Why Grow Up? between what is and what ought to be

Why Grow Up? between what is and what ought to be

According to Susan Neiman, the most important distinction in the world is the difference between what is and what ought to be. Recognizing that distinction is central to the process of growing up. (Why Grow Up?: Subversive Thoughts for an Infantile Age)

You need not be Peter Pan to feel uneasy about the prospect of becoming adult. Indeed, it’s easy to argue that Peter Pan, most drastically imitated by Michael Jackson, is an emblem of our times. Being grown-up is widely considered to be a matter of renouncing your hopes and dreams, accepting the limits of the reality you are given, and resigning yourself to a life that will be less adventurous, worthwhile and significant than you supposed when you began it.

However, life doesn’t have to be less adventurous if you never give up on creating what ought to be. We all have an opportunity to change our culture, if only in small increments. Too many people are sleepwalking through life, thinking what is given can not be changed. Of course, it helps to know where we are and how we got there to understand what changes are possible or most likely.

What Is and What Ought to Be in Corporate Governance

When looking at corporate governance, I see a system mostly on autopilot. We are heading for destruction because we are largely failing to adequately address issues like climate change and inequality. Corporations  impact virtually everyone and everything on the globe but they are run by a small mostly well-intentioned cadre too disconnected from the masses. Most of us see a gap between what is and what ought to be but our social structures, like schools and corporations, discourage us from taking on the responsibilities of adulthood.

An accountant friend of mine once told me the three most important inventions of mankind were the Arabic numeral, double-entry bookkeeping and the limited liability corporation. While I do not see much downside to the first two, the third depends on either laws to prohibit companies from externalizing costs that harm the environment and society or very responsible shareholders.

I have long believed, we need to incentivize the later as much as possible to avoid overly prescriptive laws. At the same time, we should be doing more to ensure everyone is a shareholder – everyone should have a substantial equity stake in our future. Homeowners are usually more engaged citizens than those who rent. Shareholders have more power in shaping corporations than employees or consumers.

There is no such thing to my mind . . . as an innocent stockholder. He may be innocent in fact, but socially he cannot be held innocent. He accepts the benefits of the system. It is his business and his obligation to see that those who represent him carry out a policy which is consistent with the public welfare. Louis BrandeisWhat They Do With Your Money

Of course, Brandeis was writing of a moral, rather than a legal obligation. Unfortunately, is it an obligation that increasingly goes unrecognized, since fewer and fewer people are direct shareholders. We can have a say in how corporations and the financial system is operated. Just don’t expect your bank, mutual fund or Congress to take the initiative in making it work for us. (Review: What They Do With Your Money)

Shareholders now mostly hold shares though funds that are largely indexed, depend on selling retirement services to their portfolio companies and compete on the basis of low cost. The less such funds spend on monitoring and governing the companies they own, the more profit they make while free-riding on the efforts of others. Most large funds ignore social and environmental concerns unless the issues capture public attention, directly threatening profits. (The Agency Problems of Institutional InvestorsAgency Capitalism: Corrective Measures and Influence of Public Opinion on Investor Voting and Proxy Advisors).Capital in the Twenty First Century

Direct shareholders see their wealth grow at a faster rate than wages and are taxed at a lower rate, compounding the inequality problem. Thomas Piketty documents a rate of return on capital distinctly higher than the growth rate, a rising wealth-income ratio, the increased dominance of inherited wealth, and the widening gap between the rich and the rest of us.

Even though we have an advisory ‘say on pay’ vote, CEO pay continues to climb. In part, that is because of a largely false link to performance required by IRS section 162(m), peer groups based on aspiration, and the Lake Wobegone effect. Every CEO is above average and pay is recalculated every year based on averages that automatically ratchet up. Becoming a CEO has become a primary path to joining the 1%, who usually get there through inherited wealth.

Companies used to depend on initial public offerings (IPOs) to raise the funds necessary to build factories or hire staff. Now they scale up on the Internet with much fewer resources. Instead of raising capital to expand, IPOs have increasingly become a mechanism for wealth extraction. If founders and early investors want to extract money, they do an IPO sell shares. With a broad enough moat and/or a hot enough idea, they can retain complete control by issuing dual class shares where the public puts up funds but essentially has no voice. Puppet directors serving corporate kings who hold a majority of votes using different classes of stock compound income and wealth inequality.

I heard Susan Neiman discuss Why Grow Up? on the CBC’s program Ideas and thought her book might provide additional insights into the dilemmas we have been exploring on Corporate Governance (aka CorpGov.net) for more than two decades. Although there certainly have been positive changes in corporate governance over that time, those changes have done little to stem growing inequality and an economic system that is probably moving towards self-destruction. Maybe it would be helpful to ensure we are tackling the issues from an adult perspective. What follows are a few gleanings from Neiman’s book, which I found to be increasingly relevant since the election of Donald Trump, certainly the most infantile President in my lifetime.

