The Corporate Path

“Corporations have neither bodies to be punished, nor souls to be condemned, they therefore do as they like”
Edward Thurlow (1731-1806)

Simple legal definition

A corporation is basically a group of people or a company officially recognized by a state (government) to act as a single entity which is separate from the individuals that work for the corporation.

Beyond the simple definition, what makes corporations a powerful force is related to the concept of limited liability. Limited liability basically means that the shareholders are protected from personal liability regarding actions of the corporation. In other words, if a corporation performs poorly or doesn’t pay back its debts (goes bankrupt), shareholders can’t be held liable unless they were personally involved in engaging in illegal activity via the corporation. Therefore, the losses for shareholders of a corporation are limited to the value of their investment in the company. As an example, if a corporation takes out loans and can’t pay them back, then the corporation goes bankrupt and the lenders and creditors lose their money. The maximum value that the shareholders can lose is their original investment. The shareholders can’t be held personally liable for the debts of the corporation. This allows investors to be willing to place more bets and invest more of their money in corporations knowing that there is a limitation on their liability (i.e. a known maximum downside).

Corporations can be viewed as a new virtual organism that is perhaps the most sophisticated and adaptable species on the planet. A state (country), when viewed as an organism, is usually more powerful than a corporation, but not always, and corporations have a number of advantages over states. Unlike states, corporations are not limited by geography. They can exists anywhere and in multiple places at one time. If you cut off the head (i.e. the CEO gets fired), the organization lives on and just replaces the head with less impact than what happens when a state loses its head, especially dictatorships. It has most of the rights of a human being, but is not limited by biology. It can sell an appendage to another corporation or buy one. It can cut off appendages when conditions are scarce, and then regrow them as needed. It can produce almost a limitlessly supply of offspring. Most importantly, corporations don’t depend on the individual units that make up the corporation: the employee. This all makes for a very potent combination of attributes and helps explain why some corporations are more powerful than some states and certainly outlive most states. It’s also the reason that it is critical for you to understand what they are before just blindly becoming an employee.

A brief history of corporations

For further details on this subject, an excellent history of corporations is summarized in a book titled “The Company” by John Micklethwait and Adrian Wooldridge.

Ancient history up to about the 1500s AD

The very basic concept of a company goes back thousands of years. The usual scenario was that a few investors would contribute to fund a trader who would take a team of camels or boats across a continent or sea, purchase some exotics goods and then return and sell them for a high profit. The profits were then distributed among the investors according to the size of their original “share” in the investment. For instance, the person who provided 5% of the original investment got 5% of the share of profits. The person who provided 30% of the original investment obviously got more. These are the shareholders. The main problem with these arrangements was that if the investors took out loans to assist in funding their venture and if they were not able to pay for those loans or if the organization went bankrupt, the investors could be held personally liable, and even get thrown into prison.

From this arrangement we get the word “company” which originates from the latin “com” (together) and “pa” (bread). Being part of a company was analogous to companions eating bread together. It was an activity that usually involved trust among friends, not something you usually do with complete strangers. That changed in the 1500s.

1500s to 1800s

Starting around the 1500s, companies evolve into what is know as the “chartered company”. These chartered companies are officially sanctioned by and often partnered with the state for specific types of trade. They sold shares on an open market which allowed complete strangers to participate in the investments. Famous examples include the Dutch East India Company (VOC) and the Hudson Bay company. While these chartered companies come a bit closer to something that is similar to modern day corporations, they are still quite different. They often maintained military assets such as gun boats and engaged the assets in violent skirmishes. Chartered companies also represent the start of mass speculations and economic bubbles because they allowed so many more investors to participate in the process. However, they were still not without risks of liability to investors and shareholders.

