The Transparent Corporation: A Thought ExperimentWilliam Gadea 05.24.2018
What if business was more like Chess and less like Poker? What if the facts of a company’s operation – principally its books but perhaps other information as well – were kept on a blockchain, visible to all. Perhaps all income and disbursements would need to go through a crypto-currency smart contract to certify this. I will be vague about the details, because I’m less interested in how it might work practically than in what the output of this state might be.
I don’t write this as either prophecy or advocacy, but to think through the consequences of a capacity that the blockchain might bring us. I have purposefully chosen the most radical setting for this arrangement – total transparency – to see where it goes.
I will add that if the books of a company were run on a blockchain, apart from transparency there is another capacity that might be added: perhaps liabilities could be enforced by the block chain, with garnishments being made automatically from a company’s account. This changes the nature of debt, in effect making it possible to assign the seniority of obligations before bankruptcy.
Perhaps the strongest reason companies have for keeping their operations private is to prevent the competition from seeing what they do. But if everyone revealed their operations everyone would see what the competition does, and that might have some countervailing benefits.
Today, many management consultancies are built on providing benchmarks to industries, giving them an idea of what the best practices are for each field. With radical transparency, executives would be able to analyze more reliable and fine-grain information than these companies provide, and in far more sectors. The wisdom of the crowd might lead to greater operational excellence.
It is not just competition within sectors that might be affected; the decision to enter a sector might be influenced too. It is sometimes said that the airline industry over its collective history has lost money. Whether that’s true or not, there are certainly many fields of business that are just bad, and have never made much money. Likewise, there are niches where people are making fat margins because nobody else is seeing the opportunity. Radical transparency would tend to be an equalizer between fields, giving a reprieve to areas of hyper-competition and leading new competitors to golden nooks.
Today, companies access capital by providing quite a bit of data about their operations. With more perfect and real-time information, credit risks would likely be calculated more accurately, with benefits accruing to sounder companies and penalties going to shakier ones.
The more interesting development might be a breakdown of the distinctions between debt and equity. In such an environment, debt-equity hybrid products might flourish. Instead of taking a 7% loan, for instance, you might take a 6% loan that becomes and 8% loan if your profits climb by 20% or more next year. The variety of possible products would be wide.
On both the debt and equity side, it’s likely that the already growing trend of algorithmic (and algorithmically assisted) investing would flourish even more.
The business-to-consumer relationship might not be much affected by financial transparency, although companies would probably have to be more politically accountable for their behavior. However, on the business-to-business side, things would change quite a bit.
Imagine if clients were able to see how much of their dollar went into value that they receive, and how much went into marketing, sales and other investments that accrue little benefit to them. It’s possible that clients might look for a lower-overhead approach so that they might receive more value for their money.
But why would a vendor sacrifice sales and marketing – the engine of growth for their business – to satisfy that demand? They might if taking a lower-overhead approach was enough of a visible differentiator that it won them all the business they lost by not marketing or paying sales people fat commissions, which are of course, both expensive. This benefit would diminish as the ranks of the value providers increased, presumably until equilibrium between the marketers and value providers arose.
However, it is not clear to me that these “value providers” would necessarily be what we call value providers today – the bottom-of-the-market companies. If anything, the differentiated elite would have more ability to outshine their cohort, so they might find a high-quality/high-value approach more attractive than they do now.
New ways of finding vendors might facilitate this elite strategy. Today, companies seek vendors through search engine queries, reviews or word-of-mouth recommendations. It’s often not obvious which are the biggest or best companies in a field. In a transparent world, the companies could be listed in ways that are usually not possible today. They might be listed by scale and perhaps by other metrics that indicate client satisfaction, such as percentage of repeat business. It’s the companies on top of those lists that would be more likely to be the low-overhead providers, because they would not need marketing to win them new leads, and their value approach would make them more attractive to clients.
The sales function would be transformed too. Finding and qualifying prospects would be automatic; sales people would be able to see the volume of business available on the other side of the table. Information could offer advantages to the client, too. With full visibility, discriminatory pricing would be much harder to pull off. And with access to financials, clients would be able to see the risks of their vendors (bankruptcy, related experience, failure to perform, etc.) much more clearly.
This is the one place where open books is already happening in many companies, and IdeaRocket happens to be one of them. I can attest that letting our employees see the financials has made it easier to get the team aligned on our actions. Profit is the ultimate KPI, so shielding that number from the people who are supposed to be responsible for it is like not letting a sports team see the scoreboard.
This is the area that I find hardest to game out. It is possible that more information might ameliorate the pressure to regulate. For instance, many are rightly worried about for-profit education companies that rack up debt for students with little career or educational benefit to them. If it is clear to consumers that a university puts two-thirds of its revenues into marketing and profit, then perhaps that additional information is a fair warning to consumers.
It is also possible that tokenized books might allow for more efficient and targeted taxation.
I began by saying this post was neither prophecy or advocacy. However, it would just be evasive to not ask: would something like this be for the good? And if so, is it likely?
As a business owner, this sort of radical transparency raises my hair on end a little bit. Companies are comprised of human beings, and human beings prize a sphere of privacy to protect them. However, as I consider how this thought experiment might be different than our current reality, the major difference is that it would be radically more efficient. There would be less waste and more value created. It would be for the good.
The other question is whether it is likely. Radical transparency will not come anytime soon. However, it’s quite possible that we will come closer to it. The settings on an endeavor like this are not all or nothing – there are different shades of transparency. Certifying the financials of a company on a blockchain instrument is one thing. Choosing to share that information is another. Once a company decided to share financial information, it could decide how. They could share financial information with an identified party; they could share it with a category of company; they could let their information be combined with others on a statistical aggregate basis; they could trade information.
Why would companies give up their information? Because they would get something in return: more favorable terms in an investment or business transaction.
Would this sort of transparency become a new norm? Again, it needs to be in the interests of the companies involved. But who would have thought thirty years ago that advertisers would have so much information about us? Yet we allowed it, traded for it, by clicking on numerous boxes that said “Yes, I accept the terms of service.” It was easy and we got something in return. A company disclosing its financial information is a decision that would be taken far more deliberately, but the dynamic could be similar. A cascade of self-interested decisions could, over the long-term, create a major change in business norms.