The Divine Right of Capital: Dethroning the Corporate Aristocracyby Marjorie Kelly
In this radical critique of the corporate economynewly updated with information on Enron and other business scandalsthe cofounder and editor of "Business Ethics" questions the legitimacy of a system that gives the wealthy few disproportionate power over the many.See more details below
In this radical critique of the corporate economynewly updated with information on Enron and other business scandalsthe cofounder and editor of "Business Ethics" questions the legitimacy of a system that gives the wealthy few disproportionate power over the many.
Corporate responsibility is a concept that holds very different meanings for different people. When structural changes are proposed for corporations, corporate defenders claim they exist to pay stockholders as much as possible while corporate critics claim the economic rights of employees and the community are equal to those of capital owners.
Shareholder primacy, the idea that corporations exist to make profits for shareholders, is a concept that is often cited as the first rule of American business. Although many believe it is the natural law of our free market, some critics, like Marjorie Kelly, believe there is as much value in shareholder primacy as there was in our forebears' belief that monarchy was the most natural form of government. To illustrate her point, she develops in her book, The Divine Right of Capital, six aristocratic principles that corporations are built upon that promote shareholder primacy, but exclude community and employee input. She writes that these corporate principles are not only unnatural and irrational, but also out of touch with our modern democratic system.
Wealth and Power
The first half of her book looks deeply into the difficulties created by shareholder primacy. She emerges from her in-depth examination of past and present corporate principles with the opinion that the wealthy hold too much power in the world today, and they hold too much power over the corporations that shape the planet. She writes that this power not only makes the rich richer, but it also creates an economic aristocracy that levies absurd taxes on the rest of us.
The Divine Right ofCapital also offers six principles of economic democracy that embrace the rights of employees and the concept of the corporation as a human community. Kelly, a co-founder of the national publication Business Ethics, writes that our economy can resist the inequalities of shareholder primacy by using these principles to raise consciousness about wealth discrimination and promote structural changes within corporations.
She writes that wealth inequality, corporate welfare and industrial pollution are the symptoms of an economy in need of attention. Kelly has focused her ethical eye on more than the problems that stem from corporations: She looks for rational solutions while envisioning a future where these ills are addressed and resisted, rather than ignored and accepted as inevitable.
The Theories of Thomas Paine
Her response to the current corporate situation is the development of an economic democracy. Using the theories of Thomas Paine, as well as more contemporary thinkers, she assembles ideas that could serve as the basis for future reforms. Beyond all the thought-provoking rhetoric and jargon of progressive business ideals, Kelly also offers many small steps that businesses can use to reach more community-minded results.
Kelly writes that her book "examines how our corporate worldview remains rooted in the pre-democratic age, and how we can transform it." She is a firm believer in the dismantling of the bias of "wealth privilege," which she describes as an undemocratic remnant of aristocracy that serves the wealthy few and disregards the many.
According to Kelly, wealth privilege is built into the design of corporations, and contradicts democratic and market ideals. "We may have done away with the divine right of kings, but we find ourselves in the grip of a new divine right of capital." To break this grip, she offers the logic and inspiration of America's founding fathers, while presenting several examples of how workers, business students, investors, executives and the public can create change in corporations. She does not call for immediate revolution, but instead offers ways for businesses to extract aristocratic bias from their systems while leaving the institutions intact, and in healthier shape.
The compelling nature of her book comes from her research into history and the lessons to be drawn that apply to our current economic situation. Along the way, she coins the phrase "wealth discrimination" and discusses the perpetual economic inequality that accompanies it. Although her perspective will be challenged, the American idealism presented in Kelly's book offers a compelling view of how far many corporations have drifted from the guiding principles of democracy. Copyright (c) 2002 Soundview Executive Book Summaries
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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.
I grew up with bombs in the house. Two, actually. They were part of my father's collection of antique war implements: a motley assortment of swords, masks, rifles, and these two shellstall as a two-year-old child, standing upright on the long brick hearth in our basement. It wasn't until my dad died and my mother moved outafter eight children had grown up wrestling near those bombsthat we discovered one shell was live. It could have gone off any time.
These days I collect tamer antiques than my dad: old magazines, cobalt blue Fiestaware. Mostly I collect antique ideas. I'm fascinated by the way an idea becomes antique, intrigued that a concept once considered ordinary can later seem absurd. I find it useful to keep antique ideas around, as a reminder that how we see things today is not how the world will always see them. And conversely, ideas we think of as dead may turn outlike old bombsto have an unexpected, lingering power.
