The Divine Right of Capital: Dethroning the Corporate Aristocracy

* Named one of the Best Business Books of 2001 by Library Journal

* Excerpted in the Harvard Business Review, Utne Reader,

San Francisco Chronicle, Minneapolis Star-Tribune,

St. Louis Post-Dispatch, Tikkun, Earth Island Journal, and elsewhere

* Selected as a Recommended Book to Read by

Harvard Business School’s Working Knowledge

* Chosen as a Favorite Book by Wharton faculty

and staff, Wharton@Work

* Featured in BusinessWeek online

* Chosen for the September Book Club

by Minnesota Monthly magazine

* Used in classrooms at the University of Minnesota’s

Carlson School of Management, the University of Massachusetts,

Marshall University, Western Kentucky University,

and many other places

I have read this work with great pleasure—yes, even joy. It’s sharp and right on the dot. It has a wonderful style and great passion.

—Rolf Osterberg, former chairman, Swedish Newspapers Association, and author, Corporate Renaissance: Business as an Adventure in Human Development

I’ve been recommending this book to everyone I know. This is a marvelous, wise, artful, and moving contribution to our world.

—Frances Moore Lappé, author, Diet for a Small Planet and Hope’s Edge

"As the global decision makers search for answers, they should read Marjorie Kelly’s book The Divine Right of Capital. The book is an intelligently written, challenging romp through history, philosophy, and economics."

—Patricia Panchak, editor-in-chief, Industry Week

This is the back story in the Enron fiasco, the one the mainstream media won’t touch. Sure, we care about shareholders who lost their life savings. But what about the rest of us, our communities, and the planet? Kelly takes a reader through heavy conceptual territory with a deft, irreverent touch.

—Jonathan Rowe, YES! A Journal of Positive Futures

None of the modest reforms in accounting, disclosure, and governance proposed by Washington or Wall Street will do any good unless corporations are encouraged to look beyond shareholder value, Kelly says. People say we need better alignment between management and shareholder interests. Kelly says no—that’s the problem.

—Rex Nutting, CBS MarketWatch.com

This just might be one of the most important books of the past fifty years.

—John Renesch, author, Getting to the Better Future:

A Matter of Conscious Choosing

"If you want to be current on proposed corporate reform, read The Divine Right of Capital. To read it is to feel present in an Ivy League lecture hall at one moment, only to be transported to your best friend’s kitchen table the next. Downright fun."

—Susan Wennemyr, SocialFunds.com

Kelly has a way of taking the complex concepts of economics and explaining them in a way that even people who can’t balance their checkbooks can understand.

—Terri Foley, Minnesota Monthly

Kelly is remarkably clear in her analyses and makes the arcane easy to understand.

—David Cogswell, American Book Review

Kelly’s book will exhilarate you, because it is such a thorough de-masking of the indefensible.

—Paul Hawken, Whole Earth

"Until I read The Divine Right of Capital, I never really entertained the thought that stockholders are not even the rightful owners of corporations. This is Kelly’s seditious claim. She delivers a provocative plea for a dialogue on ownership and the nature of the corporation, in the bracing tradition of Thomas Paine."

—William Bole, America: The National Catholic Weekly

I can think of no volume more worthy of American patriots’ attention than Kelly’s challenging new book.

—E. E. Copeland, The Business Journal, Portland, Oregon

"This is not another one of those bash capitalism/reinvent socialism books. The Divine Right of Capital is something far more valuable and rare—a genuine, well-informed, and intellectually courageous attempt to see our economic system anew, and to suggest visionary improvements that might work in the real world."

—Mark Satin, Radical Middle

If you ever wondered what exactly is so destructive about the Old Bottom Line, read this book.

—Tikkun magazine

"Chock-full of provocative ideas. Those interested in economic justice without scrapping free-market capitalism will find The Divine Right of Capital engrossing reading."

—Marshall Glickman, Green Living

"If you want mental stimulation and some really radical notions to consider, notions that make a great deal of sense, you will want to read The Divine Right of Capital."

—Marlene Y. Satter, investment adviser

"The Divine Right of Capital has influenced my thinking more than any book I have ever read."

