The Divine Right of Capital: Chapter 4

Chapter 4: Only the Propertied Class Votes

The Principle of Governance:
Corporations function with an aristocratic governance structure, where members of the propertied class alone may vote.

Stockholders reign supreme in corporate governance. In theory, the boards of directors are elected by shareholders, but in reality they are handpicked by the CEO and the existing board. There isn’t much actual governance going on in most cases, aside from ensuring allegiance with the prime directive of maximizing returns for shareholders.

Corporations did not start with shareholder primacy as their prime directive. It is primarily something that’s evolved out of common law – the law as interpreted by the courts – and common law can be overturned by legislation. The 1919 “Dodge v. Ford Motor Co.” Supreme Court case was the precedent setter on shareholder primacy.

There are three tools through which shareholder primacy is enforced: hostile takeovers, stock options for the CEO and firing the CEO.

Until the 1980’s, most corporate boards were a pretty sleepy place. But then, in the wake of Reagan’s deregulation, corporate raiders started knocking on boardroom doors, forcing boards to sell underperforming companies to the highest bidder or be sued by stockholders. Most of us think that was just the 80s, but the trend has since accelerated. It’s just that in most cases, boards simply stopped fighting the takeovers and started embracing them.

To ward off the threat of hostile takeovers, boards soon became more activist, heaping stock options on CEOs who caused nice increases in the share price, and firing those who did not. Most of this happened in the 90’s and accounts for the steep incline in CEO compensation we saw then. This was also a time a huge cost-cutting, most of which was born by employees though governments contributed their share too in the form of massive corporate tax cuts. It was during those two decades that we saw the passage from an era of managerial capitalism to a new era of investor capitalism.

Public corporations function like monarchies after England’s Glorious Revolution – when the king’s power was superseded by Parliament, the seats of the aristocracy. In the case of the corporation, the CEO is king but it is shareholders who hold the real power behind the throne. Instead of the divine right of kings, today we have the divine right of capital – a notion so important, Kelly made it the title of her book.

Stock options are often seen as a way to inject employees back into the ownership equation, but they are limited in their effectiveness. They’ve only been extended to non-management employees in 7% of companies, and it’s really the tech sector that makes by far the largest use of them. Even when average employees do own options, it’s usually only a very small amount; not a large enough number of shares to experience much financial upside relative to base salary. When salaries are suppressed to drive up the stock price, stock options simply don’t help most employees because they don’t have enough shares to offset the salary declines.

In closed societies, the fate of society is equated with the fate of the ruling class. These societies create taboos to take certain topics out of the realm of debate and discussion, and blending natural laws (like gravity) with normative laws (a societal norm, like the divine right of kings). Today we have confused the idea that “the only responsibility of the corporation is to make a profit” with a natural law, when in fact, it is just expresses a norm or set of behaviors that we currently practice. This is one of our taboos. Another taboo is that shareholders govern the corporation and employees do not. That is because we are still stuck in the frame of the corporation as a piece of property, a thing that’s yours to do with as you see fit if you are the one who owns it.

Kelly closes chapter four with an exploration of “wealth discrimination.” At America’s founding, the right to vote was limited based on race, sex and wealth. As a society, we have recognized the harms of racism and sexism, but we have yet to truly address wealthism.

Wealth bias is typically rolled into our notions of class, but class can be embedded in our family of origin, dress, schools, mode of dress and other factors. All these factors matter when it comes to social status, but political and economic power, where Kelly makes the case that it is more precise to focus on wealth rather than class. She tells the story of Thomas Dorr and the Dorr Rebellion of 1842, which focused on extending the right to vote to all white males, regardless of whether they owned property. Dorr was imprisoned for life, and still remains a relatively unknown name in history even though universal suffrage was extended to all non-property owning white males across the United States as a result of his efforts.