"My most surprising discovery: the overwhelming importance in business of an unseen force that we might call 'the institutional imperative.' In business school, I was given no hint of the imperative's existence and I did not intuitively understand it when I entered the business world. I thought then that decent, intelligent, and experienced managers would automatically make rational business decisions. But I learned over time that isn't so. Instead, rationality frequently wilts when the institutional imperative comes into play.
For example: (1) As if governed by Newton's First Law of Motion, an institution will resist any change in its current direction; (2) Just as work expands to fill available time, corporate projects or acquisitions will materialize to soak up available funds; (3) Any business craving of the leader, however foolish, will be quickly supported by detailed rate-of-return and strategic studies prepared by his troops; and (4) The behavior of peer companies, whether they are expanding, acquiring, setting executive compensation or whatever, will be mindlessly imitated.
Institutional dynamics, not venality or stupidity, set businesses on these courses, which are too often misguided. After making some expensive mistakes because I ignored the power of the imperative, I have tried to organize and manage Berkshire in ways that minimize its influence. Furthermore, Charlie and I have attempted to concentrate our investments in companies that appear alert to the problem."
"As companies get larger and more complex, there’s a tendency to manage to proxies. This comes in many shapes and sizes, and it’s dangerous, subtle, and very Day 2.
A common example is process as proxy. Good process serves you so you can serve customers. But if you’re not watchful, the process can become the thing. This can happen very easily in large organizations. The process becomes the proxy for the result you want. You stop looking at outcomes and just make sure you’re doing the process right. Gulp. It’s not that rare to hear a junior leader defend a bad outcome with something like, “Well, we followed the process.” A more experienced leader will use it as an opportunity to investigate and improve the process. The process is not the thing. It’s always worth asking, do we own the process or does the process own us? In a Day 2 company, you might find it’s the second."
It's not immediately clear to me, and as such makes an otherwise good-looking argument feel less "solid".
"Amazon.com passed many milestones in 1997: by year-end, we had served more than 1.5 million customers, yielding 838% revenue growth to $147.8 million, and extended our market leadership despite aggressive competitive entry.
But this is Day 1 for the Internet and, if we execute well, for Amazon.com."
Bezos has attached the 1997 letter to every letter to the shareholders he has written since. There is even a building in Seattle named Day 1.
 https://www.amazon.com/p/feature/z6o9g6sysxur57t (bottom half of the page)
You'll notice for example that even my initial comment pointed the guy to the answer (i.e.: it's in the third paragraph of the link).
Now, both requirements aren't opposite, someone could have made a comment like this: I like Bezos's notion of a Day 2 company, how it differs from Day 1, etc.
Basically, I like people to show that they aren't asking someone else to do the work for them (or, if they are, at least they made some attempt).
That's at least as reasonable a position as the one you just expressed IMO.
"In particular, their poor handling of software development has been well known for many years. The answer to the WMF's problems with software development has been well known for decades and is extensively documented in books such as The Mythical Man-Month and Peopleware: Productive Projects and Teams, yet I have never seen any evidence that the WMF has been following standard software engineering principles that were well-known when Mythical Man-Month was first published in 1975. If they had, we would be seeing things like requirements documents and schedules with measurable milestones. This failure is almost certainly a systemic problem directly caused by top management, not by the developers doing the actual work."
"This is not to imply that decades-old software development methods are somehow superior to modern ones, but rather that the WMF is violating basic principles that are common to both. Nothing about Agile or SCRUM means that the developers do not have to talk to end users, create requirements, or meet milestones. In fact, modern software development methods require more communication and interaction with the final end users. Take as an example the way Visual Editor was developed. There are many pages of documentation on the WMF servers and mailing lists, but no evidence that any developer had any serious discussions with the actual editors of Wikipedia who would be using the software. Instead. the role of "customer" was played by paid WMF staffers who thought that they knew what Wikipedia editors need better than the editors themselves do. Then they threw the result over the wall, and the community of Wikipedia editors largely rejected it. Or Knowledge Engine, which was developed in secret before being cancelled when word got out about what the WMF was planning. Another example: The MediaWiki edit toolbar ended up being used by a whopping 0.03% of active editors."
