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Nov 16, 2010

Comment: The rights and wrongs of ownership rights

There is a lack of equality in corporate America

Once upon a time, property-owning democracy was the bedrock of Anglo-American society. The assumption held by government – as in current theories of corporate governance – was that if you own shares in a firm, or property in a community, you have an interest in looking after it and increasing its value.

From different angles, both voting and ownership now seem in a state of flux. In the old days, you owned a house or a farm, and you had clear title. Now, you might live in a house, but it’s far from being your castle. Its beneficial ownership is besieged by banks or other financial institutions and the mortgage is owned by… well, that’s not entirely clear.

Conversely, if you are an investor, and you put money in mortgage bonds, what do you own? Neither the dweller in the home nor the investor is legally certain of his or her relationship with each other, and as tales spread of fast-food servers conscripted to notarize foreclosure documents there has been a hitherto undeclared revolution in property rights.

The bankers who swore that society would fall into anarchy unless they were paid every penny of their bonuses, even if they had brought ruination to their firms and the global economy, now say the dubious foreclosures should go ahead – even if some fully paid-up householders lose their homes as a consequence.

Stockholders in companies face similar ambiguities. It has taken a titanic multi-year campaign for the SEC and Congress to approve a tiny incremental enfranchisement of shareholders of more than three years’ standing to nominate and get proxy access for a tiny portion of the corporate board. They may even, eventually, be able to force non-binding votes on whether corporate officers can munificently distribute stock options to themselves. Shareholders have little or no control over such dilution of the value of existing shares. It’s as if your mortgage holder told you it had given away your dining room to a deserving bank manager.

Maybe it’s all academic, anyway, as shareholder value in failed corporations can be wiped out by governments without compensation, while the managers who totaled them are legally entitled to their full contractual emoluments. Some employees might have thought they had some sort of entitlement to their jobs and pensions, but their legal rights were somewhat exiguous compared with those of their senior managers.

Last year the Supreme Court, citing constitutional amendments designed to protect citizens’ free speech and the rights of freed slaves, ruled that corporations have the right to spend unlimited amounts of money in election campaigns. Stockholders are not consulted about such decisions.

You might think you own your shares and pension, but everything you thought was solid could dissolve into air. You might think your lonely vote in the solitude of a voting booth will sway government decisions, but its impact pales into insignificance in comparison with the flood of cash donations from CEOs and banking executives. And their bonuses persist in keeping or increasing their value.

It seems every shareholder and mutual or pension fund holder is equal; it’s just the CEOs and bankers are so much more so.