Reclaim Corporate Governance

This entry is part 9 of 12 in the series Political Reforms

The corporation is the most powerful engine of progress ever devised. Ungoverned, it is also the most powerful engine of destruction. Like a chainsaw, it can do a lot of great work for you — or it can rip off your leg. The trick is for American citizens and employees who run those companies to regain control of them.

Originally published 2015

It’s helpful to start with a quick history that explains how corporations originally came to be, and how they worked. That will help us to understand that they have evolved into something quite a bit different. In some ways, the differences are good. In other ways, they’re not.

Then we’ll investigate the questions of who controls modern-day corporations, and who owns them. The final section then presents a preliminary, multi-pronged proposal for harnessing the power of the corporations, to ensure that act to society’s benefit, rather than to its detriment.

A Quick History

Corporations started in England, under charters issued by the Crown. If the corporation wasn’t acting in the public interests (or more accurately, the Crown’s), the charter could be summarily revoked. Shares were owned by a few major investors, and that was it. They figured out how much of the profits to reinvest in the corporation, and took the remainder for themselves, as “dividends” — after paying the Crown its share, of course.

Fast forward a few hundred years. The number of corporations has exploded, and anyone can create one for a $1 and a form. Stock exchanges have burst onto the scene, allowing stocks to be traded on a daily and hourly basis. Even on a minute-to-minute basis. And with the advent of computers, many thousands of times a second.

Dividends are still paid by stable corporations with small rates of growth, but the stocks themselves are now the most valuable commodity for any company that has a strong growth story. So lots of companies are formed, with large amounts of stock granted to the founders, and often to employees of the “start up”.

When the stocks go public others can buy those stocks, in hopes they’ll grow in value. If the company’s future is bright, the folks who were granted stocks get to trade them to others who want them, and make a small fortune in the process.

Of course, companies fail. And when they do, the stocks are worthless. But any investor or stockholder who “cashed out” early enough is still sitting on a windfall. So people invest their time, or their money, or both, in hopes that their investment will pay off in a big way.

Rewarding people handsomely for innovation has certainly had its benefits, as witnessed by the explosion of technologies in the last 50 years. So, so far, so good.

Corporate Governance: Who’s In Control?

Now we come to the matter of “corporate governance”. The question of who determines the direction a company takes, and how profits are allocated. In other words, it is a question of who sits on the Board of Directors. And it is no small matter.

In European countries like Germany and France, the Board of Directors is required to have employee representatives, and representatives from the local community. That policy ensures that the corporation is working in the best interests of all concerned. (Interestingly, the European model was put in place by FDR’s advisors after WW II, establishing reforms he could not get enacted here, in the form of a “Citizen’s Bill of Rights”, as described in The Second Bill of Rights: FDR’s Unfinished Revolution.)

In Iceland, the Board must be at least 40% women, and at least 40% men. While that policy does not give employees and the communities direct influence, it does ensure that the half of the species which is generally regarded as the most “nurturing” and “caring” has a major voice in policy decisions.

In the U.S., in contrast. There are no requirements for who can sit on the Board. So when a new company gets started, the CEO recruits experienced business people for the Board. That CEO, in turn, becomes an “experienced business person”, who is recruited by others to sit on their board.

It all sounds good, on the surface. Who wouldn’t want people with experience doing the navigating and sitting at the helm of the ship? But over time, the system becomes incestuous. The only people sitting on the Board are CEOs and investors. They all sit on each other’s Boards, and do the kinds of things that make the papers every so often:

  • They voting themselves huge payouts, whether the business succeeds or fails.
  • They purchase parts and materials from 3rd world countries, because they’re cheaper.
  • They export divisions and entire companies to those countries (increasing profits at the expense the jobs).
  • They pollute the land, air, and water around them, because it is expensive to do otherwise.
  • They sell food products that cause disease and obesity (in the long term, not overnight).
  • They sell other products that can cause harm in various and sundry ways, all in the quest for profit.

