changes (e.g., the Sarbanes-Oxley Act 2002) have either almost failed or
added to the costs and complications of enforcement that includes additional levels of bureaucracy and
more red tape.

In the year 2014, 14.2 % of CEOs at the world’s largest 250 public companies were dismissed - the
highest rate since 2005. Executives from Bank of New York Mellon, British Petroleum, Burger King,
Hewlett Packard, Standard and Poor, Yahoo, among others, were all abruptly shown the door (BTS
Insights, October 2015). For today’s CEOs, the window available to develop a strategy and translate it
into long-term production-cycle action is narrowing dramatically. To deal with the new age requirements
CEOs are turning to new age solutions. Business simulations and experimental learning methodologies
are being used increasingly. However, the industry is still on the look-out for a solution that holds well in
the long run.

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 Public corporations have been at the heart of modern capitalism for over a century now. Public
companies can raise funds and capital through debt or equity instruments. Going public is an easy way for
private organizations to raise capital. But since the turn of the century, number of publically traded
companies has been dropping consistently. On the American Stock Exchange, the number of such
companies dropped close to 44% from 1997 to 2012.

Share Buy-Back for Restoring Corporate Control

A very recent trend in USA is share buy-backs by corporations. These ran at $600 billion a year.
Apparently, they are a legitimate way to return cash to investors and also artificially boost earnings per
share (EPS). Thus, IBM spent $121 billion on buybacks during 2005-2015, twice of what it forked out on
R&D in the same period. In the third quarter of 2015 its sales fell by 14% (or by 1% excluding currency
movements and asset disposals). Wal-Mart spent $60 billion on buy-backs and thus fell far behind
Amazon in e-commerce (The Economist, October 24, 2015, p. 58). Both IBM and Wal-Mart should have
invested more in their own business. Buy-backs may not be the best strategy to recover balance for the
embattled public corporation as they erode profits. For their entire obsession with growth, big
corporations appear paralyzed. While they long to expand, they also want to protect peak profits, restrain
wages from profit sharing, buyback shares and hold armfuls of excess cash on their balance sheets. What
might make sense at the level of the firm causes stagnation across the economy. How can corporations
escape this trap?

High-potential Dynamic Startups

A new interesting alternative, however, to the troubled public listed company is the new breed of
high-potential startups in temporary office spaces created by thousands of young people, fueled by coffee
and dreams. Vizio was the bestselling brand of TV in America in 2010 with just 200 employees.
WhatsApp persuaded Facebook to buy it for $19 billion despite having less than 60 employees and
revenues of $20 million. Startups are in every business from spectacles (Warby Parker) to finance
(Symphony). Hotel Airbnb put up nearly 17 million guests over the summer of 2015. Uber (London
cabbies) drives millions of people every day, and Cloud computing stores and retrieves thousands of
Gigabytes and Terabytes of data. Across industries, “disrupters” are reinventing how the business works;
they are reinventing what it is to be a company. They are a revolution in the making, all insurgent
companies confined to a corner of Silicon Valley. Yet they are going main stream.

Is the start-up bubble in India ready to burst? This year (2015) could be one of the biggest years for
tech-based start-ups in India, concludes a study by Bangalore based consultancy firm Zinnov. India holds
the third rank in the start-up race worldwide with more than 4,200 start-ups. Investor backing has
increased by more than 2.3 times and global investors are flooding the market with never-seen-before
money. One year saw a doubling of active investors and there has been a spectacular rise in the number of
accelerators and incubators as well. The start-ups are changing the way the Indian Businesses think.
Flipkart, Amazon and Snapdeal have not only shaken the old retailers but have developed the logistics
industry (Huffington Post, October 13, 2015).

The start-up bubble, although it waits to be seen whether really it is a bubble or not, has become a
living thing and is expanding at an astounding rate. WeWork, an American outfit that provides
accommodation for startups, has 8,000 companies with 30,000 workers in 56 locations in 17 cities. Start-
ups are cropping in every part of the world, more so in the US, India and China. These countries have
registered phenomenal increase in the start-up sector, complemented by setting up of various venture
capitalist firms and angel investors coming into picture. The numbers are telling—from 3,100 startups in
2014 to a projection of more than 11,500 by 2020 - this is certainly not a passing trend. It is a revolution.

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And it is going to change the way the markets are working today in India (Das 2015). The amount of
money raised has become a way some people benchmark a startup's success. The more an investor pours
into a startup, the better the startup's idea and team must be. It will have enough money to live a little
longer, at the very least. That logic is a bit twisted (The Economic Times, October 27, 2015, p. 1).

Another important aspect of the whole case is the reluctance of such startups to go public. These
firms thrive on the mantra that without the extra burden and red-tape that is involved when going public
will result in a better operational and financial functioning and better efficiency. However, many experts
believe that it is only a matter of time when these so-called start-ups go public in order to raise funds and
become public, finally converting into a full-fledged conventional company.

Crowd-Funding and Crowd Innovations Challenge the Corporation

The extreme surge in digitization and disruption in the cloud-based technology has been one of the
ground-breaking reasons for this paradigm shift. More and more app based start-ups are coming on the
horizon with more and more innovative ideas which are trying to challenge the existing practice of
various business and its running. Some of the most successful start-ups such as Uber, Airbnb etc. are all
App-based firms which involve an alarmingly low cost of capital as there is very limited capital
expenditures (Capex) in terms of operations. Similarly, a lot of start-ups have followed the suit. For
example, Netflix had altered the basis of competition in DVD rentals by introducing a business model that
used delivery by mail. At the same time, it reinvented itself by capturing the technology and replaced
physical copies of films with digital streaming over the internet. Today, Netflix has evolved from a
solely DVD-by-mail service into the world's largest provider of on-demand streamed media. 

Technology and democratization of Internet has been successful in creating a profound impact on
entrepreneurship. The ability to learn skills for free online, share ideas, pictures instantaneously, has
created a new generation of startups with a genuine value to add. The supporters of this future suggest
that startups truly will stand up to the expectations shown by their high valuations.

