Sunday, February 25, 2018

The Role of Privately Owned Institutions - Sylvain Rochon

While the government has the role of providing people with their basic needs, the private sector should drive the economy.  We know form examples of communism that if the public sector tries to drive the economy, the economy doesn’t go very well.  This is because government on its own doesn’t have strong motivations to succeed in a competitive world.  The benefits of a properly elected, expert government, is that it is unbiased while private sector is entirely biased.

Therefore, government is ideal to ensure citizen’s rights are respected and that all basic needs are distributed equally.  However, it will do so somewhat inefficiently because it’s human operators do not have personal motivations working within the public system.

On the other hand, the private sector is filled with highly motivated individuals and groups that are totally biased towards their very special ideology, product or service.  If competition is encouraged, different private sector groups, companies and individuals will compete with their words, actions, services and products to grab market share according to the simple natural law of offer and demand.[1]

People have an innate need to be creative and to provide additional value to society.  It is part of what makes us human.  We want to create, invent, innovate and push the limits of what is possible.  For some of us it is a drive that we cannot quell.  Most entrepreneurs are bitten by this bug. The drive has nothing to do with money, influence or power.  In most cases, like myself, the drive is to find solutions to problems we see in the world. 

I think in some way every human being has this desire.[2] 

Therefore, assuming automation takes hold in our ideal world and we don’t need to work for a living, most of us will quickly find ways to contribute positively to society.  Some of our projects will be so complex that we’ll need to partner up with artificial intelligence and other passionate individuals to achieve goals. 

There is a significant issue that must be tackled though.  Most current company structures have the tendency to produce serious wealth gaps between the rich and the poor.

Most companies in the world today are structured as either sole proprietorships, partnerships or corporations.  Sole proprietorships and partnerships have a simple structure with the owner(s) having full control of the company’s activities, and they are the full beneficiaries of company profits.
Under these company structures, if the company does well and generates lots of profits, the owner or partners can redistribute this wealth in whatever way they choose to.  Most businessmen will spend some of the profits to grow their business and expand.  This is all fine and good if what the business produces is in demand.  They are solving problems, fulfilling orders and engaging other individual in, we hope, work they enjoy.

Some owners will pocket some of the profits for themselves instead of reinvesting into the company.  This is a choice that can be risky as the business’ competitors that invests more in the company may be better able to grab more market share or sell products and services at lower price points.  The company structure allows for dynamic market adjustments based on competition, offer and demand.   It is healthy.  May the best company win.

This company structure can still work very well in the ideal world we’re imagining today for exactly that reason.  We want competition to occur to ensure we get better quality products at a low price.  We want to choose socially and environmentally responsible products.  The entrepreneurs that can provide these to the population will prevail.

Unfortunately, if things don’t go exactly according to plan, owners of sole proprietorships and partnerships are entirely liable, which is why most entrepreneurs that wish to grow a larger firm will register a corporation instead to benefit from limited liability.[3]

Corporations, on the other hand, are the primary culprits behind the increasing gap between the wealthy and the poor.

The corporate structure needs change
You see, corporate structures have multiple layers of responsibilities needed by law to be properly recognized by the government.  They are more complex to maintain and to set up compared to any other form of for-profit organization.  Essentially though a corporation is its own legal moral entity in the eyes of the law and thus if something goes wrong with the corporation’s products, services or operation, or if the corporation goes bankrupt, the corporation itself is liable instead of the owners.  This makes it a very appealing structure for investors, wealthy individuals looking to make more money from what they already have.  They can risk their money but cannot be liable for the corporation’s issues when it comes to it’s operations, unless very special conditions apply.
When we start separating responsibility from positions of power, like owning a company, that’s when we start seeing troubling patterns.

