Part 2 - Chapter 4
Contents
The company as property
Citing Ostrom as inspiration for a new public policy debate, the authors begin the process of introducing the differences between private property and commons.
They start with a discussion of the Gini coefficient (which measures inequalities in wealth, where 0 is equality, and 1 is all wealth held by small elites). Applying the Gini coefficient to companies, rather than nations, the authors argue we can reveal wealth inequality between investors, executives and staff. If above 0.4 in a company, there is a danger of social breakdown (loss of the 'social license to operate'). Using this argument, the authors show the idiocy of defending 300:1 (or even 500:1) pay ratios of senior executives and front line staff. The authors suggest 15:1 might be a the kind of gap needed for a respectable Gini coefficient.
Incorporation and apartheid
The authors frame existing approaches to membership and governance rights in business as the continuation of apartheid (outside state institutions). Under apartheid, populations of people were systematically disenfrancised (not deemed worthy of participating in governance or the wealth created by past labour) because of their position in society. In today's business, workers and customers (particularly in Anglo-America cultures) are not deemed worthy of participating in governance or the wealth created by past labour because of their position in the company. Having money - argue the authors - is not a good proxy for sound decision-making (when the goal is the maximisation of six Six Forms of Wealth.
Like apartheid, the basis of separation (that all decision-making rights stem from the interests of those who invest financial capital only) is not logical. It is not in the interests of wider society and creates crises.
Excluding stakeholders causes crises
The authors do not mince their words. On p. 91 they state "Excluding most stakeholders - human and non-human - from the key decisions that create our shared reality creates a gravity that is pulling us deeper into the swamp of extinction". The issue is not financial return to shareholders per se as it is important to pay back investment capital. The issue (for the authors) is that paying money to financial investors is not (or should not be) the purpose of the business. One type of Capital should not be created at the expense of other capitals.
A second issue is that financial shareholders not only get all voting power; they also get all the rise in the (financial) capital value of the business and all financial dividends (surplus cash). Without a stakeholder class to represent the needs of children, grand-children, or other forms of life (even that on which we ourselves as humans depends) the 'cost' of decisions on their futures are not articulated. The stakeholders missing from AGMs are those the bear the costs of decisions (staff, customers, suppliers and future generations).
Multiplied a million times across millions of companies, and we arrive at the multiple crises of today. (p. 93).
Incorporation and ownership
Through a discussion of what happened when one of his books was being copied in Singapore, the issue of property (and its value) is explored. Using the metaphor of solitary animals and ant colonies, the issue of variation in attitudes to ownership is made clearer.
[Editor's note: there are statements that are hard to support with evidence from credible studies (e.g. 'we are now at a point where either all humans learn to thrive together, or we all experience a collapse'). It is hard to think of a single research informed example where everyone in a company thrives together, or where all humans experience a collapse together. My own research showed that for each initiative, there are counter-actions, counter-initiatives, even when they are well-hidden from executive eyes. Even in the recent COVID-19 crisis, the impact was not uniform - some countries fared well compared to the US and UK without putting 'lockdown' measures in place.]
On p.95, the authors argue that (legal) slavery has ended in practically every country, but it still continues through forced labour, sex work, forced marriage etc. Treating people as property continues, to the obvious detriment of the thing (person) owned. With the advent of fossil fuels, both the social and economic arguments for freedom (from slavery) changed, as it became obvious that paying everyone and enabling them to buy goods created a virtuous cycle that both raised standards of living and emancipated many people.
Between 2010 - 2013, Graham wrote a white paper on applying the concept of freedom to companies as well as people and asks the question how property ever became accepted as the basis of a (free) market economy? On p.97, this argument ramps up with a discussion of asset-stripping that ignores, marginalises (and even destroys) stakeholders on which the company's success depended. If the legal rights of a natural person (not to be bought and sold) were extended to companies, this could not occur.
[Editor's note: there is a paradox here as the documentary 'The Corporation' (2004) demonstrated how corporate power is a product of corporations claiming the same rights as legal persons over many years - the dire situation the authors describe is (at least in part) a product of extending rights originally designed for people to the corporations, and who exercise that power to overturn the rights of individual people.]
In a key question, the authors argue that a meaning-making narrative in which financial investors own the company and treat it as property to be bought and sold cannot ever be a narrative that will address climate crisis and social injustice. To overcome this, power needs rebalancing so it is issued to all parties providing different types of capital (human, social etc.), and the company itself needs to end its slavery to the owners of financial capital.
[Editor's note: there is already a powerful academic constituency - funded by Frank Bold, and referred to later in the chapter - that continually points out the fallacy that investors own companies and that Directors must act in the interests of investors. In UK Company law, nobody owns the company - only the share certificates that grant decision-making and financial rights - and Directors' actual legal obligation is to the future of the company, not its investor community. However, I do accept that the meaning-making narrative in the minds of the public is that entrepreneurs and investors own companies, and can organise and exploit them as they wish].
p. 99 - "I (Graham and Jack) believe that we cannot address the adaptive challenges of climate change and the SDGs if we continue to apply any or all of the concepts of property to our businesses."
However, shortly after they seek to retain the meaning-making story of property but frame it is different the meaning-making story of freedom, and argue for a complimentary pair and 'how to use both meaning-making stories simultaneously to create sense'. This can be done - by using 'existing company law...to protect the Commons of the law' within a FairShares Commons.
