Adam Ash

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Wednesday, July 25, 2007

Adam's blogbox: how to make capitalism democratic

A fact of American democracy that is never discussed is how undemocratic our business lives are.

Many of us spend most of our waking hours on earth working under circumstances that are totally undemocratic.

In a big company, tens of thousands of workers can be fired because of one man’s decision. The CEO of an American company has as much power as an old-fashioned monarch. Life in a modern American corporation is about as democratic as Germany under Hitler or Russia under Stalin. Our CEOs are today’s version of Genghis Khan.

The basic fact of corporate life is that you have to obey your boss.

Hence the corporate duty of sucking up to the boss. The phenomenon of phalanxes of yes men. The underlying fear in everything a company man does: what will the boss think of this?

It’s amazing that innovation can blossom under such a system. But think how innovation happens: you need to get the boss on your side before you can do anything. It had better be something he likes. It had better be something he can take credit for.

One-man rule: that’s how American business operates.

Of course, democracy and capitalism are not natural bedfellows. A good case might be made that capitalism does better under a dictatorship: witness the runaway success of Singapore and China.

Perhaps an interesting line of enquiry might be to explore how capitalism might work if it were organized along democratic lines.

Let’s engage in a thought experiment: how would one organize a company along democratic lines? What would something as paradoxical as democratic capitalism look like?

A good place to start would be with the workers of the company. We might call them the citizens of the company, like one refers to the citizens of a country or nation.

Just calling them citizens immediately changes how one thinks about them, doesn’t it?

As citizens, the workers would have some rights and some say in how their company is run. Like, for example, the right to elect their leader.

Imagine what would happen to a company in which its citizen workers get to vote for a new CEO every three or four years.

Come election time, there would be campaigns from qualified would-be CEOs inside the company (or outside the company, for that matter) directed at the citizen workers to win their votes.

What kind of campaigns would these CEO candidates run?

Obviously, they’d come up with policies that show how they’d make more money for the company than the next candidate, and how they’d spend that money better than the next candidate.

Now think about this: it would not get these CEO candidates many votes if their motivation for making more money was to return more dividends to the shareholders in the company.

In fact, to get the most votes, they’d have to promise that a solid chunk of the profits generated by their policies would be returned to the voters -- the citizen workers -- themselves. Come to think of it, they’d have to provide really good reasons why they wouldn’t return a 100% of the profits to the workers. (Think of the motivating effect if citizen workers were to make more money when the company makes more money.)

But what about the shareholders? Shouldn’t they be getting dividends?

Certainly. But it very much depends who the shareholders are.

Here’s where things get interesting.

How would you organize a company in which shares are divided between workers and shareholders and owners?

Let’s float an idea that may sound off-the-wall, even though it’s not intended as a cast-in-stone solution. Think of it as a line of enquiry for people to explore, debate, rebut, refine, develop and run with. In other words, a thought experiment. A new model for a new kind of employee-owned corporation.

Here goes. Say you have an idea that could make money. So you start a company. It’s yours, you own it. Because you have a good idea, your company starts to grow. You add more employees as you make more money so that your expanding company can make you even more money.

Here’s the thought experiment: what if corporate life was arranged –- regulated by law -- as follows.

You are the owner of the company as long as your business employs under a 100 workers. You’re the dictator. You’re free to support your employees, or exploit them, as much as you want or need to.


The day you decide to expand to the point where you need more than a 100 workers -- the minute you employ your 101st worker –- the second you find you need to employ more than a 100 workers to expand even bigger and faster to make megabucks –- at that point, a new change kicks in, legally mandated under the new democratic corporate regulations of our thought experiment.

This law says you now have to share ownership of the company with your workers. The minute you have more than 100 workers, you have to give your workers 51% of your company.

After this, if you and the citizen workers decide to take the company public, you can offer only up to 49% of the company to outside shareholders. Out of your share.

The shares of the citizen workers can never be alienated. They’re not even allowed to sell their shares themselves. If they leave the company, their shares go back to the company, i.e. to the other citizen workers.

In other words, the workers will always own at least 51% of their company.

So when you as the owner get to a 100 workers employed, you face an existential decision. You can decide to stay at 100 employees and be a dictator. But if you want to expand to make more money on a bigger playing field, you have to change your company from a dictatorship to a democracy.

You have to share ownership with your workers. You also have to share power, because now the citizen workers get the right to vote for their leader every three or four years.

They will keep voting for you, the original owner, if the company does well and makes money for them. But they will vote for someone else if you start to blow it.

If they vote for someone else, he or she starts running the company. You still own your 49% of the shares, but you have no power anymore.

