Democracy & Corporate Governance: Challenging the Divine Right of Capital

In October 2017 the New York Times invited nine “technologists, academics, politicians and journalists” to propose steps that could help “fix” Facebook, “as a product, a company or both.” While all of the suggested “fixes” struck me as likely to be helpful, two struck me as more fundamental in their approach, by focusing on the structure and processes of corporate governance rather than changes in Facebook’s policies and/or government regulations related to issues such as data ownership, competition, privacy, transparency,  the role of advertising and algorithms and other aspects of platform functionality.

One of these came from Ellen Pao, chief diversity and inclusion officer at the Kapor Center for Social Impact and a former chief executive of Reddit. While Pao’s suggestion that “Facebook needs to replace its focus on engagement quantity with interaction quality,” struck me as similar to policy changes proposed by other experts, she also argued that that, in order to make this kind of change, Facebook needs to “replace at least half of the leadership team and board with underrepresented people of color who are informed and value diversity and inclusion.”

The last, and in my view, most fundamental, remedy proposed in the Times piece came from Tim Wu, Professor at Columbia Law School, author of “The Attention Merchants: The Epic Scramble to Get Inside Our Heads” and originator of the term “net neutrality.

Wu suggested that Facebook become a public benefit corporation. This change, he says, would make it much easier for the company to realize its lofty social ambitions, since it would yield a corporate charter requiring the company to more clearly and explicitly commit itself to “do[ing] something that would aid the public,” and for its board members to “take that public benefit into account when making decisions.”

Mark Zuckerberg has said that Facebook’s goals are “bringing us closer together” and “building a global community.” Worthy, beautiful goals, but easier said than done when Facebook is also stuck delivering ever-increasing profits and making its platform serve the needs of advertisers…As a nonprofit or public benefit corporation (like Kickstarter), Facebook…could shed its “two masters” dilemma, truly pursue its lofty goals and become a firm of which its users and the world could actually be proud.

What struck me about the suggestions made by Wu and Pao is that, rather than recommending specific changes in Facebook policies, they consider the underlying issues of corporate purpose and governance that are key determinants of which policies are adopted and which are not. Their proposed structural and corporate charter-level changes seem designed to ensure that Facebook, already the world’s largest social network, also operates more like a social enterprise, which Wikipedia defines as “an organization that applies commercial strategies to maximize improvements in financial, social and environmental well-being.”

As I read the proposals from Wu and Pao I was reminded of the work of Marjorie Kelly,  co-founder and for 20 years president of Business Ethics magazine. In her two books, Kelly has: 1) examined key differences between “generative” and “extractive” ownership models and; 2) raised fundamental questions about the ownership rights of corporate shareholders in relation to those that might be claimed by a broader range of stakeholders involved with and/or impacted by a corporation’s activities. (I’ve previously discussed Kelly’s books on this site and here and here on Michigan State University’s Quello Center blog).

In a speech at the 2012 annual conference of the Business Alliance for Local Living Economies, Kelly highlighted the fundamental importance of ownership in our economy and our world, and the problems associated with the dominant ownership models of modern corporate capitalism. “Questions about who owns the wealth-producing infrastructure of an economy [and] whose interests it serves,” she argued, “are among the largest issues any society can face.”

Since I can’t match the clarity and eloquence of Kelly’s writing, my discussion of her books in this post will rely heavily on excerpts from them. While I hope this approach will convey key insights from the books, I urge anyone interested in these issues to read the well-written books themselves.

A “generative” or “extractive” business model?

The central theme of Kelly’s most recent book, Owning our Future, (published in 2012, the year Facebook went public and began selling mobile ads) is the distinction between “generative” and “extractive” ownership models, and the key elements characterizing each model. As she explains, “[t]he first and most important difference” between generative and extractive forms of ownership, is that the former have a “Living Purpose,” as contrasted with the “Financial Purpose” pursued by extractive ownership models. This distinction echoes the underlying point of Wu’s suggestion that Facebook become a public benefit corporation.

Generative means the carrying on of life, and generative design is about the institutional framework for doing so. In their basic purpose, and in their living impact, these designs have an aim of generating the conditions where all life can thrive. They are built around a Living Purpose.