Sure, such a company would have no chance of succeeding in the stock market, but what if it never plans on IPOing in the first place?
Buffet's core complaint is about companies not making enough profits due to their profligate spending on other things. A profit cap would not have the impact you're hoping for here. :)
> such that all net revenue in excess of some fixed amount is forced by the corporate charter to be turned into either employee compensation or stockholder dividends.
By definition, only profits can be paid out as dividends, so again, a profit cap would prevent the thing you're you're trying to boost.
Er, sorry, I rather meant that profits after dividends would be capped. You can do anything you like with the money—other than keep it in the corporate coffers (or in commercial paper or anything else that's still liquid assets on the balance sheet.)
But yes, you're still right, it wouldn't have the correct effect.
How about a sliding window cap on non-compensation spending, together with a sliding window cap on headcount? So, in a year with record 10x net revenue, you would be allowed to 10x your salaries/bonuses/dividends, but you wouldn't be allowed to multiply your capital costs, or "new" labor costs, by more than, say, 1.3x. (And keep the fixed profit-after-dividend cap, because otherwise the corporation would just hold all its money in the bank until the sliding window grew enough to let it spend it.)
Also, presumably you're talking about new laws in the US here? What stops businesses from just moving their HQ overseas to places with different laws they like better?
That seems likely to cause the exact _opposite_ effect of what you intend. Apple is sitting on a pretty big cash pile right now. If the only legal options they had were to invest it or return it as dividends, the original article's premise is that they would find ways to invest it (buying factories in China, bringing app development in-house, etc) rather than risk the shrinking of the bureaucracy.
The problem seems doubly bad with Wikipedia and other non-profits. The problem isn't that they have too much profit. It's that they are growing their expenses to match income (rather than capping expenses at some "rational" level and trying to maintain enough income above it). In theory, in for-profit companies shareholders will start to complain if expenses increase too high -- it's not clear who would make the same complaint at Wikipedia (other than the original article).
Trying to come up with piecemeal regulatory "solutions" like this is like trying to invent a perpetual motion machine by coming up with increasingly more complicated contraptions. There are fundamental, local interactions that you have to contend with that basically rule out accomplishing what you want.
Everything from the growth of the welfare state, to populist revolutions to put socialists into power, can be blamed on how common this misconception is.
The problem with applying top-down planning to economy is not that it doesn't work; it's that it optimizes for the goals of the few doing the planning, leaving large swaths of people struggling with the awful conditions created by not taking their goals into account in the plan.
In other words as long as you don't try to plan their activity. What you're describing is how more free market oriented economies work: with a central authority that has the power to force everyone to comply with its plans, but that deliberately chooses to mostly not exercise this power, in order to maintain a free market.
Central economic planning is better than the alternative (anarchy) only when addressing externalities that market forces do not address. So for instance providing a system of law, a national defense and basic scientific research. Even with all of the inefficiencies of top down planning, it still remains the only way to optimize resource allocation for the production of public goods.
> In other words as long as you don't try to plan their activity.
That's not what I said, and the two ideas are not equivalent. Agents may be allowed to accommodate locally only within certain limits, giving an appearance of free will, but still being within planned parameters and thus producing a controlled outcome. The system then will converge to a state that complies with the centrally stated goals. The key here is that individual agents are only allowed some local improvements, but they're prevented from any improvement to themselves that would damage the global optimization goals. See local search,  like for example Variable neighborhood search. 
The central authority sets very strong limits on what can and cannot be done, and enforces them strictly. It also sets up economic incentives, goals, rewards and punishments over the "free actors", like convincing workers that they need to program their lives around continuous learning and adaptation, jumping jobs every X years, and discouraging people from relying on the existing public education, healthcare and public retirement plans, which were the goals of the previous central plan, now deprecated. Anyone ''willingly'' failing to comply with the new program find themselves quickly pushed out of the system (but it was "their own fault", of course, for not "behaving rationally").
That's how the current Western world economic forces operate, and it's quite different from "mostly not exercising its power"; if that's a free market, it looks a lot like "forcing everyone to comply with its plans".