—Bill Gellermann, OD Practitioner: Journal of the Organization Development Network

I am impressed by this book’s deconstruction of the corporation. It is clear, paradigm-shifting, and convincing. The parallel between the blindness in our own society and the aristocratic privileges of the Old Regime is devastatingly effective.

—Bernard Lietaer, author, The Future of Money: Creating New Wealth,

Work, and a Wiser World, formerly with the Belgian central bank

Reading this work left me breathless. It addresses the life topics I have wrestled with for twenty-five years, and someone articulate and passionate is finally giving voice to these thoughts. I think this could be one of the most important books I will ever see on the shelves.

—Terry South, area general manager, Showtime Networks Inc.

This book offers an elegant and powerful argument for workplace democracy and for a new way of thinking about corporations.

—Donna Wood, professor of management,

University of Pittsburgh

The book brims—actually spills over—with unsanctioned ideas and imaginative new directions. The style is like a loose and friendly conversation, an invitation to think and talk about what is possible, what might work. I believe this book is an important step toward generating a new politics.

—William Greider, author, One World, Ready or Not, from the Foreword

This volume challenges conventional wisdom about the corporation with facts, wit, and verve. We have long needed a real iconoclast like Marjorie Kelly.

—John Logue, director, Ohio Employee Ownership Center,

Kent State University

I have read this work with great admiration. Having read countless books on business ethics, I can say this is a breakthrough work. It could even range on the same level as Francis Fukuyama’s work. The approach is revolutionary.

—Jacques Cory, International Business Programs, Israel

I loved reading this. Marjorie Kelly has systematically deconstructed a sacred cow—that corporations exist to maximize shareholder wealth—and reconstructed a social vision for a truly democratic system that rewards all who are responsible for profits, particularly employees.

—Leslie Christian, president,

Progressive Investment Management

I found this work just excellent. I have been showing it and loaning it to friends.

—Philipp Muessig, pollution prevention specialist,

Minnesota Office of Environmental Assistance

I enjoyed this work immensely. Kelly’s image of being an antiques collector but rummaging through antique thoughts rather than artifacts has a great charm. If we are to move to a more fair and sustainable world, it is imperative that we understand the concepts she presents.

—Jim Tarbell, co-host, Corporations and Democracy

radio program, Caspar, California

I found this book startlingly thought-provoking and enjoyable.

—Bob Eddy, management consultant and adjunct faculty member,

Rosemont College

Your work has made a deep impression on me. I find it morally inspiring and insightful.

—Albert Spekman, senior consultant of an S&P 500 financial institution, Bronx, New York

The Divine Right of Capital

The Divine Right of Capital

Dethroning the Corporate Aristocracy

Marjorie Kelly

The Divine Right of Capital

Copyright © 2001, 2003 by Marjorie Kelly. www.DivineRightofCapital.com All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the publisher, except in the case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright law. For permission requests, write to the publisher, addressed Attention: Permissions Coordinator, at the address below.

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First Edition

Hardcover print edition ISBN 978-1-57675-125-1

Paperback print edition ISBN 978-1-57675-237-1

PDF e-book ISBN 978-1-60994-194-9

IDPF e-book ISBN 978-1-60994-545-9

2011-1

Copyediting by Sandra Beris. Proofreading by Carolyn Uno.

Book design and composition by Beverly Butterfield, Girl of the West Productions.

Contents

Foreword by William Greider

Preface

Acknowledgments

Introduction

Part I Economic Aristocracy

1 The Sacred Texts

THE PRINCIPLE OF WORLDVIEW

2 Lords of the Earth

THE PRINCIPLE OF PRIVILEGE

3 The Corporation as Feudal Estate

THE PRINCIPLE OF PROPERTY

4 Only the Propertied Class Votes

THE PRINCIPLE OF GOVERNANCE

5 Liberty for Me, Not for Thee

THE PRINCIPLE OF LIBERTY

6 Wealth Reigns

THE PRINCIPLE OF SOVEREIGNTY

Part II Economic Democracy

7 Waking Up

THE PRINCIPLE OF ENLIGHTENMENT

8 Emerging Property Rights

THE PRINCIPLE OF EQUALITY

9 Protecting the Common Welfare

THE PRINCIPLE OF THE PUBLIC GOOD

10 New Citizens in Corporate Governance

THE PRINCIPLE OF DEMOCRACY

11 Corporations Are Not Persons

THE PRINCIPLE OF JUSTICE

12 A Little Rebellion

THE PRINCIPLE OF (R)EVOLUTION

Conclusion: Enron’s Legacy: An Opening for Change

Reader’s Guide to Action

Notes

Index

About the Author

To

Miriam Kniaz

Can it be believed that the democracy which has

overthrown the feudal system and vanquished kings

will retreat before tradesmen and capitalists?