The advent of crowd-funding platforms has the ability to disrupt the venture capital market in 2016.
This phenomenon has also driven up company valuations. The arrival of new forms of capital such as
Wall Street investors and crowd-funding platforms has altered the space previously exclusive to venture
capitalists. Non-VC investors are now in on about 66% of deals, particularly in middle and later stage
rounds. Hedge funds, mutual funds, and Limited Partnership co-investments are a growing source of
capital for startups. Crowd-funding will continue to change the dynamics of venture capital in the years to
come. An average person now has the power to invest in early stage companies, entrepreneurs have
greater access to funds, and ordinary people are in a position to gain more from early stage ventures.
According to experts, crowd-funding will move on to surpass venture capital in 2016.

At the same time, public companies are struggling to generate profits from their operations due to
conflicting interests, short-termism and regulations which impose costs. The stark difference in the
ownership has also contributed in the downfall of public companies and rise of private players. In
startups, initially the founders and first recruits own a majority stakes. They incentivize people with
ownership stakes or performance-related rewards. Today even the rights and responsibilities are precisely
defined in contracts. This aligns the interests and creates a culture of hard work and camaraderie. More
applicable performance indicators such as number of products produced are used in private as compared
to public companies which are still stuck in the convoluted rules and regulations. However, the
sustainability of the capital influx to the tech entrepreneurs will have to be seen in future. Many predict
that there’s potential for a market bubble similar to that of the 90s dotcom bubble. Recent declines in

8
venture capital funding show the industry may be on the decline, perhaps taking a backseat to new forms
of raising capital.

In the Indian context, the pioneer of start-up was Flipkart. Flipkart brought to the fore a very
different and unique business model of door-to-door delivery which was an unexplored business style.
The idea clicked and took off at an amazing pace. The company received numerous rounds of funding
and grew at an incredible rate. So much so, that the company started resembling many large business
firms in the country only to be differentiated by the fact it was still not public. It remains to be seen
whether such upcoming firms do go public in the future and even if they do, whether they can still
maintain their uniqueness and individuality and continue to thrive on the same working modules that they
incorporated during their inception.

Until 2009, 85 Broad Street in downtown Manhattan was the heartbeat of financial America, the
headquarters of Goldman Sachs. It was gracefully surrounded by streams of limousines with blacked-out
windows. Today, WeWork, an American outfit that provides accommodation for startups, has taken over
six of its 30 floors to house its 2000 “member” employees, and 85 Broad Street is now swarmed by
ordinary people with start-up wear, from tartan shirts to hoodies. WeWork has 8,000 companies with
30,000 worker members in 56 locations in 17 cities. Even though the startup scene is dominated by a
clique of venture capitalists with privileged access, yet ordinary people can invest in startups through
platforms such as SeedInvest or indirectly through mainstream mutual funds such as T. Rowe Price,
which buys into them during their infancy.

The ambiguities and obfuscation of public companies contrast sharply with the new corporate
structures of new startups. As a contrast, the startups are uniquely structured – investors, founders,
managers, and often, employees, have stakes that are carefully spelt out by contracts, rather than shares
traded on stock markets. These structures mitigate agency problems as the startup structures include
detailed agreements that include control issues (such as the allocation of board seats). Investors usually
insist that management, and often employees, own large stakes to ensure their interests are aligned to the
success of the venture. These contractual arrangements provide an experience of ownership that sidesteps
the concerns of public companies, by avoiding the contentious regulations and politics that surround big
corporations. The startups do not have the “agency problem” that arises from conflicts of interest between
people who provide money (e.g., promoter investors) and all the parties through which it travels to and
from investments. Hence, startup managers are fully focused on transforming a concept into a successful
company.

In the place of the century-old empires of old public companies where nobody knows who owns
them, these new startups are pioneering a new organizational form that defines who owns what. In their
early stages, the founders and first recruits of these startups owned a majority of stake, and they
incentivize people with ownership stakes or performance-related rewards, with rights, duties, and
responsibilities meticulously defined in contracts drawn up by lawyers. This situation aligns their interests
and creates a culture of hard work and camaraderie. Because they are private and not public, they
measure and state their performance not by elaborate accounting standards and annual financial
statements, but by new performance indicators such as how many new patents and products they have
produced. They exploit new technology that enables them to go global without being big with lumpy
nonproductive assets (NPAs) such as property and computer systems. They “can expand very fast by
buying in services as and when they need them; they can incorporate online for a few hundred dollars,
raise money from crowd-sourcing sites such as Kickstarter, hire programmers from Upwork, rent
computer processing power from Amazon, find manufacturers on Alibaba, arrange payments systems at
Square.” New startup companies always suffered from capital as commercial banks cannot lend to firms
that lack assets and revenues, nor could they afford the high fees and retainers demanded by traditional

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investment banks and law firms. But an elaborate financing system has emerged instead. Startups can get
initial capital at effectively no cost from crowd-funding sites like Kickstarter and Indiegogo.

Startups will not have it all their own way. Public companies, however, will have their place to stay,
especially for capital intensive industries like oil and gas. Many startups will inevitably fail, including
some of the most famous, and some of them will eventually list or sell them to a public company. Their
approach to building a business will survive them. Currently, a growing number of startups choose to
stay private, and are finding it ever easier to make funds without resorting to public markets. In short, the
new startups are fabulously poised to conquer the world. They are pioneering a new sort of company that
seems to do a better job of turning dreams into business (“Reinventing the Company,” The Economist,
October 24, 2015, p. 11-12). Startups are fully focused on transforming a concept into a successful
company (“Reinventing the Deal,” The Economist, October 24, 2015, p. 23).

Startups typically begin with savings, or money from family and friends, and then tap outside
investors for seed funding through a variety of channels such as angel investors, accelerators (i.e., schools
for startups). Angel investors include entrepreneurs who were successful and made money from their
own startups and now invest in other young startups. The number of angel investors and venture
capitalists has increased substantially in recent years in USA – VCs alone, some 900 or so in 2009 to
3,000 in 2014.

