Fight Power with Power

There is a raging debate going on for decades now, about how corporations, actually the capital itself, is ruling the world instead of officially elected politics. I am not that much concerned about the new world order, but rather the phenomenon of the corporations that we think are in charge today. Their internal dynamics is so inefficient that it makes me scared when imagining how crucial decisions are really being carried out. And finally, if they are really determining the future of our mankind, we as a mankind could have done lot better at this stage of our evolution.

First of all, I am an insider. I've spent my whole career working for multinationals. Those companies are growing

inefficiency as their binding tissue. It is actually what holds them together. This is especially true when it comes to regional growth. Geographical expansion is driving a need for control. Control itself is creating a whole new class of employees within those companies. They are not enough highly ranked to makes decisions, and they are not close enough to the field where work actually happens. Lot of questions arise here:

• What is this middle management actually doing?

They are supposed to coordinate regionally or functionally dispersed activities, transfer the strategic directions into tactical operations, control the execution, consolidate various reports, steer the business so it remains within the given compliance framework and finally to govern the business on behalf of shareholders and management boards. Fair enough but the main problem is in their size.

• What values do they produce?

They produce value for themselves (net salary). In order to justify needs for such roles, they necessarily create additional work for ordinary workers, filed workers, people actually doing the job. That's a negative value or better say cost for shareholders, since in that period, workers are not focused on actual work processes whatever it may be. Additionally, companies are paying taxes on their salaries and therefore, produce value for the countries. This is best described as increasing employment and therefore again a positive effect.

• What is their contribution in adding value to their companies?

I don't have a magic formula for this equation but it seems that very often net effect is negative. The main problem with these employees is their size. Positive effects of control, governance and strategic messages transmission are neutralized with negative effects of non productive work that they impose to other employees. They can't work alone, so they engage others in these processes what is reducing overall time left for actual work and added value production.

• Most important question is - what value are they adding to the macro economical systems of their home countries?

None (once again, except the salary taxation). Since I concluded in the previous paragraph that they can not produce enough value even for their companies, it's hard to believe that some value is being created for their home countries. Furthermore, these companies are hurting their economies since they engage scarce intellectual resources in low value processes.

Multinational corporations inhibit innovation, since no time is left for out of the box thinking. People have to do their work, serve internal bureaucracy, think of internal politics and ultimately their own strategies on how to climb the corporate ladders. The work itself can not be innovative in such organizations, since they are more less organized in pure pyramidal way, almost military, what by definition has to inhibit innovation. Even when innovation happens, due to internal bureaucratic processes, the way from idea to production is very, very long, often painful for individual and not awarding enough for the initiator of the idea. Also, there is a high risk that innovation will be hijacked by someone more senior on its way to actual realization. In return, the risks for breaking the rules or failing with particular innovation is often so discouraging that individuals are incentivized to remain within the given business framework.

Role of governmental fiscal politics and taxation politics is to create a framework for long term, sustainable growth and continuos increase of competitiveness for particular economy. In that respect, a taxation is great tool. Now, my theory goes something like this:

Domestic governments of the greatest industrial nations (especially true for the service economies like US, but also valid for Germany, France, Japan, China... etc) should impose additional corporate taxes on multinational companies bigger than certain number of employees. Taxes should be progressive, depending on the employee size. Also, the tresholds can be set for different industries in a way that more workforce demanding industries have lower taxation dependent on number of employees. Service industries (strongly focused on intellectual property) should be taxed most, and production companies least (but also taxed). In this way, multinationals would be penalized for growing bureaucracy, and thus inhibiting growth innovation. In the long run, they are inhibiting competitiveness of the countries where they operate therefore slowing the economic growth.

Imposing penalties on employee growth will create additional value for all. Only a minor part through taxes, but vast majority of benefits will come through reduction in business bureaucracy. It will free up scarce intellectual resources for more challenging tasks. If you are concerned about lack of capital - don't be. Like an elevated water which always finds its way down if the smallest hole exists, capital will find ways to connect with innovation, smart people that can turn it into even more capital.

I worked for Microsoft with 25k employees and Microsoft with 90K employees. The whole earth was using its software in 2000 and also today in 2010. Company itself has expanded tremendously but it is very questionable whether this expansion was also followed by innovative products or just mega market acquisition investments. Now imagine a difference of 65k bright minds deployed in let's say 5000 companies around the world, growing new ideas and products. Would it increase or decrease the economic growth? Would that create a new value? Instead of hiring tons of middle management, they could have been investing venture capital in India and China. End results would be even better for everybody but MS would have less control. Not a big deal when we know that payback would come for shareholders as well for citizens. (and MS users, not to forget them).

So, starting an extra corporate taxation at 20 000 employees sounds reasonable to me....

Best in class, Twitter has around 100 employees and close to 100 Million users - 1 employee per million users. Thats a staggering statistics. On the other side, IBM and HP will soon have 1 employee per 10 users (just a joke). Question: who provides more value to the general society? Governments are supposed to help us all (but I also believe, to protect the multinationals from themselves) with setting up such regulatory framework that incentivizes innovation and penalizes bureaucracy.

Uff, it's been almost a year since my last post:) Now it's time that someone calls me to Davos to explain this theory at WEF :). I promise to prepare the nice slides and charts...

....ufff, I forgot that Davos is also a multinationals winter retreat:)