Notes from Why Grow Up?

Primatologists Sarah Brosnan and Frans de Waal ran a now famous experiment involving monkeys paid for tasks with either a piece of cucumber or a grape. “The monkey who got stuck with the cucumber revolted; throwing it back at the experimenter, refusing to participate any further.”  Such experiments have been hailed as proof that even monkeys are incensed by income inequality—so it makes sense that humans are too. De Waal’s, Ted Talk compared the angry cucumber-slice-throwing monkey to Occupy Wall Street protestors. Both the monkeys and Occupy have valid points regarding what is and what ought to be but, in my opinion, both need to work more on solutions.

Brian Kropp, the head of HR practice research at CEB, considered human behavior in light of this research and “found that whether people felt their compensation was fair was 25 times better at predicting their engagement at work than their actual salary.” Fairness, he says, requires a transparent process. (The Fairness Factor) Studies have shown that open-book management pays. Yet, few companies have adopted such practices.

Susan Neiman’s exploration of growing up has much of its foundation in Immanuel Kant’s observation that too many of us remain immature by refusing to take responsibility for what ought to be. Kant saw this as a failure to “have the courage to use your own understanding,” which became something of a motto for the Enlightenment.

If I have a book that thinks for me, a pastor who acts as my conscience, a physician who prescribes my diet, and so on–then I have no need to exert myself. I have no need to think, if only I can pay; others will take care of that disagreeable business for me. (What is Enlightenment?, Immanuel Kant)

Deal Professor Envisions Corporate Gadfly

Starting with Corporations

Kant’s target was the church and the authoritarian state, where grown-up reflective citizens created conflict and caused trouble, but also moved society forward in accomplishing higher ideals. My target has been corporate governance. I am frequently accused of being a gadfly, pushing corporations to address democracy and other ideals they would rather sweep under the rug. (Deal Professor Equates Filing Proxy Proposals with Terrorism)

In the words of Kant, “laziness and cowardice are the reasons why such a large part of mankind gladly remain minors all their lives.” As Neiman concludes, “The state’s desire for control and our own desire for comfort combine to create societies with fewer conflicts, but they are not societies of grown-ups.”

Neiman frames the problem of individual maturity, “ideals of reason tell us how the world should be; experience tells us that it rarely is. Growing up requires confronting the gap between the two – without giving up on either one.” Too many have given up on becoming grownups. In my field they have given up on fundamentally reframing corporate governance to further our better nature. Neiman writes,

When consuming goods rather than working becomes the focus of our culture, we have created (or acquiesced in) a society of permanent adolescents.

Neiman is not without hope, pointing out that two centuries ago poverty, slavery, subjection of women, feudal hierarchies and many forms of illness were considered “natural.” Examining what really is natural, and what is not, can be the first step in constructing a better world. She quotes Alison Gopnik (The Philosophical Baby),

Whenever we act, even in a small way, we are changing the course of history, nudging the world down one path rather than another.

Of course, both corporate governance and society have made progress. The gap between what is and what ought to be is like the horizon; it is a point you can move toward but can never reach. Fredrich Nietzsche called that gap the metaphysical wound at the heart of the universe.

Neiman provides an interesting look at various attempts by philosophers to address this gap. Simplifying her discussion, Jean-Jacques Rousseau tilted toward the world as it ought to be, while David Hume was more inclined to focus on the world as it is. Neiman is guided more by Kant. Reason drives our search to make sense of the world. “The same drive that allows us to imagine that things could be different than they are given to us functions in science and social justice alike.”

Refusal to accept what is, as a necessary condition, is the source of human strength.

For the real is not rational, and reason’s task is to make sure we never forget it… It demands that we learn the difference between is and ought without ever giving up on either one… It requires facing squarely the fact that you will never get the world you want, while refusing to talk yourself out of wanting it.

The bulk of the book is, of course, about growing up, and much of the discussion focuses on education. Many insights also apply to corporate governance, since both schools and corporations are important mediating structures between the individual and our larger society.

As Rousseau pointed out in 1763, schoolchildren who are used to sitting still while a bored teacher’s jabber washes over them are unlikely, as adults, to stand up when a politician lies.Growing Up Absurd - Problems of Youth in the Organized Society

We need schools and workplaces organized to develop human potential, cultivating our autonomy. Neiman cites Paul Goodman’s book Growing Up Absurd, which in 1960 argued there is little point to growing up because not enough meaningful work is on offer. Companies have more of an impact on the world than ever before but are focused more on playthings than social betterment. It is tragic that the primary opposition to this state of the world is religious fundamentalism, which Neiman notes, “seems to offer something of value that cannot be bought or sold.” Too many corporations offer an alternative of what ought to be that lacks any focus on social responsibility, the spiritual or even the grown up.