This is in contrast to the dominant ownership designs of today, which we might call extractive. Their aim is maximum extraction of financial wealth. They are built around a single-minded Financial Purpose.

But, according to Kelly, “purpose alone isn’t enough.”  Also needed, she says, is “the presence of at least one other structural element that holds that purpose in place.”  These additional elements of generative design are:

Membership. Who’s part of the enterprise? Who has a right to a say in profits, and who takes the risk of ownership? Corporations today have Absentee Ownership. Generative ownership has Rooted Membership, with ownership held in human hands.
Governance. Extractive ownership involves Governance by Markets, where control is linked to share price. Generative ownership involves Mission-Controlled Governance, with control held in mission-oriented hands.
Finance. Instead of the Casino Finance of traditional stock market ownership, generative approaches involve Stakeholder Finance, where capital becomes a long-term friend.
Networks. If traditional approaches use Commodity Networks, where goods trade based solely on price, generative economies use Ethical Networks, which offer collective support for social and ecological norms.

Kelly goes on to explain that, while “[n]ot every ownership model has every one of these design elements…the more elements that are used, the more effective the design.”

Dethroning the divine right of kings & capital

Kelly’s first book The Divine Right of Capital was published in 2001, as the late-90s Dotcom Bubble was bursting, and roughly halfway between the founding of Google in 1998 and Facebook in 2004. The book provides an historically-grounded and potentially paradigm-shifting lens through which we can: 1) understand the dominant role of corporations in the modern capitalist economy and; 2) consider how best to address the problems associated with that dominance.

In the book’s introduction, Kelly asks fundamental questions about how the wealth of giant public corporations is created. While these questions were timely when the book was published very early in the Internet’s history, they seem even more so today, when Facebook and other giant platform companies are extracting massive financial value from their users’ activities and funneling the lion’s share of that value to shareholders.

In an era when stock market wealth has seemed to grow on trees—and trillions have vanished as quickly as falling leaves—it’s an apt time to ask ourselves, 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 in corporate America, one might suppose capital creates wealth—which is strange, because a pile of capital sitting there creates nothing. Yet capital providers—stockholders—lay claim to most wealth that public corporations generate. Corporations are believed to exist to maximize returns to shareholders. This is the law of the land, much as the divine right of kings was once the law of the land.

Just as the divine right of kings was the core myth that for centuries helped sustain the legal claims of royalty to own and control massive assets, similar claims about the rights of corporate shareholders are sustained by another myth considered unchallengeable and backed by force of law: that shareholder returns must be maximized. As Kelly puts it, “[w]e might call it our secular version of the divine right of kings.”

Kelly argues that, just as the divine right of kings was ultimately rejected as an arbitrary, self-serving and fundamentally unjust myth, a similar critique can and should be applied to the “divine right of capital” as expressed in the principle of shareholder primacy as applied to modern corporations. As she explains:

When we say that a corporation did well, we mean that its shareholders did well. The company’s local community might be devastated by plant closings. Employees might be shouldering a crushing workload. Still we will say, “The corporation did well.”

One does not see rising employee income as a measure of corporate success. Indeed, gains to employees are losses to the corporation. And this betrays an unconscious bias: that employees are not really part of the corporation. They have no claim on wealth they create, no say in governance, and no vote for the board of directors. They’re not citizens of corporate society, but subjects…

The oddity of it all is veiled by the incantation of a single, magical word: ownership. Because we say stockholders own corporations, they are permitted to contribute very little, and take quite a lot…

Why have the rich gotten richer while employee income has stagnated? Because that’s the way the corporation is designed. Why are companies demanding exemption from property taxes and cutting down three-hundred-year-old forests? Because that’s the way the corporation is designed. “A rising tide lifts all boats,” the saying goes. But the corporation functions more like a lock-and-dam operation, raising the water level in one compartment by lowering it in another.

Moving beyond capitalism’s aristocratic form

In Kelly’s view (one that I share), what’s needed is for free market capitalism to evolve from its “aristocratic form” to a form based on principles of economic democracy.

The problem is not the free market, but the design of the corporation…It is true that through history capitalism has been a system that has largely served the interests of capital. But then, government until the early twentieth century largely served the interests of kings. It wasn’t necessary to throw out government in order to do away with monarchy—instead we changed the basis of sovereignty on which government rested. We might do the same with the corporation, asserting that employees and the community rightfully share economic sovereignty with capital owners.

