Stockholders Do NOT Create Capital

What is the natural law of the market? Understanding the position of stockholders is the key to understanding who truly creates wealth. The stock market works like a used car market...

Note: Shel Horowitz's book, Principled Profit: Marketing That Puts People First, contains a great deal of other information about the interplay of marketing and social change, and ways to move a business toward both environmental and economic sustainablity.

In an era when stock market wealth has seemed to grow on trees - and trillions have vanished as quickly as falling leaves - it's an apt time to ask ourselves, where does wealth come from? More precisely, where does the wealth of public corporations come from? Who creates it?

To judge by the current arrangement in corporate America, one might suppose capital creates wealth - which is strange, because a pile of capital sitting there creates nothing. Yet capital providers - stockholders - lay claim to most wealth that public corporations generate. Corporations are believed to exist to maximize returns to shareholders. This is the law of the land, much as the divine right of kings was once the law of the land. In the dominant paradigm of business, it is not in the least controversial. Though it should be.

What do shareholders contribute, to justify the extraordinary allegiance they receive? They take risk, we're told. They put their money on the line, so corporations might grow and prosper. Let's test the truth of this with a little quiz:

Stockholders fund major public corporations-True or false?

False. Or, actually, a tiny bit true - but for the most part, massively false. In fact, "investing" dollars don't go to AT&T but to other speculators. Equity investments reach a public corporation only when new common stock is sold - which for major corporations is a rare event. Among the Dow Jones industrials, many have sold no new common stock in thirty or fifty years.

The stock market works like a used car market, as accounting professor Ralph Estes observes in Tyranny of the Bottom Line. When you buy a 1999 Ford Explorer, the money goes not to Ford but to the previous owner of the car. Ford gets the buyer's money only when it sells a new car. Similarly, companies get stockholders' money only when they sell new common stock. According to figures from the Federal Reserve and the Securities and Exchange Commission, in any given year about one in one hundred dollars trading on public markets reaches a corporation. In other words, ninety-nine out of one hundred "invested" dollars are speculative.

And the past wasn't much different. One accounting study of the steel industry examined capital expenditures over the first half of the twentieth century and found that issues of common stock provided only 5 percent of capital.

So what do stockholders contribute, to justify the extraordinary allegiance they receive? Very little. Yet this tiny contribution allows them essentially to install a pipeline and dictate that the corporation's sole purpose is to funnel wealth into it.

The productive risk in building businesses is borne by entrepreneurs and their initial venture investors, who do contribute real investing dollars, to create real wealth. Those who buy stock at sixth or seventh hand, or one-thousandth hand, also take a risk - but it is a risk speculators take among themselves, trying to outwit one another, like gamblers. It has little to do with corporations, except this: public companies are required to provide new chips for the gaming table, into infinity.

It's odd. And it's connected to a second oddity - that we believe stockholders are the corporation. When we say that a corporation did well, we mean that its shareholders did well. The company's local community might be devastated by plant closings. Employees might be shouldering a crushing workload. Still we will say, "The corporation did well."

One does not see rising employee income as a measure of corporate success. Indeed, gains to employees are losses to the corporation. And this betrays an unconscious bias: that employees are not really part of the corporation. They have no claim on wealth they create, no say in governance, and no vote for the board of directors. They're not citizens of corporate society, but subjects.

We think of this as the natural law of the market. It's more accurately the result of the corporate governance structure, which violates market principles. In real markets, everyone scrambles to get what they can, and they keep what they earn. In the construct of the corporation, one group gets what another earns.

The oddity of it all is veiled by the incantation of a single, magical word: ownership. Because we say stockholders own corporations, they are permitted to contribute very little, and take quite a lot.

What an extraordinary word. One is tempted to recall the comment that Lycophron, an ancient Greek philosopher, made during an early Athenian slave uprising against the aristocracy. "The splendour of noble birth is imaginary," he said, "and its prerogatives are based upon a mere word."

Excerpted from The Divine Right of Capital: Dethroning the Corporate Aristocracy, by Marjorie Kelly (, published November 2001 by Berrett-Koehler Publishers. Kelly is co-founder and editor of Business Ethics, a magazine about corporate social responsibility based in Minneapolis. To read the introduction to the book without charge, see

Note: Shel Horowitz's book, Principled Profit: Marketing That Puts People First, contains a great deal of other information about the interplay of marketing and social change, and ways to move a business toward both environmental and economic sustainablity.

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