The Great Chain Of Being
In my antique idea collection, a prized artifact is my 1914 Whitaker's Peerage, Baronetage, Knightage, and Companionagea fat little volume of royal blue, with a dozen gold crowns stamped on its cover (showing the king's crown as distinct from a duke's as distinct froman earl's, and so forth). It's a kind of phone book without phone numbers: a way for the British nobility to locate one anotherin space (Winston Churchill residence: Admiralty House, Whitehall), and in order of noble precedence (grandson of Seventh Duke of Marlborough). I think of it as a souvenir from a lost world, not unlike a spent shell. Or a pot shard from Pompeii, dated the year of the eruption. For 1914 was the year World War I would break out, and it would leave five ancient imperial dynasties in its rubble.
The imperial descent began in 1908, when the Ottoman dynasty fell to revolutionary Young Turks. Within three years a revolution would topple the Ch'ing Dynasty in China. By the end of the war in 1918, three European dynasties lay in the dust: the hapless Romanovs in Russia, the Habsburgs in Austria-Hungary, and the Hohenzollerns in Germany. At war's end, as a member of the Reichstag put it, crowns were simply "rolling about the floor." The British throne would stand, but its imperial possessions would soon break away to independence. Its aristocracy, as historian David Cannadine wrote, would continue its descent into "decline and decay, disintegration, and disarray."
To the nobility in my 1914 Whitaker's, the coming devastation lay yet behind a veil. They were still "the lords of the earth," still "conscious of themselves as God's elect." And they had Whitaker's to help them keep score among themselvesshowing who had the greater nobility. When Americans think of the aristocracyif we think of it at allit is as a vague lump of important personages, in which we differentiate a viscount from an earl no more easily than we might tell a paper birch from a shagbark hickory. But Whitaker's Roll of the House of Lords was numbered in order of precedence: from 1. The Prince of Wales; 2.-8. Princes and Archbishops; 9.-29. the Dukes; 30.-54. the Marquesses; down through Viscounts, Bishops, and the long list of Barons, ending with 654. Baron Sumner of Ibstone.
The list was more than preening: it was the visible symbol of one's place in the cosmic diagram, a way of knowing who was above whom, and who below, for that was how they pictured all of life. It was a world based on a primary antique idea: the great chain of being. All life had its place in this chain, which stretched vertically from the lowliest peasants up through the gentry and nobility to the king, who was highest of all (His Royal Highness) because he was just below God.
This picture of reality held pride of place for centuries, wrote Johns Hopkins University philosopher Arthur O. Lovejoy in The Great Chain of Being. Like any idea that serves as a base for a society's worldview, it was less a formally expressed concept than an "unconscious mental habit." These beliefs, Lovejoy wrote, "which seem so natural and inevitable that they are not scrutinized," are most decisive of the character of an age. They are so deep as to be inaccessible, so pervasive as to be invisible. For centuries, society accepted the great chain of being, not as an idea but as a description of reality itself.
* * *
Today, we prefer the Forbes 400, ranking individuals from one to four hundred by relative worth. We may read in it the character of the corporate age.
Like aristocratic society, corporate society bases membership on property ownership. In Baron Sumner's era, land was the property that mattered. Today property takes varied forms and is called wealth, or financial assets. So that's the lens through which the corporation views the world: the lens of financial numbers, where it sees the numbers that belong to stockholders as the end point of the whole game. The financial statements are a lens focused on wealth holders, and that lens distorts what it seesas did the lens of the great chain of being. Whitaker's lords did not see others as gentlemen like themselves. They saw commoners destined to be ruled. As CEO of Scott Paper, "Chainsaw Al" Dunlap did not see employees as members of the corporate society. He saw expenses to be cut.
Corporations believe their world of numbers is rational. They fail to see the irrational bias in the way the numbers are drawnmuch as the lords failed to see (or chose not to see) the bias in the great chain of being. A primary bias built into financial statements is the notion that stockholders are to be paid as much as possible, whereas employees are to be paid as little as possible. Income for one group is declared good, and income for another group is declared bad.
Unpacking Biases in Financial Statements
This decree is held in place by the structure of the financial statements, which we might think of as the conceptual foundation of the corporate worldview. These statements reveal, to a remarkable degree, the unconscious mental habits of the corporation. They merit a closer look.
