Corporations: Containment vs Reform - Part II By Tom Cobb

[Demeter]

OpEdNews.com

Original Content at http://www.opednews.com/articles/opedne_tom_cobb_061028_corporations_3a_contai.htm


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October 29, 2006

Corporations: Containment vs Reform - Part II

By Tom Cobb

In my last essay, I proposed that the best means of reforming our corporations would be to transfer voting control to their workforces. To most, such an idea sounds a bit unhinged. This is because most people – and especially liberals – presume that workers and shareholders hold diametrically opposing interests. This is because liberals have not yet come to understand that middle class shareholders are under siege in much the same way workers and consumers are. Because liberals have come to understand how corporate power is exerted to the detriment of workers and consumers, it is natural to assume the benefits of this asserted power flow to corporate shareholders.

This conventional belief is both untrue and unfortunate, at least for the great majority of shareholders. This is because the same class differences that exist in the workplace and marketplace exist as well in the investment world. In the investment world, roughly 2/3s of all shares are held by investment institutions who invest in stocks on behalf of their client members, while the rest are held directly by shareholders. Comprised mostly of mutual and pension funds, the institutional investors are supposed to act as fiduciaries on behalf of their member shareholders, but rarely do.

Instead, this group of fiduciaries works a gigantic skim game dedicated to the mission of siphoning vast sums of wealth out of the pockets of small investors. Their ranks include the executives and boards that run our corporations, plus all the layers of mutual funds, pension funds, proxy advisory services, the investment services pipeline, brokerage and investment banking houses, and the rest of Wall Street. While no one should be expected to work for free, the fees collected by these intermediaries are so steep that virtually half of the wealth contributed and earned by investors over their working life is ultimately lost to these fees.

To see this, investors need only understand that the stock market has historically produced returns of 7 to 8 percent/per year, before cost. But once the agency industry's skim is subtracted, absentee investors only enjoy returns of about 5%/year, which is almost exactly what they could get from virtually risk free Treasury notes. The spread between stock market returns and Treasury returns has always been marketed to investors as the extra return needed to justify the added risk of holding stocks that are volatile in price, and fully exposed to the risk of bankruptcy and complete loss.

This means our financial markets are now arranged to deliver investments returns to small investors that are virtually the same as those they can earn without any of the risks they now incur. The difference is being pocketed by the Agency Industry. How does this skim end up robbing investors of half their deserved wealth? John Bogle, the investment industry maverick who founded the Vanguard family of funds, has extensively chronicled the means by which this occurs in his book, "The Battle for the Soul of Capitalism". For the most part it is a depressing read, but to understand the stranglehold the Agency Industry has on corporate wealth is to understand the real means by which wealth is being transferred from the middle class to the wealthy in this country.

Authors Website: http://outskirtspress.com/cgi/webpage.cgi?ISBN=159800350X

Authors Bio: As the author of "A Real Ownership Society", I advocate for socializing the behavior of our corporations, and democratizing their benefits. By discarding the conventional model of corporate ownership that now relies upon absentee ownership, and replacing it with one based on worker ownership, we can accomplish these ends.

[rogerashton]

1. Support

I support the proposal to transfer voting control to employees, which I have been advocating for years. See

http://william-king.www.drexel.edu/top/personal/cs/coopsocialism.html

However, there is an incentive problem for shareholders, as employees have incentives to increase their wages at the expense of profits. However, there is also a pretty simple solution: tie dividends to the wage, so that the wage cannot be increased at the expense of profits.

Details at http://william-king.www.drexel.edu/top/personal/wkpaps/coco/coco.html

There is good reason to expect that such a system would attain higher labor productivity than "capitalist" firms do, together with efficient allocation of resources.