Re: wealth distribution and corporate control

[Shann Turnbull <sturnbull@mba1963.hbs.edu>]

Dear Homestead and Economics of Ownership Groups

Michael Harrington has pointed out one reason why micro economists do not
support the distribution of ownership.  This is because the current system
of corporate ownership and control  introduces inefficiencies in the
allocation and management of corporate resources.  

To obtain support for expanded ownership we need to show how this problem
can be overcome through the way in which ownership is expanded.  Support
thus depends upon what Jeff Gates calls the "pattern of ownership" and
which I refer to as the "architecture" of control.  

Evidence that employee ownership can increase corporate efficiency is of
assistance.  However, it is too much employee control which concerns micro
economists because employee executives can then trade off efficient
allocation and management of corporate resources for personal advantage.
This inefficiency is encouraged by institutional investors who are mostly
negligent owners because they do not become actively involved in the
control of corporations because of the free rider problem and in any event
they do not have the incentive, interest or competence to do so.
Institutional investors in the US, Canada, UK and Australia own over 60% in
value of publicly traded shares so diffusion of ownership is already a
major concern for efficient resource allocation in Anglophile countries.  

Michael Porter in his 1992 report (Capital Choices: Changing the way
America invests in industry) for the Competitiveness Council recommended to
US policy makers, institutional investors and corporations to involve their
employees, customers, suppliers and host community in their ownership and
control architecture.  No business can exist without employees, customers,
suppliers and host community so I define these individuals as "Strategic
stakeholders" (Refer to my survey of the Corporate Governance literature
'Corporate Governance: Its scope, concerns & theories', Corporate
Governance: An International Review, Blackwell, 5:4., pp. 180-205, October,
1997. http://papers.ssrn.com/sol3/paper.taf?ABSTRACT_ID=60001 )  This
survey identifies the ethnocentricity of the US theory of the firm
developed by Ronald Coase referred to by Harrington and so the limitations
in the analysis of many US scholars who base their work on this theory.

My survey and other articles provide evidence that stakeholder owned and
control firms are the most efficient consistent with the recommendations of
Porter.  So arguments for expanded ownership should be based not just on
employee ownership but on strategic stakeholder ownership with an
appropriate control architecture as suggested in my various articles on
this subject listed on my web page.  Thus I believe we need to promote
expanded control as a way of obtaining support from the micro-economists
for expanding ownership.

The ability of corporations to provide profits in excess of the incentive
required to attract funds from investors is inconsistent with efficient
allocation of resources and inconsistent with one of the main reasons for a
market economy.  The distribution of surplus profits through expanded
ownership rather than through the inefficiencies of management
appropriation and/or government transfers though taxation and welfare
should provide a compelling reason to support the distribution of
ownership.  The problem is that accountants do not measure surplus profits
(those in excess of the incentive to invest) so economists do not  see
them.  Indeed, the concepts of surplus and windfall profits are not part of
economics.  Evidence of their existence is provided in my paper 'New
Strategies for Structuring Society from a Cashflow Paradigm' available from
the COG library http://cog.kent.edu/library.html  

So how can we share the insight of surplus profits, which are both
inefficient and inequitable, to obtain support for expanded ownership?

Regards

Shann

At 08:18 AM 19/10/1999 , Michael Harrington wrote:
>Dear Homestead Group,
>
>Regarding some of the emails last week and Keith Wilde's strategy (from the
>ownership group), I went back to review some of the literature I remember on
>ownership and the theory of the firm. I came across an 1988 article by
>Harold Demsetz titled "The Control Function of Private Wealth" and found it
>very relevant to the points I was trying to make on the orthodox economics
>approach to the issue of ownership. It's in his book Ownership Control and
>the Firm, Basil Blackwell, 1988.
>Incidently, Harold Demsetz and his colleague Armen Alchian are probably the
>foremost proponents and academic researchers  extending Coase's theory of
>the firm in the 1960s and 70s.  They are renowned for their contributions to
>the theory of property rights as well as the theory of transactions costs in
>the fields of industrial organization and economic development. Demsetz's
>specialization is corporate ownership and governance issues. 
>
>To quote from his article:
>"Probably no large topic in economics is so likely to spark heated debate as
>wealth and its distribution. ...Economists show less hostility than other
>social scientists... to inequality in the distribution of wealth. [This]
>stems from the belief they generally share that wealth-seeking ultimately
>promotes the common good by guiding resources into more productive uses,
>and, through competition between wealth-maximizers, by broadly distributing
>the gains that result."
>....Differences in wealth are demonstrably explained by differences in
>investment in human capital, intelligence, hours worked, risk of employment,
>and so on."
>
>While I would not wholly disagree with his statements (except I would argue
>that differences in wealth are explained more so by ownership of financial
>assets, as Edward Wolff's research shows), we can see that his approach is
>guided by questions of corporate efficiency and economic incentives of
>private property. Thus the free-rider problem in corporate governance that
>results from a diffusion of ownership is economically inefficient and thus
>bad. 
>
>Demsetz claims that "[the productive function of the having of wealth] is
>unlikely to be served well, even in wealthy societies, if wealth is equally
>distributed. ....Private, concentrated ownership is required... and...is
>securable to a society on a broad scale only if the society is privately
>wealthy and tolerant of a skewed distribution of wealth." 
>Finally, he concludes: "Assuming that scale economies are more prevalent in
>industrial undertakings, this suggests that patient accumulation of private
>wealth, and toleration for skewness in its distribution, are part of the
>preconditions for accelerated development." 
>
>Now, I don't disagree with his premises:
>1. private property is a necessary condition for maximizing economic growth;
>2. diffusion of ownership presents collective action problems of governance
>and control through free-rider problems;
>3. efficient risk taking is essential for business development
>
>But I definitely disagree with his conclusion that a highly skewed
>distribution of wealth creates the optimal conditions to resolve these
>problems. If fact, as many have pointed out, it sets up the politics of
>redistribution that hampers economic growth. 
>
>So, one task is we must show that a flatter distribution of wealth can
>enhance stable, long-term economic growth while adhering to the dictums of
>private property and incentives for efficient risk-taking. I think ESOP
>theory has tried to demonstrate this, and I am convinced, but I would like
>to counter this orthodoxy with some convincing empirical and theoretical
>research.
>
>Regards,
>
>
>Michael Harrington
>The Milken Institute
>mharrington@milken-inst.org
>(310) 998-2699

Shann Turnbull
P.O. Box 266 Woollahra, Sydney, Australia, 1350
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