Wall Street’s “Distorporation” – The New Dark Matter of Our Economy

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The Rise of the “Distorporation”

When a free-market-oriented publication like The Economist warns that corporations are being restructured in ways that could benefit the “plutocratic few,” I sit up and take notice. Their recent article, “Rise of the distoporation,” highlights a disturbing business trend that is further concentrating wealth in the United States.

Partnership Growth

The article argues that publicly-traded “C” Corporation are now on the decline as a new breed of partnerships rises – partnerships structured specifically to generate much higher returns for their closest insiders. These new legal forms now account for 23% of of companies – and 63% of profits among all firms. So, we are talking about a very significant engine of wealth. But it’s not for everyone.

These new business partnerships are deeply intertwined with Wall Street. They are structured to minimize the earnings retained by a firm, optimizing instead for maximizing payouts to shareholders. In fact, these legal entities are sometimes called “pass-through structures” for this very reason. Without the ability to retain their earnings, these businesses become dependent upon continual injections of new capital from sophisticated private equity firms. This puts Wall Street financiers in the driver’s seat, enabling them to determine the most efficient uses of capital. But another way of seeing this same phenomenon is Wall Street having found an even more efficient means for extracting profits out of other businesses.

Not surprisingly then, these new “distorporations” (as The Economist calls them) are tightly tied to Wall Street financial wizards like Blackstone and KKR – names we recognize, but only dimly understand. The Carlyle Group is another of these behind-the-scenes architects of this dystopian version of capitalism, and as their friend and benefactor, Donald Rumsfeld once noted:

“There are known knowns; there are things we know that we know.
There are known unknowns; that is to say, there are things that we now know we don’t know.
But there are also unknown unknowns – there are things we do not know we don’t know.”

These “distorporations” are our new “known unknowns” – carefully cloaked economic entities with a huge gravitational pull; a kind of economic ‘dark matter’ that is felt, but never truly seen.

How Did We End Up Here?

One of the things I appreciate about The Economist is its willingness to ask hard questions. In this case, they note that this shift to a new form of capitalism is happening largely without much public discussion:

“This shift in how companies are governed and raise money is bringing with it a structural change in American capitalism. That should be a matter of great debate. Are these new businesses, with their ability to circumvent rules that apply to conventional public companies, merely adroit exploiters of loopholes for the benefit of a plutocratic few? Or do they reflect the adaptability on which America’s vitality has always been based? Alas, it is a debate the country is either blithely or studiously failing to take up.”

So, the question is: how did we end up in this situation?

We humans live in a world of finite time and resources. Between doing  our jobs, taking care of our loved ones, and brushing our teeth every day, we seem to have little attention for much else. Few of us feel we have the time to wrestle with big, gnarly societal challenges – things like climate change, biodiversity loss, or global poverty.

What’s more, many of these difficult societal and ecological problems are just inherently complex. To understand climate change or Genetically Modified Organisms in our food supply, one really needs to dig in and investigate topics for which we may not necessarily be all that well qualified to understand.

Contrast our inability, as citizens, to follow all these very complex problems with the well-funded capacity that corporations have to stay focused on an issue over long periods of time. The oil and coal industries, for example, have lots and lots of money to invest in funding pseudo-scientific studies aimed at debunking climate change research and are willing and able to invest huge amounts of cash into stopping political solutions to our coming climate crisis dead in its tracks.

One of the ways we deal with this imbalance is to fund non-profit organizations to develop that expertise and political clout needed to advocate for the public good on each of these respective issues. In most cases, however, the charitable dollars invested in these efforts are absolutely dwarfed by what industry can afford to invest because of the huge economic returns associated with getting around serving the public good in the first place. Further exacerbating the problem is the complexity and technical nature of many of these issues, and the inability of nonprofit organizations to match the sophistication of well-paid industry insiders.

Distorporation came about, to some degree, for these very same issues. Modern day finance is complex, and Wall Street is much better positioned to understand and pay attention to the kinds of regulatory and policy issues needed to get what they want – regardless of whether or not it is in the public interest. Which, to be clear, I believe it is not.

 Non-Profits to the Rescue?

The “distorporation” is a legal creation. It takes many forms, but in each case, its existence is the result of political and legal maneuvering: laws and regulations, manufactured and twisted by – and for – a small and crafty minority in order to benefit themselves. These partnerships and the laws that support them are complex, making them extremely difficult for outsiders to fully comprehend. And it is in the shadows of this obscurity that these entities now thrive and multiply.

These entities are our known unknowns. Firms like Blackstone, Carlyle, and KKR all have public websites and street addresses; we hear them mentioned in the financial press, but we don’t really know what they are and how they work. They are our known unknowns.

Citizens are too busy and too tired to dig into the issues surrounding the growing dominance of these new organizational structures. Our professional defenders of the public good are also ill-equipped to understand them. Few progressive social change institutions have the financial sophistication necessary to assess them, let alone develop solutions to the effects they are having on our economy.

In theory, our government regulatory agencies are the logical locus of control, but the only employees savvy enough to truly understand these issues are likely to come from the very firms that need to be regulated in the first place. It’s a classic case of the fox guarding the henhouse.

And so, while many within the progressive and even within the libertarian communities decry the dangers of the publicly traded corporation, the true challenges to our economic system, and to society more generally, have already mutated into a much more virulent new form. The known unknowns of the distorporation are growing; they are becoming the dark matter of our economy and very few of us even know much about their existence let alone where they are leading us as a society, which is a whole different level of unknown. Or, as Rumsfeld put it:

These new organizational forms for business are taking us into the unknown unknown.

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