Overturning the Economic Aristocracy
Toward New Models of Corporate Control

Multinational Monitor: What do you mean when you say that the market has an aristocratic bias?
Marjorie Kelly:The aristocratic bias in the corporate structure is a property bias. An aristocratic world is a property-based world. It says that those who own property are somehow superior beings to everyone else, and they alone are considered members of society. So only those who own property, which we call stock, can vote inside a corporation. Employees are just hired hands, they are really viewed as servants. The law of employer-employee relations today is literally called the law of master and servant.

When you look at the structure of the corporation, you see that everything is geared toward one purpose: To maximize gains for shareholders; in other words, create more wealth for those who already have wealth.

Structures of power rest on a basic conception of what the world is, of who matters.

We as a society used to believe that men were more real than women, or that whites were more important than blacks. The fundamental bias in a corporation or our economy is that those who own property or wealth are more important.

MM: In the Divine Right of Capital, you list the principles of what you call economic aristocracy. What is the worldview principle?
Kelly: The economic aristocracy's worldview is expressed through corporate financial statements. The aim invisibly embedded in the income statement is to pay the stockholders as much as possible and employees as little as possible. The secondary aim is to externalize all possible costs onto the community and to internalize all possible gains from the community, again in order to benefit stock holders.

MM: Your second principle is the idea of privilege.
Kelly: Stockholders claim wealth which they do little to create -- that's privilege, the privilege of receiving gains detached from productive contribution. Even though they're considered the sole members of corporate society, stockholders contribute very little.

In The Divine Right of Capital, I outline how of all the dollars trading on public stock exchanges, more than 99 percent is purely speculative. It goes from one speculator to another and never actually reaches companies to fund growth or operations.

Yet stockholders have this privilege that goes on into eternity. They put a little bit of money in a corporation and the corporation in return aims to serve them before everyone else into eternity.

This arrangement bears an interesting resemblance to the French aristocracy before the revolution. In the medieval era, the aristocracy actually had functions that went along with its privileges. The manor house was once a seat of private government -- it held court, protected people, defended territory, settled disputes and so forth. But over time, the aristocracy dropped its functions and kept its dues and fees coming in. So it became a kind of parasitic class. The interesting thing is no one noticed. No one thought to ask, Does the lord earn his keep?

Similarly today, we don't ask: Do stockholders earn their keep? We don't ask, What do stockholders contribute to the corporation to justify the extraordinary allegiance they receive? The truth is their capital input is less than zero. If you look at capital input as new equity sold minus stock buyback, net new equity is a negative number and has been for 15 of the last 20 years, according to the Federal Reserve. The so-called investing function has actually reversed itself; it is purely an extracting function at this point. And so the productive function of stock ownership has been dropped and yet the dues and fees are supposed to increase; this is privilege detached from productivity.

MM: In what sense is property a principle of the economic aristocracy?
Kelly: Like a feudal estate, a corporation is considered a piece of property -- not a human community -- so it can be owned and sold by the property class. This picture of the corporation as property was accurate at the turn of the last century. In 1900, three quarters of the companies listed on the New York stock exchange were railroads -- which are pretty tangible. But today, three quarters of the market capitalization of the S&P 500 is in intangibles. A lot of the value is employee knowledge, and the notion that stockholders can own that is dubious at best.

MM: Your fourth principle is economic aristocracy is governance.
Kelly: In corporations, members of the property class alone may vote. Only shareholders have a vote for the board of directors, and the board hires and fires the CEO and sets that person's pay. Only shareholders have a right to sue if their interests are not served by the board. There is also the obligation of the board to sell the corporation to the highest bidder.

We call this "ownership." More factually, you have a society composed of absentee, unproductive speculators who hold all the power, and productive employees who are powerless.

Shareholder power was enhanced in the 1980s and 1990s, when there was a revolution in corporate governance. Once-passive stockholders began to assert power over corporate boards and CEOs, with hostile takeovers, the rise of institutional investors, and the firing of CEOs. All of this helped drive the bull market, which in turn drove companies in a frenzied way to get their earnings up, which was the single demand of shareholders. So companies turned to layoffs, they turned to overseas sweatshops, they began evading taxes more aggressively, and, as we've seen lately, they cooked the books. In many ways, it was the bull market and boardroom coups that drove all of the social ills and the accounting abuses that we have seen lately.

MM: You list the fifth principle of economic aristocracy as liberty. In what way is liberty a principle of the economic aristocracy?
Kelly: Corporate capitalism embraces a pre-democratic concept of liberty reserved for property holders, which thrives by restricting the liberty of employees and the community.

