Digital Kapital
Retooling Ownership

A quick refresher and an introduction for those of you who missed last month's Digital Kapital: In the networked economy, it is virtually impossible to create within a single company the economies of scale necessary to compete on the many dimensions that complete the eCommerce experience. At the same time, it is very difficult to retain partners and customers in the very fluid online marketplace, because they can always go somewhere else for a better margin or a better price. So, I suggested that companies begin from the assumption that everyone in the value chain, from supplier through employees and partners of the company, right down to customers, need to be brought into the equity structure of the company.

This requires a new corporate structure that issues different classes of stock that are valued and vest based not only on the par value of the stock when issued, but also according to the risk the supplier or customer took in doing business with the company, as well as the performance of commitments, the size and make-up of the market, and many other criteria. This model draws on the unusual structure of VISA International, which is the largest financial organization on the planet, but which has no controlling owners and that cannot remove members from governing bodies arbitrarily. Dee Hock, founder of VISA, calls this kind of structure a chaordic organization. I'm suggesting that we take things much further than VISA did, including everyone in the equity pool. This will lock in, or at least strengthen, many relationships that are fragile at best when conducted in Internet time.

The problem with these A corporations is that you cannot set out to build one according to a strict plan, but rather according to principles and the goals laid out at the beginning and that are modified over the life of the company. For an established corporation, starting down this path is tremendously difficult, because they have grown and continue to operate according to plans and equity structures that are antithetical to organic growth. So, what's an executive to do?

Despite the rather touchy-feely, New Age neologism "organic corporate growth," I am not advocating the disposal of all the tools of management. Peter Drucker forbid I should do that. Yet, I do think that you can do much to inject the innovative gene into your organization by taking some simple, albeit unorthodox and frightening steps. I'm just going to list them, so bear with me if this sounds flippant:

Break your company up into the groups necessary to complete any discrete task that it performs today, and make them separate companies. Just take a pencil and draw lines through your org chart.

Create one billion shares, or one trillion shares, of stock for each of the new companies.

Now, before you go any further, look at the companies you've created. Would you do business with each and every one based on what they offer? If not, why do you continue to do this in-house, anyway? If so, you're in business.

Use your capital assets and cash to buy shares in the companies, and count current revenue for the first year as goodwill when valuing your contribution to the new companies. Don't wind up with more than 20 percent of any company. If you own more than 20 percent, break it down further.

Give 20 percent of the stock in the companies to the employees, lock stock and barrel or according to incentive plans.

Make a commitment to distribute stock equal to 20 percent of the value of the company to customers, suppliers and partners, regardless of the dilutive effect of these grants, a part of the articles of incorporation. The dilution should take place on a regular schedule, allowing the company to create new shares as necessary to keep customers and suppliers at 20 percent. Worry about the way this stock will be distributed later, when the company begins setting its own goals.

Specify that the board of directors will never consist of more than one representative for each of the 20 percent shares of the company allocated to your company, the staff of the new company, and the customers and suppliers. Allow the remaining seats to be filled by a combined vote of all shareholders.

Promise yourself and the leaders of the new companies that all you will ever do is give advice. You will not dictate; they will promise to listen.

Of course, this exercise can be conducted within a single company, but it will work better if you go for broke. This is the suggestion of Kuniyasa Sakai and Hiroshi Seiyama, founders of a collection of Japanese companies that are relentless divided to reinstill innovation in both the new and the parent firms. By staying small while other companies grew large, their companies have consistently been able to maneuver more adroitly than Japanese mega-corporations. It provided Sakai and his executives powerful leverage in negotiations and business relationships. Their ideas are described in a book called "Bunsha: Improving Your Business Through Company Division."

Sakai uses the analogy of a baseball team, saying that a game played by twenty-five players in the field at one time would be boring. The balance of ground to cover and nine men to cover it makes baseball exciting, and he urges executives to look at their companies as a field that can be played only by a team of a certain size. Once you exceed that size, divide the team into two or more teams of the right size.

