The Problem with Traditional Corporations

Note: Data in this section last updated July 3rd, 2022

Unlike many in the crypto space I don’t hate corporations. In fact, I think that they are one of the most important economic innovations in history as they enable large groups of people to work together to accomplish a common goal.

One of the ways they do this is by serving as a “nexus of contracts”. Corporations help coordinate the vast array of contracts that exist between the disparate (and often adversarial) group of stakeholders required to run a sizable business. This includes owners, management teams, employees, customers, suppliers, investors, creditors, etc…

Because these contracts are backed by a well-developed system of laws and enforced through the courts, they essentially allow a diverse group of strangers to trust one another and do business in a complicated, and often global, business environment.

Corporations Form the “Nexus of Contracts” That Allows Diverse Stakeholders to Trust One Another

Source: ResearchGate

Indeed, corporations work closely with the banking and legal system to provide covenants that protect:

• Owners: Partnership agreements guarantee that each of the owners of a business will receive his or her fair share of the profits. In modern corporations, they also provide limited liability protection, meaning that an owner’s personal assets can’t be seized in a judgement against the entity

• Investors: Investor agreements protect both corporations and sponsors by clarifying the amount of investment, key terms and conditions, the percentage of ownership received and the requirements of both parties to consummate the transaction

• Employees: Employment contracts ensure that workers will get paid for labor performed and that management will have recourse in the case of negligence or bad faith

• Customers and Suppliers: Customer and supplier agreements guarantee that the product will be delivered as promised and at the agreed upon price

• Funds: Corporations serve as the legal entity that interacts with the banking system and the only “person” that can access an organization’s funds and transfer capital. In addition, corporations also serve as a fundraising vehicle – instead of each individual raising money separately, they provide a single point of contact for financial markets

• Technology: Intellectual property agreements protect the intangible assets of a corporation such as trademarks, copyrights, patents and trade secrets

With all these stakeholders, it’s no surprise that the average Fortune 2000 company has 20,000 to 40,000 active contracts at any given time!

Unfortunately, managing the administrative, legal and regulatory requirements of all of these contractual relationships requires a lot of bureaucracy and overhead, and this makes corporations quite inefficient. In particular, they are often:

• Slow: Hierarchical layers slow communication and new ideas must often pass-through multiple rounds of approval before being implemented

• Expensive: Upper and mid-level managers can be very expensive, often comprising the bulk of payroll cost while representing a relatively small portion of the total employees

• Unimaginative: Top-down decision-making reduces innovation, often spurring a viscious cycle where employees lose motivation as their interests depart from the firm

• Restrictive: Corporations are often subjected to strict regulatory requirements for hiring and retaining talent (especially international talent), contributing to a “sticky” labor market

• Opaque: Most businesses tightly guard internal information and financial results, and public corporations are only forced to report on a quarterly basis

• Disjointed: The larger a corporation gets; the less employees align with the vision

• Highly Regulated: Larger firms are much more vulnerable to regulation by governments, banks and other third parties

Together, these concerns represent a major problem – not only do they curb economic growth, but they also limit access for workers and contribute to inequality.

Unfortunately, we are all but forced to accept these consequences as corporations – in close partnership with banks and governments – have historically represented the best (if not only) way to provide the level of trust needed to organize a globally diverse group of economic actors.

So while some may call corporations “evil”, up until now they have been a “necessary evil”.