I read the book The Divine Right of Capital, by Marjorie Kelly (subtitled Dethroning the Corporate Aristocracy), at my dad's suggestion. I was thinking that I was not going to bother to review it on my blog, since most of you who read this probably aren't that interested in this kind of socio-economic discussion. But Dad asked for my thoughts, so here they are. Those of you who aren't interested, feel free to skip this.
The basic ideaThe key to understanding the book is to understand the title. A quote from the preface:
We may have done away with the divine right of kings, but we find ourselves in the grip of a new divine right of capital. [page xi]
The divine right of kings, the right of the aristocracy to rule, the privilege of class and rank and landed wealth, was once a widely accepted idea. It was built so deeply into the social fabric that we didn't even see it. In the same way, Kelly argues that we have a modern blindness to the way that our corporate system is undemocratic. "Wealth privilege means serving the wealthy few and disregarding the many. It is a bias built into the design of the corporation[.]" [page xi] And, just as the abuses of the divine right of kings eventually led to revolutions in favor of democracy, Kelly urges us to have our own revolution - albeit a bloodless one - to overthrow this divine right of capital.
AnalysisWhile I have often heard about capitalism being a system where the wealthy grow wealthier at the expense of the poor, Kelly has a unique take on how the design of the corporation contributes to this process. I learned a lot about how publicly traded corporations work, that I did not know. She doesn't advocate overturning capitalism itself; she says that many capitalist ideas like a free market are useful. Instead, she argues that the problem can be summed up in four words: maximizing returns to shareholders.
I thought this was a strong point of the book. She makes a convincing case for how a host of problems - topping the list are environmental destruction, unnecessary closing of plants, and low employee wages - are all natural results of seeing corporations as existing to maximize returns for shareholders. The picture she paints is that of corporations milking every resource - of the community, of the environment, of its employees - and converting that to profit for the shareholders while giving as little back as possible. This is not dependent, she says, on the individual greed of either the shareholders or the CEOs. (And I very much appreciated that she made a point of not demonizing anyone). Rather, she says, it is inherent in the system, the design of the corporation. And she described how even conscientious CEOs can be forced (through hostile takeovers, for example) to take actions that are against the interest of the environment or community or employees, when they do not act in the best interest of the shareholders who are viewed as the owners of the corporation.
I was taken aback to learn that maximizing returns for shareholders is actually enshrined in law as the fiduciary duty of corporations. (That is, enshrined in "judicial law".) While I am in favor of people trying to make a profit, in general (as is Kelly), and I can understand that corporations should have
some duty to their shareholders, the idea of legally requiring them to put shareholders first, above other considerations, seems dangerous at best.
Her solution to the problems of maximizing shareholder returns is to advocate for a complete change of worldview in regard to corporations. She wants to change the way we think about them, the way we talk about them. She wants people to stop thinking of corporations as property owned by shareholders and start thinking of them as communities, as public charters for the common good (revocable when it stops serving that good), with employees participating in democratic governance. She has a host of ideas that might contribute to this, but she calls them a compass rather than a map; the important thing is that we head towards more democracy in corporations, rather than how we get there.
I think she understood how drastic such a worldview change would be from the current dominant paradigm. This is why she continually makes comparisons to the old-time privileges of aristocracy; this gives us a narrative that people can follow and believe in. But I think it ends up being a weak point in the book. As I was reading the book, it brought back vague memories of a conversation that I had seen on a blog once. That conversation dealt with economic issues, and one person made arguments that I now think probably came straight out of this book. At the time, I thought it sounded silly. Although I have a better idea now what was behind those claims, I think the claims are still going to sound silly to anyone who hasn't read the book (or at least read a lengthy review of them). I suspect that Kelly's appeals to democratic ideals are not enough, in practical terms, to convince most Americans to overturn what they believe they
know. If we need a fundamental paradigm shift, it is going to have to be something that can be put even more simply and made to sound more obvious.
One strength of the book was the way that she pointed out that, even though more people own stock than used to, "of all financial wealth held by households, the wealthiest 10 percent hold 90 percent." And she offers some statistics to show that wealth is becoming more concentrated in the hands of a few, not spread out over the masses. Another strength was her arguments showing how little stockholders contribute to a corporation, how unproductive they are, especially in comparison to the employees. I think this is especially important when it comes to the capital gains tax. Capital gains are taxed at significantly lower rates than earned income is. But if capital gains are the result of owning and trading stock, which is of much less use to society and the state than income is, it should be taxed at significantly higher rates. I would highly support a progressive capital gains tax increase.
As for her individual ideas, I had varying reactions to them. I love her idea of re-construing the corporate balance sheet so that both employee wages and returns to shareholders are viewed on the profit side, instead of viewing employee wages as costs that take away from profits. I am not really sure about her idea of not allowing corporations to be viewed as persons under the law. That may help, but I think a better conceptual case needs to be made for how a corporation should fit into the law and why. I am perfectly ok with her idea of states revoking the charters for corporations that don't serve the public interest (which she suggests only as a last resort). She has too many individual ideas for me to evaluate every one of them.
There is one passage that I want to quote at some length because I think it gives us a good view of how things currently work compared to how differently we might view them.
To help us begin to see [how wealth is protected by the visible hand of the law, while labor is left to the "invisible hand" of the free market], we might, for a moment, imagine a different arrangement of institutional power. Picture a free market in which labor rights are enthroned in law, and property rights are left to the invisible hand. This would be a world in which we believe employees are the corporation. They are, after all, the ones running the place. Hence only employees could vote for the board of directors, and the purpose of the corporation would be to maximize income for employees. In theory, stockholders would receive income they negotiated through contracts. In practice, the corporation would dictate those contracts with little real negotioation, and stockholders could accept the terms or go elsewhere, only to find other corporations offering nearly identical (and dismal) terms.