Myths
Myths are introduced as stories 'that have little grounding in actuality' (p.101). Myths can only be defended by force (extreme violence), not by evidence. The Myths are:
- Shareholders own the company and its assets (not true)
- Directors of the company are there to serve the shareholders (not true)
- The company exists of maximise shareholder value (not true, but a reality if an organisation does not define its purposes clearly)
- Buying shares is the only way for a stakeholder to gain the right to vote in a General Meeting (not true, companies can define membership according to any criteria they decide, as happens in companies limited by guarantee).
- Money is neutral
What matters is what Directors and managers believe - once the above are accepted as myths, behaviour can change.
[Editor's note: there is a practical issue here, noted briefly in the book. If one shareholder (or a small group of shareholders) owns the majority of shares in a legal entity where voting power is defined as one-share, one-vote in General Meetings, they have the power to replace Directors at will, remove the board etc. They also have the power to dissolve the company and acquire (most of) its assets. The issue is partly the legal structure, but also the power that the legal structure gives to anyone sufficiently wealthy to acquire a dominant shareholding. Of course, none of this applies to a FairShares Commons company if the advice on structuring/voting rights and governance follows guidance issued by the FairShares Association. However, this is not always the case and it leaves open the possibility that existing FairShares Commons Companies could have their decision-making power captured by an elite unless there are active provisions to prevent this, and they can be enforced in practice.]
The section closes with a call to maximise shareholder value, but extend shareholding to all stakeholders, and to maximise the generation of all capitals, not just financial capital.
Steps in the right direction
The first step described is Open Source software. Today Wikipedia, Android, Linux are all successful 'free software' projects that show what can be achieved when intellectual capital is allowed to multiply freely as a commons resource. Next are new ideas (integrated reporting, economy for the common good) and legal reforms (benefit corporations, purpose companies) and social movements (transition towns). These are supported by new theories of organisation and leadership (holacracy, sociocracy, deliberately developmental organisations). None of these can thrive until the apartheid of incorporation can also be overcome so that investors do not have dominant control of decision-making (particularly to decide the board and allocate resources).
The hope for the future is overcoming the 'lack of capacity' to see the gravity-like pull of existing legal structures and replace them FairShares Commons. If South Africans could rewrite their constitution in 5 year, so too can we rewrite the norms of the legal foundation for business (to be full generative of all the capitals needed to thrive).
Commons (Highly Functional)
The authors introduce Hardin's article on the Tragedy of the Commons, Elinor Ostrom's response and Michel Bauwen's recent work on commons transition.
Governance
The authors advance 'self-policing' as a core principle, keeping in mind future generations. The goal is that everyone shares in the caring, and in the benefits, the commons resource creates - that also requires everyone to share in the policing of the commons (self-responsibility). Outside regulation or interference weakens the commons. However, in modern society some commons require global governance to meet the adaptive challenges of climate change.
External defence
A commons needs to defend against invasion - which today typically means company law and lawyers, but could also mean physical force. Until the meaning-making narratives of wider society change, the careful crafting of articles of incorporation can prevent the enslavement of either a company or its members. Using the example of the US (with a hostile takeover stemming from a European invasion), the need for physical defence of the commons is explained. Part of the battle is to legally defend the superiority of the commons over private property (i.e. stopping it being seen as inferior). Without this, commons will be captured and changed to private property.
Fiduciary duty
The fiduciary duty in a FairShares Commons is to all six capitals and their providers (those alive now and in the future). In place of management hierarchy, the authors talk of 'human capacity hierarchy' and 'functional accountability hierarchy' using consent-based decision-making.
Capital growth
The driver for creating a commons is making-good a collect need for everyone to have access to a defined resource. In a highly functional commons, the needs of future generations is taken into account through gradual growth of the resource (and all capitals, including financial) over time.
Benefits
Through collective decision-making processes, the goal is to meeting the needs of all members adequately. Decisions should be be taken by a small stakeholder group disconnected from other stakeholders, or the commons resource.
The modern day narrative is not about a shortage of financial capital, it is about depleted (and depleting) natural, social and human capital. So the narrative needs to change - a new paradigm is required.
Free companies and FairShares Commons are advanced as the 'minimum viable solution'. Inclusive legal incorporations exist and are sufficiently proven to be adopted, and these build on decades of work by Carl Zeiss, Robert Bosch, Mondragon Co-operatives and even VISA (in which CEO Dee Hock admitted later that omitting card holders from governance was a fundamental mistake in the design of the company).
FairShares Commons company can be created now in most countries - usually no changes are required in company law (but some creativity may be needed). The authors caution against a new apartheid with investors - keep them in, and give just the right amount of power and reward.
Shares do not necessarily have to be bought with money - rights can be earned by becoming engaged (as investor, employee, customer, supplier) - the investment of all the capitals. The design goal is to have 'balance across all stakeholders, including future generations' (p. 111). Comparing the advancements in the civil sphere (admitting everyone into the political system at local, regional and national levels), the authors call for the same in business. Nations can no longer by sold by one king to another king. So the same should be true for companies.
Freedom including the freedom to die (when too old) or no longer serving a niche purpose in an ecosystem. In contrast to the 'slow, clumsy regulation of state bodies' (p.112), FairShares Commons Companies with general meetings attended by all interested parties can create immediate responsive micro regulatory systems. The inclusion of all stakeholders is the first step towards ending the injustices of today's capitalism, and even cities and states can participate in the wealth generation to align their interests with others.
Return to the FairShares Commons
