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The Divine Right of Capital: Dethroning the Corporate Aristocracy

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The Divine Right of Capital expands on a theme that many Leftist writers allude to but rarely explore in depth: the correlation between the profit motive and the co-optation of our democracy by private corporate interests.

Inspired by the work of Thomas Paine -- who in an earlier era helped build support for the American Revolution by communicating to ordinary people in clear, uncluttered prose -- Marjorie Kelly makes her case for the democratization of capital in an accessible manner, making this a highly readable book.

The work challenges our basic assumptions. Why are balance sheets constructed to highlight the rate of return from a shareholder perspective only? The author points out that accounting practices could easily be changed to create a more balanced view of the company's value to society. It could measure things such as the value of its employees, the amount of financial support corporations may have siphoned off the public trust, the depletion of natural capital, etc.

Kelly explains that such exercises are rarely taken because shareholders make infinite demands on capital, in much the way that Monarchs declared perpetual domain over land and people in an earlier time. The author refers to writings by Jefferson and other revolutionaries to support her case that the colonists were concerned about limiting the power of corporations even while they were struggling to overthrow the King: corporate charters were usually awarded during this era for limited time periods and were often revoked when companies misbehaved.

Regrettably, corporations later used their power to petition the courts and eventually claimed status as "persons", leading to numerous abuses of power (such as the relatively recent argument that corporate campaign contributions are equivalent to free speech and are therefore protected); these abuses unfairly skew the democratic process in favor of big money. This is just one of many reasons why Kelly believes that citizens must reclaim their rights and cast off the corporate aristocracy.

Could it be that in the wake of the Enron scandal -- which so compellingly shows how deeply corporate money and political power are connected -- the people will demand the kind of change that Kelly advocates? If so, they would do well to consider some of the ideas in this outstanding book.

The central aim of "The Divine Right of Capital" is show that the structure and legal basis of the modern American corporation bears a great deal of resemblance to feudal estates of the Middle Ages. However, this situation is at odds with an era that holds democracy to be sacred. Large corporations that draw upon the ideas of an era of aristocratic privilege are contrasted with corporations organized democratically. A secondary and less successful interest of the book is to show paths that have or could be taken to bring about such a change.

The author outlines those characteristics of modern corporations that can be considered aristocratic. The aristocratic corporation adopts the legal pretense of being a non-public, private entity. Based on private property rights, a distant and ever-changing group of stockholders have the liberty and voting rights to choose the CEO, while the core constituent body of the corporation and the actual wealth producers, the employees, have no legal voice. Financial gains for the stockholders by virtue of their "ownership" position, irrespective of any real corporate functionality, are to be maximized while costs, which employees represent, are minimized. It is this "wealth privilege" that is truly reminiscent of the status of the olden feudal lord.

By contrast democratically organized corporations would be developed and viewed much differently. First, it would be acknowledged that corporations are semi-public entities with obligations for the public good and subject to control by both the community and employees. A body of distant, amorphous "owners" would not be able to disenfranchise a stable, human community of workers, that is, the employees. The aims of the corporation would reflect the primacy of employees. Payouts to stockholders would be viewed as costs to be contained with the rewards of productivity improvements accruing to employees.

Historically, however, the author notes that in the early republic corporations were chartered by state governments for fixed terms to accomplish specific functions and were subject to some government oversight with the possibility of charter revocation. But a series of court decisions established the "bizarre" notion that corporations are private entities with full rights as persons. In that construct, employees are subsumed within the corporation with only a subservient role to perform.

Turning to more recent attempts at ameliorating the primacy of shareholders, the author notes that some states have enacted legislation that obligates corporations to act in the best interests of other stakeholders including employees, customers, and the community. But much of that legislation is relatively weak and untested. In addition, voluntary corporate initiatives such as codes of conduct or enlightened management seem to be mostly reactionary with little staying power.

At this point in our economic and political history, any change in the structure of corporations would be a most difficult task.
Free market economic theory, the current rage in the U.S., holds that more or less equal entities freely interact in the economy. The fiction of corporate personhood dovetails with the theory perfectly. Corporations are just people; the non-democratic power dynamics and the privileges of corporations are neatly hidden away. But without public understanding of the aristocratic vestiges of corporations, the privileges of wealth, there will be no public clamor for change. Even the Enron debacle is likely to be viewed as simply personal criminality rather than an example of more general flawed corporate structure. The author does not delve into the public's perceptions of corporations or for that matter the media's role in manipulating those perceptions. But that may be a subject for others. "The Divine Right of Capital" certainly delineates the aristocratic nature of corporations in a democratic age.

