Some companies endure a loss of character as they mature. I wrote this article to share my view that this is not caused by greed or individual character flaws. Indeed, the central individuals may be fighting very hard to protect the quality of their work, and their company's mission. Rather, such problems are caused by a structural flaw based in the company's corporate governance. My article is inspired by Eric Ries' recent book, Incorruptible, which discusses this problem, citing numerous examples, and providing ways to structure a company so that it can resist this pull away from its mission.
Duolingo
Duolingo's language learning app has been increasingly aggressive in its commercialization in recent months and years. Recently I saw an advert that was literally a scam, which is what first made me look for a possible connection with Duolingo's corporate governance. They are following in familiar footsteps: A beloved service gains commercial success thanks to its pursuit of a mission that serves the common good. After a certain level of success however, the company starts to lunge for higher margins and profits, cutting costs and plundering the pockets of goodwill they have been providing. Ironically, this policy ultimately whittles away the value that the company's controlling investors intended to benefit from. When this happens, everybody loses: Customers, employees, and investors.
Duolingo's espoused mission can be found in their marketing copy: "Our mission is to develop the best education in the world and make it universally available." Here's a question you may never have considered before: Is that mission legally binding? i.e. Is it the real mission?
Yes, a company mission can be legally binding
You may be wondering: What does it mean for a company's mission to be legally binding? As it turns out, plenty of successful companies enshrine their mission within their corporate governance structure. For example, Anthropic has a Long-Term Benefit Trust of five members who hold no Anthropic stock (i.e. have no financial incentive towards profit), and control a majority of Anthropic's board seats, which gives them the power to essentially select the CEO and thereby determine the policies and direction of the company. You can read more about this on the Anthropic website, however they are merely one example. Companies that you've heard of, but wouldn't necessarily associate with a particular zeal for their mission, in fact do have similar protections, and have had to use them to protect the mission in the past.
Example 1: Patagonia
The Patagonia Purpose Trust now owns all the voting stock of the company (two percent of the total stock) and exists to create a more permanent legal structure to enshrine Patagonia’s purpose and values. It will help ensure that there is never deviation from the intent of the founder and to facilitate what the company continues to do best: demonstrate as a for-profit business that capitalism can work for the planet.
Example 2: Novo Nordisk
In total, as of 8 November 2024 Novo Holdings A/S’ ownership amounted to ... 77.28% of votes of Novo Nordisk.
Novo Holdings A/S is wholly owned by the Novo Nordisk Foundation. The Novo Nordisk Foundation has a dual objective: to provide a stable basis for the commercial and research activities conducted by the companies within the Novo Group (of which Novo Nordisk A/S is the largest) and to support scientific, humanitarian, and social purposes.
(Source: https://www.novonordisk.com/about/corporate-governance.html#shareholders)
Let's return to Duolingo. What is their legally binding mission? If you read their Certificate of Incorporation in the State of Delaware, you can find this seemingly harmless text: "The purpose of this Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law." This appears quite open-ended, but in fact that is not the case. This sentence holds a very specific meaning. Corporations don't have any inherent purpose other than to make money for their owners - they are financial entities, nothing more. Their only purpose, given no other constraints, is to create value for stockholders. This is the law as practiced. The law is called shareholder primacy, and it is upheld by the precedent of cases in which investors (i.e. owners of a company) have sued the company's board of directors for failing to uphold their fiduciary duty to prioritise stockholder value over everything else, which may include employee wellbeing, the environment, democracy etc. - you get the idea. The seminal case for this law was Dodge v. Ford Motor Co. (1919), in which minority shareholders successfully sued Henry Ford when he attempted to drop special dividends and instead reinvest that money into increased production, so that Ford could employ more people and further lower car prices. In the end, he had to pay the dividends, because, as quoted in the judgement, "A business corporation is organized and carried on primarily for the profit of the stockholders". That case was in Michigan, but in other states, including Delaware, the same de facto law is practiced.
So remember shareholder primacy when you wonder why Duolingo is making the choices it is making, or how it is possible for Duolingo to get paid to expose their users to phishing scams. The board of the Duolingo corporation has a legal obligation to its investors, to make decisions that maximise stockholder value. Their choices are constrained by the governance structure they find themselves in. This isn't the case for all companies though.
How can some companies resist shareholder primacy, and why can't Duolingo?
The more startup-oriented among you may be wondering about an obvious and common caveat: Founder's dual-class shares. When a company is created, it is common for a special class of shares to be issued to the founders, which effectively give them full control over the company, despite the presence of other investors on the board. Meta has this governance feature. Duolingo too - the co-founder and CEO, Luis Von Ahn, holds dual-class shares that grant him significant control over the company's direction.
Personally, I think Von Ahn's influence could be the reason Duolingo's mission has held out for as long as it has against profit-seeking interests. Consider that Duolingo made over $1B of revenue last year, and yet the core, user-facing value it provides is still free.
It is no surprise that Duolingo is succumbing to investor pressure for more profitability. One individual's personal attachment to the mission isn't easy to constantly defend against the legal pressure of shareholder primacy. For a company to resist this pressure, the mission needs to be baked into the corporate governance model, so that prioritising the mission is a legally defensible position, structurally protected against myopic profit maximisation.
Epilogue
It may come to pass that Duolingo alienates many customers and loses market share. The Duolingo board, acting on its fiduciary responsibilities to investors, may end up destroying some or much of Duolingo's value as a company, but this would nevertheless be a kind of creative destruction. New companies, innovative and different, will emerge to fill the gaps in the market left by Duolingo. Many will turn out to be useless AI slop, but a few may turn out to be real and useful innovations. I'm hoping to make one of the latter with my app, which gives intermediate learners an extremely convenient way to expand, retain, and practice vocabulary. The essential and most useful core of its functionality is free, unlimited, and always will be.