Wednesday, January 11, 2017

The Leader as King, the Leader as CEO

Of all the ideas in Unqualified Reservations, perhaps the one I found most compelling is the comparison of the state with a corporation.

In the Moldbug view, the state, in any meaningful sense, already is a corporation - a group of individuals working for a shared purpose under an agreed-upon structure. It's just that the modern democratic state is a very oddly run corporation. This was satirised very well in the Moldbug theory of rotary management, where he described how bewildering democratic governance would look if applied to a regular company.

But behind the parody was a serious, and brilliant, point. Most educated people in the west think that the way we run corporations is approximately optimal, given their tasks. That is, being run with dispersed shareholders separate from the customer base, elections of board members who appoint an all-powerful CEO who is subject to board dismissal, and a share price to monitor performance. And most educated people in the west similarly think that the way we run governments is approximately optimal, given their tasks - that is, with democratic elections, a permanent civil service, judicial review etc.

But it is not at all clear that the tasks of the two organisations are that different. And since they are governed in such totally different ways, if you think that they are both optimal, it is incumbent upon you to explain what specifically about the differences between the organisational tasks requires such totally different structures.

The Moldbug answer is quite simple - there is no difference. Companies fill essentially similar functions to countries, and we can thus judge the expected success of difference governing structures by the relative success of different company structures. Sovereign corporations would likely outcompete sovereign democracies, in much the same way that regular corporations outcompete co-operatives (which is approximately what democracies are, but with more dysfunction). They just haven't been tried.

But there is another aspect to this metaphor that gets less emphasis.

Suppose we have a family-owned firm. All the shares are owned in their entirety by the male head of the family, the father. The father is both the sole shareholder and the CEO. He passes both the CEO position and his equity stake, simultaneously, to his eldest son upon his death. In this corporation, the two roles are inextricably linked by company by-laws - if at any point the father ceases his role as CEO and transfers it to someone else, then the shares and any cash flow rights are transferred to his successor, except those periodic payments given as a gratuity by the new CEO who may keep him on as an informal adviser. This has some beneficial effects, since the principal-agent problem is basically solved - the CEO now has the strongest possible incentives to maximise the value of his shares.

The father does not have to make every single decision - as CEO, he can hire advisers and delegate certain decisions, but ultimate authority must remain with him in order for him to retain his ability to reap the profits of the company. As both CEO and sole shareholder, there is no board to either evaluate his performance as CEO, or provide external opinions - the only opinions he will hear are those of subordinates directly employed by him, and who may be fired by him at any moment. Indeed, as CEO he is wary of delegating too much, lest people misinterpret these actions under the company by-laws as meaning that his delegate is actually the new CEO and shareholder. As a result, it is hard for him to reap the profits of the company without actively managing it. At first this works okay, but he has to keep doing this even when he is old and feeble - retirement means losing his equity stake.

Because the CEO must hold all the shares, he is prevented from raising outside equity. If he wants to raise capital for a project, only debt financing is available. As a result, if the CEO has a firm that is short in pledgeable assets, he may find it difficult to raise external funds for capital projects. This occasionally makes it difficult for him to ward off competitor firms.

While the father naturally has affection for his son and successor, he loves his other children too, and ideally would like to arrange to transfer his shares to a formal trust to provide for all of them. Unfortunately, company by-laws prevent the shares from being transferred to a trust. Most of the time, he can rely on his oldest son to treat the rest of the family fairly well, but it's always a gamble. In addition, he occasionally suspects that the total profits would be greater if he transferred power to his smarter, younger son, rather than his oldest wastrel son. But the by-laws are fairly strict on that point.

Every so often in the corporate history, the father becomes completely evil, incompetent, or mad. Since this threatens not only the value of his shares, but the livelihoods of his senior employees and the welfare of the customers, they occasionally take drastic action. But since the by-laws don't allow for the removal of a bad CEO, and since there's no way for the CEO to transfer control without impoverishing himself, this usually means that the current CEO has to be killed. Since this is a risky move, which the current CEO has the highest conceivable incentives to prevent, it's only attempted in the most dire circumstances.

There are other unscheduled transfers of power. Sometimes, the eldest son gets impatient, and kills off the father. Sometimes, a junior son will kill off the eldest in a deniable manner, in order to be further in line for the CEO job. You'd think that the by-laws would explicitly preclude someone from benefiting in this manner, and the shares and CEO job would be taken away, but oddly this isn't the case.

Because the parallels are more straightforward, and because I lack the cleverness and imagination of Moldbug, it's probably quite apparent that I'm describing a simplified version of absolute monarchy. I have defended absolute monarchy before, and think that it probably worked a lot better than people today tend to think. But like before with democracy, we can use the history of corporate governance to judge the merits of monarchy versus neocameralism, or sovereign corporations.

Reader, suppose that we unleashed our monarchical corporation into the world, to compete with the firms in the S&P 500. Do you suppose it would succeed? True, it has its advantages. If it started in office with a great CEO, it might do quite well for a while, since it wouldn't suffer from the standard principal agent problems of managers empire-building, or enriching themselves at the expense of shareholders. But how long do you think such an arrangement would last, especially past the first CEO? Most CEOs, even good ones, are only at the top of their game for a short number of years, and when they screw up, they have to get replaced by someone else, who is picked from among the top managers across the whole planet. The advantages here are fairly plain.