Capitalism is pervaded by talk of freedom. We talk about free markets, free enterprise and free trade. There is this notion that the system is free of government restraint only if you are the capitalist class and you want government to stay out of your feudal estate.

From the point of view of the serfs, there is very little freedom.

And, in fact, from the point of view of the community, there is very little freedom as well. The fundamental freedom of the community is the freedom to write its own laws, and that is overturned by international trade rules such as NAFTA's Chapter 11, and those of the World Trade Organization, which claim the right to overturn local laws if they conflict with the rights of property owners.

Inside the corporation, employees have very little liberty. I write about a Nabisco plant, where women on the line were not allowed the simple liberty of deciding when to go to the bathroom. Some were forced to wear diapers to work and ended up suing and settling for an undisclosed amount. Meanwhile, every key stroke of employees is counted, their phone calls are monitored, their blood is drawn and tested, they are forced to urinate in a cup, in an extremely humiliating manner. If government did these things, we would scream about a police state, yet "free enterprise" does these things daily and no one screams.

MM: The final principle is sovereignty.
Kelly: Corporations assert that they are private, and that a free market will self regulate -- much as feudal barons asserted a sovereignty independent of the crown.

Another way of saying this is that in our economy we have a pre-democratic notion of sovereignty. Sovereignty is that power beyond which there is no appeal; it is the ultimate ground of power. In a monarchy, the sovereign is the king; in a democracy, it is the people. In an aristocratic economy, sovereignty rests in property.

The history of democracy is really the history of sovereignty evolving and broadening out -- from the being sole property of the king, to the property of the aristocracy, to the right of the people. And among people, it broadened from white men to black men, and finally to women.

The widening of sovereignty is a fundamental movement of democracy. But in our economy, sovereignty is frozen at its middle stage. It's limited to the propertied class, it has not yet been extended to the workers or the community -- at least in the business view of the world. Of course, ultimate sovereignty in a democracy rests the with the people. We do have the power to control corporations, if we choose to use it.

MM: One part of your critique suggests that intensified shareholder involvement in corporate governance has been harmful. Most of what is being said right now in response to the emerging financial scandals is the opposite, that there needs to be more shareholder involvement.
Kelly: The Enron and attendant scandals hold some interesting lessons.

We think of this as a situation where shareholders got harmed, but we forget that leading up to it, shareholders got precisely what they wanted. The financial elite got complete alignment between CEOs and shareholders through stock options, they got the removal of a regulatory regime to a large extent, and they got a rising stock market -- all the things that they wanted -- and yet it imploded.

People are saying we need to align executives more closely with shareholders.

I believe that alignment was too close.

We need a corporation that is accountable to someone besides shareholders. In a real sense, shareholders are not capable of governing corporations. They're scattered, they change from day to day, their only interest is in their own gain. You can't run an economy that way; it is a ludicrous way to run an economy.

MM: How do you propose moving to democratic control of corporations?
Kelly: There are two ways to approach this. Number one, you can break the link between sovereignty and property. That's what happened in the mid-1800s in the United States, when we finally got rid of the law that said you had to own property in order to vote. To make that same shift in the economy, we could say employees have a right to vote regardless of whether they own stock.

We see this is Europe, for example, with works councils. These are a kind of an alternative governing body, weaker than they probably ought to be, but at least they offer a model of a different way of doing things. We might, for example, legislate that no merger or sale of a company could take place without majority approval by employees. That would slow down the growth in company size, make layoffs less likely, and be a first step toward democratic power for employees.

Another approach would be to leave the link between property and sovereignty intact and say, let's work for broader employee ownership and use a legislative approach to provide some incentives for doing so.

Another basic concept is that corporations ought not to harm the public good. This could be accomplished by expanding the notion of fiduciary duty, which right now resides in state law. It's in the state law of directors' duties that directors must act in the best interests of the corporation and its shareholders. Perhaps we ought to say that in this pursuit of private gain, they ought not to harm the public good. There is an attempt in Minnesota to do just this -- a proposed code of corporate responsibility that would amend director's duties to say that profit for shareholders may not be pursued at the expense of employees, the community or the environment.