If the citizen workers decide to sell shares to the public, they can do it without your say so. They can raise capital for the company by selling up to 80% of your 49% share of the company. The capital they raise goes to the company, not to you. You can decide to sell your 20% of your 49% share of the company in the IPO if you want to cash in.

It gets better (or worse, depending on your point of view).

Every year, if there hasn’t been an IPO, you have to give away 5% of your 49% to the citizen workers until the last 20% of it, which you can keep forever and pass on to your kids. Or sell to the citizen workers in what used to be your company, or sell to shareholders.

Crazy, isn’t it?

But is it any crazier than what we have now? Who says it’s better to have a board-appointed CEO than one democratically elected by the workers? Who says it’s better to have outside shareholders in your company who may never have stepped foot on your factory floor and only bought the shares on the recommendation of a broker – what you might call a class of absentee landlords? What’s so logical about that?

One idea behind our crazy thought experiment is that it’s OK to be the dictator of a 100 people, but not of more than a 100. In fact, the workers who sign up with your dictatorship are there because they’re hoping your company will grow beyond a 100 workers into a democracy.

This is not meant as a hard and fast plan, but as a basis for discussion. A way to deconcept the logic of undemocratic capitalism and point out how democratic capitalism might work. You may have your own ideas.

What cannot be gainsaid is that the capitalism as it is practiced in the US today is totally undemocratic.

Under a more democratic system of capitalism, not only are power and assets shared, but also motivation and incentive.

When everyone is an owner, behavior changes. Everyone in the company, from the CEO down to the janitor, owns shares and will be thinking about how they can make more money for the company –- how they can do their job better, how they can save monet for the company, how they can maximize profit. The company’s money is their money. Isn’t that more true to capitalist ideals than it is for the workers to rely solely on a fixed wage?

My contention goes further: I say a democratic corporation will beat an undemocratic corporation, run by a board-appointed CEO and owned by absentee shareholders, hands down. Every time. It stands to reason: a company owned and run by many capitalists who actually work in the company, will work harder and smarter and more cost-consciously and more profit-mindedly and more competitively than any other.

The workers will work smarter and harder. The bosses will work smarter and harder. The CEO will work smarter and harder. They’re all working for each other as well as for themselves. They're all accountable to each other. They all want each other to do better, because that way they themselves will do better. They win by sharing. The CEO knows he keeps his job only while his decisions and actions do well for the people working under him.

The workers will follow a CEO who makes good money for them with a 110% of their smarts, goodwill and effort.

This could be the perfect model of a perfect company.

If workers could vote for their CEOs today, which CEOs would survive? Steve Jobs of Apple would, for sure. But how many others?

If you’re a CEO, engage in your own thought experiment: do you feel the cold breeze of democratic accountability raise the hairs on the back of your neck?

If only more of our American CEOs labored with that breeze down their necks.

If only our capitalism worked in a more democratic way.

But under our widely accepted and highly admired system, we just have to cope with the results of dictatorship-predator capitalism: cars and burgers that wreck our environment and endanger life on earth; HMOs that deny us operations that could save our lives; and CEOs who make more money in a day than their workers make in a year.

We’re stuck with the capitalism we have instead of the capitalism most of us may prefer, if only we knew about it.

Call me a dreamer. But if democratic capitalism actually happened, you yourself might find that, ohmigod, there’s a dream out there worth following.

(This is from my forthcoming book: Invisible Dictatorship and the Sovereign Self: Why America is a Dictatorship Cross-dressed as a Democracy and How to Live Free in it. Comments are welcome.)

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At 9/17/2007 9:21 PM, Blogger Dave Nalle said...

Your proposal for forced collectivism on companies with more than 100 employees is novel, but would be economically disastrous. No company would ever want to expand or innovate or develop new projects or sources of income, because the moment they become too successful and need to generate capital to carry out essential expansion, your rule kicks in and the CEO and existing shareholders get horribly penalized.

Plus, how do you deal with international businesses under this system. Your proposal would just force any successful business overseas at the loss of jobs and wealth on a huge scale to this country.

BTW, where have you been lately? No new posts on here, and nothing on BC either.


At 3/28/2008 11:20 PM, Blogger Tom said...

Dave is wrong, Adam is right. Adam's idea is just a thought experiment, fully intended to allow for tweaking. I'm gathering that he just wants to provoke thought on why we rely on an autocratic, hierarchical form of business organization when its advocates claim to hold democracy so dear to their hearts.