ALEXIS DE TOCQUEVILLE

Democracy in America

Foreword

THE UNASKED QUESTION that hovers over American politics and smothers public life is this: Do corporations have too much power in our society? As a younger reporter covering political campaigns, I occasionally asked this of candidates, mainly to watch them squirm and duck for cover. But during the 2000 Presidential campaign, I had an opportunity to ask the question of Senator John McCain, a conservative Republican in most respects but a man blessed with an incautious nature. Do corporations have too much power in America? Without a doubt, without a doubt, he answered without hesitation. I see it every day in Washington.

So I think it is possible now that many more Americans of all stations are ready to listen to Marjorie Kelly and her insistent, probing questions and arguments. Her book is intended as a free-spirited provocation—a gloriously incautious and intelligent plea to think anew and to act. It reads not like another gloomy recital of familiar economic complaints but more like an enthusiastic tour of a far horizon—a time when Americans find the will and the way to correct the systemic failures of economic institutions.

What Kelly offers in the first half of her book is a diagnosis of why corporations spin off so many social ills. In her view, problems such as wealth inequality, corporate welfare, and industrial pollution are like the fevers and chills of the economy. The underlying illness is shareholder primacy, the corporate drive to make profits for shareholders, no matter who pays the cost. Corporations do indeed hold too much power in the world today, but Kelly says the more invisible problem is that the wealthy hold too much power over corporations. In the interest of making the rich richer, corporations are in effect levying absurd private taxes on the rest of us (to paraphrase Adam Smith, as Kelly does). Financial powers have become an economic aristocracy.

The solution is economic democracy, and in the second half of the work, Kelly draws on ancient radical thinkers like Thomas Paine, as well as more contemporary theorists, to assemble a menu of fundamental reform propositions. She also deliberately leaves room for doubt, disagreement, and playful speculation. I only presume to offer hints, not plans, Thomas Paine wrote. Kelly likewise generously explains that what she offers is a rough draft, and if it encourages others to make better drafts, it has served its purpose.

The book brims—actually spills over—with unsanctioned ideas and imaginative new directions, all utterly unacceptable to those in the orthodox circles of economics, business, government. But the style is like a loose and friendly conversation, an invitation to think and talk about what is possible, what might work.

As a small business owner and business journalist, Kelly is grounded in the real world of enterprise. She has earned her conviction that nothing less than systemic structural change is needed. For fourteen years, she has edited and published Business Ethics, a publication that chronicles the many efforts to establish social responsibility in business and investing. Her publication is both hopeful cheerleader and tough critic. She remains idealistic herself but says that in recent years she has become increasingly discouraged at how little enduring change has been accomplished. Legislation, social investing, business ethics, and other progressive initiatives have in some measure made business more humane, she believes, but the overall result seems to her the opposite: corporations are focused more ruthlessly than ever on shareholder gain, to the exclusion of all competing values—from employees to the environment to social equity. It was this discouragement that led her to search for deeper answers.

Can we imagine an economy in which firms are typically owned in large part by the people who work there? In which corporate boards of directors are required to exercise broad fiduciary obligations to all of the stakeholders in the company—employees and community as well as absentee owners? Can we imagine a broader, more inclusive understanding of property rights? Kelly believes all these are possible. And she shows how in beginning ways they are already becoming reality, with nearly twelve hundred employee-owned firms thriving today, thirty-two states already having stakeholder laws redefining fiduciary duties, and courts beginning to recognize community property rights.

Kelly puts big questions on the table. But she also offers smaller steps that can move us forward, explaining all with a sense of history that helps us understand how we got to the present circumstances. Along the way she introduces new language with which to discuss the structure of modern corporations. Perhaps most provocatively, she introduces the phrase wealth discrimination, showing its kinship to sex and race discrimination. The principle of equality, in her view, has no meaning unless it is also established in economic terms: 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.

