Marjorie Kelly: Saving Capitalism From Itself
Just over a decade ago, in The Divine Right of Capital, Marjorie Kelly took a close look at the contemporary corporation and found serious problems at its core. She provocatively criticized the corporation’s intense focus on producing profits for shareholders as unacceptably exclusive. And her cogent, far-reaching proposals challenged readers to reconsider not just our tolerance for corporate misdeeds but the proper role of stockholders in public companies. Long before The Nation presented “13 Bold Ideas for a New Economy” in its June 2011 “Reimagining Capitalism” issue, Kelly had charted the course. Today, as corporations make an unprecedented bid for political influence in the run-up to the presidential elections, her analysis remains more timely than ever.
In a metaphor Kelly maintains throughout the book, she argues convincingly that capital’s seat on the throne of the corporate world is no more legitimate than the divine right of kings. Kelly paints this picture: The law gives corporations limited liability as well as perpetual life, and it is through these specially protected entities that the private sector operates, often imposing on the broader society the costs of, say, environmental damage or poor worker health and safety in the interest of maximizing shareholder returns. In America’s early years corporations were intended “to be subject to the sovereign will of the people and to serve the common good.” But as time went on, they committed themselves to shareholders at the expense of workers and communities, and wrapped themselves in the flag of “shareholder democracy” even as they trampled on other stakeholders.
Kelly correctly points out that shareholders today are rarely the ones who financed the enterprise in the first place. On the contrary, most shares are bought and sold publicly in the secondary market, where those who had nothing to do with providing capital to the company trade securities based on different perceptions of the risks and rewards of ownership. These shareholders, many of whom own their positions for very short time periods, get to vote for the board of directors once a year, and if they do not like the slate, their recourse is a proxy fight to wrest control from the board.
Such a contest is expensive, time-consuming and not easy to win. Many companies have set up so-called “staggered” boards so that if the diverse base of shareholders actually succeed in coalescing against the leadership, they obtain only a minority of the seats. Most of the time, if a shareholder doesn’t like the direction of a company, his practical recourse is just to sell his stock. As a result, it is rare for shareholders to succeed in changing corporate governance, strategy or management. And to many it has come to seem that the main result of this peculiar “democracy” has been ever increasing recompense for management.
Kelly did allow that positive change was taking place in the growth of socially responsible investing, cause-related marketing and growing corporate concern for environmental stewardship. In fact, on publication date, she was able to credit thirty-two states with somewhat broadening the corporation’s fiduciary duty beyond the shareholder constituency. But she was not one to bet on the social conscience of CEOs, since under the current system they are under great pressure to pursue near-term profits.
On the contrary, Kelly was ready to mandate that companies serve not just investors but also other stakeholders—including, most especially, the people who work for the business as well as their local communities and the broader communities affected by the companies’ decisions. She advocated lawsuits aimed at revoking the business’s corporate charter on grounds of antisocial behavior in violation of the state corporate law. And cleverly, she tagged mergers as a juncture where employees could use state stakeholder laws to block job-destroying deals. Redefining the very essence of corporations through these (and new) stakeholder statutes, she would have us move “beyond laws focusing on specific abuses—like environmental damage, low wages, or unsafe conditions—and focus on structures for reallocating power.”
To embrace Kelly-ism, a world where companies are obligated by law to look beyond the bottom line and consider the broader interests of society, we would have to be persuaded that our private corporations could still compete in the international and domestic arenas. We need to be a little cautious here, because Kelly’s focus on the myths of shareholder democracy seems to blind her to how essential those daily market bets are in determining how capital is allocated. The fastest growing, more profitable companies get capital on more favorable terms, while those that are less promising must give up more in shares or interest rate to attract capital and resources.
We would also have to address the potential that corporations might simply migrate away from socially responsible states. If some states were permitted to get away with only seeming to serve broader constituencies while basically ignoring all but investors, such loopholes would undermine Kelly’s vision. So we would need an overarching federal stakeholder law that would place a limit on states enacting their own watered-down variations.
Was Kelly indulging in pie-in-the-sky thinking? Many in the corporate world would say yes. Some CEOs I have spoken with argue that they do not need state law to tell them they must treat employees fairly and respect the environment. Their very commitment to the bottom line, they say, forces good behavior. Doubtless that is true in some instances, but as an adviser to many public companies’ boards over the years, I remain convinced that Kelly was right when she tagged corporations with a proclivity to externalize every expense they can impose on society without immediate negative consequence to the business.
In today’s world, where the corporation is gaining ever more legal and economic power, Kelly’s thinking is by no means outdated. Rather than fall prey to the proposition that we need just a few more laws proscribing this or that particular manifestation of bad citizenship or mandating specific obligations companies must take on, we could alter the very foundation of corporations’ reason for being. We must recognize that as we compete with rising economies such as “Communism with Chinese Characteristics,” we need a “capitalism with American characteristics”—a political economy for the twenty-first century that fosters not just high productivity but an acceptance of obligations to a broader community. Kelly says, “It wasn’t necessary to abandon belief in God in order to change the monarchy. And it is not necessary to discard belief in the free market in order to change corporate structures.” In those words I hear a thought that begins to lay the underpinning of a very vibrant, competitive, albeit more humane, form of capitalism.