Birth of the corporation
The corporation emerged as a tool of conquest. European governments needed a way to finance trade ventures without risking too much individual wealth. In 1602, the Dutch East India Company became the first company to sell shares to the public. The company’s monopoly over the spice trade in southeast Asia allowed it not only to trade but essentially make war. An early windfall came in the plunder of the Santa Catarina, a 1500-ton Portuguese carrack, near Singapore in 1603.
As soon as was there were shareholders, however, there was shareholder activism. Rival investors battled for control. Then there was the issue of the Santa Catarina. Though its booty had enriched the shareholders, pacifist Mennonite investors complained that they were essentially financing piracy. They faced a dilemma that would become a commonplace in ethical activism: whether to engage as owners, or to divest and wipe their hands. They did the latter.
Other colonial powers soon chartered their own enterprises, which came to be known as joint-stock companies. But it was not until the Industrial Revolution that these enterprises began to resemble modern corporations.
As production grew in size and complexity, particularly in Britain, the needs of capital outgrew the capacity of the partnership or sole proprietorship. By offering ownership shares to the public, the joint-stock structure allowed for larger operations and smaller risks for entrepreneurs.
John Bray (1809-1897)
Soon enough, these financial innovations inspired radicals. Among them was John Francis Bray, a US-born printer who influenced early Anglo-American radical movements. Bray saw in joint-stock enterprises ‘the best exemplification of the power which man may wield’, whose ‘gigantic power’ was found in ‘innumerable roads, railways and canals, and in the creation and distribution of almost every description of wealth’.
In Bray’s utopia, the economy would be ‘one great joint-stock company’, free of competition and subdivided into many subsidiaries. Communities would ‘universally produce or distribute wealth, and exchange their labour and their productions on one broad principle of equality’.
Bray left the details vague, but his ideas prefigured later arguments about the socialising potential of corporations. By dispersing ownership claims, joint-stock companies encouraged a more fluid distribution of profits. It is no great conceptual leap to imagine a socialised economy consisting of a few great joint-stock companies in the largest industries – shipping, communications, manufacture – their shares evenly distributed. Nor was Bray the only early socialist to build a utopia on the foundations of the joint-stock company.
In 1842, the pseudonymous Aristarchus proposed a system of ‘Interchanging Joint-Stock Companies’, which would form a ‘community of profits’ to supersede the ‘community of property’. A pamphleteer called John Frearson envisaged a society of ‘equitable joint-stock companies’ run by ‘working shareholders’.
Of course, workers could simply bypass the financial system and organise production themselves. Worker-owned cooperatives sprung up around Europe and the US in mid-1800s – to Marx they represented ‘within the old form the first sprouts of the new’ – and have been a fixture, if a marginal one, within capitalism ever since. In the US, black cooperatives joined economic solidarity with racial emancipation. Yet the growth of cooperatives has been constrained by competition and access to capital.
Few socialists better appreciated the revolutionary potential of corporations than Karl Marx. For him, the divorce of ownership from control represented ‘a mere phase of transition to a new form of production’. The single, private capitalist was being supplanted by collective, ‘social’ capital, which was ‘distinct from private capital’. The joint-stock company became ‘the abolition of the capitalist mode of production within the capitalist mode of production itself’.
Marx had some personal experience in this department. ‘I have, which will surprise you not a little, been speculating’, he wrote to a friend after coming into a windfall in 1864. Betting on a bubble in English joint-stock companies, which were ‘springing up like mushrooms’, Marx made a purported £400 – nearly £50,000 today. His justification: ‘It’s worthwhile running some risk in order to relieve the enemy of his money’.
The Gilded Age
Despite Marx’s hopes, corporations generally served a purely capitalist function. Perhaps no country took to corporations as energetically as the US. Following the Revolutionary War, the young states issued a flurry of corporate charters. These entities served a range of purposes both civic and commercial, from schools to banks to cotton manufactories. Nearly all of them promised some ‘public utility’ beyond that of profit-making.
But US corporations soon shook off their civic attire. By the mid-1800s most operated under the control of a small coterie of shareholders who appointed close associates as managers. Towards the end of the century, tycoons like John D. Rockefeller enacted a wave of mergers through complex stock manoeuvres and, occasionally, outright fraud. The corporation, once an expression of democratic impulse, became the locus of gilded-age plutocracy.
