Chapter 24
Business Structures—Think Again

The creation of the limited liability corporation in England changed corporate history. It allowed for massive innovation in capital raising, greater risk taking, and innovation while allowing the founders to protect other portions of their wealth. It is not likely that technology will change the legal concept of the limited liability structure. However, technology and related social changes are influencing critical features within every corporation.

Due to a combination of generational differences in the approach to work as well as a spike in technology driven company start-ups that can evolve very quickly, many corporations are moving from traditional hierarchical structures to flatter more evenly weighted ones. Technology allows more work to get done by fewer people; small teams can get significant amounts of work accomplished using technology rather than having to throw teams of subordinate personnel at a problem to solve it. Use of technology still needs to be well thought out and organized, simply throwing every whimsical idea into a spreadsheet or a data search is not a valuable or efficient approach. Teams can solve problems if they are organized well and truly run as teams. This often works well with flatter structures, which have begun to permeate corporate organization charts.

A lack of hierarchy in a corporate culture is not always a utopian situation for every organization and can cause problems internally and externally. There can be free-rider issues where certain employees, or partners, are not carrying their own weight in the workload. People may not do their own work and feel they can still opine or criticize others, creating incredible time wasting, inefficiencies, and ill-will. There is the potential that it can evolve into an inability to make decisions, too many opinions are given, too much weight is applied to everyone’s opinion, and no conclusion is reached. Certain times call for decisive action and sometimes that means someone must have the final word and dictate. If a nonhierarchical structure is going to be successful it usually needs some clarity of people’s roles in the organization and accountability.

In previous corporate generations as a business grew they added people to add scale. Often a manager judged his importance by how many people worked for him, unfortunately, this often took precedence over their output. The leadership in the “C suite” had generally climbed the ladder through success in managing people and as they climbed they managed continually larger groups. Critical factors were getting the right people in the right job and the tools to do their jobs. This is still critical, but corporate organizations now depend much more on information than just people. Management of data and information are of more value, making sure it is in the right format and structure, gets to the right people and places all is increasingly vital. In many organizations this has led to the rise of the chief information officer and chief technology officer as key members of the “C” suite.

With more centrally accessible data and electronic communication people can work from distances and communicate through video chats. Business demonstrations can be done on your computer as someone else takes over your screen. Even e-mails are an easy way to give detailed information about work that you need to leave for somebody allowing someone in India to hand off a project overnight to New York. The ability to manage work flow and track projects electronically has made it easier to manage oversight and easily create paperless paper trails. This has allowed for the growth in telecommuting, which allows a company the ability to leverage off their employees’ capital (their home) in exchange for savings on commuting. Data and the internet have also changed corporate communication. Broad communication can be accomplished quickly through e-mail and other chat systems; though it has its drawbacks as everyone has a horror story of a “reply all” e-mail that was not intended for that broad an audience. Combine e-mail with video chats and telecommuting and satellite offices are more connected to work, but it can create various “classes” of employees. People in the home office are likely to develop tighter relationships. There has not yet been the invention that can change the value, focus, and insights you get from an in-person meeting. The ease of new methods of communication have increased the amount of interaction but reduced the amount of in- person encounters. This has increased the value of the times you do meet in person.

The ability to monitor workers remotely as well as reach them with information and regular communication has allowed once rigid corporate structures to be much more flexible. Companies do not have to commit to long-term leases and infrastructure to start new businesses or divisions; they can rent space for short-term periods from companies that offer shared flexible term work space, like WeWork or The Office Group. The development of logistics, outsourcing and supply chains, and even 3-D manufacturing can allow a company to manufacture and distribute goods without building massive factories or distribution networks. A corporation can manage the design, distribution, marketing, branding, and manufacturing of products but have each of these duties outsourced to other businesses. The organizational structure extends out from the center like spokes on a wheel, but all the spokes can be changed at any time. This growing number of expert outsourcers allows companies to be formed more quickly. It also allows these companies to be formed with less capital, fewer people, and therefore, perhaps, less commitment. A lack of imbedded structures can allow new companies to change their focus, alter strategies or fix structural issues more often and more quickly. This can all be good for a start-up company competitively. For existing incumbents it means more competition shows up more rapidly and from more directions.

Several generations in the United States had owning a home as a key component of their financial dream; it appears that many in the millennial age bracket have owning a company as the key component of their dream. The giant shift in employment from the industrial revolution was the move from independent agrarian farmers becoming employees of huge conglomerates to whom they sell their labor (as predicted by Karl Marx, even if he got the conclusions wrong). Now with the efficiency of technology we may see some of this unwind. Employees of major traditional corporations may increasingly move away from these companies and choose to form their own business and labor for themselves and a few partners in their own company.