The top layer of a corporation structure is the shareholders.  These are typically the founders and investors in the company.  They are the owners and the ultimate beneficiaries of the corporation’s profitability through ownership of shares.  That’s where the term share comes from.  If the corporation decides to give a portion of its revenues to the shareholders, each one of them receives it’s “share” based on the percentage of the total amount of shares owned.  More complicated structures are possible in different classes of shares and so on, but these differences don’t matter for this argument.

The second layer is composed of directors structured as a board that are selected by the shareholders by vote.  The board’s legal responsibility is to act as the brain for the legal moral entity that is the corporation.  They make decisions on behalf of the corporation for its best interest, not their own.  If they do not act for the best interest of the corporation, then the shareholders can bring them to court of law.  Now, remember who the shareholders are:  they are the owners that are not liable for the corporation’s actions.  Shareholders will sue the board of directors if they feel the company is not run properly and there is legal reason to make proper accusations.  Normally board members are selected on an annual basis, so even if the shareholders don’t agree with board members’ decisions and there is no possible legal recourse, they can still change the board for one that will move in the direction they want the corporation to go.  

Suddenly, you see the obvious pattern of control.  The board really must act according to what the shareholders want.  On paper, it seems like the board of directors are the custodians of a moral entity and thus will act to grow the corporation, hence grow profitability and ensure the corporation has a good social image.  But really, all they do must translate into sales, whether through social responsibility, revenue generation and other means.  They need to ensure the shareholders are happy all the way through, within the limits of the law.

The third layer is composed of the corporation’s officers, chosen by the board of directors, to run the company itself.  The officers staff the corporation, make sure the products or services are made and sold to customers and so on.



While there doesn’t seem to be any issue with this structure at first glance.  Corporate shareholders can be private investors or the original owners that started it all, but they can also be stock market investors.  Only a very small number of corporations are traded on the New York stock market (2,800 out of 1.7 million in the US in 2014), the corporations that are traded on the stock market are typically the largest ones and those that have the highest growth ratio.  It is expensive and complicated to get traded on the stock exchanges, however, powered by stock market investors who speculate on corporate success, the clear majority of the top 500 revenue companies in the world are publicly traded corporations.   

Here lies the issue:  investors in stock market trades are people or companies that already have money to invest.  They invest to grow their money.  They risk their money but have no personal care whether the company they have invested in treats their employees well or has strong social or environmental responsibility codes.  A totally valid endeavor on the surface.  However, the objective is strictly to “play the market” and grow funds no matter what.  If a corporation pays their employees lower costs, or outsources to South-East Asia to increase profitability, all the better.  Whatever the corporation does to increase profits will make public company shareholders happy.  Remember, these are people with money to invest already.  In fact, according to the Federal Reserve reports, barely one third of the bottom 50% American earners own stocks and nearly 94% of the top income group owned stocks in 2016.[4]
Lower-income Americans don’t have extra money to put into stocks and in the case of America, a third of workers don’t have access to a 401(k) or another retirement plan either.[5]

The board of directors of public corporations will therefore try to keep funds within the corporation to accomplish their duty.  Directors of publicly traded corporations is thus solely focused on increasing the value of the corporation at all costs. They cannot negotiate with their shareholders.  They are an emotional bunch that only care for the numbers and will sell their shares driving the value of the corporation down if the corporation isn’t careful. 

A company that may have started with good intentions becomes a machine whose purpose is exclusively to increase the value of its shares.  Even if on the surface they spin great social responsibility stories, the purpose of the stories is to keep share values up by fooling shareholders in some way or another that the company is gaining strength and thus economic value.

Since public corporation shareholders are disconnected from the operations, motivations and social responsibility aspects of these companies, it often leads to questionable decision-making that is not in the best interest of the environment or society in the long run.  In addition, public relations and communications staff can very adeptly spin a story that makes something that they want to do factually terrible seem like a social service.

