Market economies, in which the key productive inputs such as land, labor, and capital are bought and sold, display a notable long-run tendency toward business concentration, high inequality, political capture, domination of the laboring classes, and ultimate economic sclerosis. Auspicious beginnings in economic and political freedom and relative equality seem ineluctably, despite periods of reprieve, to end in oligarchy, authoritarianism, and decline.
This is not just a surmise based on the current US trajectory, or on the higher returns to capital than labor.11xThomas Piketty, Capital in the Twenty-First Century (Cambridge, MA: The Belknap Press of Harvard University Press, 2014). It is also a conclusion of the comparative study of market economies from medieval Persia through the Dutch and Italian republics down to today.22xBas van Bavel, The Invisible Hand? How Market Economies Have Emerged and Declined Since AD 500 (New York, NY: Oxford University Press, 2016). To date, there has been no exception that would give us reason to ignore the words of caution attributed to Supreme Court Justice Louis Brandeis: “We can have democracy in this country, or we can have great wealth concentrated in the hands of a few, but we can’t have both.” The fates of political democracy and political economy have always been linked.
The great challenge today is that the colonization of the market by corporations has, if anything, accelerated this process of business and wealth concentration. Corporations centralize control over the individual investments of multitudes and make takeovers easier. Meanwhile, neoliberal policies of privatization, deregulation, globalization, unrestrained economic concentration, shareholder empowerment, and tax reduction have cleared the way for corporations to concentrate business and wealth even further. There is no billionaire class without the corporation. And signs suggest the billionaires are taking over—in the economy, in the media, and in government.
The pressing question, then, is whether there is a way—a politically realizable and sustainable way—of governing corporations that retains their productivity while more broadly spreading the returns. If not, it is hard to imagine the United States avoiding the same fate as other market civilizations before it. The received approach, of redistribution through taxation, has proven insufficient and, at the levels that would be required to check economic concentration, politically unsustainable.
Fortunately, there may be such a way. Incorporated business enterprise, which in its current manifestation has been pushing us down the road to ruin at breakneck speed, also has unprecedented potential to lead us off it. The problem is that in Anglo-American countries this potential is being squandered as a result of bad ideas and bad law. Margaret Thatcher was wrong when she said, “There is no alternative”: There are alternatives to Anglo-American neoliberal political economy—truly existing ones that are functioning vigorously, in plain sight, and they have nothing at all to do with socialism, against which Thatcher so adamantly set herself.
The Carlsberg Case
One of those models is at work in Denmark, which has developed, almost by accident, an unusual vehicle for bending a corporate economy toward the public welfare, even while boosting productivity. It is a vehicle that once existed in the United States, until 1969, when Congress placed a misguided restriction on the participation of nonprofit organizations in the economy.
The Danish story begins in 1876, when J.C. Jacobsen, founder of Carlsberg Brewing, established the Carlsberg Foundation to advance the science of brewing and support various philanthropic causes. Soon thereafter, Jacobsen fell out with his son, an aspiring brewer himself, over the latter’s willingness to compromise quality for short-term profit. To protect his vision for his brewery—that product improvement be its “constant purpose, regardless of immediate gain”—Jacobsen willed his company stock to the foundation instead of his son, making it, at his death in 1887, the company’s majority stockholder. This meant the foundation would select and oversee the board of the for-profit brewery. In today’s parlance, it became an “enterprise foundation,” overseeing a for-profit corporation and supporting philanthropic causes with the dividends.
Giving a nonprofit foundation this governing role defies reigning economic wisdom. On the assumption that money is the one reliable motivator, this wisdom holds that control should be in the hands of those with the greatest monetary stake in a company’s profitability, such as conventional stockholders and stock-compensated executives. Stockholders normally receive returns only if there are profits (or a strong expectation of future profits). The higher the profits, the greater the returns, in the form of high dividends, stock buybacks, and a rising stock price. With profit maximization as the assumed object of all business, it follows that stockholders, having the strongest pecuniary stake in profit maximization, should be given the reins, or at least the whip.
The board members of the Carlsberg Foundation and other Danish enterprise foundations, by contrast, are paid strictly in salary, being prohibited by law from receiving pay tied to the performance of the company they indirectly control, whether this be in the form of bonuses or stock. What is more, they are appointed and dismissed by fellow board members, not by stockholders, and are thus at little risk of removal for company underperformance. So why should they put in any effort?
