Why All the Fuss About Stockholders?

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Why All the Fuss About Stockholders?

By Marjorie Kelly
Co-founder and Editor, Business Ethics

here does wealth come from? More precisely, where does the wealth of public corporations come from? Who creates it?

To judge by the current arrangement, one might suppose capital creates wealth--which is odd, because a pile of capital creates nothing. Yet capital-providers, stockholders, lay claim to all wealth public corporations generate. They also claim the more fundamental right to have corporations managed exclusively on their behalf. Corporations are believed to exist for one purpose: to maximize returns to shareholders. This message is reinforced by CEOs, The Wall Street Journal, business schools, and the courts. It is the guiding idea of the public corporation, and the law of the land--much as the divine right of kings was once the law of the land. Indeed, the notion of "maximizing returns to shareholders" is universally accepted as a kind of divine, unchallengeable truth.

It is not in the least controversial. Though it should be.

What do shareholders contribute, to justify the extraordinary allegiance they receive? They take risk, we're told. They put their money on the line, so corporations might grow and prosper. Let's test the truth of this with a little quiz: Stockholders fund public corporations--True or False?

False. We speak as though it were true: "I have invested in AT&T," we say--imagining AT&T as a steward of our money, with a fiduciary responsibility to take care of it. In fact, dollars don't go to AT&T, but to other speculators. "Investments" reach a public corporation only when new equity is issued--a rare event.

Public corporations need capital to operate--$555 billion in 1993, for example. According to the Federal Reserve, equity contributed 4 percent of that. Borrowing provided 14 percent; retained earnings, 82 percent. From 1987 to 1994, corporations bought back more equity than they issued. Dividends flowed out in generous streams: $1.2 trillion. Capital gains piled up. But the flow of funds the other way was nil.

Well, yes, critics will say--that's recently. But stockholders are pocketing gains today, because they funded corporations in the past.

Not so. Take the steel industry. A study by Eldon Hendrickson examined capital expenditures from 1900 to 1953, and found that common stock provided only 5 percent of capital--over the entire first half of the 20th century.

Equity capital is one relatively minor source of funding, vital at a certain point. Yet it entitles holders to suck out all wealth, forever. Equity investors essentially install a pipeline, and decree that corporations' sole purpose is to funnel wealth into it. The pipeline is never to be tampered with--and no one else is to be granted access (except CEOs, whose function is to keep it flowing).

With the exception of initial public offerings, the commotion on Wall Street is not about funding corporations. It's about extracting from them.

The productive risk in building businesses is borne by entrepreneurs and their initial venture investors, who do contribute real investing dollars, to create real wealth. Those who buy stock at sixth or seventh hand, or 1,000th hand, take a risk--but it is a risk speculators take among themselves, trying to outwit one another, like gamblers. It has little to do with corporations, except this: Public companies are required to provide new chips for the gaming table, into infinity.

It's odd. And it's connected to a second oddity--that we believe stockholders are the corporation. When we say "a corporation did well," we mean its shareholders did well. Employees might be shouldering an outsized workload, getting by without health insurance, doing without a raise for three years--still we will say, "the corporation did well."

One never sees rising employee income as a measure of corporate success. Indeed, gains to employees are losses to the corporation. Employees can go to work for twenty years, using all their energy to create wealth for a company--yet not really be considered part of that corporation. They have no claim to wealth they create, no say in governance, and no vote for the board of directors.

Investors, on the other hand, may not know the names of the companies they "own." They may not know where "their" companies are located, or what they produce--and they may hold stock for only a day. Still, corporations exist to enrich them alone. Only those who own stock can vote, like an earlier time in America, when only those who owned land could vote. Employees are disenfranchised.

We think of this as the natural law of the free market. It's really the government-made law of the corporation. And it violates free market principles. In a free market, everyone scrambles to get what they can, and keeps what they earn. In the artificial construct of the corporation, one group gets what another earns. One group contributes nothing, never lifts a finger, and takes no responsibility ("limited liability")--yet has a "legitimate" right to siphon off all wealth. Another group does all the work, and makes the corporation a success--yet counts itself lucky not to be thrown off the premises in a layoff.

The oddity of this is veiled by the incantation of a single, magical word: "ownership." Because we say stockholders "own" corporations, they are permitted to contribute nothing, and take everything.