One of my favorite examples from history is how from the 1930s to the 1950s, the tobacco industry was able to fool millions into thinking cigarettes were good for people’s health.[6] 

Thankfully, with information flowing freely through the web, consumers do have the ability to direct some of these large corporation’s decisions through their shopping patterns.  It helps if large enough amounts of consumers take part of the discussion because, again, corporations will go where the money is.  If enough people choose to boycott some companies’ products, the company changes their tune very quickly to keep share values up.

Corporation structures were originally designed to allow crowdsourcing of funds to grow companies, but the practical result of their existence is to make wealthy individuals wealthier without care for what happens to those that don’t have lots of resources.

This structure is unacceptable in our ideal world we’re trying to create.  We do want private companies to compete, but we need company structures to be legally programmed to satisfy the fundamental needs of a citizenry:  provide additional social value to society. 

The government needs to step in and create regulation and programs that motivate and direct the development of corporation towards building economic strength and social good.

Eliminating the absurdity of the stock market
The stock markets themselves are corporations that control all stock market trades.  They are the only boys in town that enable investments into companies where the goal of the public investor is strictly to increase its holdings.  Stock markets even allow all manner of stock derivatives that increase investor choices and their gamble on how stock prices change over time.  It is strictly a game of educated guesses.  Very few stock market investors invest to ensure the company has sufficient funds to operate and make great product they enjoy. 

Though the system looks innocent enough, and the idea of having more money is a good one, making money strictly from buying and selling instruments worth cash causes all manner of socio-economic problems we are aware of today, including the huge gap between the wealthy and the poor. 
Banks offer some investment services that are connected to stock markets too, like mutual funds and retirement funds, but they also offer their own services that play only on money:  savings accounts are a good example.  They’ll take the money you deposit in an account and reinvest it in… the stock market.  They’d to this for profit and then provide you with a small percentage gain every year, and have you pay service charges for the service of “keeping” your money. 

Anything that creates money out of thin air, like interest, will help increasing the gap between rich and poor simply because rich people have more to gain.

There are many new ways to invest in businesses these days, like the very popular, modern and accessible crowdsourcing platforms like Kickstarter, Patreon, IndieGogo and others.  These systems are much healthier means of investing money and much more accessible to average people since the investments are for actual products and services with intrinsic value to the people investing.  Investors in an artist on Patreon will receive pieces of art.  Investors on Kickstarter will receive goods and services promised by the company listed.  These are fair trade systems that are increasing in popularity because it is people risking money out of the belief in the company making promises.  In exchange they receive something they personally care about.  Not just more money. 

In our ideal society government should encourage modern value-based trading platforms and ensure companies like stock markets become illegal.  Only value trades should be allowed in the new economy to further encourage offer and demand between individuals, fair trade, competition and avoiding issues with serious wealth gaps.  More on this specific topic in the Economy Section of this book.




[1] Adam Hayes, CFA.  Economics Basics:  Supply and Demand.  Investopedia. - https://www.investopedia.com/university/economics/economics3.asp
[2] Steve Taylor Ph. D. (July 2013) The Power of Purpose. Psychology Today  - https://www.psychologytoday.com/blog/out-the-darkness/201307/the-power-purpose
[3] Limited Liability Company – LLC.  Investopedia.  - https://www.investopedia.com/terms/l/llc.asp
[4] Nathaniel Meyersohn (October 2017).  CNN.  Millions of Americans are left out of the stock market boom  - http://money.cnn.com/2017/10/20/investing/trump-stock-market-americans/index.html
[5] Employer-sponsored retirement plan access, uptake and savings.  (September 2016).  The PEW Charitable Trusts. - http://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2016/09/employer-sponsored-retirement-plan-access-uptake-and-savings
[6] Leah Lawrence (March 2009).  Cigarettes were once ‘physician’ tested, approved.  - https://www.healio.com/hematology-oncology/news/print/hemonc-today/%7B241d62a7-fe6e-4c5b-9fed-a33cc6e4bd7c%7D/cigarettes-were-once-physician-tested-approved

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