Startups want to know what investors want – investors’ opinions matter hugely to startup firms.
Julia Jacobson’s small startup, NMRKT, enables boutiques and small manufacturers to create appealing
electronic marketplaces for their products in about half an hour. Since 2013, NMKRT has gathered 150
clients and is now considering its fourth round of financing. She attends several events (e.g., baby
showers) to meet prospective clients and investors. This empowers her to align interests of owners and
investors – an enduring inefficiency of the current corporation market. There is no “agency problem” to
contend with, no misalignment of interests between the investor and the owner. In startups there is a clear
distinction between what it is to be an owner and an investor. “Such a new model of capitalism practiced
by Ms. Jacobson and thousands of other startups is an attempt to get around the inefficiencies and costs
imposed by the agency problem” (The Economist, October 24, 2015, p. 24).ii

Incidentally, September 2015 in India, losses to unit holders and redemption pressure faced by JP
Morgan Asset Management Company (AMC) have driven capital market regulator SEBI to consider new
investment limits for fund houses. Two debt schemes of JP Morgan AMC faced redemption pressure
after bonds of Amtek Auto were downgraded by credit agencies. Unlike fund houses in the past, JP
Morgan chose to pass on the credit loss to investors. The Amtek Auto default rattled the corporate bond
market, raised risk premium on securities, and turned investor attention to securities of other debt-laden
companies. SEBI’s decision to revisit investment limits was occasioned by these developments in the
financial markets. According to a proposal under discussion, no fund manager would be allowed to
invest more than 20% of a scheme in securities issued by companies belonging to a corporate group.
Thus far, there have been no restrictions on the maximum amount that can be invested in a single
company or sector; that is, there is no cap on exposure to a single business group. The sector exposure
limit is likely to be reduced to 25% from 30%, while the single issue limit may be brought down to 10%
from 15% (Zachariah, Zeena (2015), “New Investment Limits for Fund Houses Likely,” The Economic
Times, Friday, October 30, 2015, p.1).

Is the Corporation an Over-Taxed Endangered Species Today?

In his online article of September 26, 2014 titled “Is the U. S. - Based Corporation an Endangered
Species?” Stephen J. Entin, a senior fellow at the nonpartisan Tax Foundation in Washington, D.C.,

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contended that America's businesses are tired of waiting for tax reform, and in response they are voting
with their feet - physically and metaphorically. This do-it-yourself tax reform will continue until Congress
lowers the corporate tax rate, repeals our arcane worldwide tax system, and ends the double tax bias
against schedule C-corporations.iii Globally, the nearly 40 percent combined US federal-state corporate
tax rate is the third highest of 163 countries, behind only Chad and the United Arab Emirates. Not only is
our corporate tax rate too high, but the U.S. imposes that rate not only on domestic income, but also on
the non-U.S. income of U. S. headquartered businesses if the income is brought back to the United States.
Only six other developed OECD countries do the same to their businesses. The rest have so-called
territorial tax systems and do not tax the earnings of their companies in other countries.

A handful of U.S. multinational corporations are actually voting with their feet by moving their
official headquarters abroad to escape U.S. tax on their foreign income, a practice known as "inverting."
In fact, over the past two decades, thousands of businesses have quietly adopted "pass-through" forms -
such as partnerships, LLCs, REITs, RICs, and schedule S corporations - to escape the double taxation of
the schedule C-corporation. Inverting firms still pay tax to the U.S. on their U.S. earnings like any other
company. They only save the additional tax the U.S. imposes on repatriated foreign earnings, on top of
taxes paid to foreign governments. This is an additional tax that U.S. businesses' foreign competitors need
not pay. That added tax may be the difference between thriving and failing in foreign markets, and
between expanding and contracting U.S. production if firms need access to their foreign profits to reinvest
here.

As a result, the traditional C-corporation is on the path to becoming an endangered species.

According to latest IRS figures, there were 1.65 million C-corporations in 2011. This is the lowest
number since 1974 and nearly 1 million fewer since the Tax Reform Act of 1986. By contrast, the number
of non-C-corporation entities has exploded since 1986. The number of schedule S-corporations (which
are taxed like partnerships) has grown from 826,000 to nearly 4.2 million in 2011. Also, the number of
partnerships and LLCs has doubled, from 1.7 million to almost 3.6 million. The growth in the number of
sole proprietorships has been equally impressive. In fact, there is now more net income reported on the
individual 1040s of pass-through owners' than on the 1120 tax returns of C-corporations.

While Washington condemns inversions, it has actively encouraged foreign firms to buy American
firms. The Bush Treasury begged Barclays to bail out Lehman Brothers at the onset of the financial crisis,
but Barclays waited until the bankruptcy to pick up selected assets. The Obama Administration had no
qualms when Delphi was shopped to Britain during its reorganization, and had no trouble with Fiat's
purchase of Chrysler, even though the combined firm will be headquartered in the Netherlands.

Britain had a high corporate tax rate and a global tax system. As other European countries cut their
corporate tax rates, Britain saw some of its leading firms move to Ireland or the continent. In response,
Britain cut its corporate tax rate and adopted a territorial tax in line with or better than its neighbors. Now,
their corporate sector is rebounding and U.S. firms are fleeing to Britain. The number of U.K.
corporations is now more than triple of what it was in 1986, exceeding one million in 2012, and climbing.
It may soon surpass the U.S. level.

Chinese Economic Invasion Threatens American Capitalism and the

Corporation
Currently, China is dominating the production of goods in the world and is able to supply 40% to
60% of general public usage goods for far lesser prices than most competing companies, and is thus
endangering existence of smaller corporations and companies. Most of the domestic factories were
forced to shut down as they were unable to compete with the Chinese players. For instance, microwave

11
ovens were once pioneered by Raytheon, a USA company; in 1946 another U.S. company, Amana, outdid
Raytheon as the U. S. market leader, and in 1976 GE/Samsung emerged as the world leader. Today
almost 100% of microwave ovens sold globally are produced in China. Wal-Mart, the largest retailer in
the world and currently commanding over $600 billion in annual sales, purchases from China nearly 30%
of its supplies. China manufactures about 40% of furniture and over 45% of garments sold in the USA.
China’s exports of auto parts to the USA are three times over its next highest trading destination (Japan).
Apple Company, even though its headquarters and R&D units are still based in the USA, does most of its
production in China through its subsidiaries.

