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Corporations: Containment vs Reform - Part II

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Message Tom Cobb
In my last essay, I proposed that the best means of reforming our corporations would be to transfer voting control to their workforces. To most, such an idea sounds a bit unhinged. This is because most people - and especially liberals - presume that workers and shareholders hold diametrically opposing interests. This is because liberals have not yet come to understand that middle class shareholders are under siege in much the same way workers and consumers are. Because liberals have come to understand how corporate power is exerted to the detriment of workers and consumers, it is natural to assume the benefits of this asserted power flow to corporate shareholders.

This conventional belief is both untrue and unfortunate, at least for the great majority of shareholders. This is because the same class differences that exist in the workplace and marketplace exist as well in the investment world. In the investment world, roughly 2/3s of all shares are held by investment institutions who invest in stocks on behalf of their client members, while the rest are held directly by shareholders. Comprised mostly of mutual and pension funds, the institutional investors are supposed to act as fiduciaries on behalf of their member shareholders, but rarely do.

Instead, this group of fiduciaries works a gigantic skim game dedicated to the mission of siphoning vast sums of wealth out of the pockets of small investors. Their ranks include the executives and boards that run our corporations, plus all the layers of mutual funds, pension funds, proxy advisory services, the investment services pipeline, brokerage and investment banking houses, and the rest of Wall Street. While no one should be expected to work for free, the fees collected by these intermediaries are so steep that virtually half of the wealth contributed and earned by investors over their working life is ultimately lost to these fees.

To see this, investors need only understand that the stock market has historically produced returns of 7 to 8 percent/per year, before cost. But once the agency industry's skim is subtracted, absentee investors only enjoy returns of about 5%/year, which is almost exactly what they could get from virtually risk free Treasury notes. The spread between stock market returns and Treasury returns has always been marketed to investors as the extra return needed to justify the added risk of holding stocks that are volatile in price, and fully exposed to the risk of bankruptcy and complete loss.

This means our financial markets are now arranged to deliver investments returns to small investors that are virtually the same as those they can earn without any of the risks they now incur. The difference is being pocketed by the Agency Industry. How does this skim end up robbing investors of half their deserved wealth? John Bogle, the investment industry maverick who founded the Vanguard family of funds, has extensively chronicled the means by which this occurs in his book, "The Battle for the Soul of Capitalism". For the most part it is a depressing read, but to understand the stranglehold the Agency Industry has on corporate wealth is to understand the real means by which wealth is being transferred from the middle class to the wealthy in this country.

Because this reality is so poorly understood by liberals, their eyes have been on the first half of the wealth transfer process. Here, they have concentrated on the ways and means by which corporations rack up profits, assuming all the while that these profits automatically flow to shareholders. They do, but some shareholders are more equal than others. For those with intermediaries between themselves and their shares, a considerable toll is paid before their investment returns are seen. Meanwhile, the Agency Industry themselves accumulate this siphoned wealth into their own portfolios, knowing not to subject them to the costs of intermediaries.

This reality is unfortunate, but it does have a silver lining. Provided that middle class investors could first be taught that they at least technically hold majority control of our corporations, and then taught the true cost of their dependence on the Agency Industry, we would be a step closer to reforming our corporations. But even then, we would have ahead of us the battle royal of dismantling the Agency Industry.

To do this, workers would need to partner with absentee investors in order to eliminate the need for the Agency Industry. One way to look at this would be to see workers as replacing executives, corporate boards, and Wall Street as the protectors of investors' wealth. For those steeped in a lifetime of assumptions about the relationship between workers and capitalists, this will feel like an unnatural - even unholy - alliance.

To get past this thinking, we need to see that stock ownership has been democratized on one level, but not another. Workers now nominally own a majority stake in our corporations via their ownership of stocks via pension and mutual funds, but this has not translated to voting control of corporations, or even a majority stake in corporate profits. Taking this last step requires that we properly align the interest of workers and shareholders, especially as the democratization of shareholder has made them closer to the same anyways.

Aligning the interests of the two must be done with care. The failure of United Airlines to get this alignment of interests right accounts for their failed attempt at worker ownership. The next essay talks about how to bring about a proper alignment of these interests. The only losers under this arrangement would be the parasitic Agency Industry, so their resistance can be assumed. But as noted before, their resistance can only be made by way of disavowing all that they claim to believe in. Next up as well, is why these reforms would create such an untenable position for the Agency Industry.
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As the author of "A Real Ownership Society", I advocate for socializing the behavior of our corporations, and democratizing their benefits. By discarding the conventional model of corporate ownership that now relies upon absentee ownership, and (more...)
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