Neiman reminds us that former New York Mayor Rudy Giuliani’s response to the terrorist attack on New York City was to advise citizens to go shopping… a call also taken up by President Bush.

Compare Giuliani’s speech with President Roosevelt’s Call for Sacrifice in a fireside radio chat, which called for the abandonment of luxuries, heavier taxes, stabilized prices, war bonds, rationing of scarce commodities, and discouraging installment buying. (Listen starting ten minutes in.)

As Neiman understands,

The forces that shape our world are no more interested in real grown-ups than they were in Kant’s day, for children make more compliant subjects (and consumers)… thinking for yourself is less comfortable than letting someone do it for you.

Most of us learn to accept mixed messages without question. Capitulating to the status quo is often taken as a sign of being grown up, while accumulating the latest toy is a sign of youthfulness. Our role in politics becomes simply choosing strong leaders, not helping them see what is and what ought to be.

It is impossible to fully engage most citizens in a culture that undermines adulthood but “even partial liberation will leave the next generation a better place to start.” How do we do it? Neiman offers up Otto Neurath’s oft-cited metaphor:

We are like sailors who have to rebuild their ship on the open sea, without ever being able to dismount it in dry dock and reconstruct it from its best components.

Cynics will see such work as too hard. Neiman advises that we cannot force people to grow up but must offer compelling models. She seems to place some hope in the growing number of old people, in the likelihood they have developed better judgment. Perhaps today’s generations have will join Neiman in the realization that “everyone else is as terrified of being found wanting, and faking it, as we are.” We must learn to trust our own responses to life.

In radical opposition to every philosopher who came before him, Kant believed that philosophy was not an exercise for the privileged few, but an activity prescribed by the very nature of reason itself – hence something that’s natural to all of us.

Before the Enlightenment, our place in society was largely defined by our ancestors, be they slaves or noble.

Once life was no longer viewed as given by God and fixed in place by social and political forces that claimed to have His blessing, the question of whether you’d choose yours began to make sense.

Defining the reality that ought to be is an individual project, “but any answer that remains individual will fail. The political dimension is inescapable.” The “political dimension” isn’t confined to government. It is everywhere. Who could think otherwise after Citizen’s United (Citizens United: Five Years Later)? Discussions of the gap between what is and what ought to be should pervade our schools, workplaces and every important social institution.

From Divine Rights to What Ought to BeThe Divine Right of Capital

The Enlightenment threw off the divine right of kings. Marjorie Kelly argues we should now throw off The Divine Right of Capital. A more accurate description of “investors,” according to Kelly, would be “extractors.” Most investors purchase stock, not during the IPO, but on secondary markets. Those investments contribute nothing to a company’s working capital. Instead, shareholders are buying the right to extract future wealth.

Alternative theories of corporate governance, such as stakeholder theory, are frequently based on the notion that corporations ought to be accountable to more than just shareholders. Everyone who has a stake in a corporation’s success or is impacted by a corporation’s operations should have some say in how it is governed. Those subscribing to stakeholder theory often favor government intervention to require representatives from the community, employees or others on the board, federal chartering and other mechanisms designed to spread accountability to a broader-based authority.

The problem with this approach is that if companies are accountable to multiple stakeholders, they can all too easily end up being accountable to no one. The board and CEO can play one group off against another. See Stakeholder Theory: Impact and Prospects for a  history of that perspective and Review: The Corporate Objective for my thoughts on a more innovative attempt to move forward within that framework.

Kelly recognizes the problems inherent in stakeholder theory but finds one often overlooked stakeholder group stands out — employees. Employees and investors present an interesting comparison.

Employees typically invest a great deal where they work. Margaret Blair documents growth of the knowledge economy and builds on the concept of “firm specific human capital.” Employees develop knowledge and skills, much of which is specific to their individual firm’s operations. In addition, employees often have 401(k) or other investment plans that are over-weighted in their employer’s stock. In contrast, most shareholders have a relatively small proportion of their investments in any one company because they recognize the reduced risk of a balanced portfolio.

Despite noble protests from Lynn Stout (Review: The Shareholder Value Myth and 2013 Millstein Forum: Beyond Shareholder Primacy), the fiduciary duty of directors is widely recognized. They are to maximize the wealth that can be extracted from the corporation by shareholders, typically in the form of dividends, buy-backs or increased share value. Fundamental to standard operating procedures is the idea of minimizing expenses such as wages and income to employees.

Even though employees have a greater stake in the corporation’s success, they have no formal say as employees in corporate governance — no vote for the board of directors. Far from being treated as corporate citizens, they are subjects. In today’s corporate governance paradigm, you either own property or you essentially are property.

