Jul/094
What do shareholders own?
“The shareholders are the owners of the company.”
Really?
Let’s be blunt about this: if you’re in business and you still think that statement is true, you’ve already lost the plot.
Yes, I know it’s what the business schools assert, and even what the law asserts in some countries. But it’s always been a questionable claim, and in functional terms, in most industries, it hasn’t been true for centuries – if it was ever true at all. Which is a problem for business – to say the least…
To see why it’s a problem, we need to look more closely at what’s meant by ‘own’.
‘Own’ has two fundamentally different meanings:
- to be responsible for something
- to possess something – usually without responsibility for that ‘something’
Within a business, we’re clear what ‘ownership’ means: it’s about responsibility. A ‘process-owner’ is someone who is responsible for the execution of a process; likewise for ‘project-owner’, for ‘business-rule owner’, for someone who owns a business role or a business information-source, and so on and so on, almost ad infinitum. More to the point, the moment that someone thinks they possess that item is when it all goes wrong. Responsibilities are core; clean handovers of responsibilities are core; muddled ideas about ‘possession’ are very bad news indeed.
So why on earth do we think that it’s any different with shareholders?
What responsibilities do shareholders have? Well, none, really. They front up with a certain amount of money, and expect – demand – that the company change its ways to maximise the return to them. In many countries, corporate law will back that demand to the hilt, too. But in their role as shareholders, they don’t do any of the work of the company; they’re not responsible for any of the actions that the company takes; by law, they have little or no liability beyond the risk of perhaps losing their money. That’s it: no responsibilities. By law. A bit tricky, that.
No responsibilities. But they do possess the company, says the law. Shareholders provide capital. Capital buys assets. So the shareholders own – possess – the company’s assets. Which entitles them to all the profit from use of those assets. Yet what do we mean by ‘assets’? This is where it gets trickier still…
This does sort-of make sense for physical assets – physical things, machines, land, materials. All property-law is based around rights of possession – specifically, the right to exclude others from access to those resources, which is an interestingly back-to-front way of defining it. Those rights of property include rights to exploit the resource, without any reference to others, either in the present or elsewhen: any social responsibilities – environment, pollution, wastage, even disappropriation and dispossession by deceit – must all be managed via other law, separate from property-law itself. Shareholders’ ‘limited liability’ means that those responsibilities are always someone else’s problem: but the rights for those physical assets belong to the shareholders alone. And we can maintain ‘accounts’ for those rights in terms of valuation of those physical assets, allowing for depreciation, exploitation and the rest.
All fair enough – probably. Possibly. But the ‘shareholder-value’ – the price for which shares are sold, and the financial return from the use of assets – isn’t based only on physical assets. In fact, these days it’s very unusual for a company valuation to be based only on physical assets: for some companies the physical assets barely register in the accounts, and may even not exist at all.
So in those cases, what do shareholders own? For these, we’ll usually hear phrases such as ‘intellectual property’, ‘goodwill’ or ‘brand’. And this is where it gets really tricky…
What is ‘intellectual property’? The shortest answer is that it’s an attempt to apply the physical rules of possession – specifically, ‘alienability’, the right of physical exclusion – to a context where, by their nature, those rules cannot apply. Ideas and information are ‘non-alienable’: if I give it to you, I still have it – which certainly doesn’t apply to a physical object. For its legal justification, the physical-property system depends on trails of provenance, in which property-rights of some kind – usually the right to be paid – accrue at each stage at which value is added, and to each person (individual or collective) who added that value. But this principle can’t apply to ideas or information: David Bohm and other physicists have long since proved that since knowledge-generation is always collective, and that there is no identifiable initial-source for ideas, there is no means to establish a valid trail of provenance in which all appropriate parties may be appropriately paid. The only way it can be made to look like the physical-property system is if someone arbitrarily asserts exclusive possession, defining an arbitrary start-point for a trail of provenance, but disenfranchising every other party in the item’s history. In other words, what in the physical-property system would and must be called theft. In short, there is no ethical, legal, philosophical or scientific basis for any of it: the entire ‘intellectual property’ concept is a delusion – or, arguably, a fraud – dependent entirely upon belief and lawyers’ bluff. And in essence, any valuation based upon that bluff is likewise a delusion. Which means that a very large chunk of ‘shareholder value’ is also likewise a delusion. Ouch…
To make things worse, applying physical-property notions to ideas and information makes no practical sense. ‘Possession’ of an idea implies a right of exclusion, a right to prevent others from using that idea: yet the idea only has functional value when it’s used. A physical resource – a machine, for example – can often be exploited without any change to its ownership; but that simply does not apply to intellectual-property, because usage in effect is extensional transfer of ownership. Exclusion prevents use – defeating the entire object of the possession in the first place, because if the idea is not used, it may as well not exist. The result is incredibly wasteful: not merely having to reinvent the wheel, but reinvent even the concept of wheel, constantly having to create alternatives just to get around pointless, petty, pathetic intellectual-property ‘rights’. Perhaps useful for certain types of innovation, but that’s about it: in any other sense, it’s about as uneconomic and ineffective a system as it could possibly be. Ouch indeed…
But wait – there’s more. Yes, it does indeed get worse: because the moment we start to look at that blurry concept of ‘goodwill’, we’ll see that we’re really in trouble, because shareholders’ ‘rights’ of possession come into direct conflict with just about every other form of law.
