The Divine Right of Capital: Chapter 3

Chapter 3: The Corporation as Feudal Estate

The Principle of Property:
Like a feudal estate, a corporation is considered a piece of property — not a human community — so it can be owned and sold by the propertied class.

The source of stockholder privilege is ownership. Today we assume that 1) the corporation is an object that can be owned; 2) that stockholders are the sole masters of that object; and 3) they can do as they like with their “object.”

Social standing used to be based on “real” property – i.e. land. It led to three categories of persons: property owners with full rights; slaves, who were property themselves and had no rights; and a mixed category of right-bearing subjects who were the property of another. A man’s wife and servants fell into this last category. This ownership created a lopsided loyalty, where servant was loyal to master but not the other way around. This relationship has been extended to today’s property – the corporation, where common law duty of loyalty to the corporation is still dominant, but duty to employees is minimal. At marriage, women “disappeared” into their husband upon marriage. Only men were permitted to have property. Employees similarly disappear into the corporation, with the property passing to shareholders.

Corporations create wealth in two ways as the property of shareholders. There is a stream of income in the form of dividends. What’s left is retained by the firm as retained earnings, which is booked as stockholder equity. The earnings are therefore one part of the stockholder property and the second is the value of the corporation – its market cap. It’s like owning a house and getting rent off of it. The original investment contributed is the equity and retained earnings is the profits that accrete on top of that each year, even though shareholders may never contribute another cent.

The book value of a firm is the value of all its tangible assets, but that’s usually just a quarter of the typical firm’s actual valuation. Most of its value is intangible – things like patents, reputation, and people. In owning intangible value, stockholders essentially own employees. Our law doesn’t support the buying and selling persons, but we can own certain types of property that are “in” others. Intellectual property of employees is one example. If one owns the firm, then one owns everything created on top of those assets – even if that thing is an idea that is inside someone’s head. This is very feudal, similar to the idea that lords own the fruits of everything done on top of their asset, the land. But under democratic law, we’ve adopted the notion that “future improvements” to property should be left to the developer – which is at odds with how corporations are run today.

Kelly provides a great example of the St. Luke’s ad agency and what happens to the value of a firm when employees simply leave.

We’ve accepted the unconscious assumption that corporations are objects, not human communities.