The Challenge for Corporations in the 21st Century - economist John Kay
In the past hundred years, the nature of business has fundamentally changed; our thinking on business has not.
In the past hundred years, the nature of business has fundamentally changed; our thinking on business has not. So argues eminent economist John Kay, who will deliver this year’s Sir James Mirrlees Lecture, in his new book, The Corporation in the Twenty-First Century.
We have inherited a picture of business and industry as the domain of greedy capitalists, with the rewards flowing to fat cats and those born with the right surname.
Companies such as Amazon and Apple service the entire world while only controlling a narrow base of assets.
Amazon does not own most of its warehouses or delivery vehicles, Apple does not own much except its Cupertino campus and a large pile of cash, and airlines don’t own the planes whose fuselages are painted with their logos. Instead, capital is a service like any other, which is regularly rented to those with the capabilities to achieve significant returns.
The modern corporation is a collection of capabilities, and 21 st -century corporations can and do choose to focus on the domains where their unique combination of capabilities can be put to best use.
How business has changed
Not only has the nature of business changed over this period but so has the culture surrounding business and management. Corporate management in large companies was once dominated by talented specialists, with little formal training in management. Airlines were managed by aeronautical engineers, while hospitals were managed by doctors. What these individuals did have however was knowledge of the product and the desire to build a great company.
Nowadays, large corporations are dominated by a class of professional managers more likely to be trained in McKinsey’s graduate programme or an MBA class than at the bottom rungs of a large corporation. This has fundamentally changed the way large corporations are managed, and not necessarily for the better. Instead, the pursuit of shareholder value has destroyed some of the leading companies of the 20th century, from ICI to Boeing. This, I believe, gives some insight into Britain’s economic stagnation and attempts to identify the factors that led to the downfall of many of Britain’s corporate giants.
The need to change corporate culture
As the management of these organisations has changed, so has their corporate culture, with modern business ethics still largely rooted in Milton Friedman’s doctrine on shareholder primacy. However, I would argue that the goal of the entrepreneur should not be to maximise shareholder value, but to build a great business. Only then can we discard the short-termism that currently leaves corporate managers at the mercy of their latest quarterly earnings report. This is a theory of business based on Aristotelian virtue ethics, rooted in a core belief that business exists to benefit society as well as its owners.
In this lecture I will draw on lessons gained from a lifetime of academic and professional experience, including from teaching at both St John’s College, Oxford University and London Business School, and from my role as founder of economic consultancy firm, London Economics, to help us reevaluate how we think about business, and gain a truer picture of how business actually operates.
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