But, how do you provide the necessary structure to employees and others in the value chain that will earn more or less based on the performance of the company? And here we come back to well-established practices of compensation management. You must recognize that each contributor needs to quickly and clearly understand their obligations, even if that obligation is as simple as the customers, which is "You must buy a product at least once in order to gain equity."

What is any one of these contributions worth, whether its buying a product, supplying a raw material or service the company needs, or performing as part of the core team? Let's take a look at the assumptions that define the perfect competition within the labor market we are familiar with (though I think we are forgetting it very quickly). The following list comes from Compensation Management in the Knowledge Age. I'll deal with the changes an A Corporation will work on these assumptions, which are:

1. Employers seek to maximize profits and workers seek to maximize utility.

The dichotomy between the employer's and workers' priorities is no longer true. In fact, these concerns are converging as more workers invest in stocks and long-term compensation packages. Both employers and workers seek a balance of profit and utility, though they rely on different criteria. The employer wants to sustain profitable employment relationships, maintain a positive public image, and maximize knowledge captured in the orbit of the company. Workers, meanwhile, want to increase profits in an A Corporation, because they share in the profit. Furthermore, they may hold multiple jobs and interests in multiple companies, so they are also interested in time and quality of life issues, not just money.

2. Employers and workers have perfect information about wages and job opportunities in the market.

This is not true and I don't believe ever has been, because companies have diligently erected barriers to the flow of this kind of information. However, even if information is nearly perfect, the dynamics of a rapidly-changing market keep reality racing ahead of the information that describes it. This is also true of company-consumer relationships and in networked markets, ironically, it is the company that invariably has less information than the consumer, who flits from seller to seller collecting offers.

3. Workers are identical with respect to skill and performance, and jobs offered by employers are identical with respect to working conditions and other nonwage attributes.

This becomes less true every day, even though human resources managers attempt to inflict a regime of sameness of jobs through standardized job descriptions. In A Corporations, or any information-age company, the job is defined by the person it it, who brings relationships and a whole range of manias and neuroses that weren't allowed into the workplace before 1980. Compensation has been completely destandardized, making the bargaining process all the more important to recruiting and keeping valuable people.

4. The labor market consists of many individual employers on the demand side and many workers on the supply side and any one employer or employee has a negligible influence on the market. Employers do not collude and employees do not belong to unions.

In a marketplace where a single worker can bring along a loyal team or a portfolio of relationships, they can have a tremendous influence on the market. Because companies that have failed to land these people can assume they will be investing in growing those relationships through another employee they will pay considerably less for someone in the "same" position; the employee, however, may have other ideas. Salaries for entire markets are defined by single companies, too. For instance, people will kill themselves for low wages and stock while working at a hot startup, but will expect massive salaries at an established company. In the networked economy, companies may be inter-related, but still fiercely competitive, and workers may have so much information at hand that it is like having a father who is a union boss to guide them in compensation negotiations.

5. All jobs in the market are open to competition and there are no institutional barriers to mobility of workers from one job to another.

This is still largely true. It may be more true than ever, but the psychological barriers to movement between jobs that have kept generations locked into gray flannel and dreams of corner offices still remain. As companies struggle with new conditions through constant restructuring, they have actually diminished the power of those psychological barriers. An A Corporation environment may reinvigorate the employer-employee relationship, strengthening bonds between company and worker. In any case, the days when, as an editor did when I told him my wife was pregnant, employers say "I have you now, because you need to save that kid's college tuition" are over. In fact, I quit my job a few months after he said that, and I still work with him, but not for him, today.

Given all the turmoil in the marketplace and the conditions an A Corporation will grow under, the goal-setting challenge becomes critical to the success of an organic institution like I am describing. Just as in a modern company, people have to know in clearly stated terms what they must do and how they will be rewarded.

The company's primary role, then, is to manage the cost of developing, monitoring and enforcing these agreements, whether they are with employees, suppliers who will compensated with additional stock if they lower the cost of goods sold, or customers who are facing a buying decision that pits an established firm against an A Corporation with a killer product, but little support in the market.

