From FO/Futureorientation #1 - 2005
By Gitte Larsen
Translated by Allan Jenkins
That capitalism is a discarded chapter economically is hardly likely to be a headline in tomorrow’s paper. Nevertheless, it’s a reality that all companies must face.
Our most important production factor today and in the future is people. And even though that sounds like a given, few companies actually have faced the consequences. Most companies and organizations still act as if the dominant production factor is capital. Some places – in European football, for example – the bottom line goes more and more to the players, but that’s the exception to the rule. If companies use only the traditional economic bottom line as a parameter for success, it will have fatal consequences for more and more of them. Top management should, among other places, look at international sports to see what’s happening. So believes Arie de Geus.
The phone rings in Arie de Geus’ home near London. Even though he’s long retired, he is still passionately interested in the world’s condition and its development. After 38 years in the Royal Dutch Shell Group, he continues to write books and articles, and give speeches about the thing that interests him most: the future and businesses.
We talk for almost an hour about what The Living Company is, about why capitalism is a finished era, about the consequences for companies and organizations, and not least about what we can do to change the fact that only a few companies have accepted today’s and tomorrow’s critical production factor – people and their talent. Arie de Geus believes first and foremost that the best way to change this situation is to talk about it. And so we do.
The three factors of production: land, capital, and labor
Behind Arie de Geus’ belief that the era of capitalism is behind us is one of the basic definitions in economic theory: that the creation of affluence, of goods and services, requires land, capital and labor as “factors of production.”
Capital has the right to the bottom line
Arie de Geus explains: “My thesis is that production factors don’t always have the same weight in all societies or all companies at all times. As a rule, one of the factors is dominant. If you look at nations of 1000 years ago – Denmark, Holland, or Germany, for example – land was the dominant factor. And that had consequences, because it meant power accrued to those that owned land.”
“In the 15th century, capital was introduced in a few regions of Europe as a production factor. The first savings were available, and they were placed in production processes. It is extremely well documented today how capital was introduced to production. From then on, capital became the dominant production factor, with the result that power has accrued to them with savings and capital.”
“In the 15th century, the bottom line became critical, a situation that lasted until the end of the 20th century – until 1998/1999, when the capital market shifted from being a seller’s market to a buyer’s market. That’s when it changed, and capital no longer was the dominant production factor. Since then and from now on, people and their talent will be the dominant production factor. Despite that, we still live in a world structured as if capital is still the dominant production factor. And so capital still has the power, still has the right to the bottom line; the external reality is in opposition to the internal reality in companies today.”
“There’s no doubt about what the dominant factor of production is today – it’s people.”
You believe we should wave good-bye to capitalism from an economic perspective. What are the consequences for companies?
“We talk about business in a classic economic language. The company consists of assets, makes products, and should make a profit. The formal language we use when we talk about companies today is the language we learn in university, that’s written in our laws, that all newspapers use. That language is one-dimensional and actually is nearly in opposition to the reality for successful companies. That language completely ignores the human side of the company. As I see it, a company is first and foremost a living community of people. It is a continuum, a series of generations, with young people joining and replacing the elderly. That language is anthropological, sociological, and psychological, but is certainly not a commonly accepted way to talk about companies today. To talk about business is to talk about effectiveness, profit, et cetera.
“What first made me doubt the classic economic definition of a company was when I observed the truly successful companies. Companies such as IBM, Siemens, and Toyota don’t define themselves as a bundle of assets that produce goods and services to be sold at the highest price for the lowest cost. They define themselves as a community of people; therefore, the company is people and not just a set of assets, abilities and skills or hands and minds. These companies basically consist of individuals who share values that are in harmony with the values of the community.
“When the capital market became a buyer’s market in the late 1990s, there came an economic price, a world price of capital, and why should we keep on running companies to maximize shareholder value? Today, you should run a company to maximize the value that is returned to the people that are a part of the company. The reason that doesn’t happen yet is that you have an internal reality in the company that says results are entirely the result of human talent, while at the same time you have an external reality that says you must continue to see capital as the dominant production factor.