I haven't seen any evidence that this is an effective way of organizing an economic system, at least relative to the free market.
Modern western economies have grown increasingly stagnant as the level of central planning has increased since 1960. Contrary to your claim that "public education, healthcare and public retirement plans" have steadily been deprecated, the raw statistics show that government social spending in a major Western economy, the US, increased, on average, 4.8 percent per year between 1972 and 2011, after adjusting for inflation . This represents a massive shift to more central economic planning. And this shift has been associated with reduced rates of improvement in all metrics of economic development.
That's not really it either. If you have a business which is generating high profits, it will have a high market cap. You can reduce it by transferring the corporation's liquid assets to shareholders, but if you've transferred the liquid assets and you're still above the limit, transferring non-liquid assets to shareholders is clearly the wrong direction.
What you really want is for separate businesses to be separate companies. Conglomerates are inefficient. Don't expand into new markets, just give the shareholders their money. The shareholders can invest it in the new markets if they want to.
The main impediment to this is the tax code, because if you give the shareholders the money it gets taxed -- twice -- but if you spend it internally or leave it inside the corporation in an offshore subsidiary, that doesn't happen.
Wikipedia gets to the same place via a different route. A non-profit doesn't have shareholders to pay dividends to, so instead of paying dividends being discouraged by the tax code, it just isn't possible, and you get the same results. The website generates more revenue than it actually needs to operate and the rest of the money has to go somewhere, so it goes somewhere inefficient as determined by internal politics.
It's interesting that you say that on a subthread discussing something Warren Buffet said. Berkshire Hathaway became an efficient conglomerate by acquiring and operating companies that eschewed the very principle we're discussing.
Dividends are nice, but dividends would stay small if the company itself stays small (because it's constrained from growing.)
(I'm not equipped to evaluate whether or not that point is true, especially in the case of any specific company. Just trying to point out that the argument you're making here kind of begs the question.)
Look at utilities and regional banks, which are usually priced based on return on assets or operating margins.
Growth oriented companies have advantages and disadvantages. Microsoft is a great example -- they have a business that's a monopoly cash cow, but they also need to hit high growth rates to prosper. They squandered a decade trying to both grow and milk the cow, and are now growing again, while breaking and eventually losing parts of the legacy business.
That is basically what you are doing when you leave money on the table. Opportunity costs are still costs.
For about 7 years, I was collecting an effective 10% dividend while getting significant capital appreciation as well.
Likewise, as part of my diversified retirement portfolio, I have a portion in boring dividend paying stocks that generate moderate returns and don't get punished as severely during bad market conditions.
Is there some known principle that governs this, something that could be named along the lines of Parkinson's Law or the Peter Principle?
Anecdotally I noticed that even with 5 people you usually have someone starting to act as adhoc part-time manager, and this role quickly become too much for a part time responsibility as the team grows.
you don't need to create a middle management structure from the get go, just have a chain of command.
Any project with more than one team already has a middle management structure of sorts - you've got the CEO / CTO, then the team leaders (scrum masters, or just whoever's the loudest). There's your middle management layer already.
Elinor Ostrom received a Nobel Prize for researching into how societies have develop structures to manage commons sustainably. Unfortunately her conclusion was there is no default solution.
I theorize that it is related to size/scale, which disassociates causes and effects across time and groups.
My solution is to keep companies as small as possible
There are also plenty of counter examples in corporations and governments throughout history where the size of the organization has not affected its ability to achieve its goals or compete with smaller organizations. Therefore, I think the issue and solution lies elsewhere. Somewhere between accountability, culture and trust.
That's not to say I disagree with you completely: large corporations can achieve things small ones cannot (especially as you move out of software) but I've seen plenty of talk around accountability, culture and trust, and very few results.
Sure there's plenty of talk around accountability and proper management without much substance and I don't claim I have any specific solutions in mind to the problem. I think keeping organizations small (i.e. tribalism) is one hack that may help, but comes with different considerations as I mentioned.
I ask because it's a large work, but I'd read it if it was the latter.
