May 5

Mike Loukides

Mike Loukides

The Corporation's Two Bodies

The New York Times quotes Laura Martin of Soleil Securities, as saying "This is management putting its employees and its job security ahead of current Yahoo shareholders' interest." The sense of horror here--that management could actually put the interests of employees ahead of the interests of investors--is interesting, to say the least. It raises an important question that's really almost theological in nature. It is most certainly theological in, as Lawrence Ferlinghetti wrote, "the promised land where every coin is marked In God We Trust, but the dollar bills do not have it being gods unto themselves. ("Autobiography," A Coney Island of the Mind, 1958, New Directions)

Where did the notion arise that management's sole responsibility is to its funding sources? It's not surprising that someone who represents investors thinks that investors are the only people who count. There's certainly some legal precedent for that view--employees work at the will of their employer, and if you take the abstraction far enough, the employer is basically a pile of money, and the employees are abstract labor power. But while Marx's formulation for the age of the Industrial Revolution may be applicable to workers in sweatshops, it's certainly not an appropriate formulation for the creators of value at Yahoo. Where, ultimately, is Yahoo's value? After all, Yahoo's contribution to the technology of the Web is second only to Google's (and that not by much). Yahoo engineers are not merely interchangeable cogs in an industrial machine.

Behind the idea of a "corporation" is, of course, the notion that a business entity is a kind of mystical body and can be treated as a person. So, what is that mystical body? Is it the investors, who certainly enable that body's existence, or the developers who create the value that the investors are after? Do we give priority to the food, or to the processes that digest the food? To give priority to the food lands us in a "cult of the investor," where Dollars provide the divine spark that animates the body corporate. In this view of the world, the investors are, in fact, little divinities. But Yahoo's value certainly doesn't derive from the investors, but from the company's technical creativity--something for which the investors are not responsible, and that they ultimately have nothing to do with. Would those creators be equally creative as Microsoft employees? Would the culture still be productive? Maybe yes, maybe no; it seems to me that the history of corporate acquisitions is littered with takeovers in which the shareholders may have profited, but the corporation's life and creativity withered.

It's certainly an oversimplification to imply that all (or even most) Yahoo employees opposed the Microsoft deal. But it's likewise an oversimplification to imply that all investors approved it--after all, one imagines that Yahoo's board and senior management are significant investors. But whether Jerry Yang was thinking in these terms or not, I can only applaud the idea that his company's value has something to do with the people who make it creative, not just with passive investors who wouldn't know a line of Javascript if it bit them on the wallet.

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Comments: 16

  Jay Finney [05.05.08 01:49 PM]

Well said Mike. The Yahoo investors chiming in like mynah birds is more than annoying. It is very clear what their rights are. One share, one vote. That's it. If they have enough votes to change the board and change the management, go for it. Otherwise, it's a lot of wasted breath and I wish they would shut the blip up.

  Ross Stapleton-Gray [05.05.08 02:13 PM]

I'm on the other side of that, personally; I was cofounder of a start-up that's still, zombielike, lumbering along... there were several opportunities at which it might have been profitably sold to a larger company, but the board, now stacked with engineering cofounders, seems to dislike the idea of having their comfortable nook disrupted, and deals just never got sought, or, if they fell through the door, were ignored or rebuffed. The company's been remaining solvent by shrinking, but at some point it'll just collapse, I fear.

I'm not sure I see the wisdom of a Microsoft acquisition of Yahoo!, but I can't say I'd go long on either, separately, either.

  Jo [05.05.08 02:18 PM]

Mmmmm. . . as an investor can move their money at the drop of a hat, or the click or couple of clicks of a mouse . . . why haven't they?

Let's be clear . . . they would have done by now if yahoo was not delivering adequate returns?

The marketplace is a two way street - investors in British banks are finding out . . . you win some you lose some . . . or your go on bended knees to the employees and thank them for not watering down your stocks.

Yahoo investors - throw your employees a party and say THANKYOU!!!!

  Ryan Waldron [05.05.08 02:23 PM]

Hey, Mike! Just chiming in after seeing your tweet.

As I understand it, the notion that management is primarily beholden to the shareholders is by definition: they're the legal owners of the company, and whatever value it has *belongs* to them.

It's not entirely relevant to complain that the shareholders didn't "create" the value because they can't write javascript; without the investors who put up the money to pay for all those fancy chairs and massages and chefs and pinball machines and whatever else, all the bright, creative people who built all that value would have gone down the road and built it for Altavista or somebody else, and nobody would have ever heard of Yahoo!