Most companies provide named executive officers (NEOs) with restricted stock and/or options. Hopefully, NEOs are contributing substantial firm specific human capital. However, most employees further down the chain of command also contribute firm specific human capital. If they do not, maybe they should be fired. Research finds companies with employee ownership plans, especially coupled with meaningful opportunities for participation in decision-making, add considerable value. (Research on Employee Ownership, Corporate Performance, and Employee Compensation)

One way to rebuild the ship of capitalism without wholesale refurbishing, to use Neurath’s metaphor, would be to expand employee ownership programs. Consider allowing employees to directly elect board representation through mechanisms such as preferred or dual class shares entitled to vote on specified board seats.

At some companies, such as Twitter and Amazon.com, it may also be worth exploring hybrid forms that provide representation to at least some customers. For example, Twitter users with millions of followers like Katy Perry, Justin Bieber and Taylor Swift could be adding value to Twitter through firm specific human capital, their tweets. Alternatively, with fake news being a major problem, perhaps Twitter users who frequently “fact check” posts should be rewarded with increased voice.

Having a Prime membership at Amazon.com may also be contributing, in a small way, firm-specific human capital, since Prime users may think of Amazon first, before other retailers. Other Amazon.com users could also be adding such value through online reviews that other users find helpful.

According to studies such as that done by McKinsey (cited in A More Cooperative Based Twitter), cooperatives perform substantially better at growing market share. Customer owners are more in touch with customer needs and their knowledge. Worker cooperatives generate more ideas and engagement from employees. The McKinsey study found cooperatives do substantially better that traditional publicly traded companies in alignment, future, motivation and accountability. Publicly traded companies perform better at coordination and control, capabilities, external orientation and innovation and learning.

Co-op Strengths and Weaknesses

A key message from many in the field of corporate governance during the last few years is that executives need to focus on the long term. Serving all stakeholders, not just shareholders, is commonly cited as the key to maximizing long-term value. We need boards to think more like owners. These sought after perspectives are inherent in the cooperative business model.

By limiting shareholder liability, corporations have been the greatest engine of wealth generation ever devised. However, success has also led to a growing crisis and a growing frustration that neither business nor government is adequately addressing societal needs.

While a few have profited greatly from the technological boom, many have been thrown out of work or out of the middle-class. Frustrated, we turn to leaders, both in business and government, who promise to think for us, offering short-term perspectives that in the long run often make our situation worse.

What Is and What Ought to Be: Corporate Governance Empowering People

Do not get caught by social forces that discourage examining real differences between what is and what ought to be. Those in power have financial and other incentives to support the status quo and keep us distracted.

Growing up requires confronting the gap between what is and what ought to be, keeping in mind that we cannot change social constructs by ourselves. All such constructs have a political dimension. Although we each need to decide what ought to be on our own, substantive change will require joining with others.

Cooperative Principles: Catalyst for What Ought to Be

Cooperative Principles: Catalysts for What Ought to Be

Board- and shareholder-centric models of corporate governance are substantially less democratic than cooperatives, whose principles embrace democratic control, continuing education, etc. (See graphic on the right.) However, corporations do have elections, which are sometimes meaningful and at least have the trappings of democracy.

We have recently witnessed a number of companies moving to democratic-free zones, where founders and initial shareholders hold ruling class shares, while peasant class shares are sold to the larger public with rights that turn voting into a meaningless gesture.

This growing tendency, especially among Internet-based companies, accentuates the individual’s state of dependency, which Neiman and other adults have railed against since the days of slavery. The Enlightenment led many to recognize that much of what appeared natural and given were simply social constructions shaped to favor the few over the many. They threw off feudalism and inherited notions of class.

Today, the dominant mode of corporate governance reinforces a perpetual state of childhood, focused not on reason, learning and judgment but on dependence. Experts, often conflicted, will make our decisions for us. Fundamental religions appear to many to be the primary force fighting domination by financial and corporate elites. Believers of the Islamic faith may be even more susceptible to such thinking, since there is no separation of religion and politics in the Islamic perspective. (Review: An Islamic Perspective on Governance) They do not leave their values at home when conducting economic transactions. Yet, in many ways, the alternative some fundamentalists appear to present is the world much as it was before the Enlightenment – a return to feudalism and serfdom.

Given the magnitude of climate change, wealth inequality, terrorism and the like, it is time for adults to experiment with new forms of corporate governance, which empower all those willing to invest not just money but human capital into creating new corporate governance paradigms. The contribution to productivity stemming from human ideas and intellectual property has outstripped the contribution of money investment for decades. The legal basis for corporate control should recognize such realities. Let’s refocus corporate governance to help empower average citizens through life-long learning, independent thinking and collaborative work. Combining the best elements of publicly traded companies and cooperatives could help move our world from what is, to what ought to be.

I hope to continue pushing forward with #BuyThisPlatform, , , Exit to Democratic Ownership and more. Please leave comments below, on LinkedIn or by email.