Evidently, they do, as control by nonprofit foundations appears to work, and work quite well. Carlsberg is today the world’s fourth-largest brewer, and the Carlsberg Foundation a lauded philanthropy. This success has led other Danish entrepreneurs to follow suit, establishing and endowing enterprise foundations, usually at their retirement, to perpetuate their companies and the values that sustain them (and without disinheriting their children, who can be assigned a certain percentage of the dividends). Today, three of Denmark’s four largest corporations are foundation controlled—Carlsberg Group, Novo Nordisk (a pharmaceutical company and maker of Ozempic, the blockbuster diabetes and weight-loss drug), and Maersk (one of the world’s largest container shipping companies). Indeed, foundation-controlled companies comprise more than 70 percent of the value of the Danish stock market. It is the dominant form of governance in Denmark’s corporate sector, and the large firms that use it generate much-higher-than-average R&D expenditure, growth, and profitability, even while far outstripping their peers in areas of progressive labor policy, environmental stewardship, and community support.33xSteen Thomsen, The Danish Industrial Foundations (Copenhagen, Denmark: Djøf Publishing, 2017).
In light of such success, it is our theory that needs to be brought in line with reality, not the other way around.
Enterprise foundations exist in some form in numerous countries besides Denmark. And they are but one example of a growing body of what we might call “stewardship enterprises”—enterprises that are controlled by stewards of the corporate purpose (such as, in the present example, a nonprofit foundation) rather than by conventional investors.
“Benefit corporations” gesture in this direction. But there are stronger forms of stewardship. In addition to the enterprise foundation, there is also the conventional nonprofit business. Other examples include businesses organized through new legal forms such as the “stewardship trust” (e.g., the Organically Grown Company) or through bespoke forms that creatively use contract law, trust law, and law governing nonprofit foundations to create legal vehicles that protect a business mission or purpose from being eclipsed by profit motives. One such firm is the outdoors outfitter Patagonia, which uses a Purpose Trust as its steward.
All of this percolating experimentation with stewardship control reflects a growing frustration among entrepreneurs with the neoliberal corporation—the firm that orients itself strictly to its stockholders and stock price—which is increasingly seen as an obstacle to building a great and good company.
The Neoliberal Corporation
“A rambling, shambling disaster waiting to happen.”44xQuoted in Shawn Tully, “How Boeing Broke Down,” Fortune (April–May 2024); https://fortune.com/2024/02/22/boeing-stock-crash-history-737-outlook/. That is how an anonymous whistleblower described Boeing’s production process, which led ultimately to the January 2024 blowout of a 737 Max door plug, even after two deadly 737 Max crashes, in 2018 and 2019, grounded the entire fleet.
The path of declining quality that led to these disasters has become all too familiar among companies oriented to Wall Street and its mantra of “shareholder primacy.” In the case of Boeing, it was paved by the outsourcing of the manufacture, and even design, of all major Max systems; reductions in worker training; work speedups; and the replacement of reams of experienced quality-control inspectors with “inspection technologies,” statistical analysis, and line-worker “self-inspections.” All played a part in precipitating the door-plug blowout.55xIbid.
Prior to the year 2000, Boeing had been described as “an association of engineers dedicated to building great flying machines.”66xIbid. It was a long-term approach to profitability through high quality and safety.
But Boeing’s merger in 1997 with the floundering McDonnell Douglas brought some McDonnell Douglas executives into Boeing’s senior leadership. This included, most importantly, Harry Stonecipher, appointed chief operating officer and, in 2003, CEO. Stonecipher was a former division chief at General Electric, where he became a disciple of its CEO, Jack Welch, a pioneering practitioner of, and evangelist for, “shareholder primacy,” who raised GE’s stock price almost thirtyfold during his twenty-year tenure. This earned him plaudits from Fortune magazine, in 1999, as “Manager of the Century.” GE’s concomitant cuts to basic research, reinvestment, and worker training that put it into slow decline and dismemberment had yet to catch up to it.77xDavid Gelles, The Man Who Broke Capitalism: How Jack Welch Gutted the Heartland and Crushed the Soul of Corporate America-—and How to Undo His Legacy (New York, NY: Simon & Schuster, 2022). At Boeing, Stonecipher—who, as part of the merger deal, had become one of Boeing’s largest stockholders—broke the back of the more engineering-minded in a bitter internal fight in 2000 and reoriented the firm to its stockholders. “Although Boeing was supposed to take over McDonnell Douglas,” said Clive Irving, author of Jumbo: The Making of the Boeing 747, “it ended up the other way around.”88xClive Irving, Jumbo: The Making of the Boeing 747 (England: Edditt Publishing, 2014), quoted in Quartz; https://qz.com/1776080/how-the-mcdonnell-douglas-boeing-merger-led-to-the-737-max-crisis#.