“I believe companies and their leaders should look at European football clubs and their statistics. These show that up to 90% of the top 70-100 European football clubs are fundamentally insolvent. And why? Because there is a fight in these clubs over who should have the bottom line. And basically it’s the players – the human talent – that get the bottom line. In America’s baseball, basketball, and currently hockey leagues, the same fight is happening, and now all their hockey players play in Europe. Professional hockey no longer exists in North America because the fight for the bottom line was so bitter that it destroyed the industry. What’s happening in international sports is something businesspeople should look at with open eyes because that’s really the naked truth about the world we live in – the naked truth about a world where capitalism is economically finished. And that’s why people like you and me should talk about these things. We don’t want a world without football and hockey, do we?”
What are the challenges for companies today and tomorrow?
“A hundred years ago, a company was based mainly on capital; the human element was a minor element. The most important was capital assets. That’s absolutely untrue today, because the human talent you have in the company defines your success, with other assets playing a lesser role. Just look at how many assets Microsoft has, for example. Its capital assets are minimal compared with its market value. The difference between market value and the balance sheet is the value of the human ‘community’ in the company. That’s completely ignored in the language of today. And that’s the tension or great challenge for companies today. We have to change the way we talk about companies. Business is about people working together to produce economic material wealth and quality design. Denmark has beautiful examples of how good ideas and good design quality are essential – for example, Lego and B&O. Their success is based on the quality of the people that work there, not the quality of their machines.
“Everyone still talks about business with the language we used more than a century ago, but reality for business today is quite obviously completely different. At Shell, we have studied the successful companies that have survived a long time – so has the American Stanford Professor Collins in his book Built to Last, and we reached the same conclusions. Long-term success depends on how you build a human community based on real values.”
The Living Company
Arie de Geus says that he recently read the article “Toyota’s Global Drive” in the January 29, 2005 edition of The Economist (which he describes as the archetype of the capitalist/economic way of discussing companies) that discusses how the three largest American automakers combined have fewer profits and less market value than Japan’s Toyota.
“The Economist asks what the difference is but still doesn’t understand the enormous success,” explains de Geus. “Toyota has “the mystery factor” as the Economist calls it.”
“The Living Company doesn’t have employees or abilities. The company has members, and these members have a set of shared values. And this is certainly the “mysterious thing” about Toyota. Toyota has a strong ‘corporate culture’; if you are a member of Toyota, you share the values of that culture. That’s just one aspect of the Living Company, but it’s a very central and important one,” says de Geus. “There are examples of companies that have survived a long time – Shell, for example, is more than 100 years old – and these successful old companies have a strong culture. They have a set of values that the people in them share. That’s the biggest difference between a living company and how we usually define a company; that is, according to legal and economic definitions. The living company is a community of people from the start.”
The two main hypotheses behind Arie de Geus’ The Living Company are that the company is a living being, and that decisions and actions that the living company takes are the result of a learning process.
Read more in Arie de Geus’ The Living Company – Habits for Survival in a Turbulent Business Environment, 1997 & 2002, Harvard Business School Press.
Many companies have worked with their values in recent years, and many of them today have five or seven values. Don’t you think there is some weariness around ‘corporate values’ and ‘corporate branding’?
“I’m not so sure. Very often the values I’m talking about, the values in a living company, are unwritten. It’s not about management sitting down and deciding what five values the company should have. The company already has these values: they’re brought into the company when it’s formed. For example, if the founder’s values are in harmony with the world he lives in, many people will accept these values and quickly want to be a part of the company. The values are there when the company is founded and they can come from different sources – the founder, the region, or a specific profession.”
Do you believe there is a mismatch between today’s individual employees who want to bring their own values into companies and companies’ own ‘corporate values’?