Those are fighting words, of course, and the people who presently hold the high ground of economic power in society will not be amused. But the strength of Kelly’s case is that it restores democratic principles in the economic context—demonstrating that structural changes in business, far from being radical, are grounded in the founding ideals of America and are required to sustain the democratic idea. Kelly wants to provoke a fighting spirit in America and other democratic nations. She aims to stimulate active curiosity and doubt about the current nature of the system and how far democracy has drifted from its first principles. Her flood of ideas are so numerous and profound, no one should expect to agree with all of them—and certainly I didn’t. But I believe this book is an important step toward generating a new politics, and I share Marjorie Kelly’s optimism that this is possible. What she essentially is after is a lively time of argument and inquiry in which the oldest, deepest questions—what it really means to live in a democracy—are back in play again, and people are once again in motion toward achieving their democratic ideals.

WILLIAM GREIDER

author, Who Will Tell the People: The Betrayal

of American Democracy and One World,

Ready or Not: The Manic Logic of Global Capitalism

Preface

IF YOU WANT to understand why the recent scandals at Enron, World-Com, and elsewhere have happened, read this book. It tells the story the mainstream media won’t touch: the story not of a few bad-apple CEOs but of an economic system designed to do precisely what it did—to enrich a few at the expense of the many. The few are the financial elite, the aristocracy of our age. At the most visible level, this means CEOs. But if they are the whipping boys singled out for punishment, they have not acted independently. They are subordinates to the real masters of the system, the invisible aristocracy of major shareholders.

In the system design of aristocratic capitalism, CEOs are hired by shareholders and directed by boards to focus on a single goal: maximizing shareholder return. Executives are paid well only if they achieve that end. CEOs have been indicted for pushing the limits in pursuit of rising share price, but in the past they were fired for doing anything less. The excesses of Enron, WorldCom, and the rest did not arise from the minds of errant executives; they arose from a system that exalts rising share price as the definition of corporate success.

There is outrage today about the illegitimacy of CEO gains. But nowhere will you find outrage about the illegitimacy of shareholder gains, for that is the sun around which the system revolves. To question this is to question the divine right of capital.

Which is precisely the aim of this book. It questions the idea that the needs of wealth holders come before the needs of all other persons. It questions the idea that achieving a 15 percent return for a billionaire is more important than paying employees a living wage or protecting a community’s water.

This is a book about wealth privilege, which is the hallmark of aristocracy. Wealth privilege means serving the wealthy few and disregarding the many. In the age of kings, wealth privilege was deeply woven into both political and economic institutions. Civilization crossed a great divide into a new world of democracy in the twentieth century. But we have democratized only politics, not economics.

Wealth privilege remains embedded in the ancient institution of the corporation. It is a privilege out of step with market ideals, which has led to wealth disparities that threaten our political ideals. We can never really have political democracy without economic democracy.

It begins with imagination. We begin by using the one territory that we the people still control: our own minds. We simply see that wealth supremacy is illegitimate. For once we see it and name it as illegitimate, we undermine the ground on which it stands. And we pave the way for its transformation.

We are often told the revolution has already come because stock ownership has been democratized. But of all financial wealth held by households, the 10 percent wealthiest hold 90 percent. And wealth has not spread democratically in recent decades. It has concentrated in fewer hands. The 1 percent wealthiest in the last two decades doubled their share of national household wealth, from 20 percent to close to 40 percent.¹

This concentrated wealth controls not only corporations but also government. Rule by the financial aristocracy is the reality of life in America today. And Americans know how to combat aristocracy. We do it with democracy.

The democratic ideals of America’s founding fathers show us the way out. That way leads to economic democracy, to a new vision of a healthy economy—rooted not in the unsustainable wealth of a few but in the enduring prosperity of the many. Following the best of what European economies offer but also creating new forms, we can evolve democratic capitalism out of the aristocratic capitalism of today. We can create an economy where all can accumulate capital, and where the living capital of the commons is preserved for all to enjoy.

Some may paint economic democracy as anti-business, but they might as well paint George Washington as anti-government. An economic democratizing process doesn’t tear down; it’s about extracting aristocratic bias from business institutions while leaving the institutions themselves substantially intact, and healthier.

