The Corporate Law Group

Should Non-Owners Run Businesses?

A bill introduced into Congress would force public companies to operate at the behest of non-owners. In other words customers, employees, etc. would “run” the business alongside its shareholders and their elected board members. Is this a good idea? Nope. It’s not even close to a good idea. It creates perverse incentives, undermines property rights, and is undemocratic.

It’s hard enough running any business these days, public or private. No surprise; most fail. And as businesses become public, managers face a host of new securities rules in addition to the hundreds they have to navigate just to stay alive; many of which supposedly protect employees. In fact many companies are opting to stay private. Silicon Valley is lettered with Unicorns that don’t want to go public. And now, this harebrained proposal.

It costs anywhere from $9.48 (Ford Motor Company) to $2,012.71 (Amazon) to buy a share of stock in a public company but folks too lazy to do that should be able to operate the company? Folks unwilling to put any skin in the game get to decide what that company makes, who they sell to, and how much they are paid? Bad idea.

All businesses already serve their customers because they all need customers to survive. Jay Snelson always spoke about the “consumer bosses” because without customers you were out of business. So trust us, customers have enough influence already. THEY actually control the business. And if the business ignores that feedback, there is no business. You don’t need a new law for that

Similarly employees can leave whenever they want. Want them to stay? Take care of them. Everywhere we go today there are help wanted signs. Due to the prospering economy many businesses have started advertising, “no prior experience necessary.” What a boon for entry level employees. No new law needed there either.

So why the attack on businesses? Why the attack on stock ownership? Politicians attack anything they don’t already control. They attach freedom. That’s their business. If they don’t control it in some fashion they can’t fundraise from lobbyists.

Years ago we read In Dubious Battle by John Steinbeck, about the communist labor organizing of an apple orchard. The pickers keep asking why the owner gets to keep the profits? Why aren’t they split with the workers?

Well, two things. First, the workers already got their wages. On average, labor takes home around 58% of any dollar spent. [The chart below is from a BLS article estimating the US labor share, dated February, 2017.] The number is going down as businesses innovate and use technology to become more efficient. Eventually when the labor share hits 0%, we all get a guaranteed income as the robots do all the work.

Second, “profit,” is not guaranteed, unlike wages. The owner, the capital, the shareholder may get nothing. How often do workers say, “It’s OK, we’ll take 60% of each dollar of revenue and if that means we make less, too bad for us”? Never. Employees get paid whether or not the business makes any money.

Want to have a say in how a public company is run? Save and invest. Buy their stock. Don’t create perverse incentives, undermine property rights, and hurt corporate democracy.