Almost 60% of Chinese exports to USA, however, are produced by firms owned by foreign
companies, many of which are American. These firms have moved production operations to China and
overseas in response to competitive pressures in USA to lower production costs and thereby offer cheaper
but quality products to consumers, as also higher shareholder return to domestic investors. In 2005,
China was a net steel importer; it became net steel exporter in 2006, and the largest steel exporter in 2007
to being the top global marketer of steel in 2015.

Obviously, while employment significantly increased in China, USA lost over 5.5 million
manufacturing jobs to China since 2005 (see “China’s Unfair Trade Practices” by Stephen Tabb 2011).
Since 2001, USA has lost 42,400 factories (362 among them employed over 1000 workers). If we include
the social externalities of these factory shutdowns on ancillary industries, the total multiplier effect could
be a loss of about 27.5 million manufacturing jobs. This loss looms large when we factor in that USA had
just about 33 million manufacturing jobs in 2005. Meanwhile, USA continues to increase its goods trade
deficit with China which grew from $124 billion in 2003 to $162 billion in 2004 to $366 billion in 2015.
[The USA, however, has a services trade plus with China that was around $30 billion in 2015, up by 5.2%
from 2014]. Allegedly, China’s government continues to subsidize its domestic manufacturing units so
that they remain overseas competitive and more. Out of 33 Chinese listed steel companies, 20% received
government subsidies accounting for more than 50% of their profits in 2014.

Even the Chinese dual currency (Yuan and RNB) seems to be artificially manipulated to nearly 35%
depreciation in relation to the US dollar so as to boost exports to the USA. China has essentially
“pegged” the value of Yuan to the US dollar instead of allowing it to float freely in open world foreign
currency markets. Such currency manipulation is illegal against Article IV of the World Trade
Organization (WTO) Agreement, but China as a sovereign nation, refuses to treat its currency devaluation
as actionable under a foreign law, even though it officially joined the WTO in 2001 with an agreement to
abide by its rules. In 1994, China devalued its official currency rate, and combined its dual exchange rate
system for uniformity. Apparently, Chinas continues indulging in regular espionage, counterfeiting, and
buying American technology companies. According to the US-China Economic Panel Security
Commission’s Report of 2015 to the Congress, “China’s government conducts and sponsors a massive
cyber espionage operation aimed at stealing trade secrets and intelligence from U.S. Corporations and the
government.” This includes Chinese government’s blocking of U. S. Company websites, revoking
business licenses, and censoring the Internet. Of late, China requires U. S. companies that build plants in
China to create joint ventures with local companies and build local R&D facilities so that they have
access to their latest technologies. China has over 1,000 such R&D units today. Testimony to Congress
by Patrick A. Mulloy asserts that “we are slowly losing the Advanced Technology Products industries to
China.” iv The Advanced Technology Industries include computers and electronics, life sciences and
biotechnology, aerospace, and nuclear technology. In 2014, US trade deficit with China in advanced
technology products was $123 billion. To say the least, these Advanced Technology Industries have
provided China with a strong military build-up.

Initially, USA promoted trade with China hoping thereby American consumers would be better off
by low-cost, high-quality Chinese imports. But currently, and in the long run, trade with China has proved

12
to be worrisome: it has created an accumulated trade deficit of $3.6 trillion, while exporting millions of
manufacturing jobs to China and stagnating domestic wages in the USA. China’s share of the US trade
surplus has soared, especially in 2009. American small businesses and entrepreneurs have lost market
opportunities losing to the dominating presence of Chinese products in the domestic markets. If
therefore, USA continues to be a major dumping station of China and its subsidized products, what can
stop China from dominating and overpowering the US markets and endangering its corporations?

Reinventing the Capitalist Corporation

The content, structure and operations of a typical corporation are changing. For instance, the highest
valued online retailer in the world, Alibaba, holds no inventory. Airbnb, which provides the highest
number of accommodations in the world, owns no real estate. Uber, which is the world’s biggest car
service provider, owns no cars. Google that maintains the largest and fastest growing encyclopedia in the
world does not provide the content. All four startups have one thing in common: they are thriving with
their customer-facing. They are capitalized, energized and growing via customer involvement,
digitization and globalization.

Creativity and innovation continue to be the prime engine of growth and sustainable competitive
advantage (SCA) for the corporation in general, and for the American corporation in particular. The 21st
Century innovative company is disrupting the economy at an unprecedented scale and if anything can be
predicted, it is that the disruption is going to continue. This is, according to Joseph Schumpeter (1943), a
positive and healthy disruption. A friction-free economy is an economy where labor, currency, capital and
data move with lightning speed at almost no cost. Journalist Geoff Calvin, in his Forbes article (October
2015) on the 21st century Corporation, demonstrates how this economy has already entered our world.

In October 2013, Tesla Model S-cars were catching fire due to low ground clearance. Usually a
defect like this would involve a recall that would cost the company in millions but Tesla skillfully
avoided this by sending a software update to thousands of cars remotely. Tesla in this case was
successfully able to bypass intermediaries like dealers and directly serve the customers. The trend of new
companies cutting down physical assets is led by Tesla. The drivetrain employed by Tesla is simpler and
requires the employment of fewer people. While General Motors creates $1.85 for a single dollar of
physical asset, Tesla makes $11. The common thread running in the 21st century Corporation is the
fluidity of asset movement and this is only possible by owning less physical assets and being nimble.
Companies have found ingenious ways to eliminate friction in the economy and connect the stakeholders
in an efficient way. The new way of conducting profitable business is to be idea intensive (see Beyond the
Idea by Vijay Govindarajan and Chris Trimble (2013)) and light on assets (see Forbes, October 2015,
Geoff Calvin).