What an extraordinary word. One is tempted to recall Lycophron's comment, during an early Athenian movement against slavery. "The splendor of noble birth is imaginary," he dared to say, "and its prerogatives are based upon a mere word."

Author's Note: I'm working on a book about this and would like to find colleagues to discuss early drafts. E-mail MarjorieHK@aol.com, or fax 612/962-4706.

This article appeared originally in Business Ethics, a newsletter about socially responsible business. For a free sample copy write Business Ethics, 52 S. 10th St., Suite 110, Minneapolis, MN 55403. Phone 612/962-4700. E-mail subscription correspondence to BizEthics@aol.com.

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This is all very interesting and many people will agree the system that has been built may not be the ideal one. I see you've got an article by Margaret Blair in the same issue as your note about stockholders. I would think she is giving these ideas considerable thought. Where are you going with this? Jim McRitchie jm@corpogov.net

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You said you're not sure where I'm going with my comments. I believe I have identified the precise mechanism that is making the rich richer, and keeping wages stagnant. That is -- we're managing public corporations exclusively for the benefit of shareholders -- even though they contribute really nothing. It's an archaic arrangement, akin to the feudal arrangements of an aristocratic society, where some did all the work, and all the benefits flowed to a few. It's a structure that's incompatible with democracy.

The real change needed is in our thinking. Changing the markets need not be radical. We could start by putting a time limit on equity ownership. If no new equity is issued, should equity markets continue to suck out all wealth forever? Could we cap equity at 50 years? 100 years? 500 years? Or does that equity have the right to all wealth the company creates, into infinity? We need to have this discussion. If we grandfathered in current corporations, gave them maybe a 20 year window, markets could adjust. Then maybe we'd free up some capital to go where it really should go -- to building new companies.

Large major companies -- as Margaret says -- aren't things that can be owned. They're human communities. And the people who work every day in that society need a say in governance, and a stake in wealth they create. They need this as a right -- not an occasional gesture of generosity.

We need boards of directors to do real governance -- which starts with real democratic elections, by employees and stockholders. Enough of this one-person-on-six-boards stuff. Could one person be a legislator for six different states? It exposes the paucity of governance that's going on. CEOs control the whole show -- which makes the major corporation essentially a feudal monarchy. That's no way to go into the 21st century. It's a travesty of all the free market stands for.

So that's roughly where I'm going with my arguments. I'll look forward to comments from your folks. E-mail MarjorieHK@aol.com, or fax 612/962-4706.

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So, this is interesting and adds a great deal to your previous statement. I'm still not sure where this would take us...perhaps you are not either? Would stockholders lose all governance rights after 20 years, or some other negotiated time? I'm not sure what happens with groups like American Capital Strategies. Do they sell their shares to the employees and the firm becomes a worker co-op or do they sell to the market? I suspect the later. I think worker cooperatives have their place but there are benefits from having owners outside the immediate community as well. It seems to me that employees should have a stronger voice but where should voting rights come from? Does the basis shift from monetary investment to temporal investment? Do you have a model in mind?

I certainly agree with the need for reforming the election process of corporations and have long been fascinated by Mondragon and other cooperative forms. Are you headed in that direction?

Jim McRitchie jm@corpogov.net

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The direction we need to move in is clear.
1. Employees need a stake in gains they help create -- as a matter of law, not occasional generosity.
2. Employees need a say in governance, as a matter of law.
The idea is to democratize what is in essence a medieval structure.

How do you get from here to there?

First thing you have to do --and I'm talking major multinationals now (start-up companies are different, equity investments there are real) -- is clear out the old equity. You can't have it hanging around forever, I don't think. If no new equity is issued, old equity should expire -- at some point. Otherwise we leave the pipeline intact forever. Yes, that means no more voting rights. No more dividends, no more capital gains, nothing. The equity goes away, like a bond that's done. Now, whether that equity is actually purchased back, or simply dwindles away -- I don't know. I'm having a hard time picturing this.

What it means, I think, is that capital will gradually migrate away from the multinationals -- which it should. A large, profitable company doesn't need to go to the capital markets for capital -- it can go to the bank, or use retained earnings. So it should be weaned. Investors helped it get started, helped it grow, it grew and grew and grew and kicked out huge piles of money to investors -- so at some point enough is enough. You don't keep kicking out money forever. At some point you stop sucking out money, you take your capital and move on. Make a productive investment in a growing company. Extractive investment should be allowed to go on only so long -- not forever.

