Toppling the Corporate Aristocracy
Marjorie Kelly makes the case for creating more democratic corporations.
Interview by Robert Hinkley
Democracy always wins in the end, says Marjorie Kelly, and she is ready to see our economic aristocracy fall.
OUR CURRENT ECONOMIC system is an aristocracy, according to Marjorie Kelly. Think British rule of the American colonies. It's based on the divine right of kings: the interests of the king are paramount; the aristocracy alone has a say in government.
At the center of the economic aristocracy we have today is the corporation, its authority based on the divine right of capital. Shareholders are king, and their interests reign supreme. The aristocracy's primary goal is to pay shareholders as much as possible and pay employees as little as possible.
The public good is ignored."Voluntary change by progressive business people would transform capitalism," Kelly used to say. Now, she writes in her new book, The Divine Right of Capital (Berrett-Koehler, 2001), she believes that lasting improvement will only come by changing and amending the form and rules governing corporate operations.
Just as we once democratized government, Kelly argues, we must now democratize economics. To her this means, in part, genuine empowerment of employees. "Corporate wealth belongs to those who create it," she writes, and, in the knowledge economy of the twenty-first century, more corporate profit is generated through the efforts of employees than by the capital of shareholders. She believes that funneling profits solely to shareholders is a misallocation of resources and inconsistent with free-market principles.
Today's corporations, she adds, should be viewed as human communities, not just pieces of property to be owned and traded by shareholders. Employees should have a greater role in governing the corporation, including participation in decisions regarding whether, and to whom, the company will be sold.
If employee interests need new protections, so too does the public interest. Kelly maintains that in its pursuit of profit the divine right of capital too often damages the environment, the public safety, and the welfare of the community. She asserts that "community wealth belongs to all," and corporations must not harm the public good.
Kelly reminds us that corporations exist only because we have passed laws that allow them to exist. The Declaration of Independence asserted our right to alter or abolish government that no longer serves the public interest. She says we should all claim the same right to alter or abolish corporations: to change the rules that govern the corporate form itself--to make corporate governance democratic rather than aristocratic. Kelly explains how this could be done--and why it might be inevitable.
Bob Hinkley: What led you to become an advocate of socially responsible business, and how have your views changed since you started?
Marjorie Kelly: I am a small business owner, as were my father and grandfather before me, and I understand the rigors of running a business. But I don't believe a fat bottom line is the overriding purpose. I see American business as trying to evolve from its robber baron beginnings to something more socially responsible. I co-founded Business Ethics magazine to support this evolution, believing voluntary change by progressive business people would transform capitalism.
But in recent years I have become discouraged. Over and over again I've seen the failure of voluntary change by individual companies. They might announce family-friendly policies only to turn around and lay off tens of thousands of workers. They pursue environmental stewardship, but only to the extent that it enhances their bottom line. Companies become generous corporate citizens, but then demand far more in tax breaks.
I had hoped socially responsible business would have caught fire by now, but in fact, the reverse is happening. Companies are becoming more ruthless, more focused on the bottom line. After more than a decade of seeing the promise of socially responsible business thwarted, I came to ask myself, "What is blocking this change?" I believe there is one obstacle--the legal mandate to maximize returns to shareholders.
When the interests of capital are primary, it's wealth discrimination. Until we turn and challenge this premise as illegitimate, and change the institutions that support this premise, all our efforts of social responsibility will fail.
BH: So how does the legal mandate to maximize profits for shareholders thwart businesses becoming more socially responsible?
MK: Corporate law as enforced by state courts dictates that corporations maximize profits for shareholders. This law requires directors and officers to put shareholders' interests before all others. The law says nothing about companies protecting the public interest, the health of the environment, employees or the community. Executives who want to manage responsibly can find themselves fired or subject to hostile takeover--so the idea that enlightened CEOs can really manage in a responsible way is a fantasy. It's a system-design issue, and we are all caught in it.
I've been to business schools and seen them teach ethics, and I have been to companies and seen them train employees in ethics. The premise is that good people using the tools of ethical analysis will make socially responsible decisions. But moral individuals only take us so far when the rules they are legally bound to follow say they must put shareholder interests above all others. At some point you have to look at system ethics: what behavior does the system encourage or require?
To rest our hope with ethical leaders is like waiting for the philosopher king. At some point you wake up and realize aristocracy itself is the problem--and you move to democracy. You don't wait for justice and equality to show up in some noble leader; you build them into social structures.
BH: Is the problem equally severe with small companies as well as large companies?
MK:: I don't believe it is, but I prefer to make the distinction between private companies and public companies. When an individual or a family own all the shares of a company they have the option of managing in a humane way, putting quality of life for employees or the good of the community ahead of shareholder gain. But when a company goes public and its shares are widely held, managers don't have this option. Managers reluctant to make layoffs, for example, can be forced out in a hostile takeover or fired by the board. Public companies often pursue profits even if at the expense of the public interest and employee interests. Private companies can do the same, but at least they have the option of something else.
BH: How would you change the law to eliminate this problem?