Reinventing the Corporation

We assume the 125-corporation can be still renewed, renovated and even reinvented as a crucially
important component of the free enterprise capitalist system (FECS). Essentially, what the new
corporation needs is asset fluidity, human agility, nimble management and structure flexibility. From the
discussions on the current threats to the corporation we have considered thus far, we suggest the
following features as necessary conditions for redefining and redesigning the new corporation:

Fluidity of Asset Management: The distributed role of the capital from millions of household investors
has moved to stifling dominance by a handful few behemoth financial hegemonies like BlackRock, JP
Morgan and Vanguard. Reverse this progressively. Promoter domination is not good for the FECS-based
Corporation anywhere in the world. It destroys corporate executive freedom of imagination and planning,

13
the spirit of national and international venture and adventure, curbs inter-industry creativity and
innovation, cross-industry research and experimentation, and skews global progress and prosperity.
Promoter dominance accumulates wealth and capital at the top, and hence, growth and opportunity
concentrated with the top less than 0.01% of the national or global population, thus widening the gap
between the rich and the poor.

Change in Ownership: One way of reversing this promoter dominance trend is to decrease ownership of
capital assets by renting, leasing or shared use. The less dependence on physical capital (e.g., land,
buildings, equipment) as done by Uber, Airbnb) the more nimble and mobile will be top management.
This will reduce the need for huge promoter investor capital, and accordingly, for promoter dominance.
This will reduce crony capitalism. This is the secret of Apple and Google.

The action and values of a company are defined by its ownership structure. Today there are
numerous alternative ownership models viz. limited liability, Chinese capitalism, and western joint stock.
These range from Chinese state capitalism, with its strong connection between government and
enterprise, to cooperative businesses in Europe, where employees - the shareholders - distribute the
annual profit among themselves. But the single model which has claimed attention recently is the “No –
ownership” model. The largest hotel service provider (Airbnb) does not own a single hotel, the largest
taxi service player (Uber) does not own a single taxi, the largest electronic encyclopedia (Google) does
not provide any page of content, the largest content provider (Facebook) does not create a single line of
content on its own, and largest retailer (Alibaba) does not keep any inventory. Thus non-ownership model
has redefined the business processes and now it is more about creating value platforms rather than own
and control everything. Also the ownership of the company should not be invested in few hands which
control and make decisions for the company but rather each stakeholder should own the company and be
a part of the decision making process.

Long-termism and New Product Design and Development (NPDD): Good and innovative products and
services take some time for translating customer ideas into upstream value-chain activities such as
industry concepts, designs, prototypes, supply chain management, materials management, inventory
management, trade credit management, to midstream activities such as form and function, size and space,
color and sheen, texture and touch, product bundling, to downstream value chain functions such as
marketing, advertising, promoting, customizing, personalizing, pricing and financing, distributing and
retailing, salesforce and customer feedback, honoring warranty and guaranty, handling complaints and
redress.

All these are customer-facing functions that get compressed or fast-forwarded in promoter-
dominated, and rushed and crushed product cycles. Strong brand design, management and development
takes time, decades, and even centuries, as was the case with Glenfidich, P&G products, Lever Brother
Products, Levi Strauss, Coca-Cola, MacDonald, Pepsi-Cola, and the like. A strong brand can provide and
promote capital much more steadily and effectively than by promoters that spell loss of control. The
corporation should reinvent itself getting back to the basics of higher customer-facing-blessed, upstream,
midstream, and downstream NPDD value-chain activities and cycles.

Comprehensive and collaborative Entrepreneurship, Social Entrepreneurship and Startups: The

reinvented corporation should redefine and restate its more comprehensive and collaborative goals and
mission of reengineering and retrofitting this world as a place of entrepreneurship, incubation, creativity,
imagination, innovation, research and experimentation, with a primary purpose of making this world
more just than unjust, more equal than unequal, more safe than unsafe, more peaceful and secure than the
opposites, more giving back to society than sucking from it, more humanizing societies than
dehumanizing, more sustainable than ever before, more legal and moral and spiritual than ever before.
The Company’s statement of purpose defines the goals and motivations of an organization. The purpose

14
can also reveal the degree to which a corporation is committed to social improvement or wealth
generation and distribution. The purpose of the company should be clearly defined and it should not be
confined to being a part of the mad race of improving balance sheet numbers. This can also prove useful
as startups continue to grow in size and number as every firm will be aware about its social and economic
role in the marketplace.

All business entities, the big corporations, the startups, the small and medium businesses, new
entrepreneurs and venture capitalists, should focus on developing products and services that solve real life
problems, creating value for the customers rather than aiming for short term higher profits, improving
meaningful work (not necessarily employment) for all that progressively eliminates poverty, destitution,
squalor and disease. Startups like Amazon.com and eBay, Apple and Microsoft, Google and Tesla, Nokia
and Motorola, Uber and Ola, FaceBook and What’sApp, WeWork, JustDial, Naukri.com and Rediff.com,
to name a few, should produce products, produce and services that will make nations and continents safe
and secure, binding and belonging, socially and economically equalizing, ethically, morally and
spiritually humanizing. The established corporations like the Tata’s and the Fords, GM and GE, Toyota
and Honda, L&T and Voltas, P&G and Unilever, and the like, and the heavy infrastructure companies
like BP and Indian Oil, International Caterpillar, Komatsu and Hitachi, Indian Oil and ONGC,
commercial and investment banks, passenger and cargo railways, and the like, should be collaboratively
contributing to a happy and humanized world. Some of these companies have done it successfully and
have become market leaders in no time. Then all will revive and survive - the corporations, the startups,
and entrepreneurship, the big and the small, and all over the world. The means should justify the noble
ends. Bad ends can never justify the means.

Corporate Governance: The quality of leadership and human capital is very vital to the long term growth
of any organization. The management of the company would continuously work on infusing fresh talent
at regular intervals to maintain its growth trajectory. Over the past decades, regulations in the financial
markets have increased dramatically in the wake of various financial crises. This has increased the cost of
doing business and has also pulled away individual investors from the financial markets.

