THE TIMES 100 : The Best Performing Companies in California : The Bottom Line : The Wonder of Paychecks--and Profit

A friend of mine worked for a while as a computer jockey for a giant California bank. He made a nice income, had good benefits and sat in a pleasant office. But eventually this bank, which is known for not wasting money, decided my friend wasn’t worth it. He was laid off. And he quickly realized that it would be virtually impossible for him, working on his own, to make as much as the combined value of his salary and benefits.

The astonishing thing, in retrospect, was that this bank, for a good while at least, got enough value from his work to pay him and have plenty left over. It did this for tens of thousands of others just like him too.

At the time, I wondered how. They had huge vaults, of course, and a federal charter and economies of scale. They could even create money and influence demand for their products.

But none of this seemed to account for the bank’s extraordinary ability to support so many middle-class lifestyles and still leave something for shareholders. In other words, how do corporations make so much money?

The Times 100 list--the most-profitable public companies--will make you wonder the same thing. It’s headed, for example, by a Mountain View software maker called Adobe Systems, whose two-year average return on equity fell--fell!--to 57% in the most recent 12 months. Stubbed their toes, all right. The year before it was 64%.

But even the hundredth most-profitable company--the very last one on our list--managed an average return on equity of 15%. Amazing.

I don’t happen to be remotely so profitable. After expenses, in fact, I’m hardly profitable at all. And when it comes to return on equity, the rising value of the toolshed that is my home (so I had a couple of good years) means a growing denominator that leaves only a fraction of a fraction when you cram it into the profits that are the numerator in the return-on-equity equation.

So how is it that, after all the bills are paid and everyone’s cashed his or her paycheck, these companies make so much? And what on earth does that imply?

The answers, in my view, are in this analogy to a person, which reminds us that something about profitable companies makes them more than the sum of their parts.

The word “company,” according to my dictionary, comes from the vulgar Latin compania, meaning literally “group sharing bread.” Perhaps more mystically, “corporation” has its roots in the Latin corporatio, for “incarnation,” and corporare, “to make into a body.”

So company or corporation is an embodiment of the many functioning as one so that all may have bread. This singular embodiment is recognized even under the law, which construes a corporation as a person. For this we can thank a Northern California community and the U.S. Supreme Court.

Santa Clara County vs. Southern Pacific Railroad arose from 19th Century efforts to tax the mighty railroads of the day. Santa Clara was not alone in this, and it was not to have an easy time. Fat with federal giveaways and accustomed to buying influence in government, the railroads were awesome antagonists.

“They far outmatched the resources of any state at the time, including California,” observes Stanford Law Prof. Robert Gordon. “In America, the big corporation precedes the big state.”

(Ironically, Leland Stanford made his money--the money that went into the great university--in the Southern Pacific Railroad, and Gordon, who is paid by that university to study such matters, lives in Santa Clara County.)

Southern Pacific argued that it was a person entitled to all the protections thereof, including those of the 14th Amendment, which hadn’t yet begun to serve its original purpose of protecting blacks, but whose due process clause was handy for fending off unwanted taxation. In 1886 the Supreme Court went along. Southern Pacific beat the tax, and corporations got the right to practically everything people get, except the right to vote. As recently as 1978, the high court upheld a corporation’s right to free speech.

This idea of the company as a person reveals the source of its strength and its weaknesses. Like people, companies put self-interest first. They’ll do almost anything to survive. But companies are more than the sum of their parts in every way. Their historic rapacity is just human greed, magnified.

And their profitability, despite noted tendencies toward caution and bureaucracy, is greater than the sum of the independent earning power of the individuals they employ. They enjoy economies of scale, access to capital and influence in government. They benefit by luck. But aside from that last, I couldn’t get rich even if I had all those things.

Most of all, I think the successful ones do it by getting everyone to row together without completely stifling the desire to row alone. That’s why they do so well, and that’s why we dislike them so much.

“Because we give up control,” explains Charles O’Reilly, a UC Berkeley management professor. “Corporations are about conformity and uniformity. On the one hand, we love ‘em. They give us offices, phones and so forth. But in the end, the corporation constrains us. As adults, we don’t like this.”

Chances are I’ll never be as profitable as Adobe Systems, which has been in the top three of The Times 100 for three years running. But I don’t feel so bad about it since talking to Stephen Penman, another UC Berkeley business professor, who says, “Most firms can’t maintain a high level of profitability in the long term.”

High returns on equity suggest hefty retained earnings and investments in new plant and equipment, which tend to mean more equity and more depreciation charges. Besides, times change, trends fade and companies, like people, can lose their edge. Accordingly, 39 companies on last year’s Times 100 are no longer on the list.

Watch out, Adobe Systems. In profits as in life, there is a regression toward the mean. Ashes to ashes, dust to corporate dust. “On average,” Penman says, “they tend to revert.”