A similar process took place in Germany. Its highly concentrated banking system had consolidated industry to the point where equity finance seemed a relic. Bank loans to corporations supplanted stock issues, and Germany’s so-called Big Three banks owned so much stock that exchanges atrophied.
To Rudolf Hilferding, theorist and Weimar Republic finance minister, this evolution betokened a new stage in capitalism: that of ‘finance capital’. For Hilferding, it was not the corporation that held revolutionary potential, but the banks. ‘Taking possession of six large Berlin banks would’, he wrote, ‘greatly facilitate the initial phases of socialist policy’– just as German bankers feared.
Banks were also ascendant in the US, where the likes of Andrew Mellon and J.P. Morgan helped forge twentieth-century US capitalism. But unlike in Germany, Wall Street’s rise empowered the small shareholder, as companies made use of the New York Stock Exchange to mass-market their shares. Between the start of World War I in 1914 and the end of the 1920s, the portion of US households owning stock rose from around 3 per cent to nearly one quarter. Then came 1929.
Charlie Chaplin stands on Douglas Fairbanks’ shoulders during a Liberty bonds rally. Liberty bonds were war bonds sold to support the allied cause in World War I. The bonds introduced the idea of financial securities to many citizens for the first time. Credit: Underwood & Underwood (see lens.blogs.nytimes.com) [Public domain], via Wikimedia Commons
The Golden Age
The Great Depression altered the face of corporate governance for generations. With New Deal legislation came limits on how much corporate equity a bank could own. A new paradigm took hold for executives and shareholders: professionalisation of the former, marginalisation of the latter.
This was the age of managerialism. In their 1932 classic, The Modern Corporations, New Deal economists Adolf Berle and Gardiner Means described how buccaneering investors had given way to staid careerists in charting the course of corporations. With shareholders facing irrelevance, the ‘traditional logic of property’ no longer held.
Looking ahead, they suggested a ‘purely neutral technocracy’, should control the great corporations, resolving stakeholder disputes and distributing income ‘on the basis of public policy rather than private cupidity’. Inspired by this analysis, Marxist economists Paul Baran and Paul Sweezy declared that shareholder control was ‘for all practical purposes a dead letter’.
Although some of this was overstatement, it was true that major shareholders and financiers had had their wings clipped just before the golden age of capitalism took off. But the New Deal legislation that established bodies to police Wall Street also empowered small shareholders to exercise their voice in new ways. Thus, in the nadir of financial power, a new breed of shareholder was born: the corporate gadfly.
The gadflies reflected the social currents of their time. In 1949 Wilma Soss began gate-crashing the annual meetings of companies like US Steel and lobbying for the inclusion of women on their boards. (Around one-fifth of listed US companies still have no women directors.)
In 1948, Civil Rights activists James Peck and Bayard Rustin bought one share each of Greyhound Corporation and submitted a proposal for it to consider desegregating its southern bus lines. While companies could generally block such proposals, with regulatory approval, by 1970 regulators sided with the gadflies. The floodgates opened to ethical activists, particularly environmentalists and Vietnam war protestors, as long as their proposals avoided focusing on ‘ordinary business operations’.
Shareholder activism emerged with the civil rights movement. Credit: Leffler, Warren K., photographer [Public domain], via Wikimedia Commons
The golden age of capitalism also produced attempts to consolidate economic gains within social vehicles. Progressive economists like James Meade landed on the idea of public funds that would invest in financial assets and deliver payments – social dividends – to citizens. The British Labour party in 1973 floated a ‘Workers Capital Fund’, whose goal was ‘extending opportunities for economic democracy by giving Fund members – through their ownership of shares – direct powers over key financial decisions’. US economist John Roemer proposed a similar plan in the 1990s.
The most ambitious application of such a fund took place in Sweden. Authored by economist Rudolf Meidner, the plan proposed to transfer corporate stock into publicly owned ‘wage-earner funds’ until they were majority owners. What took effect, however, was a watered-down compromise; from 1984 to 1991 only 5 per cent of Sweden’s equity entered the funds. It was ultimately ‘a rather symbolic gesture’, according to Meidner.