In this world, stock would be sold in a manner controlled entirely by the corporation, much as wages are set today. stockholders would appear alone at the company, where they would be taken into a room and made an offer. There would be no reliable way to compare current stock price to past price, to compare the price one person receives to what others receive, or to compare prices from one corporation to another. Wage and benefit data would be published daily in the Main Street Journal, and the movement of the Dow Jones wage index would of course be tracked nightly on the news. But returns to shareholders would be considered proprietary information and would not be given out.
If stockholders tried to improve their negotiating position by organizing into mutual funds, corporations would threaten to cut off payments altogether. The companies would talk about replacing stockholder money with funds from people overseas who were wiling to accept lower returns. ...
When the newspapers said "the corporation did well," they would mean that employees did well. Stockholders might have seen no dividend increases in years. Some might even have seen their income terminated in "capital layoffs." But whenever anyone dared to suggest changes in this economic order, they would be said to be "tampering with the free market." [p 78]
Kinda creepy, isn't it?
My immediate reaction to the above section was the idea to form a Labor Rights law. At the top of the list of such rights would be the classification of the wages and benefit information of every employee (by title) in every publicly traded corporation as public information. (I think Kelly calls this idea the Employees Right To Know Act later in the book.) Any citizen would have the right to request such information from the corporation, and the corporation would not have the legal right to deny it to them. (Much as certain information about the government is considered public information and must be given out to whoever asks.) I suspect this kind of transparency might do more to encourage living wage jobs than minimum wage laws. (The conservative's argument that minimum wage laws leads to inflation has always made some sense to me; but transparency could be seen as working inside the market, rather than forcing it from outside). The right to form or join a union would also be on there, although I might personally add something about the right not to join a union, or at least the right not to have a payment coming directly out of one's paycheck be a condition of joining the union.
The other major reaction that I had - somewhat in opposition to Kelly's ideas of re-defining corporations as not being property - was the idea of a "No Ownership Without Responsibility" law. Currently, stock owners are seen as owning the corporation, which is why all the profits must flow to them (and away from employees, as much as possible). But stock owners are not held responsible when a corporation does something wrong, because they are too far from the day to day governance of the corporation. To me, this seemed a lot like saying that if I own a rabid dog, and he breaks out of my fence and bites you, you can sue to have the dog put down, but you can't sue me, the owner, for your medical bills. Allowing ownership without responsibility allows people to reap all the benefits without paying any of the costs, which is not particularly just. A NOWR law would allow people to claim damages from shareholders themselves, proportionate to the shares owned, when a corporation broke the law. This would have to be balanced with also allowing shareholders as much say in the governance of the corporation as they desired (also proportionate to the shares owned). I imagine this is highly impractical; it would probably be too great a deterrence to owning stock. On the other hand, maybe it would reduce the sort of short trading and playing the stock markets that people do - actions which from my point of view are unproductive and based in greed.
Similar to this, but not quite the same, is the idea of increasing the responsibility of the corporations themselves. In a section titled "Why Environmental Damage Is Invisible", Kelly writes "
The corporation aims to internalize all possible gains from the community, and to externalize all possible costs onto the community. Costs placed on the corporation show up on the income statement, and diminish the bottom line. That's bad. But costs placed on the community are invisible: the financial lens doesn't see them, so they are of no consequence in the corporate worldview."[p 26, emphasis in the original] How would things change if we forced corporations to internalize all those costs? Some of this may already go on when people sue corporations; and sometimes people win those [Erin Brockovich comes to mind]. But we need to go further. We need to define in law the many ways in which a corporation damages the environment and the community and hold them financially responsible for these. We need to have a police detective force that is trained to discover any violation of these laws, supported by a transparency law that requires corporations (or maybe even private companies too) to cooperate with these police in every way. We should have an anonymous tip line that anyone (employees or community members) can call when they suspect that something a corporation is doing is having a negative effect on them, someone they know, the community at large, or the environment. The detectives should be sufficiently funded that they can investigate all these anonymous tips. (This could be funded with that capital gains tax increase).
She also talks about increasing employee governance within corporations. It sounds generically like a good idea to me, but I don't have any clear notion of how to implement that.
She briefly addresses the issue of campaign finance reform. I have no objection whatsoever to forbidding corporations from contributing to campaigns. The individuals that are involved with a corporation are, of course, free to contribute to campaigns. I wouldn't even necessarily object to having a corporation hand out extra money to its employees on the condition that they contributed it to a particular campaign. As long as the employees were not coerced or pressured into making any contribution unfreely, I think this would still be an acceptable limit. But corporations could not use corporate funds directly to contribute to a campaign; at most, they would have to persuade their employees.
I would also outlaw lobbying. Not in the sense of forbidding corporations to have lobbyists present their point of view to politicians, but I would outlaw any gifts or promises given in exchange for a politician voting the way they wanted. (And this would apply to all individuals and private companies as well as public corporations.) And I would suggest vigorous enforcement.
To sum up, I would say that Kelly does a better job of presenting the problem than she does of presenting the solution. Some, probably most, of her ideas to help would be good steps in the right direction, and I offered my thoughts on possible good steps too. But I keep having this niggling feeling that there is a basic conceptual solution, one that would make the cure more obvious, that she is missing out on (or at least not articulating clearly enough). Then again, I may be guilty of thinking like an engineer and trying to reduce a fundamentally complex system to a simple concept.
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