In a knowledge age, it is becoming increasingly apparent that, in sharing the profits, intellectual capital should often hold sway over traditional equity investments and that this return should flow to the individuals who create the value. On this premise alone, Marjorie Kelly cogently and clearly argues that our current system of awarding the majority of the spoils to stockholders may be an idea whose time has past or, perhaps, never should have come.

The Divide Right of Capital is a tightly constructed, highly readable, volume that explores this singular issue along with a number of Wall Street Myths and sacred cows in order to lead the readers down a path that questions traditional investment wisdom and the present structure of our capital markets. Kelly gathers her arguments from across the intellectual spectrum, facts from economics, and political and social rationales, with equal facility, from philosophers. Footnotes inform and enlighten without the heavy hand of academic validation. In fact, with this slim volume, Marjorie Kelly solidifies her position as a public intellectual, a role that has, indeed, been almost vacated by the academic community.

Ms Kelly skillfully points out that, in the 90's, there was potentially, a net outflow of equity capital from the corporate community with corporate buyback of stocks exceeding the investments through new stock offerings. The increase in value in the stock prices through sales in the market did not directly accrue to the corporations whose stock was traded, leading the reader to question what the difference might be between Las Vegas and Wall Street or whether the stock analysis underpinning investment decisions might not be as different as schemes of gamblers to win at games of chance. In fact, many of the developers of complex dynamic computer programs, that execute stock and commodity trades, consciously ignore the underlying corpus that the stocks represent.

But Kelly's major point is that money, once invested does little over time to enhance the value of the corporation. Rather, those employed are the parties who increase the net worth of the business and thus should enjoy an equal, if not greater share, of the profits with the success of the enterprise. What Kelly is arguing for is a change in how current capital markets work. In the end, she skillfully lobbies for a radical change in the relationship between those who create the wealth and those who benefit through investments directly or indirectly in the equity of the company.

The volume is not a blueprint for a change in the current capital markets. Rather it is a call to rethink current economics. If Kelly's argument has a flaw it is in its negligence of what one might term the hope of the gambler. Individuals have the great desire to take limited capital resources and receive an annuity as if they had won the lottery. The stock market represents this hope for persons at all financial levels, almost with the same enticement as a lottery or a casino.

Kelly is to be commended for trying to balance the market instinct with a more appropriate reward structure for private sector employees, and for also trying to raise the larger issue of the corporate citizen in the community. The volume arose out of Kelly's epiphany that corporate responsibility across the business spectrum would not come solely from an enlightened management, but rather required both sticks and carrots to achieve the goals of a greater public good.

Unfortunately, the volume is written as a logically argued, dispassionate, piece. And though the logic is there, the volume lacks the clarion call to arms of a Martin Luther or a Thomas Paine. It is a volume that leaves one comfortable that change must come but does not inflame the reader with either righteous indignation or the passion from the same epiphany that awoke the author's passions.

Whether one accepts or rejects Kelly's thesis, it cannot be blithely dismissed. Its arguments deserve a hearing in business schools and political science departments. It should be in the brief case of the ubiquitous management and human resource consultants and union officials as they travel across the country.

I was thrilled with Marjorie Kelly's extended analogy of the corporate state as the last bastion of feudal state (and the belief system which upheld it, i.e., the great chain of being, the divine right of kings, etc.). In her introduction, Kelley warns us that she may overuse the analogy -- but really, it's not possible. Nor is the analogy of the American Revolution as a revolution against a regime which saw Americans as colonials (and thus with limited rights -- as England "owned" us, our energies and the goods we produced).

The feudal metaphor explains the queasy feeling most workers get when their advice is solicited in quality circles (it's because its like we're being patronized by the nobles, who are only asking us how we feel to have more effective dominion over us). It explains the pervasive lack of trust employees have for their employers (the lord of the manor only has his interests at heart, and only pays lip service to the importance of developing and keeping employees: when the chips are down, it's bye-bye serfs). She drags out of the shadows the biases of 18th century models of economic man and the nascent industrial system it described, and demostrates how current conceptual frameworks of business are based on feudal values. The king is the law, the law is designed for property owners to enforce their power, labor is always seen negatively, as a cost, an inconvenience, a population that must be ruled. She notes that in current accouting practices, labor and employees are seen on the expense side of the equation, as liabilities, not assets. This anti-democratic bias is so deeply woven into the fabric of how we think about business and how we're taught about business by MBAs, by business scholars, by the media, by the political and corporate establishmen, that to finally bring "wealthism" to surface amounts to a revolutionary act.

