Preface

IF YOU WANT to understand why the recent scandals at Enron, World-Com, and elsewhere have happened, read this book. It tells the story the mainstream media won’t touch: the story not of a few bad-apple CEOs but of an economic system designed to do precisely what it did—to enrich a few at the expense of the many. The few are the financial elite, the aristocracy of our age. At the most visible level, this means CEOs. But if they are the whipping boys singled out for punishment, they have not acted independently. They are subordinates to the real masters of the system, the invisible aristocracy of major shareholders.

In the system design of aristocratic capitalism, CEOs are hired by shareholders and directed by boards to focus on a single goal: maximizing shareholder return. Executives are paid well only if they achieve that end. CEOs have been indicted for pushing the limits in pursuit of rising share price, but in the past they were fired for doing anything less. The excesses of Enron, WorldCom, and the rest did not arise from the minds of errant executives; they arose from a system that exalts rising share price as the definition of corporate success.

There is outrage today about the illegitimacy of CEO gains. But nowhere will you find outrage about the illegitimacy of shareholder gains, for that is the sun around which the system revolves. To question this is to question the divine right of capital.

Which is precisely the aim of this book. It questions the idea that the needs of wealth holders come before the needs of all other persons. It questions the idea that achieving a 15 percent return for a billionaire is more important than paying employees a living wage or protecting a community’s water.

This is a book about wealth privilege, which is the hallmark of aristocracy. Wealth privilege means serving the wealthy few and disregarding the many. In the age of kings, wealth privilege was deeply woven into both political and economic institutions. Civilization crossed a great divide into a new world of democracy in the twentieth century. But we have democratized only politics, not economics.

Wealth privilege remains embedded in the ancient institution of the corporation. It is a privilege out of step with market ideals, which has led to wealth disparities that threaten our political ideals. We can never really have political democracy without economic democracy.

It begins with imagination. We begin by using the one territory that we the people still control: our own minds. We simply see that wealth supremacy is illegitimate. For once we see it and name it as illegitimate, we undermine the ground on which it stands. And we pave the way for its transformation.

We are often told the revolution has already come because stock ownership has been democratized. But of all financial wealth held by households, the 10 percent wealthiest hold 90 percent. And wealth has not spread democratically in recent decades. It has concentrated in fewer hands. The 1 percent wealthiest in the last two decades doubled their share of national household wealth, from 20 percent to close to 40 percent.

This concentrated wealth controls not only corporations but also government. Rule by the financial aristocracy is the reality of life in America today. And Americans know how to combat aristocracy. We do it with democracy.

The democratic ideals of America’s founding fathers show us the way out. That way leads to economic democracy, to a new vision of a healthy economy—rooted not in the unsustainable wealth of a few but in the enduring prosperity of the many. Following the best of what European economies offer but also creating new forms, we can evolve democratic capitalism out of the aristocratic capitalism of today. We can create an economy where all can accumulate capital, and where the living capital of the commons is preserved for all to enjoy.

Some may paint economic democracy as anti-business, but they might as well paint George Washington as anti-government. An economic democratizing process doesn’t tear down; it’s about extracting aristocratic bias from business institutions while leaving the institutions themselves substantially intact, and healthier.

I myself am a small business owner, as were my father and grandfather before me. As a business publisher and journalist, I have seen that a democratic evolution in business has been trying to happen for some time—with growing attention to environmental stewardship, employee profit sharing, family-friendly policies, and good corporate citizenship. Fifteen years ago, I cofounded the publication Business Ethics to support this rise in corporate social responsibility, believing that voluntary change by progressive businesspeople would transform capitalism. I no longer believe that.

The turning point in my thinking came at a seminar years ago, when business theorist and author David Korten and I found ourselves arguing in the halls, off and on, for three days—with me insisting that businesses were becoming more humane and David insisting that change at the company level wasn’t enough, that we needed systemic change.

David’s premise is one I’ve come to accept. In the years since then, again and again I’ve seen the failure of voluntary change by individual companies. I have seen corporations announce family-friendly policies, only to turn around and lay off tens of thousands. I have seen companies pursue environmental stewardship, but only to the extent that it enhances the bottom line. I have seen companies create profit-sharing incentives, but at the same time cut benefits. I have seen corporations become generous citizens as they demand far more in tax concessions.

After a decade and a half of advocating corporate social responsibility and seeing its promise thwarted, I’ve asked myself, What is blocking change? This book is my answer. The answer is the mandate to maximize returns for shareholders. It is a systemwide mandate that cannot be overcome by individual companies. It is a legal mandate with which voluntary change can’t compete.

This mandate is a form of discrimination: wealth discrimination. It is rooted in an ancient, aristocratic worldview that says those who own property or wealth are superior. It is a form of privilege out of place in a democratic society, a form of entitlement out of place in a market economy.

It is also, in the end, a system design that is not sustainable. This is the lesson of the bursting stock market bubble: that the wealth that companies supposedly “create” ends up evaporating. Yet in pursuit of that phantom wealth, corporations bought our government, evaded taxes, laid off millions, and dismantled our regulatory structure. They themselves are now left with employee ranks decimated, debt incurred for fruitless stock buybacks, and pension plans underfunded. Even on its own terms, the system failed.

Instead of a casino fantasy of a few getting wealthy, we need a new economic ideal of sustainable prosperity for all. That means embedding democratic principles in our economic structures, with a new definition of corporate purpose, new groups represented in corporate governance, and new ways of measuring company success. It means finishing the American Revolution by building a world of economic liberty and justice for all.

With the public anger created by the Enron crisis, an unprecedented opening for change has arisen. It is an opportunity that will come but once in a lifetime. We must make the most of it by working for fundamental system reform. That may seem daunting as we contemplate the power of the financial elite. But we should remember that the power of kings was once as great.

The institution of kingship dominated the globe for millennia, as a nearly universal form of government stretching back to the dawn of civilization. The very idea of monarchy once seemed eternal and divine, until a tiny band of revolutionaries in America dared to stand up and speak of equality. They created an unlikely and visionary new form of government, which today has spread around the world. And the power of kings can now be measured in a thimble.

MARJORIE KELLY

September 2002

Minneapolis, Minnesota