It's perfectly valid (even if I might not agree) to attack the whole structure of allowing the investors who create and fund an entity to demand that their interests be served by the entity . But it seems important to me to be clear that this is how it is *supposed* to work, not in a teleological sense, but surely in a legal one.

Of course, whether Yang's (and his board's) decision served investors' *or* employees' interest is a rather more complicated question to answer, in my view. If we haven't seen the legal vultures descend en masse by the end of the week, I'll be surprised.

  esseffen [05.05.08 02:33 PM]

Just close enough to May Day, I have to say I don't follow you on the Marx bit. And if there's one thing I can't stand, it's a decent argument built on crummy logic.

Workers are workers, if they are building pyramids in the desert, sweating in factories, or doubled over in cubicles typing on keyboards.

I like that you're demonstrating that some big tech companies can value labor in different ways, but are you sure Yahoo! isn't talking about all their employees? Administrative assistants and IT grunts as well as the creative-technical staff?

Are geeks really that different from the rest of us?

  Bob Warfield [05.05.08 03:13 PM]

I suspect that it's just as easy for investors to forget that there are two bodies to consider (meaning the employees you bring up) as it is for someone else such as you to miss that in fact there are three bodies to consider. The third body is, of course, customers.

All three have invested something in the company in exchange for a return. All three need to be considered.

It's fine and well to view that the investors are needlessly greedy and should "shut the blip up", but it is all too common for fat cat management to run the company for their own benefits regardless of what impact it has on investors, employees, or customers.

If management in this case actually has a plan (that sure hasn't been obvious to date), and if that plan actually works, fine and well. If they don't or it doesn't, everyone, investors, employees, and customers, will be much the worse for the wear.


Bob Warfield

SmoothSpan Blog

  Mike Loukides [05.05.08 04:23 PM]

I'm certainly sympathetic (in a "been there, done that" sense). I don't mean to imply that corporations should not be sold. What I object to in the analyst's remarks is the sense that it's somehow abhorrent that management should take the employees' interests into consideration. (I don't even want to imply that Yahoo's management *was* taking Yahoo employees into consideration.) Certainly when management doesn't have a clue, selling out profitably might be the best thing, both for investors and employees.

  John A Arkansawyer [05.05.08 05:02 PM]

IANAMT* nor do I have a deep understanding of Marxist theory, but I did notice something interesting in Mike's original post. He seemed to be verging on (what I understand to be) Marx's labor theory of value.

That's a controversy among Marxists today: Some say that the LTOV is not essential to Marxist thought. Others say it is, and yet others say that isn't important because the theory is a crock, at least in the historical context in which Marx invented it.

Mike seems to be suggesting the current historical context gives it more force.

As I said above, IANAMT* or an expert on Marxism, but someone who is might give better insight on this point.

*I Am Not A Marxist** Theoretician

**Although, when my goatee is short and my head shaved, I'm told I do resemble Lenin

  Bob Stewart [05.05.08 05:41 PM]

This reminds me of Peter Drucker's book "Post-Capitalist Society", where he presents the future management of corporations of "knowledge workers". Since knowledge workers possess the means of production, managements challenge becomes keeping the workers happy. So shifting priorities from shareholders interests to employee interests makes sense. The source of Yahoo's value is its knowledge workers, primarily, rather than the capitalists which own the shares.

  Mike Loukides [05.05.08 05:45 PM]

Hi, Ryan! Right, I expect we'll be seeing legal vultures soon enough. And certainly, from a legal standpoint, management is beholden to the shareholders.

But it's more complex than just Fezziwig (with his quasi-feudal sense of noblesse oblige) versus Scrooge (the New Industrial Man). It really is about financial theology. if we confuse funding creativity with being creative, we're in Ferlinghetti's promised land where the dollars are gods unto themselves and where billion-dollar-a-year CEOs and investment bankers make sense. The difference between Altavista and Yahoo ultimately isn't about money. Altavista was a DEC property, and they had lots more money than a couple of graduate students at Stanford. They also had a much better product. But Yahoo managed to nurture a creative culture (and yes, once it had money, bought some other creative companies), and Altavista (or its succession of corporate owners) made poor decisions and wasted their imaginative capital.

It used to be said that clothes make the man; now perhaps it could be said the funding makes the corporation. But the real value is elsewhere, in nurturing and preserving creativity. I've been a part of two promising startups where the "mature management team" that the investors put in place stifled creativity and eventually killed the company off. Yahoo's real value is what it contributes creatively. That creativity is ultimately what keeps the corporate body alive. How you square that with investors' desire for return is, I suppose, "not my problem." Would a Microsoft acquisition stifle or kill off Yahoo? I don't know. I can certainly imagine Yahoo being more creative under Microsoft management (though I doubt it). But "maximizing return" is, all too often, a shorthand for "foolish and short-sighted." Maximizing return is not the only issue. It can't be.