What we have known until now is capitalism’s aristocratic form. But we can embrace a new democratic vision of capitalism, not as a system for capital, but a system of capital—a system in which all people are allowed to accumulate capital according to their productivity, and in which the natural capital of the environment and community is preserved.

To provide some historical context for understanding how and why corporations have expanded their power as institutions of “aristocratic capitalism,” Kelly refers back to the American Revolution’s attempt to free the colonies from an aristocratic form of control by the English Crown.

The major companies of their era, like the East India Company, were arms of the Crown. America was founded by similar, though smaller, Crown companies. The founding generation in America seemingly felt that in bringing the Crown to heel, they had immunized themselves from corporate predation. This may be the reason that they left us few tools, at the federal level, for governing corporations: the word corporation itself appears nowhere in the Constitution.

This lack of tools to constrain the unbridled growth of corporate power, operating largely free of government control, has allowed modern corporations to, in Kelly’s words, “evolve into something new in civilization—more massive, more powerful than our democratic forefathers dreamed possible.” To support her argument she cites FDR’s description of major corporations as “a kind of private government which is a power unto itself.’” (as discussed in another post, Mark Zuckerberg has described Facebook in similar terms).

Kelly cites a number of changes in the nature of major corporations that have made the notion of shareholder primacy “increasingly out of step with reality.”

Increasing size. Today, among the world’s one hundred largest economies, fifty-one are corporations. They have revenues larger than nation-states, yet maintain the guise of being the “private property” of shareholders.

The shrinking of ownership functions. While we still call stockholders the owners of major public firms, they do not—for the most part—manage, fund, or accept liability for “their” companies. Ownership function has shrunk to virtually one dimension: extracting wealth.

The rise of the knowledge economy. For many companies, knowledge is the new source of competitive advantage. To allow shareholders to claim the corporation’s increasing wealth—when employees play a greater role in creating that wealth—is a misallocation of resources.

The increasing damage to our ecosystem. The rules of accounting were written in the fifteenth century, when to the Western mind nature seemed an unlimited reservoir of resources, and an unlimited sink for wastes. That is no longer true, but the rules of accounting retain fossilized images of those ancient attitudes.

It’s worth noting that the third item in the above list refers to employees but makes no mention of the contributions to corporate wealth creation by digital platform users, which was only a nascent and barely monetized phenomenon when the book was written, but today has grown to encompass massive numbers of users and equally massive creation of social value and shareholder wealth.

The chapters in the first part of The Divine Right of Capital explore six key principles that prioritize the needs of corporate shareholders over the needs of others involved with and/or impacted by corporations:

  1. Worldview: In the worldview of corporate financial statements, the aim is to pay property holders as much as possible, and employees as little as possible.
  2. Privilege: Stockholders claim wealth they do little to create, much as nobles claimed privilege they did not earn.
  3. 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. Governance: Corporations function with an aristocratic governance structure, where members of the propertied class alone may vote.
  5. 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. Sovereignty: Corporations assert they are private and the free market will self-regulate, much as feudal barons asserted a sovereignty independent of the Crown.

Part 2 of the book explores an an economic structure based not on the shareholder primacy myth but on principles of economic democracy.  And it discusses how a societal shift to this new structure would have historical parallels to the Enlightenment’s rejection of the divine right of kings.

Embracing economic democracy as an expanded Enlightenment

“If we study the era of the Enlightenment, in which America was founded,” Kelly writes, “we find it did not begin with crafting laws and structures.” Instead, “[i]t began with challenging the principles on which the monarchy stood, and with articulating new principles of democracy.”

With that in mind, Kelly offers six principles of economic democracy as contrasted with today’s dominant system based on the principles of economic aristocracy:

  1. Enlightenment: Because all persons are created equal, the economic rights of employees and the community are equal to those of capital owners.
  2. 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. Public good: As semipublic governments, public corporations are more than pieces of private property or private contracts. They have a responsibility to the public good.
  4. Democracy: The corporation is a human community, and like the larger community of which it is a part, it is best governed democratically.
  5. Justice: In keeping with equal treatment of persons before the law, wealthy persons may not claim greater rights than others, and corporations may not claim the rights of persons.
  6. (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. Intellectual principles like these may seem to be mere abstractions, airy things with little relevance to the real world. But as Michel Foucault observed, ideas are mechanisms of power. “A stupid despot may constrain his slaves with iron chains,” he wrote, “but a true politician binds them even more strongly by the chain of their own ideas.” Ideas are the foundation of the social order. If we are to build a new order, we must build on the base of ideas.

