Some of you might have seen my posts on LinkedIn about a new book, The Corporation in the 21st Century by John Kay, that I bought and was reading recently. Actually, it was a review that I read in the Financial Times that prompted me to buy and read it. I must admit that I hadn’t heard of the author who is an economist in the UK, nor had I read any of his previous books. I should have known that PR agency idiot bosses would have meddled with it, and so they have! The first signs of it appear in the author’s introduction to the book, where the author writes about “business having evolved, but the language describing business has not”, about physical capital not necessarily being owned by the business that uses them, and about the 21st century corporation being defined by human capabilities that is collective knowledge and collections and combinations of capabilities, but towards the end, goes on to say that the book is written for students who read popular science or history and those who would never normally pick up a business book!
I wondered why the FT even cared to review the book considering the audience it is meant for, but then the book is also reported to have made it to the longlist of FT’s Business Book of the Year for 2024! You can imagine my eye-roll but having bought it – and for a change Amazon India seems to have priced this reasonably – I was determined to read it and write about it on my blog, of course.
The Corporation in the 21st Century is divided into eight parts which don’t seem to have much relevance with the contents. In the introduction John Kay introduces the idea of “economic rent” which he says is different from profit in the sense that it is no longer primarily a return on capital, but a return that accrues to people and organisations because of commercially valuable talents which others struggle to emulate. He does admit that the term is borrowed from the days of a predominantly agricultural economy when it was used to differentiate between a more fertile – and more valuable – piece of land from another. The fact that some organisations or companies are better than others at providing a certain kind of product or service is very much connected with the concept of brands, and so I made a mental note of it.
The first chapter, Love the Product, Hate the Producer is about people’s aversion for big business, especially in the aftermath of the 2008 Financial Crisis. Strangely, though, the author doesn’t dwell on the Financial Crisis itself and what effect it had on people around the world. And in making the point about people continuing to use certain products even as they hated the companies that made them, he makes some bizarre comparisons such as comparing the financial excesses of big banks with advertising puffery, and cites US courts proceedings as reference notes. I haven’t checked the reference notes, but I would be very surprised if such comparisons were made in adjudicating the cases against Goldman Sachs and JP Morgan.
“The statement of business principles was ‘generic’; it represented ‘puffery’ akin to claims that ‘Heineken refreshes the parts other beers cannot reach’. No reasonable person would regard them as statements of fact on which they might rely. US courts had ruled in an earlier case that JP Morgan’s claims that the company had ‘risk management processes that are highly disciplined and is designed to preserve the integrity of the risk management process’ and that the bank ‘set the standard for integrity’ were ‘puffs’ like ‘Red Bull gives you wings’, and hence unactionable.”
Similarly, he writes about the poster children of the internet, companies such as Google, Facebook and others that people were beginning to dislike, all of which seem to be exaggeration, including an Atlantic article by the editor, Adrienne LaFrance, and also cites a Pew Poll about people’s views on capitalism vs socialism that I think is downright silly. It seemed to me while reading all this that he didn’t have to go through the trouble of inventing stupid examples of people’s distrust and dislike for big business – there were enough real examples around.
Chapter 2, about pharmaceutical companies has more of the same, where the author even writes about the famous recall of Tylenol by Johnson and Johnson. He calls it a painkiller, though, and says it was ‘spiked by a criminal’ and offers someone’s blog on Medium as a reference note. The more important point that he makes in this chapter, though, is about the way pharma companies make money for shareholders – that the pay-off from marketing the product is immediate, while that from R&D is delayed. He concludes this chapter with four problem areas between business and society.
“I have described four problem areas: the motivation and standards of behaviour of leaders of the industry, the interface between business and finance, the difficulty of constructing a regulatory regime that is relevant and effective; and the sometimes too tenuous relationships between prices, costs and values. None of these issues is unique to the pharmaceutical sector: similar questions arise in every kind of business, and the answers are necessarily specific to industry, time and place. But in this book – and another that will follow – I will illustrate principles and directions of travel.”
Having introduced several ideas early on in the book such as economic rent in place of profit, shareholder capitalism vs stakeholder capitalism and collective knowledge and combinations of capabilities, one would think that the author would now concentrate on these ideas and elaborate on them in the rest of the book. But, no, Kay goes back into history to describe the rise of the corporation, the days of the industrial revolution, the rise of finance, etc. and loses control of the main argument or idea he is exploring through this book.
For example, in the third chapter titled Economic Motivation, he writes about how personal wealth was put to use as productive capital and to the control of business, rambles about Adam Smith as well as the famous paper by Jensen and Meckling before arriving at the conclusion that in applying such individualistic thinking to business, we have lost out on the social dimensions. In fact, he fails to explain how companies create or earn economic rent, even as he makes comparisons with land holdings and football companies!