The Board of Directors should play an active role in ensuring transparency in its daily operations and
would discourage activities like ‘off balance-sheet financing’, wash trading, complicated organization
structure, intercompany transactions, and other accounting shenanigans. It would also make sure that the
members of the Board of Directors do not hold multiple directorships that breed conflict of interest, and
which could impact their ability to contribute to the company. At the moment, successful businesses find
it easier to find it raise money through private means, which allows them to take more risk. Low interest
rates have undermined returns from “safe” investments and encouraged speculation. Even so, the new
structure pioneered by start-ups is likely to endure as long as it serves as an effective response to the flaws
of the current corporation and its public markets.

For a continuous sustainable growth of firms, the structure of accountability and decision making is
a critical element. There is a crying need for shifting the focus from shareholder accountability to
stakeholder accountability. All the key stakeholders like employees, customers, governments,
shareholders, suppliers, distributors, unions, creditors, directors and the community from which the
business draws its resources should be considered while making all the business decisions. This Board of
Directors (BOD) should first realize this shift in values which then trickles down to the entire
organization. All this change should accompany with an increase in reciprocal transparency and make
long-term decisions not concentrating on short-term fixes and profits.

Democratization of Capital: Regardless of its organizational structure, the financial investments are
critical for every corporation. Historically, capital markets operated without regard to long-term impacts
or regulations. Although, recently, the firms have started taking sustainability into account for the

15
decision-making processes. Instead of raising capital through public offering, firms should opt for private
funding through crowd funding and angel investing as it reduces the pressure on the firms to show profits
to the shareholders. This allows unhindered growth of the organization and promotes innovation and more
strategic production cycles.

Since the invention of public company in 19th century, they have been the locomotives of
capitalism. In 1990s, older forms of corporate organizations like partnerships and newer rivals such as
state owned enterprises, were discarded over choosing to be a public company. As China’s former
President Jiang Zemin put it: “NASDAQ is the crown jewel of all that is great about America.” Cozy
partnerships were abandoned by Wall Street banks in favor of the public equity. v

The reasons for the triumph of the public company were three main factors which make for durable
success: limited liability – encouraging public to invest; professional management – boosting
productivity; and ‘corporate personhood’ - ensuring that businesses survive the removal of a founder or
CEO. But in the past two decades, it has been more like the eclipse of the public corporation. The number
of public companies in America has fallen dramatically- over 38%, in the past decade. Some of
America’s most prominent public companies imploded in 2001-02 like – Enron, Tyco, and Global
Crossing. Lehman Brothers, another public giant fell 6 years later and Citigroup and General Motors
turned to the government for a bailout. Simultaneously in the emerging markets, SOEs are growing and
challenging the fact that public companies are the biggest fishes in the sea. With the flouring private
equity firms in the West and the rise of Asian economies and their legions of family-owned
conglomerates, the idea that public companies are the best managed and best equipped to capture new
geographical frontiers does not sit well. Statistical data also seems to corroborate this with the number of
initial public offerings (IPOs) in America declining from an average of 311 in a year in 1980-2000 to 99 a
year in 2001-11(Reuters, 2015). It is the small companies (having annual sales less than $50m before
their IPOs) which have been the hardest hit. From 165 small companies on average going the IPO route in
1980-2000, the number fell to 30 in 2001-09.

This IPO famine has given a shot to other corporate life forms. Limited liability companies and
partnerships seem to be thriving with many established names choosing the LLC route too. Larry Ribstein
of the University of Illinois called this “the rise of the un-corporation.” Policymakers also seem to have
embraced the alternatives to the public company. WL Gore, a private firm and the maker of Gore-Tex
and employing 9,500 ‘associates’ and ‘sponsors’ and not workers and bosses is being cited as a model by
American corporate reformers. The firm uses shares to motivate their employees and shield themselves
from the capital markets. On joining, employees become co-owners and they also need not sell their
shares when they leave the firm. Laws have been passed by seven American states allowing companies to
register as “B” corporations which explicitly subordinate profits to social benefits. vi

The Brookings Institution, one of the USA's oldest nonprofit think tanks, released a paper last
week (late June 2016) on B Lab and the B Corp movement. Brookings conducts research and education in
the social sciences, primarily in economics, governance, and global economy and development. Authored
by B Lab cofounders Jay Coen Gilbert, Bart Houlahan, and Andrew Kassoy, the paper is titled “Impact
governance and management: Fulfilling the promise of capitalism to achieve a shared and durable
prosperity.” In it, the B Lab cofounders tackle the cultural shift around the role of business in society, the
opportunity—and necessity—for businesses to be a force for good, and the institutional and normative
barriers in the way. The B Corp movement is profiled as one example of how legal innovation and
credible, common standards can transform shareholder capitalism into stakeholder capitalism.

We are in the early stages of a global culture shift that is transforming our vision of the purpose of business
from a late 20th century view that it is to maximize value for shareholders to a 21st century view that the
purpose of business is to maximize value for society. Significantly, this transition is being driven by market-

16
 based activism, not by government intervention. Rather than simply debating the role of government in the
economy, people are taking action to harness the power of business to solve society’s greatest challenges.
Business—what we create, where we work, where we shop, what we buy, who we invest in—has become a
source of identity and purpose.vii

In India too family conglomerates are among the top firms. Though listed on the stock market, they
do little to constrain the power of the family shareholders. Family businesses account for about two-thirds
of the listed companies in India. Tight control of their empires is exercised by the families and
shareholder power is limited through a variety of mechanisms such as family controlled trusts (having
more power than boards), appointment of family members in managerial positions, and attaching different
voting rights to different classes of stocks. Long term views are taken by diversified family firms and
money is diverted from cash cows to new industries.

We can note that some of the reasons for the decline of public companies are temporary, like the
dotcom bust. Also, the success of alternatives could be due to transient reasons like private equity boom
being fuelled by cheap debt and the rise in the price of oil and other commodities turbocharging SOEs
growth. But at the heart of all this lies a fundamental glaring fact that the alternate corporate firms are
managing their problems better than public companies while also exploiting their advantages. The biggest
plus of SOEs are political ties with governments which protect them from unwelcome competition.
Family firms have the ability to take long term views.