The stripped-down structure of the income statement is this:
Profit = Revenue - Costs
We might begin by making a few things visible that are invisible here. In simple terms, there are two kinds of costs: labor costs and materials. People and objects. There are also two kinds of people: employee people and capital people. Instead of designating gains to one as costs and gains to the other as incomewhich contains an invisible biaswe might designate them both as income. So we may restate the equation:
Capital income = Revenue - (Employee income + Cost of materials)
There's also something invisible on the capital side: retained earningsprofits not given out as dividends but retained for the corporation's use. Thus we have:
Capital income + Retained earnings =
Revenue - (Employee income + Cost of materials)
Common algebra teaches us that we can draw an equation in different ways while retaining its essential meaning. We might, for example, draw it this way:
Employee income + Retained earnings =
Revenue - (Capital income + Cost of materials)
Using this income statement, a corporation would define its purposeits bottom lineas maximizing returns to employees. It would do so in part by driving capital income down as low as possible. That's the nature of the equation, to reduce costs, and to increase profit. Note that in this equation, capital income is relatively secure: it's a cost of doing business that must be paid. But it's also fixed, so if the corporation does well, capital doesn't share the gain. Employee income has been put at risk: if there aren't profits, employees don't get paid. But if the company does well, employees do well.
It might make more sense to draw income statements this way. If employees were given incentives to cut costs and increase revenuesknowing they'd pocket the gainsthe company might become enlivened. Capital providers are in no position to increase revenues or cut costs, so giving them incentives to do so makes little sense. It's also simply more logical to lump capital providers with materials providers. Both are suppliers, people outside the daily workings of the company, providing resources for its use.
* * *
We might observe here the unconscious power of the equation, for by its structure it defines insiders and outsiders. Whoever gets lumped with materials becomes a commodityan object conceptually outside the corporation, to be purchased at the lowest possible price, to be used to enrich the bottom line of the insiders. In our redrawn income statement, capital becomes the outsider. Employees become the insiders.
An equation is simply an equation. We can draw it any way we like. But the way we draw it says a great deal about our worldviewand it unconsciously locks us into that view. Drawing it as we do today represents a choice: to view capital providers as those who are the corporationand to view labor as a commodity.
* * *
The balance sheet reveals a similar capital-centric bias. Its structure is this:
Assets = Liabilities + Equity
The balance sheet is a funny beast in that it must balance. The two sides must be exactly equal. But in a way it makes sense: every asset a company has is either owned outright (thus is represented by equity) or has debt against it (and is represented by liabilities). Thus liabilities and equity added together equal assets.
Stockholders are represented on the balance sheet by equity, which is supposedly a reflection of what they own (in truth they own far morethe value of the corporation as a whole). But employees don't appear on the balance sheet at all. They simply don't existmuch as commoners did not exist in the Roll of the House of Lords. When a corporation looks around and records everything it has of value (its assets), it doesn't see employees. It's commonly said, "Our employees are our greatest assets," but this isn't true in accounting terms. If it were true, layoffs would be portrayed as a wholesale destruction of assets, rather than as an elimination of pesky expenses.
In accounting terms, employees have no value. Money has value, objects have value, ideas (intellectual property) have value, even some airy thing called goodwill has value. Employees, by contrast, have a negative value: They appear on the income statement as an expenseand expenses are aimed always at a singular goal: to be reduced.
If it's the balance sheet that renders employees invisible, it's the income statement that turns them into an enemy of the corporation. The reason is simple: every dollar paid out to employees is a dollar that doesn't go to profits for stockholders. And common law (judge-made law) says public companies must maximize returns to shareholders. Every time an employee asks for overtime pay, or a raise, or benefits, he or she is acting as an enemy of the company's fundamental mandate.
Changing the Narrative
It doesn't have to be this way. For a moment, let's reimagine the income statement in a different design:
Capital income + Employee income =
Revenue - Cost of materials
Instead of viewing either labor or capital as a commodity, we've made them both the bottom line. They're both insiders nowboth considered full-fledged members of the corporate society, with a claim on profits. Now we have something that resembles a competitive internal market. We also have a natural partnership between stockholders and employees. Profit flows naturally to bothand the two parties must find a way to distribute it, presumably negotiating for it. The new design means employee income is put at risk. It also means employee gains are limitless. And it means employees are likely to start asking tough, market-based questions: Who contributed to the company's success recently? When was the last time stockholders put any real capital in? How much have they already made off their contribution?
Employees are not asking these questions today. The financial statements do not encourage them to do so. Nor does corporate governance allow them a voice in income allocation, because they are defined as outsiders.
This business of insiders and outsiders is key. As cultural historian Edward Said notes, the fundamental tool of an imperialist order is turning the natives into outsiders in their own land. "For the native," he wrote in Culture and Imperialism, "the history of colonial servitude is inaugurated by loss of the locality to the outsider." And because of that outsider's presence, "the land is recoverable at first only through the imagination."