So let's say the equity will expire. Investors will complain that's changing the rules in the middle of the game -- but that's done all the time. In feudal times, a tenant who built a house on landlord's property forfeited the right to that house -- all the gains went to the landlord. ThatÍs what's happening in corporate America today: employees are building new business on top of a capital structure owned by investors, but all the gains are going to investors.

In America, we devised a different rule -- saying removal of fixtures is a tenant's right. If I build a house on your land, I get to remove the house. It's mine. That's the democratic answer to feudal rights.

So maybe you cap equity at 20 years -- which gives investors 20 years to adjust. They can still draw dividends and capital gains -- but at the end of 20 years, no more. No more dividends, no gains, no voting rights. The equity goes away. Presumably its price would dwindle over those 20 years -- so the market would be self-adjusting.

At the end of 20 years, equity reverts to the company: ie. the employees. If they need more capital, they can sell it out into markets again. Or, they can give the profits to themselves -- or reinvest in the company. Democratic voting by a real democratic board would decide.

Where should voting rights come from? Probably one person one vote -- but you must work there 1 year. You could have employees on the existing board. Or have a bicameral structure -- with a board for investor rep, a workers council for employee reps. Kind of like House of Lords and House of Commons. You would need to distinguish management from governance. Not everything is votable. Management stays in the hands of competent managers. Governance is by the group.

I agree worker coops can sometimes be a nightmare. I was on the board of one. So if investors want to continue being part of the company, let them invest again -- real equity that goes to the company, not this gambling stuff.

I don't think I'm headed in the direction of Mondragon. Too far-out. It would never catch on.

So do you think investors should keep their equity forever? Maybe have it decline over time -- or employee shares grow over time. I don't know. What ideas do you have?

One thought: I feel strongly we should avoid literacy requirements for voting. We do need to build economic literacy -- I suppose you could have a requirement to pass a test before you get "citizenship" -- but I'm leary of that. If you're a member of a community, you get a say. You don't have to be a genius.

Also, if we have temporary hurdles for employees (must work there 1 year) we should have the same hurdles for stockholders: must hold stock one year.

What do you think? I mean, let's say we're really serious about this. Let's say this is the final piece of the democratic revolution that's sweeping the world. It's the final hiding place of the aristocracy, and we're out to reform it -- I mean seriously. Not some weird little model like Mondragon that maybe a few places try. But a fundamental transformation of major corporations. How would you do it? E-mail MarjorieHK@aol.com, or fax 612/962-4706.

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Well, I don't have any argument with your fundamental analysis; investing in stocks is generally more like speculating in the rising value of antiques or art than the wealth creating mechanism it is often thought to be. We would be better, off as a society, if our policies encouraged the initial financing of new businesses rather than trading in the value of companies already well established and generating needed capital through retained earnings. This was one of the more interesting revelations of Kelso's The Capitalist Manifesto back in 1958. His answer was to use tax and other incentives to make every worker a capitalist. Under his "two factor theory" the benefits derived from investments would gradually come to outweigh wages for the majority of workers. I guess my current position would be somewhere between Kelso and Kelly.

Cooperatives have a number of problems. Greg Dow and Louis Putterman enumerate some of these in a recent paper "Why Capital (Usually) Hires Labor: An Assessment of Proposed Explanations" (see Dow). Among the problems most frequently cited are the following: liquidity and credit constraints (workers have greater need for a relatively fixed wage and poorer credit rating than owners of capital), risk aversion (workers have more of their "eggs in one basket"), collective choice problems (capital suppliers can more readily agree on firm strategy because their interests are less diverse). Many of these problems could be addressed through education, tax incentives, and other laws. I have a sense from what you have written that you are also looking for something of perhaps a hybrid structure...somewhere between cooperatives and the current form of investor capitalism. Your bicameral governing situation sounds a lot like co-determination. Are you familiar with that system? If not, I could give you plenty of citations.

My focus is more limited. I'm just looking at the first few steps of making corporations more democratic. Lets' make the elections fair and allow information to flow more freely. Let's require fiduciaries to vote in the interest of plan beneficiaries and to keep verifiable records. Let's encourage "relational investing" where owners participate in governance rather than doing the "Wall Street walk" when they are dissatisfied. Let's encourage employee ownership and corporate cultures with genuine forms of democracy in the workplace. I am, as you say, "really serious about this." If transforming the corporation is not the "final piece of the democratic revolution that's sweeping the world," it is certainly the most important step towards a more democratic world that I can imagine.