  Bob Stewart [05.05.08 05:48 PM]

Marx theory only made (some) sense when the workers did not own the means of production. Back then labor was beholden to the capalists who had the cash (and factory, tools, etc.). But his theory quickly failed when management theory enabled rapid increase in worker productivity, and therefore wages. Today, however, the worker (in Yahoo's case) DOES IN FACT own the means of production, and can walk away with those means to any other company (or start there own).

  Alex Tolley [05.05.08 09:59 PM]

"Where did the notion arise that management's sole responsibility is to its funding sources?"

Say what? The company is owned by the shareholders and it is the primary fiscal responsibility of managers to maximize that return. That has been taught in US and UK B-schools since at least the mid 1980's.

From a philosophical POV, maximizing shareholder value is akin to maximizing efficiency as it throws off more wealth to be invested, which is what drives biological evolution (energy for reproduction).

  Reedo [05.06.08 12:49 PM]

I don't see the conflict here. Any business, corporate or not, is about converting resources into something of greater value. In Yahoo, one of those input resources is the selling of shares and another of those input resources is the creative workforce (who are VERY valuable). Actually, depending on the stock options available to the workforce, these Two Bodies may not even be disjoint.

If a merge would massacre the value of an important input resource, the employees, then the product's end value will also be cut. The business will bring in less. Both the employees and the investors will be splitting up a smaller overall pie of profits. In other words, if a merge will disrupt the ROI of a business, then it's in an investor's own best interest to protest the merge.

There's also two kinds of stockholders: speculators who always buy and sell on a short-term basis depending on quarter-by-quarter performance, and investors who bought into the business pretty early based on its long-term growth potential. I'd argue that the first kind are the true "villains".

  matt m [05.07.08 06:36 AM]

Laura Martin is simply wrong- as are her defenders. She is thinking about only the short term interests of the non-employee investors. While management's primary responsibility is to its shareholders, the interests of those that want to sell the stock as soon as possible as opposed to those that want to hold it are often opposed. Ms. Martin is attempting to create a false dilemma of a choice between employees and owners.

In reality, as many have pointed out, this acquisition would have caused the destruction of value- almost as if the factories of one company were to disappear (or, even worse, begin to work for Google) when it was acquired.

Maybe Yahoo can buy Microsoft in ten years.

  Aaron Williamson [05.07.08 09:35 AM]

Wonderful post, Mike;

As has come up in a number of comments here, the funding model for corporations is a throw-back to the industrial era, when investors needed to pool finances to acquire the capital required for production. Direction from shareholders makes sense under this model, as they are providing workers with the opportunity to work by accumulating capital.

But in knowledge based companies, things are a little different now. A corporation, which makes a lot of sense for industry, is not custom fit for a knowledge economy. The way I see it, a knowledge based corporation creates value not by amassing capital to be manned by laborers, but by sequestering talent, creativity and knowledge from the collective pool of knowledge workers. The relationship with the investors, in this case, is reversed; value does not come from the machines which the investors comes from the knowledge workers whom the investors are allowed to "back", in hopes of riding on the wealth created by exercising their knowledge.

Why does this matter? Where knowledge and creativity are the product, direction from investors is harmful to the trajectory of the corporation.

Plato asked if you would rather be under the care of a doctor concerned primarily with medicine, or one skilled at money-making. Companies now face that same question; while an accountant can make more short term profits from administering medicine, they will ultimately kill the patient.

  Jim Rait [05.16.08 05:48 AM]

I've just been reading Funky Business by Jonas Ridderstrale & Kjell Nordstrom.. They say "If you think about it, most of what your business does could be bought from someone else using the Yellow Pages or an Internet search engine. How are you going to be attractive? By being more efficient? By doing it cheaper? Come on! This is the age of time and talent, where we are selling time and talent, exploiting time and talent, hiring time and talent, packaging time and talent. Today, the “critical resources” wear shoes and walk out the door around 5.30pm every day. Karl Marx was right; the workers should own the critical means of production - it’s small, grey and weighs about 1.3 kilograms. It will move markets and it will make capital dance. Only talent will allow you to be unique, to escape business as usual. In this world we need business as unusual. We need innovative business. We need unpredictable business. We need Funky Business."
I think we need to think Football teams rather than Ford factories and lead accordingly!

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