It seems quite apparent that our monarchical firm would struggle to compete. Most of the world's successful coprorations have structures that are nothing like the one we describe above. They look more like our regular, familiar public firms.

"But," you may protest, "there are successful family firms too!"

This is true. In the world today, there are large, successful family-run firms. But they tend look more like regular public companies than our monarchical corporation. Many of them are publicly traded as well, like Wal-Mart, with the family retaining only a controlling stake. Out of the rest, the shares can be distributed across family members or held a trust. The CEO job can be kept within the family, or transferred to an outsider (even if the outsider is "adopted" into the family, like in Japan). The firm can raise equity financing.

And for the families that own such firms, they don't seem to be in a huge hurry to change their corporate by-laws to those of a monarchical corporation. By revealed preference, they seem to prefer more modern arrangements.

Out of the various aspects of an absolute king, it seems beneficial that the executive has absolute authority over personnel, budget, operations, and other kinds of organisational decisions. Divided power in this regard mostly just causes problems and inefficiencies. But the linking of absolute organisational authority (which both the King and CEO share) with sole inalienable equity ownership (which only the King has) is not nearly so obviously beneficial. And the process of removing a bad CEO seems far preferable to the process of removing a bad king.

Moreover, if the CEO is not to be the sole shareholder, then it seems misguided to make the CEO the sole judge of his own performance. Having a board, who lacks any major organisational authority except the power to appoint and remove the CEO, along with other major structural changes, seems fairly benign as far as divided power goes, and is very beneficial in the event that you need to change the CEO. It's possible that the board might become meddlesome, but most of the charges against boards made by economists are that they rubber stamp the CEO's decisions too much, not that they're overly combative.

And finally, dispersed shareholders also go a decent way to combating the problem of an owner with perverse or evil preferences. When the sole shareholder in a country is the king, it's possible that the king just has preferences for evil, nasty stuff. Sure, he'd like more profit, but perhaps he's more interested in droit du seigneur, even though it's value-destroying and the citizens hate it.

But if we take the preferences of a multitude of shareholders, and ask what set of preferences can they agree upon, it's typically to just get paid more. In other words, maximise dividends, and let each shareholder buy whatever he wants. There's not usually cross-subsidisation of shareholders in their purchases from the company. It's possible that shareholder citizens in a sovereign corporation might also vote for droit du seigneur, but it seems easier and cheaper to just get hookers or groupies with the extra dividends.

Sovereign corporations have their problems, no doubt. But if your plan for how you'd like a government to be run varies wildly from how you'd like a regular corporation to be run, then you at least want to know the specific reasons why, lest the ghost of William of Occam haunts your country's fortunes.


  1. Good post.

    I agree with your assessment of absolute via the corporate route.

    In other words, the difference is between a great man and a mechanism.

    So, the corporate model offers two things. Firstly, a responsibility mechanism; secondly, a selection and removal process.

    I have written about this here

    (More work, on the removal, and transfer of power, process needs to be done though.)

    To add to your argument, I would consider Augustus -Tiberius-Caligula-Nero-civil war as a good example of what you are arguing.

    Augustus was a great ruler, Tiberius, despite his unpopularity, was competent enough, but after that we had raving lunacy.

    Long before I read Moldbug, I used to play around with the idea of "fixing" Rome.

    Here was one idea from my system, select the Caesar in a similar way to the Catholic Church. Though, this time I would have all the heads of key elements in society (military, commercial class, religious, political class, plebs,) vote for the Caesar in a concave. This would similar to a board, the Catholic Church's cardinals.) The Caesar would only reign as emperor for ten years, or some other fixed term period.

    Now, this was just an a general plan, the details could be changed.

    My judgement of Rome, before, and especially, after Moldbug, was that its inability to formalise and regularise its power structure, and succession, was its major weakness because it lead to repeated civil wars, which weakened its system.


    Dark Reformation.

    1. Thanks for the link - I like your discussion of how a sovereign corporation could be integrated with religious states, and the thinking about various failure modes (which is important for a design perspective).

      I've had Edward Gibbon's "Decline and Fall of the Roman Empire" sitting imposingly on my bookshelf waiting for a year when I declare it my project book and finally sit down to it. Learning more about Ancient Rome is definitely a goal of mine. What sources do you like on the subject?

  2. I've often criticized this in cyberpunk and at least at the moment, I'm going to hold this as the most significant difference between corporations and governments. A government is obligated to provide welfare-improving services that have no profit incentive - for example, firefighting services. Companies by and large, do not, and can focus on profit-making incentives while offloading all welfare and security benefits to others.

    I think any effort to implement government as a corporation will have to take into account the number of fundamentally unprofitable services that have to be provided, and how that is to be considered versus even classical expectations of individual liberty, such as the number of children that a family can have.

    1. I think this is a worry, but less on things like firefighting. The bigger case is things like disabled people, who will never pay their own way. It's possible they'll be taken care of by private charity. It's also possible that sovereign corporations will fund some of that themselves as a social PR effort to attract more customers who would care about that stuff. This may seem like wishful thinking, but corporate social responsibility is already a large area. So it's not unheard of that companies will still spend on purely social choices because it's better business in the long run, if customers care about it.

      But that's not a guarantee, I'll readily admit. My guess is that it would end up like normal corporations. Some have really good customer service and are friendly, and some are filled with assholes. But then again, that distinction could apply to a lot of governments too.