The problem was, the average holding time of stock had already dropped dramatically and has continued to drop—according to one commonly cited calculation, from eight years in 1960 to four months in 2010.99xLynn Stout, The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public (San Francisco, CA: Berrett-Koehler Publishers Inc., 2012), 72. Today’s stockholders are thus looking for quick returns. This necessarily pushes firms from a long-term profitability strategy emphasizing high reinvestment, quality, and safety to a short-term profitability strategy emphasizing cost cutting and value extraction1010xWilliam Lazonick, “Profits Without Prosperity,” Harvard Business Review, September 2014; https://hbr.org/2014/09/profits-without-prosperity.—exactly what happened at Boeing.
Judged on its own terms, the reorientation at Boeing was a huge success. Boeing’s stock price soared as high as its planes, rising from $70 at the close of 2010, just before Max orders began to be placed, to a peak of $425 roughly eight years later, until the two crashes led to the Max’s grounding. That is a 29.5 percent annualized return, handily outperforming, in these years, other high-growth supernovas such as Microsoft (21.7 percent), Apple (19.6 percent), and Alphabet (18 percent).1111xTully, “How Boeing Broke Down.” But judged in human terms, it has been an unmitigated disaster, even for long-term stockholders, with the stock trading at the time of writing around $150 (an annualized return of 5.59 percent over fourteen years, badly lagging the S&P’s 11.84 percent). Bankruptcy is suddenly an imaginable future for what was once the country’s biggest exporter. The cost cutting at GE and Boeing proved to be like “fishing with dynamite”—great for the short-term stockholder, not great for the long-term holder or for anyone else.1212xFor this analogy, see Stout, The Shareholder Value Myth.
Chicago Theory and Its Consequences
The doctrine of shareholder primacy as implemented by Boeing and many other American corporations does not represent timeless wisdom. In some instances, it has been adopted by management, against its own better judgment, as a preemptive measure to forestall possible takeover by activist stockholders—whether the “corporate raiders” of the 1980s or private equity today. But this was not the case with Boeing, or with GE, whose transformations were driven from within by the imbibers, such as Welch and Stonecipher, of new academic ideas emanating from University of Chicago neoliberals.
“[A] corporate executive is an employee of the owners of the business,” Milton Friedman wrote in a famous polemical essay in the New York Times Magazine that pointedly rejected calls for corporate social responsibility. “He has direct responsibility to his employers…to conduct the business in accordance with their desires, which generally will be to make as much money as possible….”1313xMilton Friedman, “The Social Responsibility of Business Is to Increase Its Profits,” New York Times Magazine, September 13, 1970; https://www.nytimes.com/1970/09/13/archives/a-friedman-doctrine-the-social-responsibility-of-business-is-to.html. On the influential “Chicago School” account that grew from this, a business corporation is 1) a private, contractual creation 2) owned by its stockholders, who 3) have the legal right, as owners, to monopolize its control and benefits; although for convenience they 4) hire mangers to operate its day-to-day affairs. Stockholders are the “principals” and management is their “agent.”1414xMichael C. Jensen and William H. Meckling, “Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure,” Journal of Financial Economics 3, no. 4 (October 1976), 309; https://www.sciencedirect.com/science/article/abs/pii/0304405X7690026X.
As a description of the corporation, the Chicago account is wildly inaccurate. Corporate firms 1) cannot be created through contract but depend on the public authority for their “personhood” (their right to own and contract as individuals), their liability exemptions, and the centralized authority of their boards, which they receive from a state-granted charter of incorporation.1515xHenry Hansmann, Reinier Kraakman, and Richard Squire, “Law and the Rise of the Firm,” Harvard Law Review 119, no. 5 (2005), 1337–1354, https://ir.lawnet.fordham.edu/faculty_scholarship/69; David Ciepley, “Beyond Public and Private: Toward a Political Theory of the Corporation,” American Political Science Review 107, no. 1 (February 2013): 139–158, https://ssrn.com/abstract=2484826. Nor 2) do stockholders properly “own” them. The principal point of incorporation is to shift all property, contracts, and liabilities to the juridical person of the corporation, making it the owner.1616xJean-Philippe Robé, “The Legal Structure of the Firm,” Accounting, Economics, and Law 1, no. 1 (2011): 1–86; https://doi.org/10.2202/2152-2820.1001. The stock share is a financial instrument; purchasing it gives one a financial stake in the company, but not a “piece” of it that could justify 3) monopolizing the firm’s control and benefits. Nor 4) are board members or managers the “employees” or “agents” of the stockholders. In the United States, the board is endowed by the charter of incorporation (or by a general incorporation statute) with original authority to manage the firm. Stockholders at no point have the authority to run the company themselves, and nemo dat quod non habet—no one may give (or delegate) what they do not have.1717xDavid Ciepley, “The Corporation as a Chartered Government,” Hofstra Law Review 51, no. 4 (2023): 815–877; https://scholarlycommons.law.hofstra.edu/hlr/vol51/iss4/3. Stockholders may be given, by charter or statute, the right to select who sits on the board. But the authority of the board itself comes from this same charter or statute, not from the stockholders.
