Monthly Archives: January 2016

Corporations Should be Owned by People

Corporations should be owned by people. They should be owned by living, breathing people. But they’re not. As I mentioned yesterday, at least 67% of all outstanding US stocks are owned by institutional investors. This is a huge problem, and it’s a big part of why the economy of today feels so disconnected from the economy of our fathers – and even the economy of our own childhood.

This problem manifests in multiple ways. The first problem is, who’s in charge? For those who are unfamiliar with it, corporations are organized along a certain pattern that’s more or less universal. The day-to-day operations of the corporation are controlled by the officers of the corporation. These are people with titles like President and Vice President, and sometimes titles like Chief Executive Officer (CEO), Chief Financial Officer (CFO), and Chief Operating Officer (COO). But you can’t rely on title alone, because sometimes those last three aren’t officers, they’re actually directors (more on them in a minute).

Officers make daily decisions. They’re often authorized to spend corporate money – within certain budgets and up to certain dollar amounts – on their own authority. They’re in charge of hiring people. At small corporations, the officers may make all of the hiring decisions. At larger corporations, they usually hire the top managers and grant them authority to higher lesser people. They set corporate policies. They set the overall goals and strategies. They control the organization of the corporation.

They also have legal responsibilities to the corporation in most states. If the books of the corporation are wrong, the officers can be held liable. If the corporation commits a crime, the officers might be held liable (maybe – this can be murky). They have legal duties, such as preparing stock reports and filing annual (sometimes quarterly) paperwork with the state.

But they can’t just do whatever they want. Officers are appointed by the board of directors. The board of directors makes the very high level decisions of a corporation. They hire officers – and fire them. They usually set the budgets that are available for officers to spend – dictating not only how much, but also the broad categories that the money should be spent on.

Finally, the directors are appointed by the shareholders. These are the people (ahem) who actually own the company. Shareholders meet at least once per year, and usually vote at each annual meeting on some number of the board of directors (some companies elect directors every year; some stagger the elections and have directors serve multi-year periods).

Although they usually exercise little day-to-day influence, shareholders have ultimate control over a corporation. If they don’t like the way a corporation is run, they have the power to change it. In theory, the board of directors acts as a stand-in for the shareholders. Ideally, the shareholders say they don’t like something, the directors tell the officers to fix it, it gets fixed. In extreme cases, the shareholders fire the directors and appoint new ones and the new directors fire the officers and appoint new ones, and then something gets done.

But what happens when the shares aren’t owned by individuals anymore? When, instead, those shares are owned by mutual funds and investment firms? Mutual funds and investment firms are very different, but at the core, both of them pool money from multiple contributors and invest the larger pot of money as one. There can be a lot of advantages to this, but that’s a post for another day.

The relevant point is this: when you put your money in a mutual fund or another kind of pooled investment, you’re almost always also signing way proxy rights to any investments bought with that money. What does that mean, exactly? Think of each share as a vote in shareholder meetings (the most important vote being the selection of the board of directors). When you put your money into a mutual fund, the director of that fund now has the right to cast your votes for you on any stocks bought by that mutual fund.

So, for example, as of this writing, Vanguard Total Stock Market Index Fund controls 3,089,008,230 of stock (1.64%) in The Walt Disney Company. The director of that group has a larger say in the selection of Disney’s board of directors than any individual person does. In fact, he has more than twice the say of the top five largest individual shareholders in Disney – combined.

Who the hell is the director of the Vanguard Total Stock Market Index Fund? I don’t know. I didn’t choose him. Even if you own that fund (which is a hugely popular fund, so you might), you didn’t choose him, either. Unlike most mutual fund directors, he doesn’t even keep or lose his job based on earning profits – this is an index fund, so the investments he makes with it are almost automatic.

But most of the others who have large votes were “chosen” because their funds make money, by thousands of individual investors who have absolutely no idea what’s being done with the money they’ve invested.

When corporations are owned by people, those people have an exposure to the company’s activities. If they don’t like the way a corporation is operating, they can direct the board to change it. But in this case, who get’s to make that choice? Not the founders of the company. Not the people. Not even a handful of rich bastards who own most of it with their own money. No, the decisions are made by a handful of rich bastards who bought most of it with your money.

These people have no skin in the game. They get their (very high, often in the millions of dollars) salaries for managing the mutual funds whether or not it makes a profit. And it’s not uncommon for them to get seven figure bonuses even when the funds lose money. The company does something illegal or unethical? These guys get to shrug and point out that their only legal requirement is to make their clients money. Then they go live the high life.

Who watches the watchmen? In a word, nobody. Our corporations aren’t owned by people anymore. But they should be.

