The Last Owner: A Reprise

Had some good feedback from readers on the previous posting concerning corporate ownership. The feedback brought up some issues that I'd like to clarify. As stated previously we have a corporate model where property is represented in terms of shares of stock. And for sometime this model has worked sufficiently well. However, when we look at the current state of corporations they are obviously very unhealthy. So much so that standard presumptions of capitalists have failed. This statement from previous Fed Chairman Alan Greenspan is instructive "I made a mistake in presuming that the self-interest of organizations, specifically banks and others, was such as that they were capable of protecting their own shareholders". The Greenspan presumption is really the presumption of every capitalist.

So why didn't executives protect thier shareholders? Or even more concerning why didn't shareholders move to protect themselves when it was obvious their interests weren't being served? Obviously it was because it really wasn't in there own self-interest!

The current incentives provided for executives really promotes four types of behaviours in relation to corporate property: looting, squatting, gambling, or caretaking in a best case scenario. The incentive to behave as a property owner doesn't exist. We need only look at GM and the current cast of financial executives. In the finance industry executives were emailing each other about the "House of Cards" they knew they were building. They also knew it would all come down, but hopefully they would have looted and gambled enough of the corporate property to meet thier own needs before a collapse took place. And who was there to protect the property from the looters and gamblers? Was it supposed to be the Mutual Fund "owners" and private shareholders who only have a "squatters" relationship with the corporate property too? Why would they try to correct bad executive behaviour when it's so easy to consume corporate property for themselves and quickly move on at the first hint of problems?

Look at GM's situation, they have lost around 70 billion dollars for four years and counting. It doesn't take a degree in business to know that this is a problem. But the incentive for Rick Wagoner has been to act the role of a squatter. We can condemn Wagoner and all these executives for being evil, but things get more uncomfortable when we ask ourselves, what would I do in Mr. Wagoner's shoes with the incentives he was given? How would you or I respond if we "earned" 10 million a year for maintaining the status quo without hassling with the UAW? At least in terms of self-interest the incentive is to take the role of a squatter or a looter until the corporate property is consumed.

Of course an owners incentive wouldn't tolerate what has happened to GM. An owners incentive would move mountains to make sure that GM was healthy, competitive, and profitable. An owners incentive wouldn't blame government or the unions or anything else. An owners incentive would fix the problems.

In GM's case particularly, it was completely doomed to fail because not even the employees had an ownership interest. The UAW assured that the employee reltionship with the corporation would be also be a looting relationship.

So who really can have an ownership interest in the corporation? Those who need long term work and see the corporation as a way to have that. Those who don't have Golden Parachute's to reward failure.

We arrive again at the fact that the only possible people who can have a long term interest, or in other words an ownership relationship with a corporation is it's employees.

So now to some of the reader feedback. Some wonder if providing employees with any power is creating a built in union. I would suggest that it's more similar to other democratic social structures. The majority would act in the interest of corporate self-preservation. Union's act in the interest of union preservation to the detriment of a corporation.

Also suggested was that a a corporation be structured so that a number of employees could be on the board of directors. That'a a possibility that would be interesting too, but trying to respect the model of shareholder property ownership it seems that a small voting percentage for employees could be sufficient. In this way employees would have to form coalitions with others who own standard shares to effect changes. Ultimately, these posts seek to stir ideas that will help self-interest to align with corporate interests so that we can have healthy competitive, long lasting corporations.