Finally, it is in the 14th Chapter, titled, …The Modern Theory of the Firm in Part 4 of the book that he actually seems to come to the point about modern firms. Here, he writes about how modern firms structured themselves and did business and I think the book should have begun here, which is somewhere halfway through it, actually. Unfortunately, he continues to ramble about various aspects of modern business without building a cogent argument. For example, after writing about FM Scherer’s Structure-Conduct-Performance model and Michael E Porter’s Five Forces of Competitive Strategy, he writes that neither of the models explain why firms facing the same set of forces perform differently. I think this is to misunderstand Porter’s Five Forces, which only lays down the framework for how companies ought to devise their strategies. It is about differentiation, along one or more of the five forces, and this involves making strategic choices.
In Chapter 15, Myth of Ownership, Kay writes about Milton Friedman and his famous NYT article about the greatest corporate social responsibility of companies being to generate profits for their shareholders, an article that I have also written about. However, the author questions the entire idea of ownership and makes a rather important point about ownership of companies being different across countries, depending upon the law of the land. I am not a lawyer, but an advertising and brand communications professional in India, but if what he says is true it does make a difference to how company ownership is treated in different countries. In his comparisons he confines himself to the British, American and German systems, and continues with the same subject in the 16th Chapter Must Companies Maximise Profits?
To paraphrase him briefly, Kay writes that under the American system company law is a state law, wherein the owners of a company are its shareholders. Whereas in the British system, the law provides for a corporate personality, as in it recognizes a company as an independent and legal entity; quoting the standard text on English corporate law, he writes that “the company is a juridical person with rights and duties of its own, and a res owned by its shareholders.” In Germany, company law is subject to the Basic Law which lays down obligations of the shareholder as well as those of the company, and further, any exercising of property rights must have regard to the public good. What’s more, the author debunks the American concept of shareholder ownership by saying that throughout, managers of American companies have ensured that they retain greater control over management issues. And that although there is legislation and regulation in the US such as the Sarbanes-Oxley Act and the Dodd-Frank Act as well as SEC regulations, there is as yet no legislation aimed at controlling corporations.
On the subject of whether companies must maximise profits, again the laws vary between the three countries that John Kay compares. He writes that a section of the Company Law in the UK requires company directors to act in certain ways in order to promote the success of the company for the benefit of its members and in doing so must have regard for other matters, which range from the long-term consequences of any decision, to the interests of employees, suppliers, customers, the environment, high standards of business conduct and the need to act fairly, etc. He says that this ambiguity and compromise is built into the law, so company directors exercise good judgement and sense of balance. Whereas, in the German system there is no ambiguity as the Management Board assumes full responsibility for managing the company in the best interests of the company, meaning its stakeholders, with the objective of sustainable value creation. There is no ambiguity in the US system either, where the primary responsibility is to the stockholders.
While I found these chapters to be an interesting and fascinating diversion in the book, they end up being just that. A diversion. The author doesn’t draw the necessary conclusions from these facets of company ownership and responsibility, to make a larger argument about the modern enterprise. Instead, he goes on to discuss the subject of “earnings management” in modern companies that have led to short-termism, executive compensation linked to stock performance, share buybacks etc that we all know are problems with the American way of doing business that has unfortunately gone global.
In Part 5, Kay writes about the rise of modern finance and ways of raising capital that has led to the rise of so many new companies and start-ups. M&A deals are part of this too, but he wonders that in all this excessive financialization and dealmaking, what does any of this have to do with doing business. As in, what about the core business that companies are supposed to be in?
I am afraid, this echoes my question exactly while reading The Corporation in the 21st Century. I kept asking “Okay, but what does any of this have to do with stakeholder vs shareholder capitalism, or with economic rent, or with individualism vs combinations of capabilities, etc!” It is a pity that he lets all those thoughts fall by the wayside, as he goes on about how corporations have changed through the centuries. Part 6 of the book is where he eventually comes around to discussing the 21st Century Corporation as one enabled by a combination of capabilities, but I don’t think he dwells on it enough. He doesn’t say whether he means capabilities in the same sense as core competence that CK Prahlad and Gary Hamel wrote about in the early 1990s in HBR. Since HBR doesn’t allow non-subscribers to read this article, I recently downloaded a pdf of it online since I had been meaning to read it for years. Of course, since unprofessional PR agency idiot bosses are meddling with sites and pdfs online as well, there is no way for me to know that what I read is the genuine and original article by Prahlad and Hamel. Coming back to The Corporation in the 21st Century, John Kay casually mentions capitalism without capital – also the subject and title of a book by Jonathan Haskell and Stian Westlake that I have written about on my blog – somewhere in the book, but doesn’t pick up the thread. Part 7 is in fact, supposed to be all about capital in the 21st century, but the author doesn’t do justice to this either.
In the end, The Corporation in the 21st Century promises to have a lot of interesting ideas at the start but loses them along the way, while the reader thinks okay, maybe he will deal with this in the next chapter. Only to be disappointed yet again. If you wish to read a not-so-heavy book about the history of business – and there might be many students out there, for whom this book is intended – there might be better choices. I think it might be dangerous for students to actually be reading this, since it is so full of strange examples and comparisons, even outrageous ones. And although John Kay asks why economists prefer to think of the firm in terms of production function, markets and hierarchies, and structure-conduct-performance but not as capabilities, he doesn’t quite answer it in this book. Perhaps he will, in the sequel to follow, but I’ll give it a pass.
Peripatetic Perch 