- Capital Gains
- Corporate Mortality
On The Birth, Aging, and Death of Companies
1,446 years ago, a Japanese carpenter named Kongō Shikō decided to formalize his work into a business, Kongō Gumi. Today, incredibly, Kongō Gumi still exists as a going concern; it's been in operation since the year Muhammad's grandfather died, and has survived civil war, social upheaval, transitions from feudalism to constitutional monarchy, from that to a military state, and from that to a democracy. As with other Japanese companies, when you ask yourself what could conceivably kill off the business, you have to strike "home country loses a nuclear war" from the list, because sufficiently old Japanese companies lived through that, too.
But the history of Kongō Gumi indicates just how rare it is for a company to last this long, and how much society has to be structured around its persistence. Family businesses tend to be more stable than companies with conventional management and outside investors—how many generations' legacy are you willing to risk by levering up to increase the pace of your buyback? But a family-run company has a talent problem, where in every generation it needs to find someone who is competent, interested in the job, and part of the family. Japan turns out to have a solution to this: the country has one of the highest adoption rates in the world, 90% of the adoptees are adults, and a typical pattern is that men get adopted into a family when the patriarch wants to hand off the business to a male heir ($, Economist).1
There is nothing in the legal structure of a joint-stock corporation that makes it mortal. This has not always been so: the various East India companies, arguably the ancestors of today's multinationals, were founded with charters that limited their life to a few decades (these charters were later extended). Similarly, the oldest ancestor of today's JPMorgan Chase had a perpetual charter conditional on supplying New York City with clean water within ten years of its founding. But as the model of the corporation moved away from being a form of limited outsourcing (where the government granted a private company some legal privileges in exchange for supplying an essential service), and into a more generic way to collectively invest in and profit from private business, corporations moved towards legal immortality as a default.
There are some exceptionally long-lived companies around today, but they’re mostly in Japan and Central Europe. But there are some US survivors as well: one of the longest-surviving US companies, Dixon Ticonderoga—yes, they make those pencils—was founded in 1795 and taken over in 2004; they used to brag that they were one of the US companies that had been publicly-traded the longest. But most companies, like Dixon Ticonderoga, eventually die: they go bankrupt, or they get acquired.
In a way, this creates a nerve-wracking sense of discontinuity: most of the biggest companies in the US by market cap didn't even exist a few generations ago. Apple and Microsoft (disclosure: long the latter) were both founded in the 1970s, but three of the ten biggest global companies by market cap today were founded in the 90s, and two more in the 2000s! And of the original Dow Jones Industrial Average members, only two survive to this day: General Electric and the former National Lead, now NL Industries2 .
So, at the corporate level, the US has very little in the way of tradition: big companies are descended from conversations that happened in dorm rooms or at Denny's within living memory.
But that's just because the corporation itself is a wrapper on assets and human capital that will continue to exist regardless. Many big tech companies' compensation and management philosophies descend from how Intel decided to do things in the 1970s: pay employees in equity and refer to their goals as "Objectives and Key Results". And Intel was reacting to the way things were done at Fairchild Semiconductor, where the team had worked before. Fairchild itself was founded by Sherman Fairchild, whose father had co-founded IBM, making Fairchild (the person) the largest individual IBM shareholder. So even if the lineage in terms of corporate form doesn't go back very far, the lineage in terms of management norms and strategies goes back very far indeed—IBM was partly a creation of the National Cash Register mafia. NCR was the closest thing the 19th century offered to a modern SaaS business: they had a very well-compensated sales team that was optimized for selling information technology to businesses. It turns out that the upside from that approach, and the management style it entails, will have descendants elsewhere.
It can be fascinating to trace other companies' corporate-culture ancestry as far back as it will go, but it's a tricky endeavor. Examples abound: in a way, every quant is a descendant of Ben Graham, who was executing systematic rules (like "buy a company for less than two thirds of the value of its net working capital") by having analysts pore over Moody's manuals and compute valuations by filling out forms printed on cards. The modern video gaming transition towards in-app payments, subscriptions, and other usage-based pricing models is really a throwback to Pong; the strange multi-decade period when people would buy a device specifically for at-home gaming, purchase a cartridge one time, and play it for tens, hundreds, or thousands of hours without any incremental spending was really a brief interregnum.
The best way to think about corporations themselves is that they're a snapshot of a dynamic process. At some point in time, the best way to put certain people, technologies, physical assets, and organizational norms into action is to combine them under a single corporate umbrella, with a single legal entity collectively representing all of their behavior and accruing the profits from it. But when circumstances change, the right place for the people and assets can change, too. The norms are subject to selection pressure, but it's very hard to keep a good company culture secret over long periods (some startups where the entire founding team comes out of the same company are a sort of reactionary return to tradition—we must recreate the ways of our forefathers at Google-circa-2017, not the decadence of Google-circa-right-now!) The company contains these things for a while, but it's just not the vehicle for embodying permanence; a good reason companies don't have a limited lifespan today is that they'll inevitably die regardless.
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Read More in The Diff
The Diff has discussed corporate longevity in several different contexts:
How Would You Run a 10,000-Year Endowment? Over sufficiently long time periods, total return takes care of itself, but avoiding a drawdown to zero gets harder and harder.
This piece ($) profiles a popular, acquisitive company that's compounded for a long time with a strategy that, historically, tends to go awry.
Looking back on when the computing industry was IBM, etc.
What stands out about modern big tech companies is not the pace of growth but how persistent it's been ($).
1. Imperial Rome did this, too, from time to time, but eventually stopped. You'll note that the time from the traditional founding date of Rome, 753 BC, to 476 AD, when the last Western Roman emperor was deposed, is a bit shorter than the lifespan of Kongō Gumi. Adoptive succession seems to work! Best not to interfere with it.
2. General Electric is actually in the process of splitting itself apart, so soon only NL Industries will remain.
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