Nobody Owns Big Corporations

bigcorporationsFor the first time in years, Slate has published an article that’s actually worth reading. I’ll get to it because it helsp make the larger point I want to make today. But first, a question.

Who are the elites who own the biggest corporations in America?

Whoops. It’s a trick question. The answer, believe it or not, is largely nobody. That’s right – nobody owns most of the world’s biggest corporations. Nobody.

Hold that thought, because we’re coming back to it. Our excerpt from Slate is from an article that purports to show why bank fees are so high. Ignore that part – it’s a side issue; a distraction. The important point is this:

Because numerous banks exist in most markets, the HHI for banks is quite low, and that is why economists have thought of the banking industry as competitive, and the prices as presumptively fair. However, Azar and his co-authors make an important observation: While many banks exist, different banks are frequently owned by the same entities. If 100 banks exist, but they are all owned by just a few institutional investors, then competition may be low rather than high.

Imagine, for example, that your neighborhood is served by six banks—JP Morgan, Bank of America, Citigroup, Wells Fargo, U.S. Bancorp, and PNC Bank. You might think that these banks—which happen to be six of the the largest U.S. banks—would compete vigorously for your deposits. However, it turns out that the biggest shareholders of these banks are, roughly, the same companies: BlackRock, Vanguard, State Street, Fidelity, Wellington, and Berkshire Hathaway. These institutional investors earn profits by owning shares in other companies and managing shares owned by their clients.

[Emphasis added]

That’s right – all of the large banks are actually owned primarily by institutional investors. Let’s take a look at one of those corporations – we’ll just pick the very first one, JPMorgan Chase. As of this writing, JPM has 3.8 billion shares outstanding, valued at roughly $59 a piece, for a total market cap of $224 billion dollars (actually a tad less than that because I rounded; but close enough). That’s a big company, no doubt.

But here are some interesting factoids. There are no individual investors who own more than 5% of the company. The largest individual shareholder owns 3,148,451. To be sure, that holding is valued at around $180 million dollars – a hell of a lot of money. But it’s also less than 0.1% of the entire company. In fact, the top five insiders and largest shareholders combined control only 4,210,264 shares – or 0.11% of the entire company. That’s right – no single individual owns a controlling interest in the company. Not one.

In fact, there’s only one investor who does own a controlling interest, and that’s not an individual. It’s The Vanguard Group – an investment firm. In fact, a full 76% of the company is owned by institutional investors: investment firms, mutual funds, etc.

What about those funds? Where do they come from? Much smaller pools of money invested by individual investors – the vast majority invested by very small time investors, typically in the form of retirement accounts.

Big Banks aren’t alone. Big corporations across the globe are largely owned by these same institutional investors. As of 2010, 67% of US publicly traded corporations were owned by institutional investors – and that number has been steadily rising since for decades. In the 1950s, only about 7 or 8% of US publicly traded corporations were owned by institutional investors.

Later this week I’ll be discussing why this is not only bad, it’s very bad. As it turns out, this has a ton of consequences on how our economy, culture, and even our political system runs today. But for now, take a moment and let it sink in.

A Green Knight Christmas

"Swan Knight's Son" by John C. Wright is now available!
“Swan Knight’s Son” by John C. Wright is now available!

I received a surprise Christmas gift this year, and it happened to be one of the best that I’ve ever been given. Mr. John C. Wright sent me the first twenty-two chapters of his current work in progress, “Green Knight’s Squire.” I forced myself to finish the book I was already reading first, knowing that I might not make it back to it if I allowed myself to be interrupted. And then, of course, Christmas itself hit with all of its obligatory time commitments. So it took a little bit before I was able to sit down and properly enjoy what I’d been sent.

I have now finished reading the story as it was sent to me. And I must share that even in its current incomplete form, Mr. Wright has accomplished something truly special here. Now, if you’ve read this blog for any time then you know that I’m a huge fan of Mr. Wright’s work. But what Mr. Wright sent me this Christmas is far more than just a wonderful story – although it is that. It’s far more than a mere few hours of solid entertainment – although it’s definitely that. It carries more than beautiful prose, interesting characters, and memorable lines – although it has all of that in spades.

The manuscript that Mr. Wright sent me this Christmas will be placed next to George Washington’s Rules on Civility, the Fear is the Mindkiller poem, and the “What every boy needs to know about being a man speech” as, well, the lessons I give my boys in what they need to know about manhood. More than that, this story made me face up to my own shortcomings as a man and double down on attempts to do better in the years to come.

I am very excited to see the final version of this tale, and to see the rest of the series as it unfolds. And I’m very grateful to have been given this early sneak peak at it.

Update (8/29/16): The final version, Swan Knight’s Son, is now available on Amazon!