At its heart, the Divine Right of Capital is a conversion story. Ms. Kelly, as the 15 year editor/owner of a publication called Business Ethics, wakes up one morning to find that all the platitudes about growing corporate responsiblity, corporate environmental sensitivity, the new kinder and gentler workplace that she had been writing about was never going to work. That a revolution in how we think about business is required. She and her fellow business ethicists were trapped in the conceptual structures of corporate thinking, corporate doublespeak. Since the first commandment of this regime is: the shareholder is King, the Shareholder-King is the only party who needs should be considered (employees? those varlets!) and the Shareholder King is only interested in profit, and thus the corporation must only serve this one master -- a domination structure which is firmly embedded in Ford vs. Dodge, a 1919 Supreme Court Decision, that tends to be viewed as the "latest thing" in corporate governance law. With this conceptual structure in place, and reinforced in other Supreme Court decisions, common law, MBA programs, and the government, Kelly realized business can never become democratized, but must only serve the wealthy speculator or investor class who serves them.

Quoting American revolutionaries at length and efffectively -- a good strategy as the conservative business elements hold them in such idolatrous regard -- Kelly shows us why we Jeffersonian cube farmers must rise and throw off the psychological shackles of the private corporation! Undermine the bogus rhetoric of executive committee of the bourgeouisie and the speculation class! She studiously avoids Marx, because ultimately she believes in the market, she just believes in a new conceptual framework that more reasonably reflects the modern corporation: i.e., that in a knowledge economy, employees are the one thing that is really valuable unlike in the old Robber Baron days, when the track and locomotives and the right of way was valuable -- the things of a company.

Very reasonable, packed with good, well-researched facts, the only thing wrong with it is that she is entirely too reasonable. She's been living with the enemy too long and thus writes drily, and quotes facts and figures to make her points. Tom Paine, whom she often quotes here, was a bombthrower. And although what she is saying may be earthshattering to some, what's needed is cataclysmic break with the past.

I highly recommend this book.

Personally I have stored my older books by Mises, Hayek, Friedman, etc...away in my basement. Although still on the shelf, even Adam Smith and Ricardo are a bit outdated. Others may still believe in their theories, but I do not. I am looking for someone who can put forth a plan for economic reform. Ideas that again value work and economic stability from which strong families and engaged citizens can emerge. The author does this.

Personally I have grown weary of the right wing, free market utopian dogma of the day. Besides being old and tired, it is largely a sham. As the author points out the defenders of the status quo would have us believe the current economic system is natural law, when in fact it is subject to change and reform.

Beyond the rhetoric, the truth is in your pay check. For many Americans each day is filled with hard work and economic insecurity. It is also a matter of liberty. If all one knows is work, sleep, and worry, you can know nothing of freedom.

In particular the author's suggestion that beyond the IPO, subsequent stock holders are little more than anonymous economic parasites is very intriguing.

Along with "Confessions of an Economic Hit Man" and the Alexander Hamilton bio, I found it to be one of the best non-fiction books I've read this year.

As much information as I absorb about our state of government, there are still some very broad assumptions which pass under my radar. This book shines a brilliant light on issues that are critically important for ANYONE who wishes to consider themselves 'informed'.

The most basic mythology exposed: that those who speculate have superior & perpetual rights over those who earn by labor. The bias in our mass media & legal institutions is so outrageous that at first it's difficult to accept just how deeply we are being bluffed.

I am now on my second reading. If you only read one nonfiction book this year (instead of the Wall Street fiction & PR positioned as fact) do yourself a huge favor & buy this book.

For anyone who's ever felt a disconnect between what they're hearing about the economy and what they're experiencing personally, Marjorie Kelly's book is very enlightening. She challenges some of the fundamental assumptions we hold about the stock market's role in the overall economy. Particularly in the context of current debates about corporate responsibility legislation and the privatization of Social Security, this book is very important. "The Divine Right of Capital" is a must-read for social justice activists and market conservatives alike as we all try to figure out what to do with this broken system in post-Enron America. Love them or hate them, the ideas Kelly offers up are innovative and groundbreaking.

