In the 21st century, capital is so much easier to raise that we should no longer have to sacrifice other public goods or the collective common interest in order to facilitate fund-raising. Our corporate laws should reflect this fact, but do not. With the “free” tailwind of today’s easy capital-raising, corporations have become massive in size, but greater size and numbers have brought with them zero greater responsibility in corporate law. Corporations have few hard incentives (other than industry regulations) that are different from what existed in 1900 to look far ahead and prioritize their long-term profitability. They also have few direct incentives to contribute to the very global sustainability and trust in markets (and stock markets) that they themselves benefit from so greatly. Companies benefit immensely from limited liability—it is the reason they can raise so much money so easily and sometimes end up causing more harm than they would have otherwise—but do they pay anything for its advantages? Companies benefit greatly from the existence of public equity markets, but the listing fees they pay are miniscule compared to the benefits they and their shareholder receive in return. Large corporations also influence our political processes, and even our individual opinions as citizens in a democracy, to a degree that would have been unimaginable in 1776. Executives are overpaid to an extent that can only be called “out of control”, despite “advisory” votes. They jump to the next higher-paid position with little sense of loyalty to a mission (whether corporate or societal), and show no apparent public shame when they bail out from companies about to implode. In today’s “money culture”, described by Michael Lewis in a book by that name, the thing that determines one’s identity and sense of pride is mainly how much money one makes (or made), not his or her public reputation as a citizen of society. Those of us who are paid by corporations may not like to admit it, but that pay often binds us to be more loyal to our employer than to society and the improvement of public policy, and to not give voice opinions that we in fact think as private citizens. Should corporate statutes be “enabling” self-servingly structured limited liability and the diffused, minimal, and short-termist accountability that frequently comes with it? …
An Example of Redesigning Incentives
As a thought exercise, let’s put aside the problems posed by path-dependency for now, and imagine that corporate statutes were changed in the following manner:
A levy of 0.20% will withheld from the amount of all purchases, sales or issuances of stock, of any form.
Each director or senior executive must invest 50% of his or her total compensation in a special subordinated class of the company’s stock….and must continue to hold that stock for five years after leaving the firm. Similarly, all share-based executive compensation can only be based on this subordinated class of stock, with similar holding requirements.
The 0.20% funds that are withheld go into an “externalization/bankruptcy trust fund” set up for that company, which are invested in Treasury bills. The more often the stock is issued or traded, the larger this fund will become. The more the company’s shareholders enjoy the benefits of liquidity in the market, the larger the fund will become.
Each single share of stock is a unique digital “currency” that keeps track of all prior owners, and their trades of that share, using blockchain or any other system for recording each individual trade and its beneficial owner. (I realize this technology would need to be developed and refined.)
Non-insider investors can sell the stock anytime they like, but for five years after selling, each stands to potentially “lose” a certain percent (or all) of the total amounts they have “paid” into the fund, in the event of bankruptcy. Those funds will be available to creditors and victorious lawsuit claimants in the event of bankruptcy or liquidation of the company. The escrow interests would not be transferable other than in exceptional circumstances.
The exact percent subject to potential loss depends formulaically on how long during the prior five years each investor held the stock, which is to say, the approximate time span during which they could have voted or engaged with management differently. For example, investors who held stock for five years would be penalized more than investors who held for only one year, since they had more opportunity to monitor and correct the behavior that may have led to bankruptcy. However, to prevent “gaming” of the system, in this calculation all stock will be presumed to have been held for at least one year.
If there is no bankruptcy in five years, each investor will receive back its 0.20% amount(s), plus interest. Non-insider shareholders can also vote to use the portions that they themselves have paid into the fund for settlements that are needed to avoid bankruptcy. In the case when non-insider shareholders vote to liquidate the company, if there are funds left over after paying creditors, shareholders will receive the remaining portions of the funds in escrow, depending on their percent allocation and share class. However, the entire portion withheld from directors and executives will tapped first, before any other portion.