What are corporations made of? Well, mostly not buildings and machines and property and such anymore. Most of their value comes from brands, patents, ideas and other intangibles. Nothing is more telling than SnapChat’s recent fund raise from AliBaba at $15bn valuation.
James E. Malackowski, chief executive officer of Ocean Tomo, the intriguingly named merchant bank that assembled this data, predicts that the tangibles/intangibles balance will shift back a bit in the next few years as various forces (higher labor prices in China, cool new manufacturing technologies, etc.) “fuel a return to tangible domestic investments.”
A stock market correction would bring down the intangibles percentage too — Ocean Tomo calculates intangible assets simply “by subtracting the tangible book value from the market capitalization of a given company or index,” so the rise in intangibles since the 1970s is in part just a reflection of rising stock market valuations. But that’s not all it is: the cyclically adjusted price-earnings ratio on the Standard & Poor’s 500 Index has risen about 2 1/2 times since 1975, while the intangibles increase has been almost fivefold.
So the modern corporation really is a different, much less bricky-and-mortary creature than its predecessors. In a speech in London earlier this month (it will eventually show up online here), Colin Mayer, a professor at and former dean of the Said Business School at the University of Oxford, cited the above data as evidence that we are on the cusp of a new corporate age. To illustrate, he recited an awkward yet informative knockoff of the seven ages of man from Shakespeare’s “As You Like It”:
At first the merchant trading company established by royal charter to undertake voyages of discovery and promote commerce around the world.
Then the public corporation created by Acts of Parliament to engage in major public works and the building of canals and railways.
Then with the freedom of incorporation in the 19th century, the private corporation — the seedbed of the industrial revolution and the manufacturing corporation.
Next comes the service firm and the rise of the financial institution.
The fifth age is the transnational corporation putting a girdle around the world and running rings around national governments.
Last scene of all that ends this strange eventful history is the mindful corporation — sans machines, sans man, sans money, sans everything.
Mayer’s prime example of this “mindful corporation” is WhatsApp, a company with no assets, no profits and very few employees that Facebook bought for $22 billion. “The mindful corporation is an extraordinarily efficient concept,” he quipped. He went on:
The fact that the corporation has become footloose and timeless could be a source of tremendous wellbeing that frees it from the political constraints and historical conventions to which we are currently subject.
The story doesn’t necessarily have a happy ending, though. Last year Mayer wrote a very interesting book called “Firm Commitment,” in which he argued that corporations had in the past succeeded and created economic value in large part by entering into commitments — with employees, customers, suppliers, shareholders and others — and that the modern ideology that corporations exist only to serve the interests of shareholders was endangering their ability to commit to anyone else.
As he summed up in his speech:
From entities with persistent ownership beholden to their nation states, corporations have transitioned into organizations with investors with no commitment to any particular nation or generation other than the present. The result is that the interests of the corporation have progressively diverged from those of the societies within which they operate.
The less tangible a corporation’s assets, the freer it is to escape commitment. This is apparent in corporate tax bills, as corporations where intellectual property plays the biggest role (technology and pharmaceutical companies, mainly) are most able to shift income from country to country to avoid taxation.
Another worry, mentioned by Mayer but expounded upon at length elsewhere (and with brevity on Bloomberg TV yesterday) by another former business school dean, Roger Martin of the University of Toronto’s Rotman School of Management, is that corporations where the value is mostly intangible tend to funnel income to the relatively small number of talented people who are credited with creating that intangible value, thus fueling a sharp rise in income inequality.
Mayer’s proposed remedy to these problems is what he calls the “trusted corporation,” companies built on the model of Bosch and Bertelsmann in Germany and Tata in India, owned not by footloose shareholders but by an industrial foundation. Short of that, he argues, corporations should be required to articulate a purpose beyond just maximizing return to shareholders, and directors should hold executives accountable for fulfilling that purpose.
This isn’t just academic noodling. Similar ideas are at the heart of the burgeoning B Corporation and NewCo movements, in which entrepreneurs commit to goals other than (just) making money. Something about the evolution of the corporation over the past few decades has begun to convince a lot of people that companies need a grounding in something other than shareholder return. And part of that something may be the fact that we can’t rely on buildings and machines and property to ground corporations anymore.
Mayer uses WhatsApp as his canonical example of a company with no assets and very few employees and yet a huge market cap (given its $22 billion purchase by Facebook), but just a short while before that Silicon Valley was all abuzz about Instagram for the same reason, albeit a lower price in relative terms.
Just wait until VR goes mainstream. The most valued bricks and mortar and real estate of today are digital. It’s a lot cheaper than the real thing, and a whole lot less regulated, too. Tech companies do love their degrees of freedom.