This was, after all, the age of Thatcher and Reagan. After a period of relative quiescence, the forces of financial capitalism had been gearing up for a counter-revolution. In the 1980s, they pounced.
Maximising shareholder value
In 1976, business theorist Peter Drucker warned that the rise of pension funds – which then held around a quarter of outstanding US equities – would produce ‘pension fund socialism’. According to Drucker: ‘If “socialism” is defined as “ownership of the means of production by the workers” . . . then the United States is the first truly “Socialist” country’.
It is ironic, then, that the neoliberal power shift back towards finance was abetted by US pensions. In the 1960s and 1970s pensions (both public-sector and those operated by private-sector unions) emerged as powerful investors. With their newfound financial might, labour-backed pensions sometimes deployed their funds in the service of workers, particularly during union negotiations. Yet the primary purpose of the funds was pecuniary.
Previously, institutional shareholders – insurance companies, mutual funds, pensions, etc. – were marginal players. But their portion of US stock ownership rose from 6 per cent in 1960 to 28 per cent in 1980 (today that share is around 80 per cent). The growth of institutions coincided with a crisis of capitalist profits, amid oil shocks and ‘stagflation’. By the 1980s, institutions were agitating for management to shake up their ossified bureaucracies and get cash flowing again. Pensions, tasked with providing retirement security for millions, were no exception.
Pension funds made their influence known in the wave of hostile corporate takeovers in the 1980s. When companies felt targeted, they often adopted ‘poison pill’ measures to ward off corporate raiders. These were generally seen as harmful to shareholders, since they discouraged takeovers that could yield stock returns.
Labour-run pensions soon fell in with the rest of the shareholding class. As scholars Schwab and Thomas wrote, ‘Labor unions are active again – but this time as capitalists’.
Pension funds were initially divided over the tactic. Public pensions stood with other institutions against poison pills, arguing that they had a fiduciary duty to oppose measures that threatened beneficiaries’ returns. But union-backed private-sector funds faced a conflict: takeovers often entailed layoffs and even the capture of pension assets.
Nonetheless, labour-run pensions soon fell in with the rest of the shareholding class. As scholars Stewart Schwab and Randall Thomas wrote, ‘Labor unions are active again – but this time as capitalists’.
Though commonplace now, the idea that businesses should operate exclusively to reward investors required a new intellectual framework: shareholder value theory. Economist Michael Jensen argued that corporations could act sensibly only if they focused entirely on maximising shareholder returns. Milton Friedman pondered, ‘If businessmen do have a social responsibility other than making maximum profits for stockholders, how are they to know what it is?’
The beneficiaries of this movement were not just pensions. As investors reclaimed their place at the top of global capitalism and policymakers cleared away regulations, Wall Street and the City of London thrived. Hedge funds multiplied, empowered by the logic of shareholder maximisation. In the name of aligning management and shareholder interests, companies increasingly rewarded executives with stock, a trend that helped to balloon CEO pay.
Wall Street district. Credit: Lafra/Flickr | by-nc-nd/2.0
Fifteen years after Drucker warned about pension fund socialism, he came to a different conclusion: pension funds had grown too capitalistic. The inability of capitalists to reckon with the rise of pensions had led, Drucker wrote, to ‘much of the financial turbulence of the 1980s – the hostile takeovers, the leveraged buyouts, and the general restructuring frenzy’. He concluded: ‘As a theory of corporate performance, then, “maximizing shareholder value” has little staying power’.
Drucker would again be proven wrong. But as pension funds matured, their approach grew more nuanced. Throughout the 1990s and 2000s pensions launched the majority of governance-related proposals, seeking to increase accountability among corporate management.
A recent pension-led campaign pushed the number of Standard &Poor’s 500 companies allowing proxy access – a policy that allows investors more easily to challenge board incumbents – from 1 per cent in 2014 to nearly two-thirds today.
Potentially more consequential, however, have been the ripple effects created by the emergence of institutional investors as structuring agents within the stock ecosystem.
Their rise gave the previously hodgepodge ethical activists more powerful and concentrated targets for their campaigns. A single pension fund fiduciary is easier to convince than innumerable dispersed shareholders. The confluence of these factors holds lessons for social shareholders in the future.