In contrast, the public company is plagued with hindrances, majorly three. First is the principal-agent
problem: the split between the people who own the company (principals) and those who run it (agents).
The agents want to work for their own gain and the principals have not done a good job at monitoring the
actions of the agents. The supposed solution of making managers liable for their performance by linking
their pay to reflect the company’s performance has backfired as it led to heavy manipulation of company
share prices. Second, is the burden of regulation which, since the collapse of Enron in 2001 and the
financial crisis of 2007-08 has grown heavier for public companies. This is to safeguard the interests of
the common man who risk their capital in corporations. From the 2002 Sarbanes-Oxley legislation on
accounting to the Dodd-Fran financial regulations of 2010, new rules have been introduced in America.
As per one estimate, the annual cost of complying with the securities law due to Sarbanes-Oxley
increased from $1.1m per company to $2.8m. Costs of distraction have also skyrocketed. Founders of
Oaktree Capital Management, hedge-fund advisory firm, in 2007, chose to raise $880m in a private
placement than an IPO as: “we were happy to sacrifice a little public market liquidity, and even take a
slightly lower valuation, in return for a less onerous regulatory environment and the benefits of remaining
private.”

Short-termism comprises the third main issue. With the rise of huge institutional investors and
intensification of shareholder activism, capital markets have increased their power dramatically. Goliaths
such as McDonald’s and Time Warner are taken to task by hedge funds if they seem to give any
indication of flagging. Corporate life has become riskier as capital markets have flourished. Average life
expectancy of public companies shrank to less than 10 in 1990 from 65 years in the 1920s. A CEO’s
average tenure also has fallen from 8.1 years in 2000 to 6.3 years in 2009. Striking a balance between the
short-term satisfying the market’s demand for profits today and long term- planning for the future, has to
be done by companies. It is becoming harder on the managers to look beyond quarterly earnings due to
the demands of regulators and owners, more time is being devoted to enforcing regulations than to
strategy.

The reasons stated above have all combined to stagnate the growth of public companies. This
situation is especially true in America. In India though similar issues abound, the emerging market
enables IPO growth though at a lesser pace than anticipated. Also, many public companies are family

17
owned thus enabling them to overcome many of the inherent vices of a public company. But public
companies still hold sway over many sectors- especially that of oil and gas. This gives hope that they can
still overcome the rut that they have fallen into. We cannot afford to let public companies decline. Not
only do they provide ordinary people with a chance to invest directly in capitalism’s most important
wealth-creating machines but they also form a part of an ecosystem of innovation and job creation. The
need of the hour is a change in thinking – among regulators, among the brilliant minds in companies
themselves and restructuring to enable the companies which build the railroads of the 19th century, which
filled the world with cars and televisions and computers, which brought transparency to business life and
opportunities to small investors, to continue being the locomotive of capitalism.

Concluding Challenge
The corporation may be reinvented in many ways, and we have pointed some ways. The PBC (Case
8.1) is a good example. The ethical questions stated at the end of the PBC case are good leads to reinvent
the corporation. But the main architect of change and reinvention is the corporate executive as CEO,
CXO, or a member of BOD. These executives together with major representatives of corporation
stakeholders must follow the LEMS analysis in whatever they do:

 Legality: Is the corporation doing the legal thing? Following the Company Law of the Land? Doing
something decidedly beneficial for the society and the nation?
 Ethicality: Beyond the legal, is the corporation doing the right thing for the economy, society, nation
and the globe? Are they better alternatives than the current ones that are less harmful and more
beneficial to the society, nation and the planet? For instance, seemingly the large corporations have
accumulated wealth and opportunity in the hands of very few, thus widening the gap between the
rich and the poor as never before. Hence should we do the right thing and put a cap on the growth,
control and dominance of the corporation, thus reinventing its structure and legitimacy, survival
and sustainability strategy and capacity?
 Morality: Beyond the right thing, is the corporation doing the right thing rightly? For instance,
beyond the usual bottom line of profits does the corporation actively pursue ecology and
sustainability? How can the corporation reinvent in India such that it can provide work and
sustenance to maintain human dignity among its teeming populations? Should national and
international governments intervene such that right things are done rightly?
 Spirituality: Beyond the legal, ethical and moral, is the corporation doing the right thing, rightly, and
for the right reasons? As long as executive spirituality defined this is safeguarded we can keep in
check fraud, corruption, bribe, money-laundering, black money, tax evasion, deception and guile.

In the end, when everything is said and done, the future of the corporation is more in the hands of
corporate executives than with promoters and turbulent markets. If B-schools can redesign their
curriculum, pedagogy, and goals for students (to-be-corporates) learning to make it more ethical, moral
and spiritual, that is, making it more flexible and nimble for empowering it to make business students
more imaginative, creative and innovative, then we have laid the foundations for reinventing the morally
embattled corporation today.

References:

Chanchani, Madhav (2015, November 24). Warburg Pincus raises $12 billion new fund, may invest with a long-
term view. The Economic Times, p.1.
Das, Saikat (2015, November 4). Investment Limits In Corporate Bonds likely to Hit Liquidity, feel Funds. The
Economic Times, p.1.
Eavis, Peter (2015, November 4). Public Companies Trying to Mimic Private Firms. The New York Times.
Gratton, Lynda (2013, May 14). Reinventing the Corporation. Forbes.