As Democracy at Work founder and Marxist Richard Wolff so rightly points out, if American employees were sitting on the Board, how many of them would vote to send their jobs overseas? How many would give the CEO a $20m pay raise when the company is not doing well? How many local community members would vote to have their water poisoned? How many mothers would vote to make money by imperiling a toddler’s future. None!

So clearly, a major reform is needed, in the form of revised corporate charters. The larger the company gets, the more representatives it needs who regard the company as something other than simply a means of financial gain.

There’s nothing wrong with financial gain, of course. It’s a matter of ensuring that the gain is derived from actions that provide a benefit to society.

What About the Federal Government?

Changing corporate charters is a large change that would have to be phased in over time. It can only be mandated by government. But how likely is it that government will ever enact such a change? Is the government even capable of doing so, at the moment?

The answer, at the moment, is No. Because here, too, we fall short of the European model.

At this point in time, there are only two major parties. In fact, political science can now prove that the way our elections work, there will only ever be two parties. One of them may break apart and be replaced, but there will always be no more than two parties that have a real chance at winning elections.

Now then, while elections determined by advertising, money rules. So both parties are sucking long and hard at the corporate teat. They differ on social issues, but when it comes to corporate governance, they are equally eager to hand over the keys to the asylum, and put the inmates in charge.

In other words, the Democratic Party and the Republican Party have become two wings of the Big-$$ (Big Money) Party that is now in almost total control of government, who have decimated the jobs economy in middle-America, and who are always on the lookout for bigger and better ways to separate people from their money, like the housing scheme that brought the economy to its knees in 2008.

As one major example, it should be noted that both parties were responsible for systematically undermining and eventually destroying the separation between banks and speculative investment houses. Those regulations were put in place after the great depression, to prevent another recurrence. The systematic destruction of those regulations was a direct cause of the “housing bubble” that burst early in the 21st century, to the detriment of most.

And with giant mega-corps now rivaling the size of many governments — or dwarfing them, in some cases, the situation is only getting worse. If you really think that corporations are better suited to rule than governments, you’ll be very happy at this development. But as shown earlier, it seems clear that corporations do not always have the best interests of the public in mind.

Can People Gain Control?

At the moment, corporations in the U.S. are not under the control of employees (in general), or local citizens, or the federal government. It is possible to imagine a system in which average stockholders can gain control, but there is a pretty overwhelming obstacle in the way. I’ll get to the obstacle in a moment. Right now, let’s visualize a system that would put people in charge, instead of profits.

Imagine if there were a socially-conscious mutual fund that held the stocks on your behalf, but which passed on the voting rights to you.

  • Of course, the number of shares you own would be small.
  • But what if that organization (among others) could easily give you advice on how to vote your proxies, without “spamming” others who don’t have shares in that particular company?
  • You’d vote those proxies, wouldn’t you? Because now you have at least some idea of how to vote them. (Right now, those proxies go into the dust bin, because who has any idea?)

But let’s take that idea a step further. Suppose you could get advice from other organizations whose opinion you value?

  • Suppose you could get advice from Greenpeace, for example, or from any of the “corporate “watchdog” organizations that monitor corporate behavior?
  • If there was a system that let them give their advice freely — secure in the knoweldge that it was going only to those who want their advice, they wouldn’t have to worry about spamming people.
  • With 5 million members across the globe, they could hardly send a message to everyone! But if it it was only going to people who asked for their advice, that would be less of a problem. And if it was only going to people who asked for their advice on a particular subject — say, a proxy vote for X Corp, then it would be no problem at all!

Would a system of that nature be difficult to construct? Not in today’s world. We already have the twitter-verse. As with subscription-based blogs, you only get notifications when you have subscribed to the provider — and you can unsubscribe at any time. That’s the first step. With that system, Greenpeace can make a proxy-vote recommendation for X Corp, and it won’t go to anyone but subscribers.