However, I see it happening more gradually than you. I don't see voters requesting that laws be passed to decrease the value of stock over time. That seems about as unlikely as legislation that would take my house away after I've finished paying off the mortgage. Yes, it may be in the best interest of the average voter but the average voter has little control over the government. That seems unlikely to change unless the nature of corporations changes first or simultaneously.

Perhaps we can encourage a shift in the direction you seek by showing that financing startups or taking a "relational" approach to investing is more profitable than passively investing in the S&ampP 500. There is positive evidence but that may not be enough. Here, the relevancy of fiduciary standards comes into play. Today's pension funds are over diversified because this allows them to take a passive strategy which is widely accepted as relatively risk-free. Reducing portfolio size from the entire S&ampP 500 would require monitoring efforts. However, if monitoring is effective, greater wealth will be created. Standards of prudence may need to be changed to require a duty of continuous monitoring of indexed funds for effective governance.

What is the ideal ownership mix? I don't know but I think we will find it varies through time, by industry, region, etc. Employee ownership is growing and I see a great deal of evidence that leads me to believe this positive trend will continue. Funds will be somehwhat cautious, given that dilution could reduce the value of their stock. However, they are at least beginning to grapple with the reality. (see for example, TIA-CREF's voting guidelines) Another encouraging sign is that "corporate mix" campaigns have become more popular as corporations seek a stable shareholder base. (see especially Brancato and Useem)

I think reform will come incrementally and would encourage everyone interested in corporate governance reform to complete the SEC questionnaire regarding Rule 14a-8 and the shareholder proposal process. The purpose of the survey is to gather information and opinions for a report to Congress on the shareholder proposal process due by October 11, 1997. According to Chairman Arthur Levitt, "Everything is on the table, we are looking for new ideas, including those that could fundamentally change the way we administer the shareholder proposal process. We need input from the parties to see if we can improve the process for everyone." Surveys must be returned to the SEC in time to arrive by March 31, 1997. We encourage readers to e-mail their surveys to the SEC and to cc corporate governance at corpgov@usa.net so that we can get a better understanding of where our readers stand on various issues. Jim McRitchie jm@corpogov.net