The clue here is that otherwise well-meant phrase “Our people are our greatest asset”. There’s a subtle catch in that phrase, and a big one at that: the only time when people can be described as ‘assets’ is when they are slaves. Which is supposedly against the law: very much against the law, in almost every country. (Though quite a bit of contract-law gets dangerously close to it…) There is an asset here, but it’s not the person: the asset is the relationship with the person, without which we don’t have access to the person, or to any of the means via which those people add value to other assets. The exact same is true of customer-relations: customers add value, but customers in themselves are not assets – the asset is the relationship with each customer, via which that customer may add value in transactions or trade. And one of the quickest ways to destroy a relationship is to try to possess it: it only works when each party takes responsibility for their side of the relationship. So if we try to apply a physical-property model – possession – to those assets, we’re likely only to destroy them. Which means that the current concept of shareholder-value will automatically destroy the shareholder-value, unless we merely pretend to apply that concept but don’t actually do so in practice. Which means that, at present, the directors of every company must necessarily lie to their shareholders about their method of valuation, in order to preserve the ‘shareholder-value’, and thence the interests of those shareholders. Which is kind of interesting in terms of current corporate law…
And yes, it actually gets even worse than that – even more complicated and, for that matter, legally-indefensible – when we get to brands, or morale, or reputation or other ‘aspirational property’, because the company must preserve an abstract relationship that exists only as a belief, yet has direct impact on the company’s ability to do work and on its relationships with every other stakeholder in the enterprise. The only approach that will protect reputation is responsibility, in every possible sense: in these abstruse realms, delusions of ‘possession’ invariably lead to disaster.
So here we have, in law, the notion that the shareholders ‘possess’ almost everything, and have responsibility for almost nothing, when in reality the only way that works is the other way round. Kind of frightening to realise that we have an economy, an entire legal system, based on assumptions which simply cannot work in practice. And this isn’t a matter of the woolly wishful-thinking of politics and the like: we’re up against real, absolute constraints of physics and physical reality here. There’s no way round it: it does not and cannot work. End of story. Ouch…
But, whether we like it or not, and despite the fact that it simply does not work, in present-day business we’re still stuck with this farcical fiction of shareholder-ownership. So what can we do about it?
First, perhaps, is to put shareholders in their place. They’re nothing special: providers of a particular type of finance, who perhaps take a slightly higher level of risk than banks would (or should) be willing to offer. Their only ‘responsibility’ is to provide funding, and keep it there, to maintain the commercial credibility of the company – and given that stock-exchanges enable shares to change hands in milliseconds or less, that responsibility doesn’t stretch very far. To be blunt, their ‘rights’ in law are massively disproportionate to their risk or responsibility – but that’s a matter for politicians to debate and decide, not us. What we can do to put them more in their place is to be a darn sight more honest about the real level of assets of the enterprise, and about what they can and can’t ‘possess’. Physical assets they can ‘own’ in their own questionable way, but for everything else they can only – must – leave the responsibility-based ownership in the hands of the company itself.
And the way we do that is by being clear about where our responsibilities truly lie. If we really want to be responsible to shareholders, the last thing we should do is pander to their whims – especially those such as stock-analysts who have little or no grasp of responsibility in the first place. Business-guru Michael Porter is utterly blunt on this point: the obsession with placing shareholder-value as the highest priority is, he says, “the Bermuda Triangle of business strategy”.
Instead, we need to focus on what does work. And as business commentators such as Charles Handy documented decades ago, the priorities that do work are very well known. For example, the health-products group Johnson & Johnson summarise their own priorities as follows:
- service to customers comes first
- service to employees and management comes second
- service to the community comes third
- service to the shareholders comes last
There are many variations on this schema, of course, but the basic principle is sound: shareholders necessarily must be at or close to the bottom of the priority-stack – not the top. Self-centred shareholders will always demand to come first: but that isn’t what works. They’re no doubt quick to demand their ‘rights’; but if they really want shareholder-value, and real returns, they need to get real about responsibilities, and where those responsibilities really reside.
Shareholders’ rights are based on possession, and possession alone. But there’s very little in a present-day company that can be possessed: everything else exists only as responsibilities. In practice, shareholders own the company only to the extent that they accept and act on its responsibilities. The less responsibility they have, the less they can actually own.
As simple as that, really.