But there is one step more — to avoid spamming people who don’t hold shares in X Corp. That, too, is a problem that is easily solved. It is a simple matter of filtering. The recommendation goes out to subscribers. The subscribers system checks the recommendation against the list of things the subscriber is interested in. We hold shares in X Corp? Good. Then keep the recommendation and display it to the subscriber. We don’t? Discard it. A few electrons were momentarily inconvenienced, but the subscriber was never bothered.

Of course, not only organizations can make use of a system like that. Individuals can, as well. Want to hear Warren Buffet’s proxy-vote recommendations? Subscribe to his channel! (Obviously, the system could also be used for buy and sell recommendations. But here, we’re considering the topic of governance.)

Regular visitors to this site will recognize that system as none other than the voting advice system I recommend to put people in charge of government, instead of lobbyists. The very same system could be used to put people in charge of corporations. It would allow people to vote their proxies intelligently, using advice from trusted sources.

There is, however, one huge obstacle to overcome.

The Problem of Corporate Ownership

A voting advice system that lets shareholders vote intelligently sounds terrific, but there is one serious problem. As Richard Wolff points out, 75% of stocks are owned by 1% of the population. So that 1% has pretty much all of the voting rights, when it comes to electing Board members.

That’s a serious problem because, as Wolff also points out, instead of one-vote-per-owner, owners have one vote per share. So even if your mutual fund passed on the voting rights for every share of stock that average people own, those shares would be a drop in the bucket compared to the Big-$$ owners.

There are two questions here:

  1. How much is an initial capital investment really worth?
  2. How does so much get so concentrated into so few hands?

How Much is Capital Investment Worth?

It’s the old philosophical question of “Capital vs. Labor”. What is the relative worth of each.

Capital is important, of course. Let’s say you’re a cobbler with a load of talent, and you can make great shoes. You need leather, of course, and you need the equipment to use, not to mention a place to work.

Along comes a benefactor who offers to invest $100,000 in your business as seed capital, to get everything started. Wonderful! You partner up, and incorporate. You authorize the creation of 10 million shares of stock, eventually. But you start with 1 million shares, and you each take half.

You start making shoes. They sell like hotcakes. So you hire some people to expand the business. Now you need some extra people to manage the payroll and do the other accounting. You realize that you can expand into other areas with a good marketing effort, so authorize the sale of another 2 million shares, and sell them to get the capital to do that.

Notice that original 50-50 ownership of the company (you and your investor), has become a 25-25 share, with the remaining 50% going to other investors. In other words, your share of the company has been diluted. That’s fine, because you’d rather have 10% of a big pie than 100% of nothing. So on paper, at least, ownership of the company has fallen into more and more hands.

Of course, you don’t a want a bunch of people who don’t know what they’re doing to tell you how to run your company, so the shares you sell are non-voting shares. Terrific. You get 25% of greatly increased profits, but retain your original 50% controlling influence you need to ensure the company does well.

That is how capitalism is supposed to work, at least.

Ok. Fast forward 40 years. The company now has 100,000 employees in marketing, finance, purchasing, sales, warehousing, distribution, and other divisions. The company is now worth $10 billion dollars.

Some of the employees were involved for a time, and then went elsewhere. Some have recently joined, and some have been around since the beginning.

Some of the stock remains in your hands and the hands of the original investor, but by now much of it has been traded many, many times. In some cases, the purchasers children now own the stock.

The original $100,000 investment in the company is now worth $5 billion in company assets (50% of the company, were it to be liquidated), 50% of the dividends the company distributes from year to year, and a 50% controlling interest in the company. The stock you started with as the cobbler is worth the same.

Fast forward another 20 years. You’ve passed on, and you left your stock to your grandchildren. The original investor did the same. Let’s say the company was stable, so there are still 100,000 employees, and the company is still worth $10 billion dollars.

Here’s the question: For how long should that stock ownership entitle the owner to 50% of the assets, 50% of the dividends, and 50% of the control?

