The Ethical Case Against Shareholder Capitalism
What ethical blindspots will future generations judge us for, in the way that we judge our forebears for condoning slavery? Today it seems almost incomprehensible that it was once considered normal for a person of one colour to be permitted to own a person of another colour. And yet, slavery persisted for centuries before that norm was overturned.
Our collective morality remains a work in progress. The #MeToo moment shows how rapidly society’s view of what behaviours are acceptable continues to evolve. And Trumpism proves that progress is anything but linear: having once reached a point of relative enlightenment does not make us immune to backsliding.
Let’s take it as read, though, that 23rd-century humans will have a more highly evolved morality than we do. What will they find it hard to comprehend about us? There are some obvious ones, like the fact we continued to burn fossil fuels for decades after we knew that the consequences of doing so were devastating. Or the fact that we allowed billions of people to go on living lives of grinding poverty whilst others became multi-billionaires.
But these moral failings we can easily spot today. What I want to get at are the deeper, unspoken assumptions on which the social, political and economic system that delivers these outcomes is founded. What makes pre-abolition slavery so abhorrent and difficult to comprehend isn’t that it involved cruelty and bigotry (these, alas, are perennial traits of human society); it’s that it was institutionalised. It was recognised by the state as legal.
The 20th century reinforced the lesson that we should fear the institutionalisation of brutality in the form of an over-powerful state, because it leads to the Holocaust, the Gulag and the Killing Fields.
The antidote to proto-fascist state power is supposed to be the free market. One of contemporary Western society’s foundational beliefs is that, while states can be good or bad depending on who’s in change, markets are neutral.
This is a faulty assumption. It has enabled us to institutionalise exploitation of both people and nature with a clean conscience. The exploitation is the result of “market forces” and that makes it morally acceptable because markets are akin to a force of nature. Nobody is in charge — only the market — and therefore nobody is to blame.
Markets, though, are neither natural nor neutral. They are social inventions in the same way that governments or religions are. And while they may not be governed by a specific person or group, nor are they self-governing. The way they behave is a consequence of the way they are designed.
The fact that, today, the design of our financial markets makes exploitative, unsustainable outcomes all but inevitable is, perhaps, our generation’s greatest ethical blindspot.
Who is to blame for our collective blindness? One culprit is the economics profession. Back in the late nineteenth century, long before neoliberal ideologues like Friedrich von Hayek and Milton Friedman came along with their extremist version of the free market agenda, professional economists set off down a dangerous path. Kate Raworth, who describes herself as a ‘renegade economist’, puts it down to “physics envy”.
Economists wanted to be respectable scientists and that meant making economics ‘a value-free zone.’ (Not coincidentally, at about the same time, the term ‘political economy’ was jettisoned in favour of plain and simple ‘economics’.) Economics, they believed, was a descriptive as opposed to a normative discipline. It was about what is rather than what ought to be.
As Raworth points out in her book Doughnut Economics, ‘this created a vacuum of goals and values, leaving an unguarded nest at the heart of the economic project.’ One of the cuckoos that, in time, came to fill that nest was the idea that the goal of the economy was simply to grow.
Another was ‘marginal utility theory’, which Mariana Mazzucato skewers in her book The Value of Everything. Marginal utility theory says, in effect, that the value of any good or service is determined by the price you can sell it for. The appeal of this theory to the wannabe scientists in economics departments was its supposed objectivity. But, as Mazzucato points out, it has left us with a situation where ‘we can no longer reliably say who creates value and who extracts it.’
Of the myriad problematic outcomes this has led to, one of the most disturbing is the way it has blinded us to the extent to which our growing financial wealth in recent decades has relied on companies’ ability to liquidate stocks of social and natural capital for free.
A 2013 study by Trucost, found that if you factor in environmental costs, almost no industry in the world is profitable. The study estimates that the top 100 negative environmental “externalities” caused by businesses cost the global economy $4.7 trillion a year in lost ecosystem services and pollution costs.
So mainstream economic theory is deficient, but we need more than new theories of value and purpose: we need also to look at the deep structures of our market economy, in particular the role of ownership. Ownership, in the words of Marjorie Kelly, author of Owning our Future, is ‘the underlying architecture of our economy. It’s the foundation of our world. How ownership is framed is more basic to our daily lives than the shape of democracy.’
Kelly is a critic of the ‘absentee’ ownership model that has been enshrined in contemporary stock markets. That individual investors seek to extract financial wealth is, in itself, not surprising nor especially dangerous. But the institutionalisation of greed and short-termism in ownership design should worry us.
To quote Martin Wolf of the Financial Times, a publicly-listed company in today’s world is required ‘to serve the interests of those least committed to it, while control is also entrusted to those least knowledgeable about its activities and at least risk of damage by its failure.’ The ownership design of publicly-listed companies makes it all but inevitable that those companies will borrow from the future in order to make their shareholders wealthier today. Any CEO that refuses to do so is in for a bitter (and often career-ending) fight with activist investors.
Capitalism needs ownership models that bind together the long-term interests of owners with the long-term interests of other stakeholders, including customers, suppliers, employees and wider society.
Such models exist. Worldwide, cooperatives employ more people than all multinationals combined. Employee-owned organisations — like the John Lewis Partnership in the UK — are often held up as exemplars of a more enlightened capitalism.
Professor Colin Mayer, an academic at Oxford’s Said Business School and author of Prosperity, is a fan of the hybrid ownership model exemplified by the industrial foundations of Northern Europe: Ikea, Novo Nordisk, Carlsberg, Bertelsmann and Bosch. The combination of an anchor shareholder committed for the long term with dispersed ownership of the remaining shares amongst individual and institutional investors offers these companies the best of both worlds: easy access to liquid capital markets, but protection from the short-termism of corporate raiders.
There are plenty of other sensible reform proposals out there. For example, in a recent Harvard Business Review article, Roger L. Martin suggested that voting rights should be based not just on the number of shares held, but the duration for which those shares are held, so that long-term investors have greater influence than short-term activists. This is not just pie in the sky: in France, investors who have held shares in a company for at least two years already get double voting rights.
It’s worth remembering that the triumph of the publicly-listed company over other forms of ownership is a relatively recent phenomenon — even in shareholder capitalism’s Anglo-American stronghold. Up until the 1980s, most Wall Street firms were partnerships. This didn’t exactly guarantee that they would act as good corporate citizens, but it did at least mean that they were owned by people who were highly exposed to any risks the company took because they couldn’t withdraw their stake at a microsecond’s notice.
In The Big Short, Michael Lewis traces the origins of the 2008 crash back to a decision in 1981 by the management of Salomon Brothers to take the firm public. This started a trend and others — including Lehman Brothers and Goldman Sachs — followed suit during the 1990s. ‘Combing through the rubble of the avalanche,’ writes Lewis, ‘the decision to turn the Wall Street partnership into a public corporation looked a lot like the first pebble kicked off the top of the hill.’
This is what future humans will find most incomprehensible about us: that we thought it OK for our largest economic entities to have their ownership structured in a way that gives the greatest power to the least responsible, the least patient, the most greedy.
Irresponsibility, impatience and greed will always be with us, but their institutionalisation in market design is unnecessary and shameful. Let’s make ours the generation that recognises that and does something about it. Our descendants will judge us more kindly if we do.
