The rational answer is that ownership and control should be with those individuals who are most affected by the operations of the business. To understand why ownership by operational stakeholders is neglected we need to understand the shortcomings of free-market investors, existing owners and economists.
This restricted view is so widespread that assets and liabilities are not included in National Accounts. As a result, the greatest economists in the world did not anticipate the Third World Debt crisis in the 1980s. It was discovered by bankers who could not collect their money!
Ownership does matter because it can provide the power to control. However, very little control can be exercised by individuals with a minority stockholding. This is also true for even the largest institutions since they are required to diversify their investments over many companies so that they can also be minority stockholders.
The only ownership power minority stockholders have is to vote for the directors or sell their stock. However, since management normally controls who is nominated as a director, while also controlling the vote, management thereby acquires the power of ownership. This power can become absolute. Absolute power can corrupt absolutely until it is transferred to other managers through a take-over.
The biggest "free-market" investors are now institutions with little business specific knowledge to add value. Even if they could add value, they have little incentive to commit their resources to do so. This is because institutional managers do not own the investments. They merely hold investments for their members or clients who pay them a fee for their services. As a result, institutional investors would see reduced profits by spending time and effort trying to improve investments. In any event, the only action institutional investors can take is to vote their stock in an attempt to change the individuals who direct the companies in which they invest.
If the directors of operating companies are not adding sufficient value, then the rational action for an institution is to switch their investment to another company. This eliminates the costs and acrimony of getting involved in changing directors. It also avoids the possibility of offending directors who could be associated directly, or indirectly, with members of their own board. In many countries, PSEs are likely to be controlled by directors who are board colleagues of directors who control the local big institutional investors! In this way, "free-market" investments are controlled by a self-serving network of elites.
Even if a trade related investor produced additional profits from their operational synergy with the PSE, it would not be in their self-interest to share any mutual profits with the PSE. If the trade-related investors were based overseas, then profits would be exported to reduce domestic consumption, investment and foreign-exchange holdings.
As mature businesses, PSEs generally do not need to be listed on the stock exchange to raise funds. It is governments who seek to raise new money, not the PSE. Any new owners of a PSE will not normally be required to provide finance to expand the PSE. PSEs, like all viable enterprises, will be self-financing. In other words, anybody without any money could buy 100% of a PSE, provided that they could obtain a bridging loan to fund the self-financing period. As vendors can provide such loans, we are free to consider anybody as a prospective owner.
Free-market investors have agreed to dilute their equity in many corporations to enable employees to be financed into becoming owners. In this way, over 10% of the ownership of over 1,000 publicly traded corporations in the U.S. have been transferred to their employees. This ownership transfer has mainly been achieved through self-financing Employee Share Ownership Plans (ESOPs).
If employee ownership makes good sense for investors and corporations, then it should make even better economic and political sense for democracies seeking to create a more equitable and efficient economy. However, greater equity and efficiency would be achieved if ownership and control were more democratically shared with other strategic stakeholders such as the customers and suppliers.
Strategic stakeholders are those parties on whom a business depends to exist. No business can operate without customers, employees and suppliers, which includes the host community. Investors may not be a strategic stakeholder. This occurs when investors are no longer essential as is the case for PSEs and other mature firms which have become self-financing.
Every customer, employee, and supplier has an interest in improving the quality of service, working conditions, and productivity of a PSE. Unlike investors, they will have some inside or trade-related knowledge of opportunities for making improvements. Unlike investors who can quit their relationship with a sell order, strategic stakeholders have a far greater and longer term interest in the business. Unlike investors, strategic stakeholders have an additional incentive to make every personal effort to improve operations and an existing working relationship by which this can be achieved.
The involvement of strategic stakeholders in the governance of Japanese and German firms was identified by a 1992 Harvard Business School Research Study as a source of competitive advantage. To harness the knowledge and interest of strategic stakeholders to monitor and improve operations, PSEs would need to adopt a much more participatory system of corporate governance. In this way, national states could use PSEs as a role model for improving the competitive advantages of business.
Both rational analysis and international evidence provides compelling arguments that PSEs should be owned by their strategic stakeholders. They possess both the knowledge and incentive to add value, provided this is supported by an appropriate system of corporate control. This will require the division of corporate power to create checks and balances between customers, employees and suppliers. There are many examples in Japan and Europe of how this might be achieved through worker councils, supplier assemblies, customer panels and other forms of stakeholder councils.
It is in the interest of all economies to maximize the performance of all major enterprises by introducing stakeholder ownership and control. If the owners of PSEs want to raise money by selling them, then this would best be achieved by establishing a self-financing stakeholder share plan financed by a bridging loan. In this way, no stakeholder would need to invest any of their own money, as occurs in many corporate employee share plans.
The sale of PSEs to their strategic stakeholders registered on the electoral role would have profound political advantages. It would eliminate foreign ownership. It would widely distribute dividends to voters to provide them with an income not dependent upon work or welfare. In this way, it would demonstrate how the introduction of a "stakeholder economy" would eventually allow welfare payments and their associated taxes to be reduced with income from democratic ownership of the productive sector.
Shann Turnbull is economic consultant to the World Government of World Citizens, a founding member and former president of the Australian Employee Ownership Association, and author of Democratizing the Wealth of Nations. He can be reached at P.O. Box 266, Woollahra, Sydney, NSW 2025, Australia.