The people who now own those stocks did risk any capital. They did not generate any “sweat equity”. If there is any sweat equity at all, it is being generated by the 100,000 people who now make up the company.

I’m not sure exactly how, at the moment, but it seems to me that there should be a gradual way to transfer ownership of a company to its employees, once seed capital has been recovered and sufficiently rewarded.

How Does So Much Wealth Get So Concentrated?

The problem of inheritance combines with (and interacts with) control of the Board of Directors. These days, many times more money goes to the executives than to the average employee, compared to years past. So if an average employee is making say, $50,000 per year, a CEO in the past might be making somewhere in the neighborhood of $150,000 per year. But these days, they are getting from 3 to 5 million per year.

Granted, their services are valuable. But how valuable are they, really? Are they really worth 60 times the efforts of the average employee — an employee who is probably working just as hard or harder, for just as long or longer?

What we have here is a self-reinforcing spiral, where stock ownership produces control and control produces stock ownership, by providing the wherewithal to invest. So as the Good Ol’ Boy network feeds itself, it continually grows, others go starving.

Clearly, a serious increase is warranted in the million-dollar-estate tax — a tax that was repealed by George W. Bush and his cronies — in order to begin to break up the aristocracy of inherited wealth that has already formed.

Is There a Solution?

Given that it is a multi-phase problem, any possible solution is likely to have multiple phases as well. So right now, I see a multi-prong attack:

  1. Make sure that proxy voting rights are passed on to owners.
    Alternatively, if the voting rights are retained by the mutual fund that owns them, ensure transparency, so people can find out how the proxies were voted, and can choose the funds they want to participate in on that basis. A voting advice system like the one I recommend then empowers individuals with the ability to access trusted advisors who can tell them how those funds are doing relative to the environment and employees, in addition to profits. The actual owners then have indirect control, at least.
  2. Limit the inheritance of wealth.
    Warren Buffet is a true patriot who understands the simple principle that inherited wealth in one person’s hands limits the opportunities available to everyone else. As an old friend once said, “You have a dollar, and I have two. That is the only money in the system. There is a bottle of wine for sale. How much does that bottle cost?” (Answer: $2. He gets the bottle. You don’t.)
  3. Limit the control that stock ownership provides.
    At some point, the initial investment that founded a company has been repaid many times over. At that point, the company’s success is due more to the work the employees do, than to the money the initial investors provided. We need to find a way to put the people responsible for the company’s success in control of that company. At the beginning, it is investors. And they do need to be repaid. But they can’t keep riding a “guilt-trip” that keeps them in control forever. At some point in a corporation’s growth, we need a way to phase in employee-ownership, in lieu of capital ownership.
  4. Require representative Boards.
    At some point in its growth, a company must be required to have employees and members of the local community on the Board of Directors.
  5. Make money irrelevant to elections
    A necessary step that makes it possible for other reforms to be enacted.

There may be better solutions. Or possibly simpler solutions. Whatever they are, I’m open to them. Wide open. Because things do need to change.

Resources

  • Democracy at Work, founded by Richard Wolff
  • Fixing Elections, by Steven Hill
    Hard to read, but filled with critical information about how elections are fixed, and how we can fix them.
  • Europe’s Promise, by Steven Hill
    A very-well written book that examines the strengths of the European model.
  • The Second Bill of Rights: FDR’s Unfinished Revolution, by Cass Sunstein
    How things should work for the average American.
  • A system that uses social media to create a zero-spam “advice network”, that allows trusted individuals and organizations to provide advice to others.
  • Where to Invade Next?, by Michael Moore
    A great video that spends only 5 or 10 minutes berating the military/industrial complex. After that, he visits other countries in the world to “steal” some of their best ideas, and bring them back to America. (With a better title, it probably would have reached a much bigger audience, and been even more influential.)

Copyright © 2015-2017, TreeLight PenWorks

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