Sometimes a Decent Notion

Posted on February 28, 2011

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I don’t find a hell of a lot for me to agree with Adam Smith, the father of modern capitalism, but I do agree with him on his assessment of “corporate” structure — namely, that dysfunction (in a business sense, not psychological) will result between investors and management when investors are separate from management and do not wholly participate in the business. In other words, companies recast themselves into corporations basically to raise capital (among other things for product development, but mostly to acquire other companies and grow and grow and grow) by creating a class of investors (stockholders) who do not actively work for the company they own stock in. These investors solely want to see their investment grow (the price of the stock increase) and they want to get an occasional (or regular) bonus of dividends if the company has surplus cash on hand. Given the tax laws as they stand now, these investors want to see the stock price increase as fast as possible so they can sell higher and take their profits.

Of course, this approach can be at odds to what management (and, more so, labor) wants the company to do. Management these days cannot position a company to take short-term hits in stock prices (or continually withhold dividends) to strengthen the company’s long-term position. It also puts pressure on management to use worker lay-offs as the first (shortsighted) step to retaining profitability, putting management more at odds with labor.

The corporate structure in our current practice of capitalism is basically dysfunctional and untenable. What would make a better approach to company ownership, and capital investment, would be to outlaw (yes, outlaw!) majority ownership of any company by anyone who does not actively perform needed functions for that company to conduct business. Think now of slums, with countless buildings owned by landlords who reside elsewhere, living off the profits of their buildings that they do not maintain. When confronted with scofflaw absentee landlords, many judges in the past have sentenced these landlords to live in their slum buildings as a way to ensure that they are maintained.

We have the same problem today with our businesses. Too many are owned by absentee “landlords” who only care about extracting profit (stock price and dividends). Companies need to be owned by the people who work in them. Period. Both management and workers. Make management and workers equals and get rid of the absentee owners. Put management and workers on the same side: to make their companies healthy and profitable (because that will profit them directly). This is not a pie-in-the-sky concept. Southwest Airlines and W.W. Norton are two companies that come to mind owned by management and workers.

But how will these “cooperative” companies raise needed capital if they cannot sell stock? Well, they still could sell stock, but it would be limited to less than 50% of the shares (or even less of a percentage) so that absentee interests would not override management/worker interest. And companies could try borrowing more and find other more creative ways to raise capital that would respect management/worker ownership.

There is still the drive of competition. Under this concept, management and workers in profitable businesses would share in its good fortune. Those in businesses that are not doing so well will have to come together even more in their attempts to become successful. This way of organizing, and running, businesses might allow us to rethink how we could make government better, creating an idea of government that moves from a “us vs them” mentality to one of just “it’s us.” We could also look to how better structure “non-profit” businesses (those businesses that are needed but cannot either make a profit or for which profiteering would be unethical).

For the Tea Partiers, this proposal is not socialism. Repeat: not socialism. The government would not own these businesses. This is not syndicalism either, with only the workers owning the company.

The economic dysfunction (read: Great Recession) that is occurring now is not due to big government or undue government interference with business. It’s reflecting exactly the dysfunction that Adam Smith initially warned about. Less government regulation and smaller government (less government spending) will not solve this dysfunction. If anything, it will just fuel it. Some sort of conflict may be good to spark creativity, but large amounts of conflict extinguish creativity and proliferate misery. Buying into a system that pits workers against management and investors against both management and workers is insanity.

Working together we can accomplish great things. What’s that saying those tea baggers like to extol? “United we stand, divided we fall!” Let’s put it to the real test and create an economy that works together for all of us.

Note -- Just for reference for any tea bagger: Adam Smith was also a
proponent of progressive taxation. In his mind, the more you have (or
make), the more you should contribute to the common good. Put that in
your tea bag and smoke it.
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