Being able to identify risks, to calculate the value of those risks, and the benchmarks against which performance in the fact of those risks, is critical to the company that would remake itself as an A Corporation. The advent of information technology and distributed networks makes these calculations possible for the first time. I can think of no better application for a smart card than tracking spending and equity earned in relation to that spending - if an affinity card also functioned as an interface to an "alliance portfolio" of equity earned through consumption, consumers would flock to them.

So, back to my initial suggestions about how to break up your company. Let's assume, for argument's sake, that there's not a chance in hell your board of directors is going to approve the break-up of the company to spin out 15 or 20 new, little companies. How do you accomplish the same thing? The main challenge is bringing all parties into the equity structure. In a way, frequent flier mile programs have served this function for the airline industry. They have even been extended into travel-related industries, like hotels and credit card companies, which use miles as a form of incentive.

Is there a way to do the same thing in your industry? Say you build cars. Or PCs. If your company is typical of these industries, it has probably bought back a lot of stock in the past few years. Why not take those shares, split them 10-for-1 and start doling out a share for every $2,000 in MSRP on your product's price tag? Pay dealers a share for every $1,000 in product sold. Pay suppliers a share for every $500 in costs they save you. If you aren't a publicly-traded company, issue stock and pay a dividend to shareholders.

The long-term goal is to own very little of a company with a vast market share and loyalty among consumers and suppliers based on their shared interest in the success of the firm. What you own will be worth much more, because your market is locked in; the cost of displacing your company will be either extraordinary marketing spending or massive innovation. The A Corporation raises the barriers to entry and customer flight, not just because it is largely owned by partners who keep costs low and customers who come back again and again, but also due to the responsive nature of a company owned and governed by outsiders. Companies would, by virtue of the wide distribution of stock, be more accountable and able to factor environmental and social costs into its business decisions.

Consider the problem of creating a trusted third-party to handle the extensive anonymity problem for your company. If you break up your company and, out of those resources you take a key marketer, financial person, and technologists, you can set up that third-party and benefit from its success. The new company, because it takes the A Corporation approach and offers customers stock for signing up for the identification and escrow services it offers, brings an established audience to other markets besides your own company's target. As a result, the new structure challenges the people you put in charge there to make much more of the customer base than a defensible market share for your product or service. Because the new company is partly owned by you, you benefit from the extended relationship with customers and, since your company pays the newly formed company shares for performance, the firm is not likely to burn you by taking the audience to a competitor.

You see, as you break up your company you may find that some newly formed groups do head into your competitors' arms. That may be a good thing, since other vistas may open as a consequence of the challenge. In all likelihood, due to the distributed equity structure, this won't happen, unless the startup has a very good reason, but then you benefit from its success, and that of your competitors, anyway.

Ultimately, if the economy went over to an A Corporation structure, the distribution of risk would be dramatically altered, so that the total output of the economy would be distributed according to the work performed successfully and the support provided by suppliers, partners, customers and even competitors. There would probably be less difference in wealth between the very top and bottom of the economic ladder, since equity would be more evenly distributed. I am not describing a socialistic nirvana, since much of the stock issued by early-stage companies would end up being worthless, because companies would still fail. Wealth would be distributed according to the contribution to economic value, accruing not only to the successful sellers, but also to the wise consumer.

The churn of innovation in this new environment would be substantially accelerated, even compared to the past 20 years.

With more equity and more wealth spread across the economy, new investments would be less concentrated in the orbits of the very rich. Bill Gates has clearly invested heavily in companies that either complemented Microsoft's product portfolio or provided him diversification; what would the effect of spreading half of Gates' wealth between 10 million people (which would come out to $4,500 apiece, or approximately what the typical 35 year old has in savings)? It may all get spent, but much of it might be invested. After all, we're talking about a world where equity relationships would be normal, and the value of an investment was more widely recognized. And, hey, if somebody did spend the extra money in the A Corporation world, they'd get stock and through that stock, more wealth.

This is the way to the long boom.

Sites on my mind:

Far Eastern Economic Review
Doc Searls
Bill Martin
WebTalkGuys
Manufacturing Dissent

Copyright 1992-2002 by
Mitch Ratcliffe and
Internet/Media Strategies Inc.
No reuse or redistribution
without written permission.