> "In this work, Kropotkin points out what he considers to be the defects of the economic systems of feudalism and capitalism, and how he believes they thrive on and maintain poverty and scarcity, as symbol for richness and in spite of being in a time of abundance thanks to technology, while promoting privilege. He goes on to propose a more decentralised economic system based on mutual aid and voluntary cooperation, asserting that the tendencies for this kind of organisation already exist, both in evolution and in human society. He also talks about details of revolution and expropriation in order not to end in a reactionary way."
Usually long term initiative take a lot of domain knowledge and a specific set of connections. When something new becomes more important, they risk losing their personal position since they may not be the best person in terms of knowledge and connection to carry out the new direction. Instead they try to use their accumulated power to keep their direction supported even when it's not in the interest of the business for as long as they can.
To address this, perhaps there's merit in rewarding timely exits and somehow punishing people that have dragged things out. However the most that companies can do is usually just fire someone. And at that point they have probably sucked the company dry of the value they can personally extract.
It would be awfully surprising if virtually all companies had the same problems due to smart people suddenly behaving irrationally in the same way. It's much less surprising that smart people behave rationally in their own interests, but that those interests regularly fail to align with overall company interests.
And I think the pattern you describe is even mirrored on an institutional level. People are quick to mock Kodak for ignoring the rise of digital cameras, but they tend to undervalue the amount of risk that pivot would involve. If you're a world leader in product X, and that gets replaced by product Y, pivoting destroys the value of your expertise and puts you at risk. It's unpopular but perhaps sensible to settle on winding down profitably (the institutional version of a timely exit) instead of pivoting.
The basic takeaway is that these behaviours and forces are natural, intrinsic and inevitable; that a wise systems-manager will seek to carefully manage them rather than oppose or decry them.
For example, there is - in my opinion - a low chance that the Gates Foundation will expend its resources within 20 years post the death of the last of the two.
They are likely to have something total equivalent to (in present dollars) perhaps $250-$300 billion to get rid of in the next 40-50 years. I'd be skeptical they can get rid of it that fast in their model. They're eroding that mass of capital (presently near $190b) so relatively slowly that by the time Gates is 80, they'll probably still be dealing with $200 billion in today's dollar.
A succession of massive, but formally time-limited foundations, administered in lockstep by dynasties of custodians would add a very interesting touch to any future scenario of fiscal neo-feudalism.
"We face another obstacle: In a finite world, high growth
rates must self-destruct. If the base from which the growth is
taking place is tiny, this law may not operate for a time. But
when the base balloons, the party ends: A high growth rate
eventually forges its own anchor."
Everyone is conservative about what he knows best.
Any organization not explicitly right-wing sooner or later becomes left-wing.
The simplest way to explain the behavior of any bureaucratic organization is to assume that it is controlled by a cabal of its enemies.
If you transform Conquest's rules from politics to running (ruining?) the wikipedia, the transformed rules are
"We can change nothing not even our exponential growth spiral, not our policies, nothing"
"LOL We're not doing the fiscal conservatism thing. I like how the current top discussion is about popularity and the need for a circular firing squad, not something financial. A direct quote of an attempt to avoid working on the issues "I'm reminded of the inflammatory, low-rent campaign of Donald Trump." Yeah buddy that'll fix it, that'll fix it real good."
"We're headed off the financial cliff now get out of the way I'm going gas pedal to the floor as you can see in the exponential graphs. The problem is we're a CRUD app and that's cutting edge CS just like quantum computing so naturally there's no possibility of criticism there. After all, the Egyptians didn't have flush toilets and they built a pyramid, so any criticism of the toilet in my bathroom is either making fun of the entire Egyptian culture or pretending the pyramids were not a logistical challenge."
There is some humor in that the world of paper encyclopedia publishing ran on mostly capitalist operational principles for decades, centuries. It turns out that running an online encyclopedia off donations and extreme hand waving is powerful enough to destroy an industry on its way to its inevitable collapse. Maybe someday in the future we'll have encyclopedias again, but the era after wikipedia and before the next encyclopedia will be a bit of a dark age. That's too bad.
Also, what scenario are you talking about when yo usay "after wikipedia"? There's plenty of copies of it on the internet, so the data won't suddently vanish, and wikis don't suddenly stop existing if the Wikipedia foundation implodes.