Book Review
The
Divine Right of Capital
The Divine Right of
Capital by Marjorie Kelly. 2001.
Most of
the readers of this newsletter probably believe that employee ownership is a
worthwhile goal for its general economic benefits and its implicit recognition
of the humanity and dignity of everyone who works. But most readers who like
employee ownership probably also believe that the goal should be to spread
ownership within the present framework. Marjorie Kelly, editor of Business Ethics, will take you further than that. Much, much further.
In The Divine Right of Capital, Ms. Kelly takes on the very nature of share
ownership, the purpose of corporations, the relationship between corporations
and government, the fiduciary duty of boards of directors, and the power of
wealth. She proposes a radical alternative to present arrangements. If you have
been longing for something that would go beyond the slow gains that
employee-owners are making through buyouts and progressive management, this is
the book for you.
Ms. Kelly is highly critical of
the rights and powers of shareholders. She likens them to a feudal aristocracy
in that they benefit from the profits and capital gains of companies without
making a contribution to business success, they govern absolutely through the
board, and they can buy and sell companies and their employees’ jobs in the
same way that aristocrats could sell their lands and the people who lived
there. Most of us are so used to this system that we don’t question it, she
writes. But democratic revolutions ended political feudalism and enabled
ordinary people to have a say in government. It’s time for a parallel
revolution in the economy.
There’s a lot for the revolution
to overcome, because shareholder primacy is enshrined in law, at the heart of
fiduciary duty. And corporations are legal persons with indefinite existence.
Ms. Kelly would put an end to all that. Law that places shareholders in an
exalted position can be changed, she points out, arguing that most of the
important law is case-based rather than statutory.
Ms. Kelly asks, why should
shareholders alone claim the profits of the corporation? Employees have a good
claim because they make the company work. And the community has a claim, too,
because they provide the setting, the security, the social support, and
material infrastructure that companies need in order to do business. Why
shouldn’t investor capital simply earn a wage, a fair rate of return? Ms. Kelly
advocates changes in law to reflect the claims of all stakeholders, including
investors, employees and community, as well as others. .
Raising her eyes from the aristocracy
of the shareholders, Ms. Kelly takes aim on the social structure.
Fundamentally, it’s a problem of wealth privilege, argues Ms. Kelly. The
wealthy may not be able to directly control everything in the political system
any more, she argues, but public policy enables the wealthy to keep control of
most assets, and through their control of assets, most people. Except for a
short period from the Depression through the 1960’s, argues Ms. Kelly, the rich
have been able to dominate the U.S. economic and political system, legally
seizing the products of other people’s work, and keeping many in poverty.
Ms.
Kelly asks, What do the wealthy contribute? Her answer
is that most of them don’t contribute anything to the welfare of the
corporation, because the stock they own was bought from another shareholder,
not from the company itself. Except for initial public offerings and rare sales
of stock from the company treasury, most purchases on the stock market are a
form of gambling on what the value of the company will be in the future, and
don’t return any benefit to the company.
If the stock price goes up, it’s because the company’s employees created
value, not the shareholders. However, the shareholders’ interest in profits must
be the prime directive of the board, as they alone are entitled to dividends
and capital gains, while the employees are viewed as a cost to be minimized.
Many objections can be raised to
Ms. Kelly’s ideas. One is the risk that wealthy stockholders will simply exit
to another country if they are forced by law to surrender large amounts of
profits and control. Another is that over half the stock market is owned by
pension funds, though Ms. Kelly argues that the funds hold mostly the money of
the wealthy. A third objection is that an enterprise is not the same as a
political community – in a political community the cooperation and contribution
of all is needed to create internal order, defend against external threats and
develop infrastructure. But, most of the time, political communities are not at
risk for their very existence, and so can tolerate the loose and sloppy
practices of extensive debate, considering many points of view, and allowing
for slow change. An enterprise exists in a more hostile environment of
competition, where more structured and hierarchical leadership may be needed
for survival and success. Even successful, participative employee-owned
companies must work very hard to keep participation efficient and manageable.