Is the Modern Corporation Going Extinct?

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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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Fool contributor Dan Newman holds no position in any of the above companies. He is also a part of the contractor world, and appreciates his employer. Follow him @TMFHelloNewman.

The Motley Fool owns shares of, Google, LinkedIn, Microsoft, and Ford. Motley Fool newsletter services have recommended buying shares of Microsoft, LinkedIn, Ford, 3M, Google, and Motley Fool newsletter services have also recommended creating a synthetic long position in Ford, a diagonal call position in 3M, and a bull call spread position in Microsoft. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (3) | Recommend This Article (7)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 06, 2012, at 6:37 PM, xetn wrote:

    " 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."

    This is right out of one of the greatest books on management: "Thriving On Chaos" by Tom Peters (1987). I have read it at least 10 times.

  • Report this Comment On August 06, 2012, at 6:48 PM, chris293 wrote:

    Of course we are living in changing times where the herd be it a union, an economist, or a teacher have been grounded in needs of the many are more important than the individual. But it is the individual who creates progress and profit. Our Greek-born friend should realize this as Greece is also the birth place of individuality and democracy.

    Capitalism started with the first forms of trade thousands of years ago, and will continue to evolve whereas Socialism is devolving.

  • Report this Comment On August 06, 2012, at 10:15 PM, neamakri wrote:

    Valve is different from the usual company; they make a product that you cannot touch; it only exists in virtual space. Also, it is a very small company with extremely dedicated employees. His business model really cannot be multiplied a hundred-fold (i.e. a hundred times as many employees). I do applaud Valve for being so bold and so successful.

    He does have some valid points that current corporations are way too top heavy and have other pandemic issues too.

    Hey, did you read about the riot at the Suzuki car plant in India? THEY desperately need to be revamped.

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