Shareholder primacy simply does not follow from the legal structure of the corporate firm. If anything, a corporate firm’s reliance on the public authority for its most central attributes (its “personhood,” its liability exemptions, and the authority of its board) creates a debt to the public, beyond that of ordinary sole proprietorships and general partnerships, that justifies expecting of it a reciprocal benefit to the public that, in the words of Adam Smith himself, is of “remarkable utility” above that provided by “common trades.”1818xAdam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations, v.1.104, https://www.econlib.org/library/Smith/smWN.html?chapter_num=35#book-reader; and Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations, vol. 2 (London, England: Methuen, 1904), 246–247, Online Library of Liberty, http://oll.libertyfund.org/titles/119#Smith_0206-02_591. First published 1776. Indeed, this was the commonplace expectation of corporations before they began to be redescribed as private associations of stockholders (something that did not start until the mid-nineteenth century). No exceptional public benefit, no charter of incorporation. The public had primacy, not the stockholders.
Shareholder primacy can thus be criticized for having spurious legal foundations. But it has also been criticized for its deleterious consequences. Four major downsides have been highlighted, each of which Boeing helps illustrate.
One is that American corporations, under pressure to please increasingly short-term stockholders, have become too focused on short-term profit and stock-price maximization at the expense of long-term investment, high quality, and sustained growth.1919xStout, The Shareholder Value Myth; Ciepley, “Beyond Public and Private”; Lazonick, “Profits Without Prosperity.” This is Boeing in spades.
Another is that, by prioritizing returns to stockholders, American corporations turbocharge income inequality, with the United States now more unequal than all other advanced economies.2020xOECD data, “Income Inequality” (2016), https://data.oecd.org/inequality/income-inequality.htm; Lawrence Mishel, Elise Gould, and Josh Bivens, “Wage Stagnation in Nine Charts,” Economic Policy Institute (2015), https://www.epi.org/publication/charting-wage-stagnation/. The wealthiest 1 percent of US households owns more than 50 percent of all US-traded stock; the wealthiest 10 percent owns 93 percent; the bottom half owns 1 percent.2121xJennifer Sor, “The Wealthiest 10% of Americans Own 93% of Stocks Even with Market Participation at a Record High,” Business Insider, January 10, 2024; https://markets.businessinsider.com/news/stocks/stock-market-ownership-wealthiest-americans-one-percent-record-high-economy-2024-1. Thus, lavishing corporate revenues on stockholders while holding the line on worker pay turns the corporation into an inequality multiplier, which Boeing again exemplifies. From 2010 to 2020, Boeing’s quarterly dividend rose from $0.325 to $2.055—more than a sixfold increase. But until the recent strike, Boeing workers had received negligible pay raises for over ten years and saw pension plans eliminated.2222xDavid Koenig and Manuel Valdes, “Boeing Machinists Vote to Strike After Rejecting Pay Increases of 25% Over 4 Years,” Associated Press, September 12, 2024; https://apnews.com/article/boeing-strike-vote-machinists-12d008c0127bab57f8cc9941f48e3ac6.
The third major problem is that pursuit of short-term profit, combined with liability protection for stockholders and also for officers (for example, through company-provided Directors and Officers Liability Insurance), increases the willingness of corporations to risk committing harms, whether to the environment or to people directly.2323xDavid Ciepley, “Can Corporations Be Held to the Public Interest, or Even to the Law?” Journal of Business Ethics, 154, no. 4 (2019): 1003–1018; http://dx.doi.org/10.2139/ssrn.3173810. In the memorable words of Baron Edward Thurlow, Lord Chancellor of England, “Did you ever expect a corporation to have a conscience, when it has no soul to be damned, and no body to be kicked?” And, it might be added, no officers liable for damages? Again, Boeing.