18
Mascarenhas, Rajesh (2015, December 4). IPO rush fallout: Interest rate for funding investment in new offers could
go up by 2%” The Economic Times, p.1.
Reuters (2015, October 2). US IPO Market Scene Shaken But Not Shut. The Economic Times, p.1
Zachariah, Z. (2015, October 30). New Investment Limits for Fund Houses Likely. The Economic Times, Friday,
p.1.
DEN Networks Rallies as RBI Hikes FII Investment Limit. (2015, October 27), The Economic Times, p.1
Hyperactive, Yet Passive. (2015, December 5), The Economist.
The Endangered Public Company. (2012, May 19), The Economist, p.1
The Big Engine That Couldn’t. (2012, May 19), The Economist, p.1
Reinventing the Company. (2015, October 24), The Economist, p. 11.
Reinventing the Deal. (2015, October 24), The Economist, p. 23-26.
The Age of the Torporation. (2015, October 24), The Economist, p. 57-59.
Schumpeter – Nine Billion Company Names. (2015, October 24), The Economist, p. 63.
New investment limits for fund houses likely; investor losses may trigger SEBI move. (Oct 2015.). The Economic
Times, 30.
Investment limit in corporate bonds likely to hit liquidity, feel funds. (2015, November 4), The Economic Times.
CEOs feel the pressure after buyouts. (2015, October 30), Financial News.
The Heat is On: CEOs Under Pressure to Perform. (2015, October), BTS Insights.
http://smallbusiness.chron.com/conflicts-between-corporate-management-shareholders-75063.html
http://www.scu.edu/ethics/practicing/focusareas/business/board-management-conflict.html
http://yourstory.com/2015/04/what-propelled-indians-to-startup/
http://www.huffingtonpost.in/2015/05/15/startups-india-fail-fast_n_7289522.html
http://www.fastcompany.com/1824235/8-reasons-choose-startup-over-corporate-job

Ethical Questions:
1. Do you feel that the (listed) corporation is an endangered species in the USA, and why?
2. Is the situation anyway different in India, and why?
3. How do you legally, ethically, morally and spiritually (LEMS) justify the corporation today, and why?
4. How do you LEMS justify share-market concentration in the hands of very few promoter investors?
5. What are their long-run unintended, ethical and moral consequences, and why?
6. How legal, ethical, moral and spiritual are startups with their new startup structures?
7. To what extent do startups legally, ethically, morally and spiritually disentangle themselves from the
“agency problem” and how?
8. To what extent do startups offer real hope for industry and market survival and revival under a free
enterprise capital system, and why?
9. What are the decidedly superior legal, ethical, moral and spiritual advantages of startups over public
corporations, and why?
10. Hence, how would you LEMS reinvent the corporation to save and revive it?
11. How would you restructure the corporation in terms of debt, equity, share buy-backs, market
capitalization and the like such that ownership and responsibility passes on to the right hands?
12. To what extend can startups replace, displace or substitute the traditional corporation that has lasted for
more than 125 years? Explain.
13. How can modern entrepreneurship effectively reinvent, replace, displace or substitute the traditional
corporation that has survived more than 125 years? Explain.

End Notes

19
i
B Corp is to Business as ‘Fair Trade’ is to Coffee, or ‘Organic’ is to Veggies…The ‘B’ is a standard issued by non-profit organization –
B Lab – based on four core assessment criteria: Community, Environment, Employees, and Governance. As a certified B Corporation,
PBC takes a ‘triple-bottom-line’ (People, Planet, Profit) approach to its business model, and incorporates both social and environmental
sustainability into its operating principles and core values. PBC is committed to using the power of business to help solve social and
ecological problems. Learn more at https://www.bcorporation.net/community/persephone-brewing-company.

ii
Meanwhile the startups are creating their own problems, while the West is creating startups at an unprecedented rate. Emerging-world
companies are going global. Established companies are merging to form mind-blogging combinations. For instance, the soon-to-be
ABInBev/SABMiller behemoth is rooted in five separate companies, Anheuser Busch, Interbrew, AmBev, South African Breweries, and
Miller Brewing. Company names are important; they are the best chance of making a good impression. Great names such as Google can
provide the ultimate bonus of turning into a verb. But alphabetical ersatz names (e.g., Airbnb, Diageo, Flickr, QuickQuid, Strategy &,
Uber, Upwork, Vizio, Yahoo, WeWork, WhatsApp, Wonga) do opposite to what brand names are supposed to do: rather than putting a
human face to a corporation, they emphasize their lack of soul. Google (which got its name from the mathematical term for ten to the
power of 100 or a googol) came up with a clever name Alphabet for its holding company earlier in 2015. Copyright law is a pain:
companies have to go to great lengths to make sure that nobody has staked a claim to their favorite names. But what’s in a name? Great
companies can survive boring names but even the best names cannot save dismal companies (The Economist, October 24, 2015, p. 63).

iii
A C corporation, under United States federal income tax law, refers to any corporation that is taxed separately from its owners. A C
corporation is distinguished from an S corporation, which generally is not taxed separately. Most major companies (and many smaller
companies) are treated as C corporations for U.S. federal income tax purposes. C corporations and S corporations both enjoy limited
liability, but only C corporations are subject to corporate income taxation. Generally, all for-profit corporations are automatically
classified as a C corporation unless the corporation elects the option to treat the corporation as a flow-through entity known as an S
corporation. An S corporation is not itself subject to income tax; rather, shareholders of the S corporation are subject to tax on their pro-
rata shares of income based on their shareholdings. To qualify to make the S corporation election, the corporation's shares must be held by
resident or citizen individuals or certain qualifying trusts. A corporation may qualify as a C corporation without regard to any limit on the
number of shareholders, foreign or domestic (Wikipedia).

iv
Collins, M. (2016, June 13). It is Time to Stand Up to China: Why and how the U.S. must confront China on unfair trade practices.
Industry Week. Retrieved from http://www.industryweek.com/trade/it-time-stand-china
v
The endangered public company: The big engine that couldn’t. (2012, May 19), The Economist, 1-16.

vi
B Corporations are a new type of company that uses the power of business to solve social and environmental problems. The vision is
simple yet ambitious: people using business as a force for social good. B Corp is to business what Fair Trade certification is to coffee or
USDA Organic certification is to milk. B Corps are for-profit companies certified by the nonprofit B Lab to meet rigorous standards of
social and environmental performance, accountability, and transparency. Today, there is a growing community of more than 2,300
Certified B Corps from 50 countries and over 130 industries working together toward one unifying goal: to redefine success in business.
For a good example of a B corporation, see Case 8.1.

vii
Kassoy, A., Houlahan, B., and Gilbert, J.C. (2016, July), “Impact governance and management: Fulfilling the promise of capitalism to
achieve a shared and durable prosperity,” Center for Effective Public Management, Brookings. Retrieved from
https://www.brookings.edu/wp-content/uploads/2016/07/b_corps.pdf