Is the Modern Corporation Going Extinct?


Will we look back at boards of directors, company divisions, corporate lobbying, and egregious executive compensation with the same awe and wonder as when we hear of LaserDiscs, Ford Pintos, Prohibition, or indentured servitude? As surprising as it sounds, one video-game maker may have the answer.

Valve, maker of videogames such as Half-Life, Portal, and Left 4 Dead, does things a little bit differently. It is a completely flat organization, with no bosses, no managers, and no job titles. And while that may sound like some kind of leftist management philosophy, Valve's economist, Yanis Varoufakis, (yes, the video game company has its own economist) believes it is much more free-market based than current corporate structures.

Working at Valve
You may be familiar with Google's (Nasdaq: GOOG) idea of 20% time, where employees take one day a week to work on something outside of their job description. This self-directed time led to several products; former executive Marissa Mayer stated that half of the products launched in the second half of 2005 originated from 20% time.

Beginning in 1948, 3M (NYSE: MMM) has offered 15% time, which is said to have led to the Post-it note. According to Co Design, hundreds of 3M employees get together once a year to show off their 15% time projects and look for collaborators.

Valve, on the other hand, "insists that its employees allocate 100% of their time on projects of their choosing." It may sound chaotic, but employees can work on projects that they want, with who they want; they just roll their desk over. Compensation is decided by peer review. And it seems to work, as Valve claims their profitability per employee beats Google,, and Microsoft.

Working at a traditional company
Elsewhere, companies have managers on top of managers, each directing orders downward. The Greek-born Varoufakis, who came to Valve to work on sharing a single currency across different games, argues that this traditional structure represents the last place markets have not reached. Like a communist regime, which would dictate production and allocation of resources, managers in modern corporations decide what tasks employees should allocate their time toward.

The true question
Varoufakis dives into the philosophy of corporations, and why they exist. He concludes, along with economist Ronald Coase, that due to the transaction costs of contracting out tasks, like bargaining, it is cheaper to hire an employee, and therefore create a business with a traditional structure. But with today's technology and business models, will this structure remain in the future? Will corporations fall into Valve's model, or turn into something completely different?

Companies like Elance, an online employment marketplace, seem to signal a new type of worker and business. Almost 200,000 contracting jobs were posted on the site in the last quarter, and there's been huge growth in more traditional careers like architecture and family law. A site like Elance allows businesses to hire what they need, and allows professionals to work when they want. The transaction costs are mitigated. Many considering company loyalty dead, like LinkedIn (NYSE: LNKD) CEO Reid Hoffman states in his book, The Start-up of You, "There used to be a long-term pact between employee and employer that guaranteed lifetime employment in exchange for lifelong loyalty; this pact has been replaced by a performance-based, short-term contract that's perpetually up for renewal by both sides."

On the other hand, a company like Valve benefits from the level of talent that it hires, and there is only so much talent available. While Valve takes extremely motivated employees, companies that settle for less-than-enthusiastic employees probably wouldn't be successful with such a loose management structure. Additionally, Valve's industry of software development might attract much more impassioned workers, as well as a development process that lends itself to its structure.

The conclusion
Varoufakis ends his blog post with quite a statement:

The current system of corporate governance is bunk. Capitalist corporations are on the way to certain extinction. Replete with hierarchies that are exceedingly wasteful of human talent and energies, intertwined with toxic finance, co-dependent with political structures that are losing democratic legitimacy fast, a form of post-capitalist, decentralised corporation will, sooner or later, emerge.

While we might see changes in corporate structure sooner in technologically advanced fields, the modern corporation is still probably the best way to produce hundreds of thousands of vehicles in a month, or pump millions of barrels of oil from an offshore rig.

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