Why and how to democratise capitalism using stakeholder networks

Unless stakeholder governance is introduced, the truncation of democracy will continue, with civil governance subordinated to the interests of corporations and individual capitalists. The policies of major political parties have already become truncated and subordinated so that there is little difference in their policies. The spread of plutocracy and autocracy has become a self-reinforcing process. It is little wonder that citizens feel alienated and disinterested in democratic processes.

Corporate leaders and capitalists argue that capitalism would become degraded if directors were elected on a democratic basis of one vote per shareholder. However, this raises the question of whether degrading democracy is more important than degrading capitalism. Answering this question requires comparing many subjective political issues with economic concerns.

The question is also dependent upon what type of capitalism is under discussion. There exists the possibility of re-designing the architecture of capitalism. There are two approaches to consider for reforming capitalism to improve democracy: (i) Reducing inequity in asset ownership to make capitalism intrinsically more democratic and (ii) Sharing corporate power on a democratic as well as a plutocratic basis.

The first approach can be introduced with tax incentives to provide owners with higher, quicker and less uncertain profits when they agree to introduce dynamic-ownership rules that continually democratise ownership. The dynamics of the new ownership rules and tax incentives would increase the incentive to invest but at the same time reduce the overpayment of investors with surplus profits. Surplus profits can become very substantial. With many long-life productive investments they can become many times larger than the value of the original investment.

Surplus profits continuously and insidiously concentrate wealth even with progressive taxation. They are insidious because economic textbooks only recognise “excessive” profit but not surplus profits that are quite a different concept. Excessive profit or rents recognised by economists can occur at any time. Surplus profits can only arise after the time required by the investor to obtain sufficient returns to obtain the incentive to invest. An investor might well obtain what an economist might consider to be an excessive profit but not receive a surplus profit. On the other hand, investors can receive a surplus profit without obtaining what an economist may consider to be an “excessive” profit!

Surplus profits are not reported by accountants because accounting standards are only concerned with accounting periods, not investment time horizons. So an influential process of wealth concentration is not observed, measured or reported. However, the need to observe or measure surplus profits is not required to distribute them through introducing dynamic property rights to create “Ownership Transfer Corporations” (OTCs).

The tax incentives to introduce OTCs and the nature of dynamic ownership in regards to realty are described in my first book, written in 1975, Democratising the Wealth of Nations. My 2002 pocket book, A New Way to Govern: Organisations and society after Enron, describes the second approach to change the architecture of capitalism to enrich democracy.

Democratising the control of corporations can be achieved in two complementary ways. One approach is to use OTCs to localise the ownership of corporations to make them accountable to their employees, customers and suppliers in their host communities. This creates a “Third Way” to work or welfare to distributing the wealth of nations. A complementary way to democratise control is to introduce “A New Way to Govern” through establishing stakeholder networks. This creates a “Third Way” to markets and hierarchies for governing society.

Stakeholder networks and governance can be introduced to the public sector, as it is not dependent upon stakeholder ownership. A basic requirement for introducing stakeholder governance is the introduction of a division of powers. This provides checks and balances and so a rational basis for developing trust and efficient operations. It also introduces sufficient variety of communication and control channels to reliably identify and control such variables that are required to sustain the organisation.

A division of powers also provides a basis to reduce and/or manages conflicts of interests while introducing competition for control within the organisation to replace the need to seek efficiency through competition for control through the stock market. This provides a counter to the efficiency argument for privatisation to justify the degradation of democracy. Distributed intelligence introduced by a separation of powers reduces information overload and bounded rationality to maximises participation in decision making and so enrich democracy.

Democracy is also enriched by stakeholder advisory councils being elected on the basis of one vote per person and having a watchdog board elected on the same basis to protect minority interests when investors are involved. So while plutocratic voting may still be used to protect the property rights of investors, minority investors are protected from exploitation by dominant investors and/or management.

What is currently described as “good corporate governance” is based on plutocratic control through a unitary board. This has two fundamental flaws: (i) directors obtain absolute power to manage their own conflicts of interest to allow absolute corruption and (ii) there is no process for either directors and/or shareholders to determine when their trust in management might be misplaced. Rather than being “Good corporate governance” is in fact irresponsible governance! Institutional investors like pension and mutual funds as fiduciary agents should not be investing in corporations subject to these two flaws that are found in most publicly traded corporations.