There is accumulating evidence that corporations fail because the prevailing thinking and language of management are too narrowly based on the prevailing thinking and language of economics. To put it another way: Companies die because their managers focus on the economic activity of producing goods and services, and they forget that their organizations' true nature is that of a community of humans.

from Bloomberg Businessweek

Prologue

The Lifespan of a Company

In the world of institutions, commercial corporations are newcomers. Their history comprises only 500 years of activity in the Western world, a tiny fraction of the time span of human civilization. In that time, as producers of material wealth, they have had immense success. They have been the major vehicle for sustaining the exploding world population with goods and services that make civilized life possible. In the years ahead, as developing countries expand their standards of living, corporations will be more needed than ever.

Yet, if you look at them in the light of their potential, most commercial corporations are dramatic failures-or, at best, underachievers. They exist at a primitive stage of evolution; they develop and exploit only a fraction of their potential. For proof, you need only consider their high mortality rate. The average life expectancy of a multinational corporation-Fortune 500 or its equivalent-is between 40 and 50 years. This figure is based on most surveys of corporate births and deaths. A full one-third of the companies listed in the 1970 Fortune 500, for instance, had vanished by 1983-acquired, merged, or broken to pieces.1 Human beings have learned to survive, on aver-age, for 75 years or more, but there are very few companies that are that old and flourishing.

There are a few. The Stora company, for example, is a major pa-per, pulp, and chemical manufacturer; it has had the character of a publicly owned company from its very early beginnings, more than 700 years ago, as a copper mine in central Sweden. The Sumitomo Group has its origins in a copper casting shop founded by Riemon Soga in the year 1590. Examples like these are enough to suggest that the natural average lifespan of a corporation should be as long as two or three centuries.

I didn't see these astonishing statistics until I had already spent more than two decades as a professional manager. It took another decade for their implications to fully sink in. I worked all my life for a major Anglo-Dutch multinational, the Royal Dutch/Shell Group of companies. Born and educated in Holland, I went to work for Shell directly out of college. I held jobs ranging from accountant to group planning coordinator (coordinator is the group's equivalent of a senior vice president), working on three continents and in Shell operating companies whose businesses ranged from refining to marketing to exploration and from oil to chemicals to metals. As it happens, I am a second-generation Shell man, because my father worked for the same company. During our two generations, he and I clocked 64 working years. So it cannot be a great surprise that, for a long time, I took it for granted that most companies (including Royal Dutch/Shell) simply could not die. They would naturally exist forever.

Well, they don't. Even the big, solid companies, the pillars of the society we live in, seem to hold out for not much longer than an aver-age of 40 years. And that 40-year figure, short though it seems, represents the life expectancy of companies of a considerable size. These companies have already survived their first 10 years, a period of high corporate "infant mortality." In some countries, 40 percent of all newly created companies last less than 10 years. A recent study by Ellen de Rooij of the Stratix Group in Amsterdam indicates that the average life expectancy of all firms, regardless of size, measured in Japan and much of Europe, is only 12.5 years.2 I know of no reason to believe that the situation in the United States is materially better.

The implications of these statistics are depressing. Between the centuries of age of a Stora or a Sumitomo and the average lifespan-whether 12.5 or 40 years-there exists a gap which represents the wasted potential in otherwise-successful companies. The damage is notmerely a matter of shifts in the Fortune 500 roster; work lives, communities, and economies are all affected, even devastated, by premature corporate deaths. Moreover, there is something unnatural in the high corporate mortality rate; no living species, for instance, endures such a large gap between its maximum life expectancy and its average realization. Moreover, few other types of institutions-churches, armies, or universities-seem to have the abysmal demographics of the corporate life form.

Why, then, do so many companies die prematurely? There are many speculations about the reason, and this area undoubtedly needs much more research. However, there is accumulating evidence that corporations fail because the prevailing thinking and language of management are too narrowly based on the prevailing thinking and language of economics. To put it another way: Companies die because their managers focus on the economic activity of producing goods and services, and they forget that their organizations' true nature is that of a community of humans. The legal establishment, business educators, and the financial community all join them in this mistake.

Some Companies Last Hundreds of Years

These understandings stemmed from a surprising study which we con-ducted in 1983, when I was coordinator of planning for the Royal Dutch/Shell Group. Royal Dutch/Shell, based in Britain and the Nether-lands, is one of the top three corporations in the world in size-composed internally of more than 300 companies in more than 100 countries around the world. All of these companies are co-owned by an interlinked pair of holding companies, one Dutch and one British. The history of the Shell Group dates back to the 1890s. Its British founders began as sellers of oil for the lamps of the Far East (Shell was named after the fact that seashells were used as money in the Far East), while the Dutch founders imported kerosene from Sumatra. From the moment they merged, in 1906, Shell's primary business was the worldwide production and marketing of oil and petroleum. READ MORE