MK: Ultimately, we must design a corporate system in which all economic rights are equally protected, not only the rights of shareholders. In keeping with genuine free market principles, we should put wealth in the hands of those who create it, which is employees, and we need a new economic principle that says corporations have a responsibility to the public good. Ironically, our system now discourages public corporations from service to the common welfare. In the future we must require such service. At the very least we must require that the public good not be harmed.
As for how we accomplish this, our laws need not prohibit every possible means of harm--pollution, relocation, unfair termination, and so forth. Instead, they can stipulate broad loyalty to sets of interests and subject corporations that violate those interests to lawsuits. That's how shareholders enforce their rights, and we could extend the same tool to others.
BH: There are some people who will say the corporate system dedicated to serving only the interests of shareholders has served this country well. Why change it? What would you say to them?
MK: Well, you could have said the same thing before the Civil War. The economy was working well; why change slavery? We could have said the same thing about our political system in the early 1900s. It is working well; why give women the vote? There is always a conservative element in society that will resist change. But there are oftentimes good reasons for change.
The Divine Right of Capital is about the good reasons to change the law of shareholder primacy. At its heart, this doctrine is undemocratic. It's aristocratic. It serves the interests of the wealthy at the expense of everyone else. Ninety percent of all financial wealth held by households in the U.S. is held by the wealthiest 10 percent. So serving shareholders means making the rich richer at the expense of everyone else. It is a form of government-sponsored discrimination. It's wealthism. Such discrimination has no place in a democratic society, and it is out of place in a free-market economy.
BH: How do you think CEOs and other corporate leaders will respond to a proposal changing the corporate law in this manner?
MK: I think more of them than you might expect will agree. After all, CEOs are the ones who are being pressured to ignore the interests of the public more than anyone else, and what they are being pressured to do is act against their own instincts. A good leader doesn't want to decimate his or her troops merely to serve the interests of Wall Street. A good citizen doesn't want to avoid taxes. CEOs are paid the enormous salaries they are because they are being asked to do things they don't want to do. Some are so used to putting up with this that they may not want to admit their discomfort, but I think others will welcome the opportunity to put civic responsibility on an equal footing with responsibility to shareholders.
BH: In your book, The Divine Right of Capital, you suggest two main avenues of reform: giving greater power to employees and to the community. If you were to set priorities, which should come first?
MK: I would put corporate responsibility to the public interest first, primarily because I think it is already emerging in the public consciousness and has a greater chance of catching on.
BH: What can people do to make corporations more responsible?
MK: Ultimately we'll have to change the law. But if that's where we end up, it's not where we should start. We start by changing our minds, by changing our internal pictures of reality that tell us shareholder primacy is normal and legitimate. The way to do that is with pranks. How did the American Revolution start? Not with writing laws, but with folks dressing up like Indians and throwing tea off ships. It started with a prank. Same with the feminist revolution, where women crashed the Miss America pageant, and did a sit-in at The Ladies' Home Journal. We need some great pranks. I'd love to see some folks stage a sit-in at Business Week or Fortune, and refuse to leave until they put out a special issue on economic democracy. Or, in the spirit of Rosa Parks, refusing to sit in the back of the bus. How about employees running John Q. Employee for the board of directors? They could put up bogus campaign posters all over the company and wear sandwich-boards at the stockholders meeting: "No Governance Without Representation." It might lead to some interesting conversations with the press: why can't employees run for the board? Aren't employees part of the corporation? We can think of these as tea parties, like the Boston Tea Party. At our web site, DivineRightofCapital.com, we're hoping to encourage tea parties like these around the country. I would encourage your readers to visit the site and share their ideas. Pranks help us wake up. And they allow us to have fun along the way--which is the only way to do things, when you are a marginalized group fighting a huge entrenched power. You've got to be light-hearted. You need esprit-de-corps, so you don't feel overwhelmed. The aim is to educate people that the problem isn't greedy executives or evil individual corporations like Exxon. The problem is the system design. The problem is state law that says corporations exist only to maximize gains for shareholders. In the end, we need to get activists focused like lasers on these laws. Most of all, we need hope. We need to know in our heart that economic democracy will prevail, because it will.
BH: In The Divine Right of Capital you seem optimistic about business evolving to become more socially responsible. Why is that?
MK: I am optimistic, because democracy is an unstoppable historical force. To quote Alexis de Tocqueville, "Can it be believed that the democracy which has overthrown the feudal system and vanquished kings will retreat before tradesmen and capitalists?"
It may seem that financial powers are omnipotent today, but the power of kings was once as great. The monarchy was a nearly universal form of government for two millennia, until a tiny band of revolutionaries in America dared to stand up and speak of equality. They created an unlikely and visionary new form of government which has since spread throughout the world, and today the power of kings can be measured in a thimble.
Democratizing economics is no more unlikely a task than democratizing government--in a sense it's only finishing the task. It won't happen overnight, but it's a good bet it will happen. Major system-wide change is possible. It happened when the monarchy fell, and it can happen again. The lesson of history is clear: democracy always wins in the end. *
Bob Hinkley is a corporate lawyer and formerly a partner with Skadden, Arps, Slate, Meagher and Flom LLP.
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