THE Global Justice Movement Website

THE Global Justice Movement Website
This is the "Global Justice Movement" (dot org) we refer to in the title of this blog.

Tuesday, October 20, 2009

"No One Can Breathe Against Their Will"

In 1955, Milovan Djilas published a devastating critique of the allegedly classless society established under communist rule in Eastern Europe. Titled, The New Class: An Analysis of the Communist System, Djilas recounted how, although communism claimed to have made everyone equal, all it had done was replace the bureaucrats of the old system with the even more powerful bureaucrats of the new system — the "New Class."

While The New Class was highly praised in the west, especially in the wake of the "Red Scare" of the 1950s, many people missed a secondary theme in the book — that while the Nomenklatura were definitely worse than what they replaced, the old system was hardly something to write home about. As Pope Pius XI described the situation in §§ 105-106 of his 1931 landmark encyclical, Quadragesimo Anno ("On the Restructuring of the Social Order"),
In the first place, it is obvious that not only is wealth concentrated in our times but an immense power and despotic economic dictatorship is consolidated in the hands of a few, who often are not owners but only the trustees and managing directors of invested funds which they administer according to their own arbitrary will and pleasure.

This dictatorship is being most forcibly exercised by those who, since they hold the money and completely control it, control credit also and rule the lending of money. Hence they regulate the flow, so to speak, of the life-blood whereby the entire economic system lives, and have so firmly in their grasp the soul, as it were, of economic life that no one can breathe against their will.
As we have said a number of times in the materials distributed by the Center for Economic and Social Justice ("CESJ"), virtually the only difference between socialism and capitalism for the propertyless worker or citizen is the name of whoever controls the wage packet. As one ancient Roman writer said, "When changing masters, the only thing that changes for the poor is a name."

What can be done about this situation? Dr. Yasser Nafei, author of Corporate Dictatorship: The Evil Behind the Collapse of the World's Economy (2009), sent us an extract from his book — just released this past August — briefly analyzing the situation and offering an intriguing solution to the problem of what amounts to favored slaves acting as overseers for their faceless corporate masters. Dr. Nafei's analysis is followed by comments from Dr. Norman G. Kurland, president of the Center for Economic and Social Justice.

What about Directors' Ownership?
By Yasser Nafei

For many years, I have been puzzled by a very logical question. If board directors are claiming to share the same goals, aspirations, and motivations as shareholders, why aren't they investing in the stock of the companies they govern? Shouldn't a direct investment of their own money be a prerequisite for sitting on a company's board?

Throughout the years, many voices came to support or oppose the concept. On one hand, in June 2002, Time magazine published an article by Daniel Kadlec called "8 Remedies." The article proposed ways to improve corporate governance-mainly in the United States. The author proposed that one effective way to get directors' immediate attention and ongoing commitment is to allow them to buy a large chunk of a company's stock as the price of entry, and be paid only in shares or options with long vesting periods.

On the other hand, many opponents of that proposal argued that having directors-as-shareholders opens the door for fraud, stock inflation, and other illegal practices that roll back the board directors' independence. They cite scandals at Tyco, Enron, WorldCom, and others, where compensated directors aided corruption by turning a blind eye. Many also enjoyed the inflated stocks at the expense of integrity and ethics.

Now let's put on our social justice hats and think about the proposal. Don't you think that when corporate directors invest their own money in the stocks of the companies they manage, that we might witness a complete suite of new behaviors? Can anyone deny that these people would become more active, energized, vocal, and willing to challenge management and reach out to employees to learn more about issues? In short, can the logic deny that direct investments would result in further committed and engaged boards?

So instead of generalizing and prematurely accusing corporate directors of being corrupt, why don't we give the concept a chance? Ron Sargent, Staples Inc. Chairman and CEO, once said, "Money does not trump integrity. Incentives to perform do not translate into incentives to cheat. Values like integrity and courage are alive and well in most directors and executives."

Other sophisticated opponents stress that there is no empirical data to support the link between directors-as-shareholders and companies' improved financial performance. So again we find ourselves back to the old economics model that believed that financial metrics were the only relevant measure of success. However these days, many have already complemented that obsolete financial view with other attributes of success including social responsibility, positive and motivating work environments, long term viability, sustainable and growing customer bases . . . So are we dreaming? Absolutely not.

In March 2005, USA Today ran an article on Staples, the Boston-based company established in 1986. It is considered one of the world's largest office products companies with over 76,000 associates. In 2007 the company reported sales of $19.4 billion and was operating in over 22 countries worldwide. In its policy to align the interests of its board of directors and shareholders, Staples required its directors to accumulate at least $200,000 in company stock over five years.