To achieve this new order, suggests Kelly:

It may be that the only truly radical change we need is in our minds—in the collective pictures of reality we unconsciously hold. We accept that corporations are pieces of private property owned by shareholders, just as our ancestors believed that nations were private territories owned by kings. We live with these myths like buried shells, old bombs from an ancient war—the war we thought we had won, between monarchy and democracy.

But ideas can change. And the world changes accordingly.

It is useful to recall that the institution of kingship dominated the globe for millennia, as a nearly universal form of government stretching back to the dawn of civilization. The very idea of monarchy once seemed eternal and divine, 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 today has spread around the world. And the power of kings can now be measured in a thimble.

With Kelly’s perspective on ownership and economic democracy in mind, the next post in this series will consider the concept of platform cooperatives. In a platform cooperative, “produsers” own the digital platform to which they contribute value by interacting with the platform’s functionality.

********

Below is an outline, with links, to all the posts in this series. Unless otherwise noted, bolding in quotations is mine, added for emphasis.

  • Creating a Future Where Technology Serves Neither Kings Nor Capital, But Humanity
    • Connecting as citizens & humans, not just as users & consumers
    • More (and more effective) democracy as part of the solution
    • The tech sector can help lead the next phase in democracy’s evolution
  • Democracy & Digital Platforms: A Match Made in Heaven or in Hell?
    • The Facebook F-up as a wake-up call
    • Where to look for solutions?
  • Serving Users (to Advertisers to Benefit Shareholders)
    • An IPO + mobile ads: 2012 as a turning point for Facebook
    • Too busy driving growth to focus on privacy?
    • Conflicting definitions of “serving users”
    • Understanding & addressing social harms
  • Data as Power: Approaches to Righting the Balance
    • Our data is tracked & locked in a “black box” we don’t control or understand
    • The EU tightens privacy protections amid mixed signals in the U.S.
    • Platforms as “information fiduciaries”
    • Reallocating power & benefits when users share their data
    • Shifting from an “Attention Economy” to a more efficient “Intention Economy”
    • Who owns and controls the data used to develop AI?
    • Data as labor that should be financially compensated
    • Data as an infrastructural public good
    • A “data tax” that generates a “data dividend” we all share
    • Data portability as means to enhance competition & consumer choice
  • The Power of Dominant Platforms: It’s Not Just About “Bigness”
    • New forms of concentrated power call for new remedies
    • Platforms wield transmission, gatekeeping & scoring power
    • Antitrust needs an updated framework to address platform power
    • Creating a civic infrastructure of checks & balances for the digital economy
  • Democracy & Corporate Governance: Challenging the Divine Right of Capital
    • A “generative” or “extractive” business model?
    • Dethroning kings & capital 
    • Moving beyond capitalism’s aristocratic form
    • Embracing economic democracy as a next-step Enlightenment
  • Platform Cooperativism: Acknowledging the Rights of “Produsers”
    • Reclaiming the Internet’s sharing & democratizing potential
    • Scaling a platform co-op: easier said than done
    • The #BuyTwitter campaign as a call for change
    • Encouraging the wisdom of crowds or the fears of mobs?
  • Interactions Between Political & Platform Systems
    • Feedback loops reinforce strengths & weaknesses, benefits & harms
    • Facebook’s role in the election as an example
    • If we don’t fix government, can government help fix Facebook?
  • A Purpose-Built Platform to Strengthen Democracy
    • Is Zuck’s lofty vision compatible with Facebook’s business model?
    • Designed to bolster democracy, not shareholder returns
  • Democratic Oversight of Platform Management by “Produsers”
    • Facebook, community and democracy
    • Is Facebook a community or a dictatorship?
    • Giving users a vote in Facebook’s governance
    • Technology can help users participate in FB governance
    • Evolving from corporate dictatorship toward digital democracy
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