Stories are at the heart of how we view the world, Said wrote, for "the power to narrate, or to block other narratives from forming," is what defines culture. The great chain of being was the narrative of the old world, and implicit in it was the notion that all must accept their place, no matter how low. The financial statements are the narrative of the corporation, and implicit in them is the notion that employee income must be kept in its place, that is, as low as possible. The concept of divine right once kept other social narratives from forming. Our own version of divine rightthe mandate to maximize profits for shareholdersblocks other corporate narratives from forming.
Financial statements are nothing more than a mental construct, a picture of reality that makes companies add and subtract in certain ways. But they exact a toll in flesh and blood. And that toll is rising. In the last decade and a half, the proportion of employees making poverty-level wages has climbed substantially, and in the mid-1990s it stood at an alarming 30 percent. That's almost one in three working people, making wages that can't adequately feed and clothe their families.
The problem isn't limited to low-wage employees. For most Americans, wages have been falling for decades. Between the late 1970s and mid-1990s, income declined for a depressing three out of five Americans. Ideas do have consequences.
Why Environmental Damage Is Invisible
Those consequences affect the community and the environment as well. That's a result of a second major bias built into the financial statements: The corporation aims to internalize all possible gains from the community, and to externalize all possible costs onto the community. Costs placed on the corporation show up on the income statement, and diminish the bottom line. That's bad. But costs placed on the community are invisible: the financial lens doesn't see them, so they are of no consequence in the corporate worldview.
Let's say Texaco drills in Ecuadorwhich it did for two decades. If Texaco had to pay to clean up the environmental mess, that would be bad. Environmental remediation is expensive. Thus the logic of the income statement dictated that contaminated "produced water" wastes (water brought up in the process of drilling) were dumped untreated into the Amazons rivers and streamsin the astonishing amount of four million gallons each day. The same logic dictated that toxic drilling muds were buried untreatedthough this virtually assured the destruction of groundwater aquifers. Aquifers, rivers, and streams are not assets of Texaco. They do not appear on the balance sheet, so their destruction need not be written off. That destruction is invisible in the corporate lens.
That lens also fails to see the consequences for human and animal life: cattle dead with their stomachs rotted out, crops destroyed, streams devoid of fish, children with anemia because sources of protein have been destroyed. "All during the dry season," a clinic doctor in the region told The Village Voice in 1991, "[children] come in here with pus streaming from their eyes and rashes covering their bodies from bathing in the water."
Damage to the fabric of life happens offscreen, as it were. This allows the corporate worldview to maintain the myth that social issues are soft (not businesslike, not important), while financial issues alone are hard. If something shows up on the financial statements, it matters. If it doesn't show up, it doesn't matter. Translated into human terms, this means that what affects stockholders is important; what affects everyone else is not important.
Saying this is the corporate worldview is not the same as saying everyone in business personally thinks this way. Individual managers might be very caring, and indeed many are. But the lens of the financial statements forces them to see, and to behave, in certain ways, regardless of their personal beliefs. The lens forces them to put aside their humanity and see in business termsdisregarding social costs if there are financial (that is, shareholder) gains at stake. It leads them to believe that it's natural and correct to discriminate in favor of shareholders, and against employees and the community.
* * *
What is lost is at first recoverable only in the imagination, as Said noted. If we've never questioned the ideas implicit in the financial statementsnever imagined we could (horrors!) add and subtract in different waysit's because we don't think of these concepts as ideas. We think of them as reality.
The great chain of being, in its day, seemed like reality. It was a picture of reality that seemed so natural and inevitable that it was not scrutinized. Its bias was so pervasive as to be invisibleas the bias toward stockholders remains today. We see it not only in the corporation, but in treaties like the North American Free Trade Agreement, which puts financial concerns at the core and puts labor and environmental concerns into side accords. We see it in a business press that has trumpeted an era of great prosperity, while one in three workers made a poverty-level wage.
Our mental habits take many bizarre (indeed, dangerous) forms, once we think to notice them: that company assets matter, while community assets do not. That the people who work at the company every day are outsiders, while those who never set foot in the place are insiders. Most of all, that this is the only way corporations can see the world. That the corporation's current worldview is rational, natural, inevitable.
One hopes these notions turn out, some day, to be our own antique ideas. Today they retain their invisible, almost mythological power. We live with them like bombs on the hearth.
Excerpted from The Divine Right of Capital by Marjorie Kelly. Copyright © 2001 by Marjorie Kelly. Excerpted by permission. All rights reserved.
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