Editorial by Marjorie Kelly, in Business Ethics, January/February
1997, page 5.
Where 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,
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 entices 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 as 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."
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."
Marjorie Kelly is the publisher of Business Ethics. This editorial may be freely reproduced and/or reprinted with appropriate
credits to the author and to Business Ethics. Please send a courtesy
copy of any publication in which it is reproduced to Marjorie Kelly, publisher of Business Ethics,
Business Ethics, P.O. Box 8439, Minneapolis, MN 55408, U.S.A.
Federal Reserve Statistics are from Bureau of the Census, Statistical
Abstract of the United States, 1994.