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The Corporation as Feudal Estate

THE PRINCIPLE OF PROPERTY

Like a feudal estate, a corporation is considered a
piece of property—not a human community—so it
can be owned and sold by the propertied class.

In searching for the source of stockholder privilege, we come around again to the incantation of that single, magical word: ownership. Because we say stockholders own corporations, they are permitted to contribute very little and take quite a lot. This word own is deceptively small and worth unpacking.

Since stockholders own corporations, implicitly (1) the corporation is an object that can be owned, (2) stockholders are sole masters of that object, and (3) they can do as they like with “their” object.

It’s an entire worldview in three letters. And as a result of this tiny incantation (like the Shazam that turns a boy into Captain Marvel), stockholders gain omnipotent powers: they can take massive corporations, break them apart, load them with debt, sell them, shut them down, and drive out human beings—while employees and communities remain powerless to stop them.

Power of this sort has an unmistakable feel of the ancient. Ownership, that bundle of concepts we also label property rights, is another antique tradition that has remained impressively intact. It comes down to us from that time when the landed class was the privileged class, by virtue of its wealth in property. To own land was to be master. And in the master’s view, what was owned was subordinate, as in the imperial presumption that India was a possession of the throne of England. Or the feudal presumption that lords could own serfs, like so much livestock.

Ownership, according to British law, conferred upon the owner a right to “sole and despotic dominion.” The phrase is from William Black-stone’s influential eighteenth-century Commentaries on the Laws of England. It is a phrase worth lingering over, for dominion shares the same root as domination. And despotic, the Oxford English Dictionary tells us, means tyrannical rule of those who are not free.

ANCIENT RELATIONSHIPS OF OWNERSHIP

Blackstone’s chilling phrase is one I encountered in a 1993 scholarly article by Teresa Michals, who at the time was completing a Ph.D. at Johns Hopkins University. The piece was titled “‘That Sole and Despotic Dominion’: Slaves, Wives, and Game in Blackstone’s Commentaries,” and it was something I stumbled on serendipitously—on a day I had abandoned myself to the random, as one does in antiques collecting. I rummaged upon this particular volume of the Eighteenth Century Studies journal on a dusty lower shelf—one among acres of shelves—in the Book House used bookstore in Minneapolis. Pulling up a chair there in the cluttered aisle, I sat transfixed as Michals described the ancient aristocratic mind, that antique perspective that saw virtually all human relationships as varieties of ownership.

Eighteenth-century England, she wrote, was a world of “land-based hierarchy,” in which social standing rested on ownership of land, or “real property.” “Blackstone seems to assume that one either owns real property or becomes real property oneself,” she wrote. “Although the common law did not support the buying and selling of persons, it did support the general principle that one person could own certain kinds of property in another.”¹

There were, in effect, three categories of persons: the property owner with full rights, the slave as a piece of property with no rights, and, in between, a mixed category: “that of a right-bearing subject who is also the property of another.” In this third category she noted that we might find a man’s wife, or his servant, whom he owned though was not able to sell.

The element of ownership went one way. The “inferior hath no kind of property in the company, care, or assistance of the superior,” Blackstone wrote. And because ownership was one way, loyalty was also one way. Thus a servant owed loyalty to the master, but the master owed no loyalty to the servant. The husband could claim damages for trespass if his wife was abducted or seduced, but she had no reciprocal right.² Curiously—or perhaps appallingly—the law of master and servant remains the law in employer-employee relationships today, as a living fossil of the notion of ownership. Employees still owe a common-law duty of loyalty to the corporation, but as massive layoffs demonstrate, the corporation owes no loyalty to them.

In Blackstone’s era, those without property lacked voice in the legal process. Blackstone justified this by saying that only those who owned property possessed an independent will; hence only they could vote. Those without property were “under the immediate dominion of others,” meaning they had “no will of their own” and were incapable of casting a valid vote.³

In this ancient property-based world, a whole range of relationships—not only with wives and servants, but also with children, even with God—were considered relationships of ownership. And this view made its way to America. In colonial times, a widely read American advice manual stressed that “children are so much the goods, the possessions of their Parents, that they cannot without a kind of theft, give away themselves” without permission.⁴

Even in Two Treatises of Government by John Locke—the seventeenth-century British theorist whose book is considered a founding document of democracy—God is conceived of as the Great Property Owner. Locke wrote: “For Men being all the Workmanship of one Omnipotent, and infinitely wise Maker; All the Servants of one Sovereign Master, sent into the World by his order and about his business, they are his Property, whose Workmanship they are.”⁵

