The Divine Right of Capital: Dethroning the Corporate Aristocracy

by Marjorie Kelly. Berrett Koehler, 2001. 230 pages.

Marjorie Kelly, the author of The Divine Right of Capital, is the publisher and cofounder of Business Ethics magazine. She started Business Ethics, she writes, "believing that voluntary change by progressive businesspeople would transform capitalism. I no longer believe that."

The Divine Right of Capital is concise, well written, and startlingly radical. The reason companies fail to make progress toward social responsibility, she writes -- the reason a company announces family-friendly policies and then lays off tens of thousands of people -- is very basic. "It's the mandate to maximize returns for shareholders, which means serving the interests of wealth before all interests."

Just as people for centuries believed in the divine right of kings, Kelly argues, people today accept unquestioningly that shareholders, because they "own the company," have the first claim on the company's profits, and that the company has a duty to maximize those profits.

How real is this "ownership," though? When a company issues new stock, those who buy it provide the capital that helps the company succeed. Those initial shareholders, one could argue, provide an important service to the company and are "owners" in a real sense. But once the stock is traded, it makes no difference to IBM whether Mr. Smith owns 100 shares of IBM stock or sells them to Ms. Jones. Mr. Smith and Ms. Jones are not owners or investors but speculators.

The real owners of a company, Kelly argues, are its employees -- the people who invest their time, energy, and creativity into making the company succeed. Especially in the information age, the value of many companies rests not in its bank account or its physical assets but in the skills and knowledge of its employees. She uses the example of an ad agency where the employees decide to leave en masse and take their accounts with them. Once they're gone, the company essentially has no value.

What we have today, she says, is a form of economic aristocracy in which the company is considered a piece of property designed to funnel wealth to its shareholders. This is why "of the total gain in marketable wealth from 1983 to 1998, more than half went to the richest 1 percent." Kelly would like us to reimagine the corporation as a community, and to replace economic aristocracy with economic democracy.

Even thinkers like John Locke and Adam Smith, she shows, did not believe that property rights were sacred and that profit was the only legitimate goal of capitalism.

What's often overlooked in Smith is that he believed profits should naturally be low. They are "always highest in the countries that are going fastest to ruin," he wrote. Such a state of affairs enriches only the few, he continued. For "by raising their profits above what they naturally would be," wealth holders in effect "levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens."

Kelly outlines six principles of economic democracy:

1. Enlightenment: Because all persons are created equal, the economic rights of employees and the community are equal to those of capital owners.
2. Equality: Under market principles, wealth does not legitimately belong only to stockholders. Corporate wealth belongs to those who create it, and community wealth belongs to all.
3. Public good: As semipublic governments, public corporations are more than pieces of property or private contracts. They have a responsibility to the public good.
4. Democracy: The corporation is a human community, and like the larger community of which it is a part, it is best governed democratically.
5. Justice: In keeping with equal treatment of persons before the law, the wealthy may not claim greater rights than others, and corporations may not claim the rights of person.
6. (r)Evolution: As it is the right of the people to alter or abolish government, it is the right of the people to alter or abolish the corporations that now govern the world.

In a final chapter called "A Little Rebellion," Kelly suggests some practical steps that could be taken once people begin to accept these ideas. Lawyers could try to invoke the states' legal right to revoke the charter of abusive corporations. Employees could demand the right to sit on their companies' boards of directors. Business school students could challenge the assumptions of the current system and atttempt to calculate the value of the human capital in corporations. Investors could (of course) place their money with "socially responsible mutual funds or money management companies." Citizens could start to exercise control over the way their pension funds are used, and so on.

The Divine Right of Capital is an important and thought-provoking book that will make you question even some of the progressive-sounding statements you may hear. When a CEO says, "Our employees are our greatest asset," for instance, he or she is defining the employee not as a member of a community but as a possession of the company, essential for maximizing profit. How different is this from a plantation owner in 1850 saying, "Our slaves are our greatest asset"?