Mid-1800s to early 1900s

Fast-forward through a lot of history and company evolution until we get to the mid-1800s in England with the issuance of “the Companies Act” of 1862. In a nutshell, the companies act consolidated a number of concepts from previous acts that provided a legal framework for investors to be protected by limited liability. Have you ever wondered why companies included the title “Limited” or more commonly “Ltd.” in their name, e.g. “Acme Ltd.”? This comes from the Companies Act. Assuming that the company and investors operated within the law, and even sometimes not within the law, the liability of the investors was limited to their original investment from creditors. If you invested $100 in a company, then under the Companies Act, the most that you can lose is $100 regardless of how much debt the company has and regardless of whether it can pay that debt. Unlike the past when investors could be held personally liable and even get thrown in jail for the debts of the company, a “Limited” company protected the investors via a bankruptcy process. The concept of a limited company spread throughout the West and created a massive new wave of capital markets. Investment banks could raise capital and offer it to companies with the potential for unlimited rewards but limited liability. In other words, there is no limit to how much you could earn but there was a limit to how much you could lose. Not a bad deal and one that brought in tons of investors. While the common narrative is that the industrial revolution was given by new technology and inventions, it is more likely the Limited Liability company concept allowed human ingenuity, drive and plain greed to flourish, thus creating a new age for humanity.

Modern corporations

Companies as we know them that include various functions (marketing, manufacturing, R&D, Finance, etc.) in combination with a new technology called “management” were formed in the early 1900s. While it may seem intuitive that the concept of management always existed, it actually didn’t. In the late 1800s, most manufacturing companies had less than 5 employees operating within a craftsmen-like environment. There might have been an owner giving directions and some specialization within the shop, but it wasn’t hard to organize a small group of people. With the introduction of large-scale production introduced by Henry Ford’s assembly lines, companies grew in size to hundreds and even thousands of employees. By 1901, US Steel had 168,000 employees. These new large companies needed a new technology for organizing and directing their operations. The new technology created was “management”. Management concepts such as divisionalization, budgeting, pay-for-performance and modern branding strategies were all developed between 1900 and 1915.

This essentially represents a plateau in the evolution of the modern day corporation that you might find yourself working in.

The future

Unfortunately, except for some corporate innovation, not much has changed regarding corporations and management. There has been superficial progress with respect to diversity and employee protections, but companies have been effectively unchanged in 100 years. Corporations are owned by shareholders with a CEO and Board of Directors. Under the CEO there are various divisions lead by Vice Presidents who then lead a cascade of small pyramid structures led by middle managers. They all usually work in close proximity in a 4-5 days a week format between the daylight hours of 8:00AM to 6:00PM. Even though modern tech companies produce etherial products (software) that are completely unrelated to a Model T Ford of 100 years ago, the companies still basically operate very similarly, which places a severe limitation on their potential. Companies place a tremendous amount of dependence on management which can consume up to 30% of a company’s costs. The value of management is increasingly less and is very much in need of development and change. Unfortunately, the people who can make the changes, senior managers, do not have an incentive to change the system because they benefit richly from the current arrangement. For more on the topic, Gary Hamel’s book entitled “The Future of Management” provides an excellent summary of the problem with current management practices and how it needs to change. There is also a brief YouTube video where Gary Hamel summarizes the problem and the need for change. It’s quite possible that the massive disruption caused by the Covid-19 pandemic could be a catalyst for the needed change as companies learn that expensive traditional corporate facilities are not only unnecessary, but overly costly and even counter-productive. It’s also likely that companies learn that traditional management is also not only unnecessary, but now worth the cost and inefficiency as compared to a more decentralized structure consisting of teams with a hierarchy of decision makers based on knowledge and expertise instead of the most politically skillful. The future of companies could evolve into something similar to an open sourced software project where contributors work remotely and are task paid. We shall see.

Types of corporations

The following doesn’t come close to describing all of the various types of corporations in the world. In fact, that could be the subject of an entire book itself. Among the types of companies, there is tremendous diversity among them. For instance, Walmart and Apple are two very large companies, but it is safe to assume that they are nothing alike in structure, leadership, products or culture. For simplicity, the following outlines two broad categories. When considering going into corporate life, one should at least consider whether any of one of these broad options appeal to you. Generally speaking, corporate life most traditionally resides within the large multinationals. However, companies as small as 300 employees can exhibit nearly identical work experiences as the large multinationals. When company size falls appreciably under 200 employees, then there is a significant difference in work experience, culture and even leadership styles. Therefore, the two corporate profiles are basically large companies (greater than 300 employees) and small companies (less than 200 employees). Somewhere after a company grows beyond 200 employees, it changes to become what it will be probably forever. I can’t specify exactly, so we’ll just leave the 200-300 employee company as a transition stage which can’t be well defined.

