July 13, 2022
Holistic Companies Series
What is a holistic company and why must we build them?
John Oommen
A deep internalization of the basic, yet essential, concepts that underpin capitalism is necessary for its salvation.
A deep internalization of the basic, yet essential, concepts that underpin capitalism is necessary for its salvation.
If you are an athlete who is committed to training hard and improving your game, would you prefer your sport to have well-laid out rules and effective scoring, or one where winners benefit from unsportsmanlike conduct and spurious scoring?
I hope you say the former.
Consider this - Why would almost every sector in the market slump when central banks raise interest rates by the tiniest of amounts in real historic terms? Why do lay-offs kick-in immediately after the federal reserve indicated they will stop printing money and raise interest rates from zero even though we have all agreed that the easy money conditions are unsustainable for years? Why are Bloomberg and CNBC anchors already talking about “buying the bottom” and asking when “interest rates can be brought back down”?
The answer to every problem in OECD countries is not Russia or China.
The correct answer is that we are addicted to easy, unsustainable wins in zero-gravity. Creating companies that drone on about extrinsic value without a focus on intrinsic value creation is a symptom of such a free-lunch attitude.
Any number divided by zero has the same result—infinity. When the basics of money become meaningless, all other measurements around money are also meaningless. Inflation is not rampant because of Russia or China. Inflation is rampant everywhere in the world because the growth-at-any-cost party required free champagne to flow for too long and now the price of champagne is debased from any reality.
Why is this a problem? When gravity is zero, it is hard to know which players have stronger legs because everyone is floating. Easy money is a massive equalizer, but in the wrong sense. In a growth-at-any-cost environment, a well-run and highly value creating company is at a much bigger disadvantage than one-created with a short-term agenda without capabilities to create tangible value.
Like any scandal-clad sport should reset to develop effective rules, seek players with sportsmanship, find ethical referees, and focus on fan entertainment, capitalism and companies must get back to basics.
Capitalism has gone off tracks because we have lost track of the meaning and intention behind even the most basic ideas. So, let us redefine two key aspects here: 1) A Company and 2) A Holistic Company.
There are so many business books and articles out there; but almost none comprehensively talk about companies. Most cover narrow elements of companies, leaving the rest conveniently unaddressed. Others are written to glorify the protagonist. There are many opinions on social networks about tactical activities around companies, which are essentially marketing those activities. Amid all this noise, we have lost track of what the word company really means.
The most common references, like corporate America or corporations, are infused with real or feigned anger and disgust. Politicians and pop-intellectuals who benefit from creating angst to get votes and sell books or coaching programs, respectively, originate these sentiments. On the other side, many inexperienced individuals have been setting up legal entities that promise value and future profits and swiftly list those entities on public markets to make a quick buck at the expense of public shareholders. This also creates a bad brand for the concept of a company.
Early related words are the French word compagnie which implies ‘large group of people’ and the Latin word comapnio, which means ‘bread fellow.’ By the fourteenth century, we started using the word company for its present intention, ‘a number of persons united to perform or carry out anything jointly.’
In The Spiral Stairway: The System To Build A Holistic Company, I define a company as “… a set of people who have created a contract with each other to conduct trade. The people involved ‘write’ the complex agreement to satisfy their particular agendas. So, a company is nothing more than the sum of the people involved and their agendas.”
Yes, it is a simple, yet accurate, definition. But simple is hard. This definition implies that we must think about all the people involved in an endeavor and their incentives. It is easier to talk about ourselves, our incentives, and complex paperwork that meets our selfish needs. This simple, but hard to live by, essence of a company is precisely why conversations about companies devolve into what feels like chaotic bar brawls about trivial polarizing topics.
In our search for personal glory, we have lost sight of the forest for the trees. We do not refer to the word company as we originally intended to use it.
I urge a much-needed reversal towards fundamentals around companies. By fundamentals, I do not mean free cash flow that financial minds get drawn towards; extrinsic market value that short-sighted investors focus on; or greenwashing themes that special interest groups focus on. By fundamentals, I mean sustainable profitability based on intrinsic value creation.
We consider Adam Smith the father of modern economics. We can summarize his political economics theory as every person, entity, and nation must do what is in their own best interest and the overall outcomes would be the best.
John Nash revised Adam Smith to frame that the best outcomes happen when each player in the ecosystem considers the downside and upside of all the other players and makes a choice that is likely to benefit themselves and everyone else. This is called The Nash Equilibrium. The concept applies to any situation where multiple people or groups of people are involved and each has their own incentives. Unless a situation balances the incentives of every person or group of similar people involved, the ecosystem breaks down and the collective no longer exists.
Through my twenty-year search to find a formula to build and manage effective companies, I realized that effective companies find and maintain the Nash Equilibrium.
I started calling these sustainably profitable companies that satisfy the Nash Equilibrium, Holistic Companies. Our collective resources are best used to build and maintain them. In The Spiral Stairway, I assert that, "holistic companies… maintain an equilibrium between the incentives of all stakeholders — customers, investors, employees, partners, and society — and are self-sufficient." There is a way for all of us to win together. It requires us to be disciplined and objective enough to balance everyone's needs.
This might seem obvious. But it is not. Every conversation I have around companies shows each stakeholder group intentionally or unintentionally directs all their energy to their own personal benefit. Look at some real trends.
Most LinkedIn employee posts these days focus on the self and our own stakeholder groups and sub-groups within. I can imagine that it is nice to advocate for our own needs when we firmly fit into a group. But it is also an us-vs-others attitude that does not satisfy the Nash Equilibrium.
What if everyone operates under me-first and my-stakeholder-group-is-most-important mindset? Do we really want to go into a war of attrition with every other stakeholder group? Adam Smith required revision because the outcome in such games is usually mutually assured destruction.
The investor-first mindset does not work for the rest of the ecosystem either. Here are some figures about our recent growth-at-any-cost era. Employees, customers, partners, and even society, in the form of public shareholders, lost to enable a victory for creators and private shareholders of rapid-scaled companies.
Building holistic companies is extremely hard because it requires solving a five-dimensional problem that understands and evaluates the incentives of customers, investors, employees, partners, and society and operates at an equilibrium. This difficulty is precisely why folks default to creating short-term, self-serving outfits. Companies will never find an equilibrium if it plays with myopia around one or two of the stakeholder groups.
The result is today's dissatisfaction with companies from everyone. Capitalism is not going away, and we will always have companies. So, we need them to be effective and appreciated so that we can focus more on creating value than perpetual infighting between stakeholder groups.