Bear in mind, I understand that Dave would have it that there is nothing that forces our reliance on this autocratic form of organization, and that it is simply relied upon because it has proved to work better in the marketplace.
This is manifestly untrue. Our markets arise out of history, and a specific set of rules. In turn, the rules of the game ultimately drive strategy and outcomes. A sports analogy is in order: As subtle a set of rule changes as the placement of the 3 point line, and the shape of the key radically affects the pace, strategy, and outcome of a basketball game. So, too, it is in business with respect to the rules under which we allow the creation of corporations. The corporation isn't a "natural" form of commerce, even if there were such a thing; it is an artifice of law. In turn, what we allow it to be in large part defines the economic results we get.

The corporate form allows for some good, that mainly being the economies of scale allowed by the mass pooling of capital. After that, there isn't much to recommend it, as the pooling of capital is the pooling of power. And all good conservatives are supposed to know, consolidated power corrupts.

So the trick is to garner the social benefits of pooled capital while mitigating the corrupting influences brought on by the consolidations of power. We do this now through the blunt instruments of regulation, reparations, and redistribution. These methods are necessary, but clumsy Their clumsiness provide all the fodder needed by those who hold power over our corporations to say these methods don't work, and that we should leave well enough alone.

Simple changes in corporate law that would be in the same vein as that of changing the 3-point line in basketball would deliver dramatic improvements in our economic results. They could deliver not only workplace democracy, but greater innovation, better directed investment, and greater inefficiency. In a word, they would deliver greater wealth. They would also deliver as a byproduct, less inequality.

These simple changes are along the lines of what Adam suggests Mainly, they would say that a corporation of a certain size should be directed by its workforce. Their capital might still be owned in absentee, but absentee shareholders would lose the "right" to direct management in the running of the corporation. This right would be given over to workers.

To most, it is considered odd, quaint, and naive to suggest such an arrangement. Typically it elicits condescending lectures/comments similar to Dave's as to how the capital markets would respond to any rule revisions of this sort. This is because everyone can only imagine the market's response under the current rules by which the game is played.
Under those rules, corporate agents rule the world, and make the decisions. Truly, the Fox rules the HenHouse.

The bottom line is that the Agency Industry - Wall Street the executives who run our corporations - siphon off a massive amount of wealth from the current system. So much so, in fact, that both corporate workers and absentee investors could grant themselves a raise by agreeing to partner, and then fire the Agency Industry.

Another way to look at it is that corporate workforces would take the place of Wall Street and their boardroom cronies in selecting corporate leadership. How would absentee shareholders ensure they get a better deal from workers? The key to this lies in restructuring corporate capital into a blend of debt, preferred capital, and something I call Total Value Added Shares. Not to get too far into the details, but the point of the restructuring would be to lock in a relationship between workers and absentee investors that tethered the interests of the two as closely as possible.

This would take absentee investors out of the game of stock picking, monitoring corporate boards, proxy votes, executive pay, and takeover shenanigans, and put them in their rightful role as dividend recipients. In turn, business of running businesses would be turned over entirely to corporate workforces.

The behavior of these corporations would be radically different than our current corporations, and all for the better.

At 3/03/2009 2:53 PM, Blogger ` said...

i found this blog inadvertently while searching for a cartoon that appeared either in the New Yorker magazine or Penthouse magazine, depicting two businessmen strolling past the famed Wall Street Bull statue, in which one is commenting to the other, "this is really a high crime area - embezzlement, fraud, graft, insider trading..."

I find your thought experiment interesting. I don't agree that it would definitionally stifle industriousness, or disincentivize growth. On the contrary, it leads me to wonder if companies would not invest more time in nurturing recruits and incentivizing their tenure. Law firms operate on a similar set of principles, and although equity is highly gated it is none-the-less the goal of the firms to develop equity members. Would not a broader equity incentivize every employee to work harder to grow the company?

It could also lead to a novel and organic redistribution of wealth by the transfer of capital to the equity holders. This would have the avant-garde effect of minimizing the need for, or maintenance of, personal lines of credit - and simultaneously undermine regressive taxes like the capital gains tax, or taxes on bequeathments.

I am of course imagining an even more granular democratic action than posed, where the basis of all organizational change would be a simple quorum.

I'm going to bookmark this blog...

At 1/14/2011 1:38 PM, Blogger farhorizons said...

I just discovered you today (011411), Adam Ash, after reading your comment on Paul Klugman's nyt article. "Wow!" is what I think of your thinking so far, after reading your klugman comment and the instant article. Can't wait to read more.

Question 1: What would happen if the employees of your new corporation chose to put profit-making above the common good, and would we end up with democratic but still-selfish corporations?

There is no Question 2 yet.

Much luck. You clearly have been thinking long and creatively about these issues. I too would like to find a way to be a better person and make things better around me.


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