MM: You have raised the idea that particularly at the moment of a takeover, employees might be able to exert power and demand ownership and control. How might this be done?
Kelly: It was done in London with the birth of the ad agency, St. Luke's. It happened during a proposed merger with Chiat Day and Omnicon. The employees at the London branch of Chiat Day said, "We're not coming along." They phoned their clients and their clients joined the employees. In one blow you had all the employees and all the clients of this London branch leaving. The question was: What is an ad agency worth without employees and clients? The answer was one dollar -- plus a percent of profits for seven years, which is what the employees agreed to pay to take ownership of the branch. The employees renamed the agency St. Luke's and they posted a sign in the hallway that said, "Profit is like breathing, you need it -- but it's not what you live for." It's now considered the number one ad agency in Great Britain.

What happened there is that employees said, "We're not passive pawns in this game. The minute we stand up and say, �We are not for sale,' the game is off. Because what is an advertising agency except people?"

The idea that you can buy and sell these collections of people is exposed as absurd the minute people stand up and fight it.

I would love to see this happen in the United States. I would love to see a merger where employees stand up and say, "You can certainly buy this company, but you can't buy us. Let's see what the company is worth without its knowledge assets." If you have a company with machines that no one knows how to run, files no one can find, customers no one has ever heard of, is that company worth less? I believe it is. However much less it is worth, according to evaluation specialists, that's the value of employee knowledge and that's what employees should step forward and demand in stock.

MM: You also suggest that as people think about stakeholder approaches that employees should be treated as a special class. Why do you say that?
Kelly: I take issue with the prevailing progressive management view, that we need to move from serving stockholders to serving stakeholders, including stockholders, employees, customers, the community, the environment, buyers and venders. Taking a corporation from focusing only on stockholders and saying it must focus on everyone in the world is not an effective program for change.

I think we need to separate out who is a legitimate internal member of the firm, and who is part of the external community that allows that firm to exist and creates the legal platform on which that corporation can exist.

It seems to me that the community is external, it is the ultimate stakeholder, it creates the corporation by its legal apparatus.

But then internal to corporation, I would suggest, you have stockholders and employees. Employees have a much more intimate relationship to a firm than customers or community members. They go there everyday, they do its work and in a very real way they create its wealth. I believe they should have a right to claim a portion of its wealth through profit sharing, and a right to vote in governance.

If you work at a place every day, you have a right to a say in that company's matters more than someone who lives next to the plant. I think someone who lives next to the plant has the right not to be harmed by that company, but doesn't necessarily have a right to decide what product line it ought to carry or if it ought to merge with someone.

MM: If shareholders have too much power, for too long, for their initial contribution of capital to a company, how might their rights be phased out over time?
Kelly: Imperialism was the notion that one nation could own another nation. When Britain, not long ago, ceded control over Hong Kong back to China, what you saw was a kind of time limitation on imperial ownership. In that case, it was 157 years. Perhaps we could suggest a Hong Kong rule, that stockholders can own a corporation no more than 157 years.

It is interesting to me to float the idea because it raises the question: Is any amount of return ever enough for a one-time hit of money? Or must a company have as its single-minded purpose, forever, that it will move heaven and earth to create return for that one-time gamble? I happen to think that is a ludicrous idea.

The practicality of putting time limits into effect is troublesome. Probably the easiest way is to dilute shares over time. This is what St. Luke's, for example, does. Each year it revalues the company and issues new shares to those who are currently contributing value to the company. Over time, the old shares are diluted down, and never actually go away.

Another way to do it would be to try out new forms of equity ownership. We now have inflation-indexed bonds. A bond, by its nature, is a fixed income instrument. If you have the income fluctuate with inflation, you have changed the very nature of what a bond is. We could do that with equity. We could say that this is an equity instrument, but it expires after 50 years.

There are some nations that put limits on ownership. They say foreign investors can come in and invest but after 10 or 20 years they have to begin ceding ownership to local peoples at 5 to 10 percent a year. For nations to make such provisions is one way to stop the new colonialism that's springing up with American investors increasingly owning huge amounts of the assets of foreign countries.

Those are a few ideas, and we need many more. What we're talking about is writing the constitution of a democratic economy, and that's not something one individual can do. We need dialogue, we need national debate. Who should hold power in a democratic economy? How can corporations be redesigned? The present crisis offers a fruitful moment for change -- a moment for us to step forward with our agenda.

As a final word, I would add that we must have hope. If the financial elite seems to hold all the power, we must remember that kings once seemed to be backed by the power of god. And yet the monarchy fell. Democracy won in the end, as it always does. Democracy is literally unstoppable -- it is the most powerful force on earth.

People are saying we need to align executives more closely with shareholders. I believe that alignment was too close. We need a corporation that is accountable to someone besides shareholders.