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		Why All the Fuss About Stockholders? By Marjorie Kelly Co-founder and Editor, Business Ethics here does wealth come from? More precisely, where does the wealth of public corporations come from? Who creates it? To judge by the current arrangement, one might suppose capital creates wealth--which is odd, because a pile of capital creates nothing. Yet capital-providers, stockholders, lay claim to all wealth public corporations generate. They also claim the more fundamental right to have corporations managed exclusively on their behalf. Corporations are believed to exist for one purpose: to maximize returns to shareholders. This message is reinforced by CEOs, The Wall Street Journal, business schools, and the courts. It is the guiding idea of the public corporation, and the law of the land--much as the divine right of kings was once the law of the land. Indeed, the notion of "maximizing returns to shareholders" is universally accepted as a kind of divine, unchallengeable truth. It is not in the least controversial. Though it should be. What do shareholders contribute, to justify the extraordinary allegiance they receive? They take risk, we're told. They put their money on the line, so corporations might grow and prosper. Let's test the truth of this with a little quiz: Stockholders fund public corporations--True or False? False. We speak as though it were true: "I have invested in AT&T," we say--imagining AT&T as a steward of our money, with a fiduciary responsibility to take care of it. In fact, dollars don't go to AT&T, but to other speculators. "Investments" reach a public corporation only when new equity is issued--a rare event. Public corporations need capital to operate--$555 billion in 1993, for example. According to the Federal Reserve, equity contributed 4 percent of that. Borrowing provided 14 percent; retained earnings, 82 percent. From 1987 to 1994, corporations bought back more equity than they issued. Dividends flowed out in generous streams: $1.2 trillion. Capital gains piled up. But the flow of funds the other way was nil. Well, yes, critics will say--that's recently. But stockholders are pocketing gains today, because they funded corporations in the past. Not so. Take the steel industry. A study by Eldon Hendrickson examined capital expenditures from 1900 to 1953, and found that common stock provided only 5 percent of capital--over the entire first half of the 20th century. Equity capital is one relatively minor source of funding, vital at a certain point. Yet it entitles holders to suck out all wealth, forever. Equity investors essentially install a pipeline, and decree that corporations' sole purpose is to funnel wealth into it. The pipeline is never to be tampered with--and no one else is to be granted access (except CEOs, whose function is to keep it flowing). With the exception of initial public offerings, the commotion on Wall Street is not about funding corporations. It's about extracting from them. The productive risk in building businesses is borne by entrepreneurs and their initial venture investors, who do contribute real investing dollars, to create real wealth. Those who buy stock at sixth or seventh hand, or 1,000th hand, take a risk--but it is a risk speculators take among themselves, trying to outwit one another, like gamblers. It has little to do with corporations, except this: Public companies are required to provide new chips for the gaming table, into infinity. It's odd. And it's connected to a second oddity--that we believe stockholders *are* the corporation. When we say "a corporation did well," we mean its shareholders did well. Employees might be shouldering an outsized workload, getting by without health insurance, doing without a raise for three years--still we will say, "the corporation did well." One never sees rising employee income as a measure of corporate success. Indeed, gains to employees are losses to the corporation. Employees can go to work for twenty years, using all their energy to create wealth for a company--yet not really be considered part of that corporation. They have no claim to wealth they create, no say in governance, and no vote for the board of directors. Investors, on the other hand, may not know the names of the companies they "own." They may not know where "their" companies are located, or what they produce--and they may hold stock for only a day. Still, corporations exist to enrich them alone. Only those who own stock can vote, like an earlier time in America, when only those who owned land could vote. Employees are disenfranchised. We think of this as the natural law of the free market. It's really the government-made law of the corporation. And it violates free market principles. In a free market, everyone scrambles to get what they can, and keeps what they earn. In the artificial construct of the corporation, one group gets what another earns. One group contributes nothing, never lifts a finger, and takes no responsibility ("limited liability")--yet has a "legitimate" right to siphon off all wealth. Another group does all the work, and makes the corporation a success--yet counts itself lucky not to be thrown off the premises in a layoff. The oddity of this is veiled by the incantation of a single, magical word: "ownership." Because we say stockholders "own" corporations, they are permitted to contribute nothing, and take everything. What an extraordinary word. One is tempted to recall Lycophron's comment, during an early Athenian movement against slavery. "The splendor of noble birth is imaginary," he dared to say, "and its prerogatives are based upon a mere word." Author's Note: I'm working on a book about this and would like to find colleagues to discuss early drafts. E-mail MarjorieHK@aol.com, or fax 612/962-4706. This article appeared originally in Business Ethics, a newsletter about socially responsible business. For a free sample copy write Business Ethics, 52 S. 10th St., Suite 110, Minneapolis, MN 55403. Phone 612/962-4700. E-mail subscription correspondence to BizEthics@aol.com. Back to the top This is all very interesting and many people will agree the system that has been built may not be the ideal one. I see you've got an article by Margaret Blair in the same issue as your note about stockholders. I would think she is giving these ideas considerable thought. Where are you going with this? Jim McRitchie jm@corpogov.net Back to the top You said you're not sure where I'm going with my comments. I believe I have identified the precise mechanism that is making the rich richer, and keeping wages stagnant. That is -- we're managing public corporations exclusively for the benefit of shareholders -- even though they contribute really nothing. It's an archaic arrangement, akin to the feudal arrangements of an aristocratic society, where some did all the work, and all the benefits flowed to a few. It's a structure that's incompatible with democracy. The real change needed is in our thinking. Changing the markets need not be radical. We could start by putting a time limit on equity ownership. If no new equity is issued, should equity markets continue to suck out all wealth forever? Could we cap equity at 50 years? 