This notion of one sovereign master extended to the marriage relationship, where only men were permitted to own property. In early American law, a husband became owner of his wife’s property upon marriage. He had sole right to administer it, claimed its profits, and was required to render his wife no accounting. In the 1764 case of Hanlon v. Thayer, a Massachusetts court said a husband owned even his wife’s clothing—though she’d brought it with her at marriage.⁶ As Michals described the marital relationship:

At marriage a woman not only loses her property, which passes into her husband’s possession; more fundamentally, she also loses her very ability to own property, becoming instead the property of her husband. Her consent to the loss of her property is taken to imply a free consent to the disappearance of her own legal personality into that of her husband.⁷

Husband and wife were one legal person, and that person was the husband.

MODERN OWNERSHIP

Today, the corporation is considered one legal entity, and that entity is equated with stockholders. Like wives, employees “disappear” into the corporation—where they have no vote. The property of the corporation is administered solely in the interests of stockholders, who, like husbands, claim the profits, and are required to render employees no accounting. We have thus a corporate marriage in which one party has sole dominion. The reason is property.

Stockholder dominion today primarily means extracting wealth. This is done less directly than indirectly, through mechanisms that are worth understanding.

The property stockholders have in corporations is represented by two numbers. The first, stream of income, is called profit or earnings. It’s the bottom line, what is left over from revenue after all expenses are paid. Stockholders are theoretically said to have a right to all of it, and in an earlier age this was apparently true; all profits were at one time customarily paid out to stockholders. But today stockholders get only a piece of earnings (about a third) in dividends.⁸ The rest is kept as retained earnings, to be used by the corporation. That retained portion is booked on the balance sheet as stockholder equity, in a kind of nod to the old tradition. It’s a way of saying this equity “belongs” to stockholders.

Even though earnings are no longer entirely paid out to stockholders, those earnings are still often considered the basis of company value, for company worth can be measured as a multiple of its earnings. This is the meaning of the term price-earnings ratio. If a company has earnings of x, and a total market value of 25x, its p-e ratio is 25—meaning the company is worth 25 times its earnings.⁹

So earnings are one part of stockholder property. The second part is the value of the corporation itself—called market value, or capitalization (in Wall Street lingo, market cap). This is simply the value of all shares added together. Stockholders receive their portion of market value when they sell stock and pocket capital gains, if the stock has gone up. By analogy with a rooming house, you might say stockholders own the stream of rent coming in, and they own the house itself.

The key to it all is profits. This is the wealth—the property—the corporation creates each year. If earnings go down, the value of the corporation will often go down. Hence maximizing profits means working in the stockholder’s interests—and if necessary, working against employee and community interests.

One way or another—through direct payout or increased firm value—the benefits of profit flow to shareholders. Attorney and employee-ownership specialist Jeff Gates, in The Ownership Solution, calls this the “closed loop” of wealth creation. Stockholders are by definition those who possess wealth. And in the design of the corporation, most new wealth flows to those owning old wealth, in a closed loop.

This closed loop functions in a literal way on the balance sheet. Equity represents the actual capital stockholders contributed when they purchased new shares. And the retained earnings portion of profits is added to that equity each year. Thus by the magical closed loop of accounting, equity grows year after year, while stockholders never contribute another cent.

THE QUESTION OF INTANGIBLES

One might debate the legitimacy of this arrangement. One might question the rationality of infinite payback for a onetime hit of money. (Even credit cards let you off the hook at some point.) But let us sidestep that debate.

Let us assume, for the sake of argument, that all profits legitimately belong to stockholders. Let us assume they own all tangible corporate assets, so the book value of the corporation is theirs. (Book value means everything you own minus everything you owe. It’s what would be left, theoretically, if you sold everything and paid off debts.) Even granted this, stockholders are still running off with 75 percent of corporate value that’s arguably not theirs.

Consider: at year-end 1995, book value of the S&P 500 accounted for only 26 percent of market value. Intangibles were worth three times the value of tangible assets.¹⁰ Thus, even if S&P stockholders owned the companies’ tangible assets, they got off scot-free with other airy stuff worth three times as much.

Included in intangibles are a lot of things, like discounted future value, patents, and reputation. But also included is a company’s knowledge base, its living presence. Or to call it by a simpler name: employees.

