Stockholders fund major public corporations

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Marjorie Kelly and the Divine Right of Capital

Marjorie Kelly

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 major public corporations—true or false?

False. Or, actually, a tiny bit true—but for the most part, massively false. In fact, most “investment” dollars don’t go to corporations but to other speculators. Equity investments reach a public corporation only when new common stock is sold—which for major cor- porations is a rare event. Among the Dow Jones industrials, only a handful have sold any new common stock in thirty years. Many have sold none in fifty years.

The stock market works like a used car market, as former accounting professor Ralph Estes observes in Tyranny of the Bottom Line. When you buy a 1997 Ford Escort, the money goes not to Ford but to the previous owner of the car. Ford gets the buyer’s money only when it sells a new car. Similarly, companies get stockholders’ money only when they sell new common stock.

So, what do stockholders contribute to justify the extraordinary allegiance they re- ceive? Very little. Yet this tiny contribution allows them essentially to install a pipeline and dictate that the corporation’s sole purpose is to funnel wealth into it.

It’s odd. And it’s connected to a second oddity—that we believe stockholders are the corporation. When we say that a corporation did well, we mean that its shareholders did well. The company’s local community might be devastated by plant closings. Employees might be shouldering a crushing workload. Still we will say, “The corporation did well.”

One does not see rising employee incomes as a measure of corporate success. Indeed, gains to employees are losses to the corporation. And this betrays an unconscious bias: that employees are not really part of the corporation. They have no claim on the wealth they create, no say in governance, and no vote for the board of directors. They’re not citizens of corporate society, but subjects.

We think of this as the natural law of the market. It’s more accurately the result of the corporate governance structure, which violates market principles. In real markets, every- one scrambles to get what they can, and they keep what they earn. In the construct of the corporation, one group gets what another earns.

The oddity of it all is veiled by the incantation of a single magical word: ownership. Because we say stockholders own corporations, they are permitted to contribute very lit- tle, and take quite a lot.

What an extraordinary word. One is tempted to recall the comment that Lycophron, an ancient Greek philosopher, made during an early Athenian slave uprising against the aristocracy. “The splendor of noble birth is imaginary and its [prerogatives] are based upon mere word.”

The problem is not the free market, but the design of the corporation. It’s important to separate these two concepts we have been schooled to equate. In truth, the market is a relatively innocent notion. It’s about buyers and sellers bargaining on equal footing to set prices. It might be said that a free market means an unregulated one, but in today’s scheme it means a market with one primary form of regulation: that of property rights.

Shareholder primacy is a form of entitlement. And entitlement has no place in a mar- ket economy. It is a form of privilege. And privilege accruing to property ownership is a remnant of the aristocratic past. That more people own stock today has not changed the market’s essential aristocratic bias. Of the total gain in marketable wealth from 1983 to 1998, more than half went to the richest 1 percent. Others of us may have gotten a few crumbs from this feast, but in their pursuit we have too often been led to work against our own interests. Physicians applaud when their portfolios rise in value, yet wonder why insurance companies are ruthlessly holding down medical payments. Employees cheer when their 401(k) plans post gains, yet wonder why layoffs are decimating their firms. Their own portfolios hold the answer.

How do we begin to change such an entrenched and ancient system of discrimina- tion? We begin by seeing it for what it is, and naming it as illegitimate. For doing so allows us to reclaim our economic sovereignty—which means remembering that cor- porations are creations of the law, that they exist only because we the people allow them to exist, and that we create the parameters of their existence.

Listed below are some questions from this reading. Your initial post should address all of these questions.

How do the two authors (Novak and Kelly) differ on happiness?

What distinction does Kelly make about the role of corporations?

List the differences in perceptions between Novak and Kelly about corporations.

Reference no: EM132234360

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