Large companies (more than 300 employees)

These are typically the large publicly traded multinational companies that you hear about most in the news. They have locations around the globe and offer dozens of products. Their market capitalizations are in the tens and hundreds of billions. However, per above, there are many companies as small as a few hundred employees that exhibit the same structures and behaviors as the large multinationals, particularly if they are publicly traded companies. It gets fuzzy if the companies are privately owned. Regardless, these smaller companies typically want to be bigger and will the adopt similar structures, leadership styles and cultures that are modeled after the multinationals.

Pros

• Stability: Most are very stable and can withstand economic downturns.
• Personal Development: Because of their size, you could spend an entire lifetime in one of these organizations by moving from one position to another with opportunities to work abroad. That’s assuming you don’t get eliminated during a routine downsizing.
• Perks: Some companies are better than others, but larger companies tend to offer many perks like good medical benefits, tuition reimbursement and on-premise gyms.
• Consistency: Leadership can come and go, but corporate cultures virtually never change. If you like the corporate culture of your large company, then you can be assured that it probably won’t change much regardless of leadership.

Cons

• Politics: These organizations require the most political skills to advance. Knowing how to navigate the maze of powerful executives is critical for advancement.
• Pigeon Holing: You could end up doing a very narrow scope of work and get bored quickly.
• Mediocracy: Large companies typically do well by maintaining the status quo. Change for large companies is a threat. As an example, it took a complete outsider, Elon Musk, with no automotive industry experience to change the automotive industry.
• Consistency: Per the above under the “pros”, leadership can come and go, but corporate cultures virtually never change. If you don’t like the corporate culture of your large company, then you can be assured that it probably won’t change much regardless of leadership despite promises of new directions.
• Compensation: You’ll survive and maybe lead a comfortable life, but there is a very low probability that you’ll become wealthy working in a large corporation. When you join these companies at a young age, you’ll probably have to work for the rest of your life unless you pursue an extreme budget.
• Non-Value Added Work: In large companies, you could be spending a majority of your time doing administrative tasks and non-value added work including politicking.

Small companies (less than 200 employees)

These companies are often privately owned, but some are public. It includes start-ups as small as a few individuals up to about 200 employees. In these companies, most people know each other and it’s possible for one person to know every single other person in the company. The company founders often still lead the companies or at least still have some significant connection to the company.

Pros

• Connection: People are connected with the mission of the company. It’s not just a job, it’s about the work.
• People: Since most people are focussed on doing the work and spending minimal time politicking, employees can form healthy long-term relationships and even friendships more easily than in larger companies where there is always likely to be a veil of separation.
• Leadership: The leadership is hands-on and connected directly with nearly all the employees regardless of level.
• Minimal Politics: This doesn’t mean that people won’t disagree, but it does mean that the structure is simple and easy to navigate. You don’t really need to “know the someone” to get things done.
• Stock Option Growth: Compensation may start lower than large companies, but with some start-ups that offer stock options, there is an opportunity to become wealthy from your employment, even for the entry level employees. It’s rare, but at least it’s possible.
• The Work: Unlike working in a larger company, you will spend 90%+ of your time doing mission critical work. In larger companies, you could be spending up to 50% of your time with administrative and often non-value added work.
• Personal Development: In small companies, you can have a chance to “wear a lot of different hats” and get exposure to other types of work.

Cons

• Stability: Smaller companies come and go, therefore if you dislike volatility and disruption in looking for jobs, smaller companies may not be for you.
• Career Change: Unlike the larger companies, it’s a bit harder to completely change the direction of your career while remaining in the same company. Smaller companies don’t have as many departments, so opportunities for change are less frequent.
• Perks: Small company facilities can be bare bones. You will likely not have the fancy cafeterias, fitness centers and child care facilities of the large mega corporations. 401K matching will also likely be less than in the larger companies, perhaps even zero.
• Compensation: Starting compensations are usually lower than in large companies, but you do have a chance to hit it big if the small company goes public and you have stock options.