It is not all rosy. This corporate flexibility and ability to start with less capital, can allow companies to close more easily. There are fewer costs associated with shutting down, fewer long-term obligations, and fewer employees that the law may require a company to deal with. This in turn can create a lack of stability in employment as well as a lack of a sense of loyalty in employees. This can hurt the ability to plan long term and cause more volatility in the business and employment world.

From an investment basis this all means:

There are various measures of new business formation. It is unclear if the data are catching all the start-ups, in particular peer-to-peer businesses and some individually run online businesses are likely missed. However, Figure 24.1 uses the data from the U.S. Census Bureau for business applications, which are requests for employer identification numbers. This should be at least a reasonable proxy for new business formation, and the data shows a meaningful increase in recent years, implying significant more competition evolving.

Fast growing decentralized companies can develop other problems, some of which can be caused simply by a founder that is a creative mind but not a leader or can come from poor cultural evolution in an organization. This can be a problem of not having any hierarchy in the business structure and not instituting adequate checks and balances within the organization. Lack of internal controls and corporate culture has been an issue at some young, high profile and exceptionally fast-growing companies. These have included Uber and the alternative finance company SoFi, Social Finance. Both companies suffered very damning reports in the press of sexual misconduct and harassment and both of their high-profile CEOs were forced out.84

Some new business models can have unique business risks. This is particularly evident in the internet media space. In many cases much of the asset value of the company comes from the community of users attracted to a site. Every business runs the risk of disenfranchising existing customers as a company tries to grow, but it can happen more quickly on the internet. Facebook has suffered by using data that they had gathered on their customers that left many users uncomfortable, it also hurt its image by allowing postings and advertising from extreme political groups, further alienating some customers.85 The most valuable capital for many of these firms is their customers, switching costs are very low so a few miss-steps could wipe out significant value. New industries and new companies are still learning how to manage these unique types of risks.

It appears that Amazon has been masterful at avoiding missteps. Reading one of CEO Jeff Bezos’s quarterly shareholder letters reinforces an unbridled focus on the customer and he tries to imbue this ethos throughout his company. The Amazon experience has made their customer base comfortable with buying an item by simply relying on a description and reviews by fellow customers rather than seeing an item in person. Amazon must contend with unscrupulous sellers manipulating these ratings or it could lose some of the trust of their customers. However, Amazon could take steps on its own and alienate customers, too. For example, Amazon appears to list “sponsored” products at the top of their searches more frequently, and there have been articles discussing more overt advertising and a push of its own brands. As it allows vendors to run “stores” on the Amazon site they also lose more control of the customer and the process. All of this could change the shopping experience and alienate some customers. Controls and management structures must be in place to protect their most important asset, which is their community of shoppers that they created. Fast growing companies do not always have these risk management tools within their corporate structures as they scramble for market share and subscribers.

Amazon is a good reminder that scale can still make a huge difference in business. However, many of the newer companies do not need the same level of scale to succeed. Lower costs and more flexible companies can go after “tail” customers. Focusing on these niche market customers and creating specific products for specialized groups, like banjo players or unicyclists, can create a unique business that can scare away competitors because of how small the markets for the tail products are. Exploiting a specific personal passion can often be the motivation for these types of start-ups and scale may not be as important for that entrepreneur.

The emotional force behind the technology driven start-up boom varies from founder to founder; Bill Gates probably had a different goal in founding Microsoft than Andy Grove had with Intel or Jack Dorsey with Twitter. However, it does seem that this era has seen an inordinate number of start-ups that are designed with the goal of selling the company. This means creating a company, not because it can thrive and prosper over time, but it can be sold to a buyer. This mentality can create risks for investors as it is not driven by a business success but convincing someone else that a business can be successful. Broadcast.com was founded as AudioNet by Christopher Jab, Todd Wagner and Mark Cuban. It was a pioneering company in audio streaming. While it is unclear what the goal of the founders was as they created it, the company was sold for billions of dollars to Yahoo. Ultimately it failed for Yahoo. This was probably due to the timing of the product given the lack of available content and quality of internet service at the time. However, it unintentionally showed a road map for some people as a way to make a fortune on a business with a great idea, regardless of its ability to be successful.

Corporate structures and the concepts of how to run companies are changing, this is also changing the roles and jobs of people in a business. How new companies are structured, potentially outsourcing much of their needs, is different than in the past. Businesses can come and go and change direction more easily. This means that even in extended periods of good economic growth the competitive pressures on existing businesses and industries can develop more rapidly and be more prevalent and investment returns can be more extreme.