I’m just another Cog in the Machine of Corporate Capitalism

Great post this morning by Mark Mitchell over at Front Porch Republic, on Corporate Capitalism, a subject very near and dear to my heart. Fill up the coffee cup, and head on over to check it out.

He highlights what I think is the core of the problem behind corporate governance, which is the dominance of agency theory. Agency theory affirms the maximization of shareholder value as the sole purpose of the firm. As you mentioned, in the case of many corporations, employees are given the opportunity to own shares in the company stock through their retirement funds, or through outright purchase of company stock using pretax dollars. These employee stock ownership plans came into existence during the last 50 years, and have grown in widespread popularity. This practice would seem to be an excellent example of the principle of economic subsidiarity as articulated by Pope John Paul II, proposes that “Each person is fully entitled to consider himself a part owner of the workbench where he is working with everyone else” (Centesimus Annus). By having the employees participate as shareholders of the corporation, the employees become part owners of the corporation’s capital, and also share in the profits of the business.

In agency theory, the corporate management team can be held responsible by a fiduciary responsibility to the employee shareholders. Employees of the corporation invest both their labor, and a portion of their earnings in the corporation in return for a share of the profit and the security and satisfaction of the fruit of their labors. However, in actual practice the reality of the situation falls far short of subsidiarity.

While workers share in the ownership of company as stockholders, and retain the voting rights of all shareholders, they do not have a direct say in the management decision making. Their say in management decision making is via proxy through the elected board of directors. As you point out, the employee shareholder’s voting rights often represent such a small percentage of the total that they can be considered negligible. Ultimately, those who most influence the direction of a company are the management team, the board of directors, and the large institutional investors that hold and manage the employee shares in mutual funds. Each of these three constituencies are highly incentivized to maximize shareholder value through short term increases in share price, driven by near term corporate earnings per share. As the events of the current economic crisis have illustrated, and several economists have argued governance and management practices built on shareholder value alone have resulted in the unintended destruction of shareholder value on a massive scale, and the purposeful elimination of employees from the corporation. The result is one of Orwellian proportions, where corporations must eliminate jobs, or relocate them to lower cost countries in order to “add shareholder value” to the employee stock ownership / pension plans of the employees being eliminated. And the fact that the new employees in the low cost labor country are not given the same benefits, or rights as the employees being eliminated is a whole other post about Corporate Colonialism…

Despite much talk about stakeholder value (as opposed to shareholder value) until the current corporate governance structure is modified to create a legitimate voice for stakeholders, and the incentive system for management and boards changed to consider more than the stock price and short term earnings, little will change.

What is needed is a “stewardship theory” that acknowledges a social covenant (as opposed to social contract) between business corporations and the societies in which they operate. I have some ideas on how this can be accomplished within the current framework of a modern corporation. Right now I have been working on a few paper proposals in the hope of presenting my ideas at some conferences on business ethics. (Confession #253, most of this post is merely an excerpt from one of my paper proposals) If I think there’s any interest here in this forum, I might bore you all to tears with the details at some point…


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