If workers are well paid and have universal, portable benefits, does abstract inequality of stock and bond ownership really matter?
October 2, 2019
With Responses From
Oct 2, 2019
6 Min read time
Is inequality in share ownership a problem that needs to be solved?
Lenore Palladino’s essay is an important and creative contribution to the growing literature on the ills of the neoliberal economy. Her critique of the shareholder theory of the corporation is smart and convincing. Her proposals for reform, however, are less persuasive.
To help American workers, Palladino seeks two broad reforms: internal democratization of the corporation (by means of federal charters for the largest corporations, redefining fiduciary duties to encourage worker participation on corporate boards, and reforming corporate statements of purpose) and sharing profits with employees (through granting employees collective ownership of corporate shares in a trust).
Federal chartering of corporations and greater worker voice on corporate boards are good ideas, and vague language about “social benefit” in corporate charters would not hurt. The problem is that instead of making these reforms universal, Palladino would formally institutionalize a two-tier economy in law, with workers in what Alfred Chandler called the highly-capitalized, oligopolistic “core” having greater legal rights than those in the “periphery,” populated by small, often marginally profitable firms.
Palladino’s critique of the shareholder theory of the corporation is smart and convincing. Her proposals for reform, however, are less persuasive.
Palladino proposes that “the tiny number of corporations” that have more than 1,000 employees and have revenues over $1 billion be required to issue shares to their workers. If I read Palladino correctly, this proposal has two purposes. The first is to allow workers as well as shareholders to influence business decisions: “By engaging as owners of shares, employees will have the same rights to weigh in as investors do today: in mergers and acquisitions, liquidation, and electing the board of directors.” The second purpose is to ensure that workers share more of the profits.
What is troubling about this proposal is the limitation of these reforms to what Palladino herself describes as a “tiny number of corporations.” Palladino finds a model in the UK Labour Party proposal, “which would require corporations with over 250 employees to ensure that employees receive dividends.” But as Robert D. Atkinson and I have demonstrated in Big is Beautiful: Debunking the Myth of Small Business, large firms generally provide better pay and benefits than small ones. Proposals like these would do nothing to help the poorly-paid employees of small, less profitable firms. Indeed, her proposal to bestow new legal privileges and rights on the typically better-paid workers at large firms would codify the existing, informal gap between the two groups of workers into law.
Why not make these regulations size-neutral, applying to all firms, regardless of scale? The usual answer is that requiring small firms to pay and treat their employees as well as those of large firms would be unfair to small business owners and would discourage the formation of small businesses. These answers might appeal to libertarians and free market conservatives, but the solicitude of progressives toward small business, the historic enemy of pro-worker reform, is difficult to understand.
If Palladino’s corporate governance reforms were size-neutral, then the additional costs of compliance might cause a great number of small, weak firms to go out of business, replaced in their sectors by fewer, larger, better-capitalized, and more productive regional, national, or global corporations. Good riddance, I say—particularly if consolidation in former backward sectors dominated by unproductive small firms led to productivity gains that could be shared with workers.
What about employee share ownership as a method of increasing worker compensation? It would be better for firms to help their employees purchase shares in a diversified mutual fund, such as existing employer matches to 401(k) retirement funds, than for Enron or Pets.com to grant employees shares in its own soon-to-be-worthless stock. And if the goal is to democratize share ownership and promote universal capitalism, why not cut out individual employers altogether and add a uniform national payroll tax to buy all workers shares of a diversified national sovereign wealth fund?
According to Palladino: “Transitioning to a stakeholder model for corporations—specifically, employee governance and employee ownership funds—makes better sense of employee contributions while also mitigating some of the worst outcomes of the obsession with a constantly rising share price.” Really? The rise of the 401(k) has added much of the professional class to the tiny number of rich people who once followed the stock market. Wouldn’t the class of obsessive stock market fetishists be expanded further to include ordinary workers? Wouldn’t workers and managers alike now identify the health of the firm with the share price?
Palladino claims that her proposal could “rebalance wealth by granting employees a share of the wealth they create, and it could begin the process of reversing decades of wealth extraction by shareholders. We cannot solve economic inequality through wage increases alone: the gaps in wealth are too large.”
In a modern industrial democracy, it should not be necessary for the wage-earning majority to derive any income at all from the ownership of capital.
But is inequality in share ownership a problem that needs to be solved? For those of us in the older, labor liberal or social democratic tradition, the whole point of reforming capitalism is to raise the standard of living of wage earners in sync with economy-wide productivity growth with no need to turn the wage earners into capitalists themselves. The logic of labor liberalism should lead us to a more skeptical view of proposals that turn more wage earners either into small-scale capitalist rentiers who derive a share of their income from stocks and bonds, including those of the firms that employ them, or petty capitalists who own and operate their own small businesses (the anachronistic panacea of the currently fashionable antitrust school).
In a modern industrial democracy, it should not be necessary for the wage-earning majority to derive any income at all from the ownership of capital. All that prosperous and secure citizen-workers should need is the market wage, paid by the employer, and the social wage—the sum total of government benefits, including directly provided or subsidized in-kind benefits such as education and health care, as well as income maintenance programs, which provide cash to the retired and unemployed.
The market wage is determined by what John Kenneth Galbraith called the “countervailing power” of workers in negotiations with employers—power which is enhanced by a variety of measures, including collective bargaining, tight labor markets, a high minimum wage, wages and hours laws, and other factors. The bargaining power of workers can be strengthened by decommodifying many “merit goods” such as health and education which, because they are provided by the state directly or indirectly, need not be purchased with after-tax wages.
If workers are well paid and have universal, portable benefits paid for out of broadly-based taxation that taps into the growth of the whole economy, and the political system limits the influence of the rich and business lobbies, does abstract inequality of stock and bond ownership really matter?
From this perspective, the priorities of pro-worker reform should be increasing the countervailing power of workers—perhaps by innovative means, such as sectoral collective bargaining or wage boards—and increasing decommodification by means of tax-funded pay-go social insurance and what Ganesh Sitaraman and Anne Allstott, following Jacob Hacker, describe as “public options,” such as public hospitals and public parks.
As Palladino herself notes, “Despite Berle and Means’s theory, however, early- and mid- twentieth-century America was dominated by ‘managerialist’ corporations such as General Electric and General Motors: large conglomerates with strong managers who prioritized stable growth and who bargained with powerful unions.” If the countervailing power of organized labor and government made the New Deal possible, in spite of the predominance of shareholder theory in law at the time, then new forms of countervailing power can make a newer deal possible today, even in the absence of corporate governance reform.
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