Finally, a few also criticize the authoritarian management practices that the model has inspired.2424xSumantra Ghoshal, “Bad Management Theories Are Destroying Good Management Practices,” Academy of Management Learning & Education 4, no. 1 (2005), 75; https://doi.org/10.5465/amle.2005.16132558. Boeing fits this, too.
Catering to stockholders has not always had such deleterious consequences, or it would have been abandoned long ago. In the eras in which the Anglo-American system of corporate governance congealed—seventeenth-century England and early-nineteenth-century America—capital was scarce;2525xJames A. Henretta, “The ‘Market’ in the Early Republic,” Journal of the Early Republic 18, no. 2 (1998), 296–298; https://doi.org/10.2307/3124895. stockholders were generally knowledgeable about, and the large ones often ran, the businesses in which they invested;2626xEric Hilt, “History of American Corporate Governance: Law, Institutions, and Politics,” Annual Review of Financial Economics 6, no.1 (2014), 4; available at https://www.nber.org/papers/w20356 or https://www.annualreviews.org/content/journals/financial/6/1. deep and liquid stock markets did not exist, meaning that investments were generally illiquid and long-term;2727xPaddy Ireland, “Capitalism Without the Capitalist: The Joint Stock Company Share and the Emergence of the Modern Doctrine of Separate Corporate Personality,” Journal of Legal History 17 (1996), 67–69; https://doi.org/10.1080/01440369608531144. and, in the early nineteenth century, the American states generally imposed liability on stockholders, ending their exemption.2828xPhillip I. Blumberg, “Limited Liability and Corporate Groups,” Journal of Corporation Law 11 (1986), 588–589; https://digitalcommons.lib.uconn.edu/law_papers/28. At the same time, incorporation was granted only for projects promising exceptional public benefits. In such a world, offering primacy and power to stockholders, to draw their capital, talent, and commitment to such projects, was not unreasonable. (Although, as we will see, there were superior approaches even at the time.)
But in our world, none of these conditions obtains. Today, almost all stockholders are merely rentiers—i.e., passive outside investors. Rarely have they worked in the company or its industry, or even visited a company facility. Many do not even know what stocks they hold, owning them through index funds and retirement accounts. Furthermore, stockholders have been excused from all liability for the debts the company might incur, the harms it might inflict, or, significantly, even the crimes it might commit. Nor do they stay long—by one calculation, only four months on average.2929xStout, The Shareholder Value Myth, 45. Finally, most of these stockholders never make any direct contribution to the firm, financial or otherwise, because they purchase their stock shares from existing stockholders on the secondary market (the stock market), with not a penny going to the corporation. Nor do corporations, on balance, seem much to need these stockholders, since capital is no longer scarce.3030xMichael Howell, Capital Wars: The Rise of Global Liquidity (Cham, Switzerland: Springer 2020). They have for years been buying back more stock than they have been issuing, gathering all the financing they need from earnings, loans, or the sale of bonds.3131xAndrew Haldane, “Who Owns a Company?” A speech given at the University of Edinburgh Corporate Finance Conference, May 22, 2015; https://www.bankofengland.co.uk/speech/2015/who-owns-a-company. In short, the stockholders are the most ill-informed, irresponsible, uncommitted, and unnecessary of all the parties involved with the firm. Yet, in the United States, the United Kingdom, and many other countries, they alone are entitled to select directors, who (it is widely argued) are to cater to them alone—or, rather, to their pecuniary interests alone3232xOn the contrast between the strictly pecuniary interests of stockholders and what they would actually like to see from their firms, see Stout, The Shareholder Value Myth, 61–102.—over the well-being of workers, customers, the community, the environment, or even the long-term well-being of the company itself.
This makes little sense today, given what has become of the stockholder. Stockholders cannot claim primacy either by right of ownership or by the weight of their contributions. Their privileged position is an inheritance from an earlier age, but under current conditions it creates a host of problems, as noted, including the extreme inequality that leads to political capture, authoritarianism, and ossification. What is now needed—if it is not already too late—is a fundamental rethinking of the purpose and governance of corporations.
Stewardship Enterprises as (Partial) Remedy
The promise of stewardship enterprises lies in their ability to solve or mitigate every one of the problems associated with the neoliberal corporation and its central doctrine of shareholder primacy. The Danish enterprise foundation may again serve as an example.