100 years? 500 years? Or does that equity have the right to all wealth the company creates, into infinity? We need to have this discussion. If we grandfathered in current corporations, gave them maybe a 20 year window, markets could adjust. Then maybe we'd free up some capital to go where it really should go -- to building new companies. Large major companies -- as Margaret says -- aren't things that can be owned. They're human communities. And the people who work every day in that society need a say in governance, and a stake in wealth they create. They need this as a right -- not an occasional gesture of generosity. We need boards of directors to do real governance -- which starts with real democratic elections, by employees and stockholders. Enough of this one-person-on-six-boards stuff. Could one person be a legislator for six different states? It exposes the paucity of governance that's going on. CEOs control the whole show -- which makes the major corporation essentially a feudal monarchy. That's no way to go into the 21st century. It's a travesty of all the free market stands for. So that's roughly where I'm going with my arguments. I'll look forward to comments from your folks. E-mail MarjorieHK@aol.com, or fax 612/962-4706. Back to the top So, this is interesting and adds a great deal to your previous statement. I'm still not sure where this would take us...perhaps you are not either? Would stockholders lose all governance rights after 20 years, or some other negotiated time? I'm not sure what happens with groups like American Capital Strategies. Do they sell their shares to the employees and the firm becomes a worker co-op or do they sell to the market? I suspect the later. I think worker cooperatives have their place but there are benefits from having owners outside the immediate community as well. It seems to me that employees should have a stronger voice but where should voting rights come from? Does the basis shift from monetary investment to temporal investment? Do you have a model in mind? I certainly agree with the need for reforming the election process of corporations and have long been fascinated by Mondragon and other cooperative forms. Are you headed in that direction? Jim McRitchie jm@corpogov.net Back to the top The direction we need to move in is clear. 1. Employees need a stake in gains they help create -- as a matter of law, not occasional generosity. 2. Employees need a say in governance, as a matter of law. The idea is to democratize what is in essence a medieval structure. How do you get from here to there? First thing you have to do --and I'm talking major multinationals now (start-up companies are different, equity investments there are real) -- is clear out the old equity. You can't have it hanging around forever, I don't think. If no new equity is issued, old equity should expire -- at some point. Otherwise we leave the pipeline intact forever. Yes, that means no more voting rights. No more dividends, no more capital gains, nothing. The equity goes away, like a bond that's done. Now, whether that equity is actually purchased back, or simply dwindles away -- I don't know. I'm having a hard time picturing this. What it means, I think, is that capital will gradually migrate away from the multinationals -- which it should. A large, profitable company doesn't need to go to the capital markets for capital -- it can go to the bank, or use retained earnings. So it should be weaned. Investors helped it get started, helped it grow, it grew and grew and grew and kicked out huge piles of money to investors -- so at some point enough is enough. You don't keep kicking out money forever. At some point you stop sucking out money, you take your capital and move on. Make a productive investment in a growing company. Extractive investment should be allowed to go on only so long -- not forever. So let's say the equity will expire. Investors will complain that's changing the rules in the middle of the game -- but that's done all the time. In feudal times, a tenant who built a house on landlord's property forfeited the right to that house -- all the gains went to the landlord. ThatÍs what's happening in corporate America today: employees are building new business on top of a capital structure owned by investors, but all the gains are going to investors. In America, we devised a different rule -- saying removal of fixtures is a tenant's right. If I build a house on your land, I get to remove the house. It's mine. That's the democratic answer to feudal rights. So maybe you cap equity at 20 years -- which gives investors 20 years to adjust. They can still draw dividends and capital gains -- but at the end of 20 years, no more. No more dividends, no gains, no voting rights. The equity goes away. Presumably its price would dwindle over those 20 years -- so the market would be self-adjusting. At the end of 20 years, equity reverts to the company: ie. the employees. If they need more capital, they can sell it out into markets again. Or, they can give the profits to themselves -- or reinvest in the company. Democratic voting by a real democratic board would decide. Where should voting rights come from? Probably one person one vote -- but you must work there 1 year. You could have employees on the existing board. Or have a bicameral structure -- with a board for investor rep, a workers council for employee reps. Kind of like House of Lords and House of Commons. You would need to distinguish management from governance. Not everything is votable. Management stays in the hands of competent managers. Governance is by the group. I agree worker coops can sometimes be a nightmare. I was on the board of one. So if investors want to continue being part of the company, let them invest again -- real equity that goes to the company, not this gambling stuff. I don't think I'm headed in the direction of Mondragon. Too