“You’re exactly right, but there’s a mismatch in all team situations. If you look at a football team, you have 11 or more players who make up the team, each with individual ideas, talents, et cetera. But the good team shares certain values, and their individual values harmonize with the collective team’s values. There’s actually no difference between what happens in team sports and in companies. The problems arose when we decided, 100 or 150 years ago, to start thinking more scientifically about companies. We introduced a language that completely ignored that, an economic language; and it’s the economic language that dominates now. It happens everywhere, both in academia and in companies. You say: this is a company, so we will use the economic language; we produce goods and services, maximum price, minimal costs, effectiveness, shareholder value, et cetera.”
Why is it so hard to change that? How do we move on?
“It’s hard because even directors and leaders who understand it are up against society’s structures, up against the system. I believe many in your generation intuitively understand the challenge, but the problem is that the world forces them to use the old world’s economic language when they talk about business. And the minute you start making corporate decisions using the old economic language, you run a serious risk of destroying the human community. This tension is the challenge today. On the one hand, you have the internal reality in the company – the reality wher success depends entirely on having access to and being able to create good conditions for the human talent, so you get as much as possible out of the brainpower. If you are Microsoft or Toyota, your success depends on this.
“On the other hand, when you look out of your office window, or you go out the door, the world outside starts talking about your company in a whole different language. The world outside has the law on its side, and can make you follow its instructions and use its economic language. Every country, including Denmark, has a company law and that law actually says the ultimate power in a company rests with the shareholders, that top management must satisfy the shareholder and maximize the bottom line – and, incidentally, that the profit goes to the owner or shareholder. And that’s the reality of it.”
It seems as if people are ahead of the systems and structures in society?
“Yes, that’s true. People in companies and institutions live in the reality of the present, while society’s structures, laws, and everything else lags behind. They are still in the past. In a democratic society, the law always falls behind reality. The law is very rarely ahead of reality. I actually can’t think of an example. In democracies, things develop and the law gradually catches up. If you said that to a politician, he would be insulted because politicians think of themselves as leaders, but let’s be honest: politicians are translators of that which is already in society and are, by definition, behind.
“I’m not blaming anyone, because we are sitting here trying to find out how to move forward. The price is actually quite high, as things stand today. There are strong indications that company longevity is falling, so the price is high because of the tension between the internal reality in companies and the world outside with its scientific economic language. It’s not because the surrounding world is stupid, but, by definition, it lags behind. And you have financial investors, especially in New York and here in London, that have begun to almost abuse the legal power they’ve gotten from laws that are out of step with reality. And it’s dangerous, because these interests actually kill companies.”
Why is it a problem that companies die faster than ever? Some would say the opposite – that it’s positive that we constantly get new companies that are better geared to the times in which we live.
“That’s right. We actually see new companies today that aren’t organized with shareholders. People are starting to look for company structures that have no shareholders; and that’s pretty easy today, because in many companies you don’t need much capital. We’re starting to see – especially in the creative part of business – more and more use of partnerships and the structures from cooperatives, which is of course a very old organizational structure. Some of these are starting to be very successful today because, by definition, they are communities of people and have no shareholders.”
What can we do?
“We must start talking about these things. Like we are right now. Maybe I’m wrong, but in many companies, I see an understanding for these things I say. People easily recognize the problem, so I believe it should be part of the public debate. We have to talk about these things.”
How would you describe top management’s role in the company/organization of the future?
“If you are a manger, you must be very very careful when you balance the internal and external realities. You must balance the real conditions for your success internally and at the same time have a dialogue with the world outside – a world where they can find a lot of reasons to attack you. Remember the Roman god with two faces? His name is Janus. Rule number one in a CEO’s job description should be that you have two faces.”
How many have that today?
“Not enough. And mark this: in many cases it’s an almost impossible job. It’s a very very fine line to walk. In the world outside, there are people who benefit greatly when a CEO makes a mistake or two. Companies are easy to attack with the enormous amounts of capital in the world today. It’s very very easy to talk a company’s share price down, and that makes them very vulnerable. Fees are enormous in that world, so it’s “juicy business” for some. There’s so much available capital in today’s world that any company with a market value of less than $100 billion can be attacked.”