First, enterprise foundations eliminate the counterproductive pressures from short-term stockholders. Their founders typically mandate them to forever control and develop the founder’s company. There couldn’t be a longer-term stockholder. This allows the companies they control to focus on long-term growth. This appears to be the key to their superior performance. It produces high reinvestment rates, patient capital, and a credible commitment to workers, suppliers, and other stakeholders, who are thus more inclined to reciprocate the commitment. Foundation control solves the problem of short-termism.
It also helps mitigate inequality. Foundation-controlled firms typically pay industry-topping wages, and, further, the dividends they pay to the foundation go to its philanthropic work. Given the preponderance of enterprise foundations in the Danish economy, this generates massive public goods rather than just private goods for the wealthiest. Taken together, these help Denmark vie for the lowest economic inequality in Western Europe—and the highest reported happiness.
Finally, it helps reduce worker coercion and other harms, with foundation-controlled companies rated head and shoulders above their peers for social responsibility, including responsibility for the environment, employees, and society.3333xThomsen, The Danish Industrial Foundations, 146, 149.
This superior performance, though confounding to the modern financial economist, is not so surprising when placed in the context of the deep history of corporations.
Historically, incorporation was used not to facilitate but to block wealthy outsiders from bending purposive organizations to serve their financial or familial interests. It had this effect because incorporation involves transferring ownership to a juridical person, eliminating outside ownership claims on the organization. Incorporation removed control of the Church from wealthy lay patrons, removed control of towns from feudal lords, removed control of universities and civil society associations from venal bishops and wealthy donors, and removed control of the state from kings and the dynastic politics of kings.3434xCiepley, “The Corporation as Chartered Government,” 875. Little known, it also originally removed control of the firm from its investors. The board of the world’s first giant business corporation, the Dutch East India Company (VOC), was not selected by its stockholders (who were not misconstrued as the company’s owners, and who were given neither vote nor veto) but by a complex process involving the lead merchants, the port-city burgomasters, and the Estates-General.3535xDavid Ciepley, “The Anglo-American Misconception of Stockholders as Owners and Members: Its Origins and Consequences,” Journal of Institutional Economics 16, no. 5 (2020), 623-42.
The general tendency of incorporation historically has thus been to decrease the dominance of wealth in society and, in particular, to decrease the dominance of the wealthy over organizations. And in every case, this improved organizational performance, allowing the organization to better achieve its ends, or purposes. Not only did it inhibit wealth-holders from hijacking the organization, entity ownership also allowed owner autocracy to be replaced by superior constitutional and electoral forms of control, with officers placed, usually by oath, under a fiduciary duty to the organization’s purposes. The VOC, for example, used its constitutional governance system to overmatch its rival, the English East India Company, which never could secure a place in the spice trade, being chronically hobbled by impatient stockholders extracting unsustainably high dividends.3636xNick Robins, The Corporation that Changed the World (London, England: Pluto Press, 2006).
The entire history of corporations thus confutes the presumption that governance by pecuniarily motivated stockholders is bound to be best. And it has been confuted again in our own day. The Germanic and Nordic countries, where stockholder representatives must share the board with worker representatives, weathered the dislocations of globalization better than their Anglo-American peers.3737xAnke Hassel, Sophia von Verschuer, Nicole Helmerich, “Workers’ Voice and Good Corporate Governance in Europe,” Institute of Economic and Social Research of the Hans-Böckler-Foundation (Düsseldorf, Germany: Hans Böckler Stiftung, 2019). And within these countries, large foundation-controlled corporations are standouts in success.
Obstacles to Stewardship Enterprises in the US
Why then are stockholder-dominated firms so common and stewardship enterprises so rare, especially in the United States? The advantages of the latter are lost upon us, I would suggest, both because of bad ideas and bad law.
The first obstacle is the deep-seated dogma that business corporations are “owned” by their stockholders. This was not the original understanding. The Dutch—who, in the VOC, pioneered the unified, perpetual business corporation—did not think of the company’s stockholders as its “owners” but as “participants” (participanten). It was the English who, in copying the Dutch, carried over the English term for investors in unincorporated joint-stock companies and denominated them “owners.”3838xCiepley, “The Anglo-American Misconception,” 636–37.