I myself am a small business owner, as were my father and grandfather before me.² As a business publisher and journalist, I have seen that a democratic evolution in business has been trying to happen for some time—with growing attention to environmental stewardship, employee profit sharing, family-friendly policies, and good corporate citizenship. Fifteen years ago, I cofounded the publication Business Ethics to support this rise in corporate social responsibility, believing that voluntary change by progressive businesspeople would transform capitalism. I no longer believe that.

The turning point in my thinking came at a seminar years ago, when business theorist and author David Korten and I found ourselves arguing in the halls, off and on, for three days—with me insisting that businesses were becoming more humane and David insisting that change at the company level wasn’t enough, that we needed systemic change.

David’s premise is one I’ve come to accept. In the years since then, again and again I’ve seen the failure of voluntary change by individual companies. I have seen corporations announce family-friendly policies, only to turn around and lay off tens of thousands. I have seen companies pursue environmental stewardship, but only to the extent that it enhances the bottom line. I have seen companies create profit-sharing incentives, but at the same time cut benefits. I have seen corporations become generous citizens as they demand far more in tax concessions.

After a decade and a half of advocating corporate social responsibility and seeing its promise thwarted, I’ve asked myself, What is blocking change? This book is my answer. The answer is the mandate to maximize returns for shareholders. It is a systemwide mandate that cannot be overcome by individual companies. It is a legal mandate with which voluntary change can’t compete.

This mandate is a form of discrimination: wealth discrimination. It is rooted in an ancient, aristocratic worldview that says those who own property or wealth are superior. It is a form of privilege out of place in a democratic society, a form of entitlement out of place in a market economy.

It is also, in the end, a system design that is not sustainable. This is the lesson of the bursting stock market bubble: that the wealth that companies supposedly create ends up evaporating. Yet in pursuit of that phantom wealth, corporations bought our government, evaded taxes, laid off millions, and dismantled our regulatory structure. They themselves are now left with employee ranks decimated, debt incurred for fruitless stock buybacks, and pension plans underfunded. Even on its own terms, the system failed.

Instead of a casino fantasy of a few getting wealthy, we need a new economic ideal of sustainable prosperity for all. That means embedding democratic principles in our economic structures, with a new definition of corporate purpose, new groups represented in corporate governance, and new ways of measuring company success. It means finishing the American Revolution by building a world of economic liberty and justice for all.

With the public anger created by the Enron crisis, an unprecedented opening for change has arisen. It is an opportunity that will come but once in a lifetime. We must make the most of it by working for fundamental system reform. That may seem daunting as we contemplate the power of the financial elite. But we should remember that the power of kings was once as great.

The institution of kingship dominated the globe for millennia, as a nearly universal form of government stretching back to the dawn of civilization. The very idea of monarchy once seemed eternal and divine, until a tiny band of revolutionaries in America dared to stand up and speak of equality. They created an unlikely and visionary new form of government, which today has spread around the world. And the power of kings can now be measured in a thimble.

MARJORIE KELLY

September 2002

Minneapolis, Minnesota

Acknowledgments

THIS BOOK is the product of many minds. Karl Mannheim, one of the founders of the sociology of knowledge, perhaps said it best in his 1936 work Ideology and Utopia: Strictly speaking it is incorrect to say that the single individual thinks. Rather it is more correct to insist that he participates in thinking further what other men have thought before him. If writers like John Locke, Voltaire, Thomas Jefferson, and Thomas Paine had the original thoughts of democracy, others today are carrying this stream of thought into economics. For opening the channels in which my own thought has flowed, I would particularly like to acknowledge a handful of contemporary writers who have deeply influenced me—David Korten, Ralph Estes, Richard Grossman, David Ellerman, and Margaret Blair. Korten and Grossman both offered key ideas foundational to this work as well as valuable feedback on the manuscript. Estes provided the seminal insight that stockholders today are not funding corporations. Ellerman clarified my thinking on employees’ right to a voice in corporate governance. And Blair’s writing opened up to me the world of progressive corporate governance scholarship.

Other writers and thinkers mentioned in this book, whose names are too numerous to repeat here, have also had a great and apparent influence