far-out. It would never catch on. So do you think investors should keep their equity forever? Maybe have it decline over time -- or employee shares grow over time. I don't know. What ideas do you have? One thought: I feel strongly we should avoid literacy requirements for voting. We do need to build economic literacy -- I suppose you could have a requirement to pass a test before you get "citizenship" -- but I'm leary of that. If you're a member of a community, you get a say. You don't have to be a genius. Also, if we have temporary hurdles for employees (must work there 1 year) we should have the same hurdles for stockholders: must hold stock one year. What do you think? I mean, let's say we're really serious about this. Let's say this is the final piece of the democratic revolution that's sweeping the world. It's the final hiding place of the aristocracy, and we're out to reform it -- I mean seriously. Not some weird little model like Mondragon that maybe a few places try. But a fundamental transformation of major corporations. How would you do it? E-mail MarjorieHK@aol.com, or fax 612/962-4706. Back to the top Well, I don't have any argument with your fundamental analysis; investing in stocks is generally more like speculating in the rising value of antiques or art than the wealth creating mechanism it is often thought to be. We would be better, off as a society, if our policies encouraged the initial financing of new businesses rather than trading in the value of companies already well established and generating needed capital through retained earnings. This was one of the more interesting revelations of Kelso's The Capitalist Manifesto back in 1958. His answer was to use tax and other incentives to make every worker a capitalist. Under his "two factor theory" the benefits derived from investments would gradually come to outweigh wages for the majority of workers. I guess my current position would be somewhere between Kelso and Kelly. Cooperatives have a number of problems. Greg Dow and Louis Putterman enumerate some of these in a recent paper "Why Capital (Usually) Hires Labor: An Assessment of Proposed Explanations" (see Dow). Among the problems most frequently cited are the following: liquidity and credit constraints (workers have greater need for a relatively fixed wage and poorer credit rating than owners of capital), risk aversion (workers have more of their "eggs in one basket"), collective choice problems (capital suppliers can more readily agree on firm strategy because their interests are less diverse). Many of these problems could be addressed through education, tax incentives, and other laws. I have a sense from what you have written that you are also looking for something of perhaps a hybrid structure...somewhere between cooperatives and the current form of investor capitalism. Your bicameral governing situation sounds a lot like co-determination. Are you familiar with that system? If not, I could give you plenty of citations. My focus is more limited. I'm just looking at the first few steps of making corporations more democratic. Lets' make the elections fair and allow information to flow more freely. Let's require fiduciaries to vote in the interest of plan beneficiaries and to keep verifiable records. Let's encourage "relational investing" where owners participate in governance rather than doing the "Wall Street walk" when they are dissatisfied. Let's encourage employee ownership and corporate cultures with genuine forms of democracy in the workplace. I am, as you say, "really serious about this." If transforming the corporation is not the "final piece of the democratic revolution that's sweeping the world," it is certainly the most important step towards a more democratic world that I can imagine. However, I see it happening more gradually than you. I don't see voters requesting that laws be passed to decrease the value of stock over time. That seems about as unlikely as legislation that would take my house away after I've finished paying off the mortgage. Yes, it may be in the best interest of the average voter but the average voter has little control over the government. That seems unlikely to change unless the nature of corporations changes first or simultaneously. Perhaps we can encourage a shift in the direction you seek by showing that financing startups or taking a "relational" approach to investing is more profitable than passively investing in the S&ampP 500. There is positive evidence but that may not be enough. Here, the relevancy of fiduciary standards comes into play. Today's pension funds are over diversified because this allows them to take a passive strategy which is widely accepted as relatively risk-free. Reducing portfolio size from the entire S&ampP 500 would require monitoring efforts. However, if monitoring is effective, greater wealth will be created. Standards of prudence may need to be changed to require a duty of continuous monitoring of indexed funds for effective governance. What is the ideal ownership mix? I don't know but I think we will find it varies through time, by industry, region, etc. Employee ownership is growing and I see a great deal of evidence that leads me to believe this positive trend will continue. Funds will be somehwhat cautious, given that dilution could reduce the value of their stock. However, they are at least beginning to grapple with the reality. (see for example, TIA-CREF's voting guidelines) Another encouraging sign is that "corporate mix" campaigns have become more popular as corporations seek a stable shareholder base. (see especially Brancato and Useem) I think reform will come incrementally and would encourage everyone interested in corporate governance reform to complete the SEC questionnaire regarding Rule 14a-8 and the shareholder proposal process. The purpose of the survey is to gather information and opinions for a report to Congress on the shareholder proposal process due by October 11, 1997. According to Chairman Arthur Levitt, "Everything is on the table, we are looking for new ideas, including those that could fundamentally change the way we administer the shareholder proposal process. We need input from the parties to see if we can improve the process for everyone." Surveys must be returned to the SEC in time to arrive by March 31, 1997. We encourage readers to e-mail their surveys to the SEC and to cc corporate governance at corpgov@usa.net so that we can get a better understanding of where our readers stand on various issues. Jim McRitchie jm@corpogov.net Back to the top