It's called "having skin in the game." Staples's stock has been consistently improving over the years and despite the fact that we cannot attribute this financial success to the directors-as-shareholders concept, such a move counts as a contributing factor. In the interview, CEO Ron Sargent explained that to have a well-governed company, the focus should be on balancing the loyalty and independence of board directors, including surrendering incentive pay when company results are found to be overstated.

Staples even went a step further to ensure that top management are really vested in the success of the company by mandating that senior executives own at least five times their annual salary in stock. Staples also earned kudos for paying their directors varying amounts dependent on their board ranking as well as meeting attendance. There is no doubt in my minds that Staples's steps exemplify the level of commitment and dedication of its board of directors. It clearly shows a board that is vested in the future of the company and a true focus on helping it to achieve success.

Since we are on this optimistic tone, we can also highlight that in 2004, and prior to its merger with Verizon, MCI announced that members of its board of directors would invest 25 percent of their directors' fees in MCI common stock. This commitment reflected the directors' maturity and willingness to try a new initiative. Some global companies already require their board directors to contribute at least $75,000 as a guarantee that these individuals will feel compelled to contribute their time, intellect, and emotional energy to serve shareholders.

In summary, requiring board directors to purchase shares of their companies' stock is an opportunity to strengthen their commitment, benefit the shareholders, and align the interests of directors with multiple stakeholders. In multiple occasions we have alluded to the fact that many directors are concerned only with pursuing their own interests, such as beefing their resumes, gaining status and recognition, or increasing their pay and benefits. However, the benefit of this proposal is that it helps companies to vet uncommitted directors.

Simply put, directors who do not believe in the future success of their companies will hesitate to put their own money forward, and will withdraw. Contrary to the low-risk directors' stock options programs, which only serve to retain uncommitted directors, the new proposal will help retain only those vested in the long-term viability of their companies. I also further contend that the level of directors' investment should be proportional to the size of the company. A board member joining an international conglomerate might need to invest by multiples of their investment in a startup. While this might be an obstacle to hiring talent that is nonetheless cash-poor, I propose that corporations could advance part of the directors' salaries or bonuses and allow them to use it to buy equivalent stock.

In short, we need not only to continue our appeals for meaningful employees' ownership but also embark on a new frontier and demand directors' ownership.

Norman Kurland's comments:

There is merit in Dr. Nefei's idea that corporate directors in major corporations should have "some skin in the game" — that is, they should have a significant investment in the company for which they make policy. However, in my opinion that will not end "corporate dictatorship" within the existing top-down institutional environment of monopoly or exclusionary capitalism. It will not change the system.

What will change the system of wage slavery, welfare slavery, debt slavery and tax system are new leaders united behind a game-plan to adopt the lifting of artificial barriers to more universal access to capital ownership. Such true "social entrepreneurs" must begin to champion a new macro-economic system beyond conventional Keynesian "mixed economy" principles, a system we call "the Just Third Way." The Just Third Way is a system based on the Kelsonian theory of economic justice, Capital Homesteading legal reforms, and Justice-Based Management principles of leadership and management. The old macro-economic model, in my opinion, should be discarded and replaced by the new Just Third Way model by "architects of the future" such as Dr. Nafei.

Besides other basic writings on CESJ's "virtual library" at, we should reference yesterday's blog posting on how to build ownership and free economic growth from the slavery of past savings and accumulations concentrated within today's top 1% of humanity, an elite that control most of the world's money and credit systems. The Capital Homestead Act was designed to rectify this barrier to more universal and more efficient access to capital ownership among the multitudes of have-nots of America and the world, without infringing on property rights of existing haves. This link on Capital Homesteading leads to other writings for more detailed explanations of critical reforms needed to build a more just, more free, and participatory market economy. The paper on "A New Look at Prices and Money" gives a more theoretical explanation of the new system needed to change the mindsets of the elite now controlling corporate governance.

How governance power is allocated determines whether corporate dictatorships will be perpetuated or will wither away. Since economic power has and always will follow property, and who has control rights follows who has control over money and finance, then the democratization and justice in corporate governance, and basic issues of accountability and transparency will only change when enough new leaders come together who can influence public opinion and votes to change "the system" that determines future ownership of new capital and future asset transfers. Then the theory and principles of Justice-Based Management will become part of everyone's education and we will overcome the subtitle of Dr. Nafei's book, Corporate Dictatorship: The Evil Behind the Collapse of the World's Economies.

That "evil" is the system of Monopoly Capitalism, controlled by an extremely tiny fraction of humanity who controls money power, and through their money power can control those who govern the corporations, the governments of the world, education, the media, etc. Requiring that those "eligible" to serve as corporate directors to "purchase" shares in the corporations for which they make policy, is like giving aspirin to a dying cancer patient who needs more radical surgery or more advanced cancer treatment. Once we can agree that the diffusion of money power and access to future ownership on asset-backed capital credit will save the market system, then there will be more widespread implementation of Justice-Based Management.