We are heirs to this. And it puts us in a corporate-governance straitjacket, for it logically follows that the stockholders, as owners, have a right to monopolize corporate control and benefits. It was on this basis that the EIC, unlike the VOC, introduced an anomaly into the history of corporations. It allowed control to be purchased by granting the vote to buyers of stock. This is the backdoor that has allowed the wealthy to assert control over the corporation, turning it away from its practical purpose and toward their own further enrichment. This is an inversion of the original rationale for stockholders. In line with Adam Smith’s counsel, the accepted practice of kings and legislatures was to incorporate only enterprises promising exceptional public benefits, with stock sales allowed as a means of financing them. Stockholders were a means to achieving a higher end, or purpose. But having been granted sole electoral rights, they have, over time, subordinated the corporate purpose to themselves, the means, asserting that their own enrichment is the real purpose of the corporation.3939xCiepley, “Corporate Directors as Purpose Fiduciaries: Reclaiming the Corporate Law We Need” (July 2019); https://ssrn.com/abstract=3426747.
There is nothing natural about such stockholder control once one abandons the myth that stockholders “own” the corporation and its assets. Indeed, it is an anomaly in the investing world. The price of new art reflects the ongoing success of the artist, just as stock price reflects the ongoing success of the firm. But no one ever thought to give art investors control of the artist’s studio. What is more, there is already nonvoting stock in the United States, and has been for almost two centuries. Generally called “preferred stock,” it gives its holder greater protection in bankruptcy than so-called “common stock” but carries no voting rights. Despite this, it usually trades for a higher price than voting stock, and no one regards it as an incomplete investing vehicle. Whether stockholders are given control rights, and to what extent, should hinge upon whether it contributes to good governance in the pursuit of corporate purposes. It should not come as an ownership right, because the legal entity owns the assets, not the stockholders.
The second obstacle we might call the “profit-maximization idol.” Within the halls of legal academia, many have conceded that stockholders are not the literal owners of the corporation. But some still hold that they are its “residual claimants,” the ones entitled to whatever is left after all contractual obligations to employees, suppliers, and creditors have been met and necessary investments made. That is, they are entitled to the profits. They should therefore be given control, because they have the greatest incentive to maximize these profits.4040xFrank H. Easterbrook and Daniel R. Fischel, The Economic Structure of Corporate Law (Cambridge, MA: Harvard University Press, 1991), 11.
There are three fallacies embedded in this nugget of corporate-governance wisdom. The first is that the stockholders are the residual claimants. In fact, the legal entity (being the true owner) is the residual claimant to all profits, which are further distributed, if at all, at the discretion of management. Stockholders may not sue for the profits, because they have no legal right to them (as they would if they were truly the owners). Nonetheless, because it is true that the dividends they receive will normally be higher if profits are higher, reigning wisdom would still give them the control for having the greatest stake in profit maximization.
This brings us to the second fallacy, that profit maximization is the end of all business. This is really only what the (pecuniarily motivated) investor, or stockholder, desires its end to be, because the greater the profit, the greater the benefit to the stockholder. Or so it is in the usual case. But the unusual case shows us the one-sidedness of profit maximization as a business end.
In nineteenth-century America, the merchants of a town might apply for a charter to construct and operate a bridge on the road leading out of town, and they would purchase shares of the nascent company to finance the work. But profit is not what they sought to maximize. Indeed, they wanted to keep profits negligible, because as merchants, they were the primary users of the bridge and wished the tolls to be as low as possible. That was of greater value to them than large dividends.4141xHenry Hansmann and Mariana Pargendler, “The Evolution of Shareholder Voting Rights: Separation of Ownership and Consumption,” Yale Law Journal 123 (2014): 948–1013. In other words, the real object for them was to increase their total value, not their profit or stockholder value.
From a public-policy standpoint, increasing total value should be our object, too. It is not the profit, or value to the investor, that one wants to see maximized, but the total value—to investors, employees, consumers, and the general public. And it is not clear, especially in a world of imperfect markets, that the best means to this is to give sole control to investors so as to incentivize profit maximization. After all, incentivizing profit maximization does not only mean (or even always mean) incentivizing high business performance. It also means incentivizing the exploitation of the environment and of all other stakeholders (workers, consumers, suppliers, the public, and the future) to increase current profits. Real-world evidence suggests that firms controlled by stewards who do not personally benefit from profit maximization, such as the boards of enterprise foundations, may bring us closer to maximum total value creation, especially in the long term. Recall that large firms controlled by enterprise foundations also had higher profits than their conventional peers, in addition to the other benefits they produced—a clear indication of greater total value creation. But so long as we bow to the idol of profit maximization, we will see the conventional stockholder, not the steward, as the logical party to exercise control.