Note: I've talked to a couple of more radical/anarchist/extreme whatever types who found this a little on the tame side because it's so darn grounded in reality. If you're really about tearing down the whole system (not my approach, but best of luck), there might be more satisfying extremist rants out there. For everyone else, read this now!

Rarely do I read books that cause such a total awakening in my perspective on social issues. But Marjorie Kelly definitely accomplished this in the book -- I found her argument to be so thoroughly presented and refreshing that I read, re-read, and now refer back to the book frequently. Please do not view this book as merely a "leftist" or "liberal" statement -- read this book to expand your world view and open your mind, because its concepts transcend political boundaries.

Also, check out the magazine, "Business Ethics" (which is edited by Kelly), for great follow-up.

Ms. Kelly's book is essential. It should be ready by every representative, government official, CEO, lawyer, activist, and business student.
Kelly asks many important questions whose answers demand change in our system.
Why should public corporations strive for maximum return for investors by minimizing returns for their workers?
Why do stock holders have maximum control of a public corporation, when it is the employees and public that are the real investors/creators of a company's wealth?
Why are corporations given rights of individuals?
She examines current issues and historical precedent of property, inheritance, aristocracy, and ownership. It is a wonderful book for the historian as well as a guidebook for the activist.
I recommend three books without reservation. The Dalai Lama's "Ethics for the New Millennium", Benjamin Franklin's Autobiography, and Marjorie Kelly's "The Divine Right of Capital". Read these and make a better world with the gifts they offer.

Marjorie Kelly co-founded the magazine Business Ethics in 1987 and was its editor until 2006. In the preface to her book, she says that she had believed "that voluntary change by progressive businesspeople would transform capitalism. I no longer believe that." She had concluded that change was being blocked by "the mandate to maximize returns for shareholders, which means serving the interests of wealth before all other interests."

The subtitle suggests that the issue is the power of a wealthy aristocracy and the solution is to take away that power and give it to a democracy. By contrast, we believe that most power is really in the people who manage the flow of capital, skimming a bit for themselves. These are the CEOs of large corporations, the politicians/lobbyists who channel tax monies and, most of all, the investment bankers, hedge fund managers and other intermediaries who take fees from churning capital. Our solution is to build direct relationships between individuals who could provide capital and the entrepreneurs who would be stewards of that capital.

Kelly makes the point that all the buying and selling of shares is not providing new capital to American businesses. It's just speculative trading, placing bets on whether the stock price will go up or down.

To support the aristocracy vs. workers inequity, Kelly shows that output per employee in the 1990s increased at three times the rate of compensation increases, that the work week has gotten longer while wages and benefits have decreased and that, when employees come up with new products or efficiencies, the benefits go to the shareowners.

Part of Kelly's solution is to broaden the ownership of capital and she draws upon the Employee Stock Ownership experience, as well as the share distribution concepts of Jeff Gates, Peter Barnes and others. But her primary remedy is "to reconceptualize the public corporation as a semipublic government . . . to structure corporations to be accountable to a broader set of interests." The concept is to separate control from ownership, "away from control by the financial aristocracy and toward control by ordinary people." rather than moving toward direct ownership by "ordinary people."

The first step Kelly suggests in moving corporate control from owners is to have "employees naturally seen as voting citizens of the corporation . . . with access to all the tools that stockholders now use . . .." Another action would be reversing the U.S. Supreme Court's ruling that corporations are persons under the Constitution and "untangling the twisted legal reasoning under which wealth privilege and corporate privilege hide today . . .."

The book's final chapter, "A Little Rebellion," draws upon what worked in the American Revolution, to change our thinking. Then it was getting people to carry the thought that all persons have equal rights to "Life, Liberty and the Pursuit of Happiness." Today, the thoughts are "that all person have equal economic rights, that corporations are subordinate to the people."

To change our thinking, Kelly suggests many specific and highly practical actions. Some of them are attention-getting antics reminiscent of the Yippies, others are organizing and lobbying around issues and many are simply setting an example for the rest of us to see.
It is heartening to have an author who has kept the fire of rebellion and tempered it with the wisdom that comes from history and from personal battles.