The Divine Right of Capital: Dethroning the Corporate Aristocracy by Marjorie Kelly, From Economic Aristocracy to Economic Democracy

“A bad system produces bad situations in which people act badly without even necessarily knowing why . . . if enough people absorbed this argument, we might find ourselves in a better polity . . . But, alas, we seem happier with scapegoats than explanations.” (Philip Zimbardo in The Lucifer Effect: How Good People Turn Evil)

“We have dozens of codes of conduct, hundreds of ethics officers at corporations, trillions in social investing assets, and virtually universal business school courses in ethics. Yet ethics in business is worse than ever.” (Marjorie Kelly)

“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?” (Marjorie Kelly)

“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.” (Marjorie Kelly)

“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.” (Marjorie Kelly)

“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.” (Marjorie Kelly)

“We must learn that passively to accept an unjust system is to cooperate with that system, and thereby to become a participant in its evil.” (Martin Luther King, Jr.)

 

Overview

Did you know that John Locke, an intellectual father of modern economic orthodoxy, believed that people should own only as much property as they could productively use? Or that Adam Smith himself believed that profits should be small? Profits are “always highest in countries which are going fastest to ruin,” Smith wrote. High profits represent an “absurd tax” upon the citizenry, he added.

Our current economic system is an aristocracy (by the wealthiest rather than rule by the ‘best’), 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 inconsistent with free-market principles.

Thus, the fundamental myth which Kelly attacks is the fiction that owners of stock provide the capital which fuels business activity, take the risk of business and therefore deserve – exclusively – the fruits of the wealth that business produces. She demonstrates clearly and conclusively that, so far from being the providers of capital for business, stock owners as a class, and particularly the small percentage of wealthy people who own most of the stock, have for some decades been net extractors of capital, and that, as a class of mainly passive stockholders, they fill no useful economic function.

Most shareholders today don’t even contribute capital to the corporation they “own.” Shareholders own the stock of the corporation and receive its profits, but they do not fund the corporation. Instead they just play the Wall Street casino, placing bets on paper representations of ownership as opposed to actually exercising it. The only time money from sale of stock goes to the corporation is when the new stock is issued. This takes place when a company goes public and perhaps after that, but only at very rare intervals when a corporation issues a secondary offering. In the steel industry, for example, a study shows that during the growth years of 1900-1953, issues of common stock provided only 5 percent of the working capital of the industry. The sales at the stock exchange represent only money changing hands from one speculator to another. “Like the French aristocracy before the (French) revolution,” Kelly writes, “stockholders as owners have discarded virtually all productive functions they once had, but still retain their privileges.”

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 the divine right of capital too often damages the environment, the public safety, and the welfare of the community in its pursuit of profit. 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.

In conclusion, Kelly argues that the current form of economic aristocracy is ripe to be transformed into a responsible economic democracy and devotes the second half of the book to canvassing an alternative way of thinking about corporations and arranging their governance.

 

Book Content

Kelly points out that this current system is fundamentally aristocratic and inherently undemocratic in nature, a holdover from medieval times. She gives a fascinating presentation of the social structures, privileges and power held by the elite ruling class in Medieval Europe. Throughout the book she builds up a compelling comparison of our present system of wealth distribution, commonly called economy, and the social system of Medieval Europe. This comparison gives rise to the recognition that our current system is an Economic Aristocracy.

Part 1 Economic Aristocracy has as chapter headings:

1. The Sacred Texts. The Principle of Worldview. In the worldview of corporate financial statements, the aim is to pay stockholders as much as possible, and employees as little as possible.
2. Lords of the Earth. The Principle of Privilege. Stockholders claim wealth they do little to create, much as nobles claimed privilege they did not earn.
3. The Corporation as Feudal Estate. The Principle of Property. 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 propertied class.
4. Only the Propertied Class Votes. The Principle of Governance. Corporations function with an aristocratic governance structure, where members of the propertied class alone may vote.
5. Liberty for Me, Not for Thee. The Principle of Liberty. Corporate capitalism embraces a predemocratic concept of liberty reserved for property holders, which thrives by restricting the liberty of employees and the community.
6. Wealth Reigns. The Principle of Sovereignty. Corporations assert that they are private and the free market will self-regulate, much as feudal barons asserted a sovereignty independent of the Crown.

Kelly shows that since medieval times, laws permitted change from a political perspective but not from a wealth one. As a result, laws governing economic and business behaviour continue to preserve age-old wealth inequalities. So, while in the political sphere, aristocracy was eclipsed by democracy, the world of wealth and property has remained untouched. As a result, while we would never tolerate medieval practices in our current political system (imagine “King Bertie” ruling by divine mandate, without public representatives or elections), we have not recognized our economic system for what it is: an historical anachronism of an inherently aristocratic nature. Kelly therefore proposes that our economics must become democratic.

Part 2 Economic Democracy has as chapter headings:

1. Waking Up. The Principle of Enlightenment. Because all persons are created equal, the economic rights of employees and the community are equal to those of capital owners.
2. Emerging Property Rights. The Principle of Equality. Under market principles , wealth does not legitimately belong only to stockholders. Corporate wealth belongs to those who create it, and community wealth belongs to all.
3. Protecting the Common Welfare. The Principle of the Public Good. As semipublic governments, public corporations are more than pieces of property or private contracts. They have a responsibility to the public good.
4. New Citizens in Corporate Governance. The Principle of Democracy. The corporation is a human community, and like the larger community of which it is a part, it is best governed democratically.
5. Corporations are not Persons. The Principle of Justice. In keeping with equal treatment of persons before the law, the wealthy may not claim greater rights than others, and corporations may not claim the rights of persons.
6. A Little Rebellion. The Principle of (R)evolution. As it is the right of the people to alter or abolish government, it is the right of the people to alter or abolish the corporations that now govern the world.

Kelly points out that our unquestioning attitude towards the current system is a major factor holding up our progress to a more sustainable future. In medieval times no one questioned the right of the king or the aristocracy to rule, or their right to collect taxes and other wealth from the peasants and/or middle classes who created it. Everyone just accepted that this was the divine right of the monarchy. In a similar way, we have accepted without question company laws that enshrine the rights of the Economic Aristocracy to create more wealth for themselves that is not of their own making.

Kelly’s book presents eye-opening facts from up-to-date sources and is so interesting that we both found it hard to put down. Moreover it is beautifully written in a style that makes it a very easy read for general readers and economists alike.

Pointing out the changes in business law that have recently been made in Europe and some states in the USA, the book will provide its readers with important information about the legal changes we need to focus on politically in order to create a culture of responsible and sustainable business activity. It equips us to embark on a journey to install democratic principles and breathe life into the heart and soul of a new kind of economy.

 

An interview with Robert Hinkley

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.

 

References and further readings

This entry is excerpted mainly from a review of the book at Change Management Monitor, along with the following reviews:

1. “Toppling the Corporate Aristocracy – Marjorie Kelly Dismantles a Major Premise of Capitalism and Makes the Case for Creating More Democratic Corporations”, an Interview by Robert Hinkley. Published on Friday, April 19, 2002 by CommonDreams.org.
2. “Corporations: What Went Wrong?”, The Divine Right of Capital by Marjorie Kelly reviewed by David Cogswell in the American Book Review.
3. Book review by Tom Croft
4. Book review by Jonathan Rowe in YES! Magazine Summer 2002 Issue on Art and Community
5. Book review by Adrain MacFhearraigh and Catherine Ansbro