Finally, the third fallacy (or, at least, bias) is the postulate of Chicago School economists that moneymaking is the most reliable, perhaps the only reliable, motivator. Never mind that these same economists would likely not have gone into academia if money were as overwhelming a motivator as their models assume. This assumption suggests that stockholders are, and stewards are not, the right people to be put in control.
This is a bias in our philosophical anthropology—our theory of human nature. In a historically Protestant country such as the United States, the assumption of human selfishness has strong cultural resonance with the image of fallen man—the Old Adam of Protestant Augustinianism (after Augustine of Hippo), which was embedded in classical political economy by works such as Bernard Mandeville’s The Fable of the Bees: Or, Private Vices, Public Benefits. It is hard to know whether to say, in response, that we should be less Augustinian, or more.
To be less Augustinian is to re-emphasize the pro-social motives, and aspirations for a life of meaning, that drive much human conduct.4242xIn fairness to Augustine, he, too, acknowledged such motives. For example, it is the altruism, or pro-sociality, of Jacobsen that ultimately drives Carlsberg Brewing. The company is under the control of Jacobsen’s nonprofit foundation, which seeks dividends not to enrich anyone but to support its philanthropic purposes.
To be more Augustinian is to observe that it is not avidity but pride that Augustine fingers as the most fundamental human motive. A drive to accumulate more money than one’s neighbor is, from this point of view, one way in which pride can express itself. But it can also express itself in a drive to build an admired business, or to excel in the role of director, or to have the praise of one’s workforce. It can even express itself in the drive to be a renowned philanthropist.
Probably we need both less and more Augustinianism in our philosophical anthropology. But there is another mode of human conduct that is even more neglected. Those steeped in the prevailing paradigms of political theory toggle between two dominant approaches to organizing our common life. Liberal theory (especially in its economistic version) assumes self-interested conduct and seeks to direct it to common interests.4343xSmith, Wealth of Nations. Contrariwise, republican theory extols Herculean public-spiritedness, or virtue, and seeks to empower the virtuous.4444xJ.G.A. Pocock, The Machiavellian Moment: Florentine Political Thought and the Atlantic Republican Tradition (Princeton, NJ: Princeton University Press, 1975). The missing middle is the human capacity for loyalty, or faithfulness, to specific purposes, which pervades the long history of corporations. As a self-conscious mode of action, it began in the corporate bodies of the medieval Church—such as monasteries and confraternities and chantries—which were oriented to godly purposes rather than temporal ones. From there, it spread to charities, universities, and other civil society corporations. And ultimately it made its way into the early business corporations, each of which had to declare in its charter the purpose it was serving, which officers might swear to faithfully serve.4545xCiepley, “Corporate Directors as Purpose Fiduciaries.” Stewardship enterprise carries on this tradition within business. It is a field ripe for research—into the animating motives of purpose fiduciaries and into the conditions supporting their responsible performance. The results may help us overcome an implicit skepticism about steward control that leaves banks loath to finance stewardship enterprises.
A final reason we do not see more stewardship enterprises is straightforwardly legal: A misguided provision of the 1969 Tax Act made it illegal for a nonprofit to own more than roughly 20 percent of the voting stock of a for-profit enterprise. Therefore, enterprise foundations, which are among the most successful of stewardship enterprises, are not formed. Congress should repeal this restriction and replace it with an enabling law for enterprise foundations, with a public supervisory body empowered to issue charters and monitor compliance with them, as in Denmark.
A great advantage to this way of addressing the problems of our neoliberal corporate economy is that it is politically realizable, with entrepreneurs likely welcoming it as a good new option for perpetuating a business. It also does not break with the Anglo-American tradition of accountability to stockholders, since the foundation is a stockholder. Yet its success would likely increase receptivity to other forms of stewardship control. The results will not be immediate. Yet enterprise foundations have, step by step, come to occupy a preponderant place in the Danish economy, suggesting their superiority in a fair competition, even while providing much greater societal benefit. This includes dampening the levels of inequality otherwise produced by business. An economy in which corporations own the assets of business, but stewards control them, could thus turn the corporation from being part of the problem to part of the solution.
There is little time to waste. The highly entrepreneurial baby boomers are now retiring, triggering the largest transfer of business assets in US history. When children are incapable of or uninterested in continuing a business and it is too costly for employees to purchase it, retiring entrepreneurs should have the option of perpetuating their business and its values by handing control to an enterprise foundation rather than to the tender mercies of Wall Street, private equity, or dissolution. The whole country would benefit.