In owning intangible value, stockholders essentially own employees—or at the very least, they have the right to sell them, which amounts to the same thing.

Take the case of the Maryland company in Chapter 11 bankruptcy, which in 1997 sold itself to Space Applications Corp. (SAC) in Vienna, Virginia. The company’s real assets were its one hundred scientists. So it sold them. As Edward Swallow of SAC told the Wall Street Journal, “The company wasn’t worth anything to us without the people.”¹¹

Such human capital acquisitions happen all the time. Through 1997, Cisco Systems in San Jose, California, had made nineteen of them—mostly acquisitions of small software companies with little revenue but fifty to one hundred employees, for which it paid premium prices, up to $2 million per employee.¹²

It’s revealing when the accountants go to record such purchases on the balance sheet. If you pay $100 million for a company with, say, $25 million in tangible assets, what’s the other $75 million of stuff you bought? How do you record it? Well, what you don’t record is “one hundred scientists.” In post–Civil War America, we recoil from the notion that human beings might be bought and sold. So we say a company has purchased goodwill. That’s how it’s booked: as a line item on the balance sheet called goodwill.

The parallel to Blackstone is telling. Our law does not support the literal buying and selling of persons, but it does support the principle that stockholders can own certain kinds of property in employees. We allow company owners to sell company assets, even when the primary assets are one hundred scientists. This doesn’t make these scientists property in the sense that slaves were property, because the scientists are free to leave. But neither are they property owners, with a right to vote on the sale and a right to pocket the proceeds. Their status is akin to the third category Michals described: “that of a right-bearing subject who is also the property of another.”

PROPERTY IN THE KNOWLEDGE ERA

Employees-as-property is a troubling concept. But evidence of it is wide-spread—as in the commonplace observation that “employees are our greatest assets.” Assets, of course, are something one owns.

Companies can take this quite literally. Consider the case of Evan Brown. This computer programmer claimed to have dreamed up a concept that would fix outdated computer codes, and he wanted to develop it on its own. But his employer, DSC Communications in Plano, Texas, said the idea was company property, because Brown had signed an agreement granting DSC rights to inventions “suggested by his work.” Brown never made notes for his concept. So when DSC sued him, it wasn’t for ownership of his papers. It was for ownership of his thoughts.¹³

Through the lens of ownership, one either owns property or becomes property. There is nothing else. It’s an attitude that says, if I own the assets of a firm, I own everything created on top of those assets. All new wealth flows to old wealth. This is inherently a feudal assumption—and we can see this more clearly if we make an analogy with land:

Say a landowner pays a tenant to farm some land, and the tenant builds a house there. Who owns the house? The landowner or the tenant?

In feudal England, the landowner legally claimed the house. But as legal scholar Morton Horwitz points out, American courts rejected this—beginning with the 1829 case Van Ness v. Pacard, where Justice Story wrote: “What tenant could afford to erect fixtures of much expence or value, if he was to lose his whole interest therein by the very act of erection?” Under democratic law, the rule became that “the value of improvements should be left with the developer.”¹⁴

Refusing to bow to ancient property rights, democratic law articulated a new precedent: the house belongs to the person who built it. New wealth flows to those who create it.

In this tradition, employees who “build” atop the corporation (creating new products or new efficiencies) have a legal right to the value of their improvements. But in corporate law that isn’t the case. Corporate law says stockholders own everything the corporation now has and everything it will create into the perpetual future. Hence the increasing value of the corporation will flow forever to shareholders, though they won’t lift a finger to create that value. The presumption is literally feudal.

Tied up with it is the notion that property owners are the corporation. Employees are incidental: hire them today, get rid of them tomorrow; they’re of no consequence. Sell the company; maybe employees will come along, maybe they won’t. It doesn’t matter. They’re not on the balance sheet, so they don’t exist in the tally of what matters.

Yes, well. We might puncture this fantasy with a simple question: What is a corporation worth without its employees?

This question was acted out, interestingly enough, in London, with the revolutionary birth of St. Luke’s ad agency, which was formerly the London office of Chiat/Day. In 1995, the owners of Chiat/Day decided to sell the company to Omnicon, which meant layoffs were looming, and Andy Law in the London office wanted none of it. He and his fellow employees decided to rebel. They phoned clients and found them happy to join the rebellion. And so at one blow, the London employees and clients were leaving.

Thus arose a fascinating question: What exactly did the “owners” of the London office now own? A few desks and files? Without employees and clients, what was the London branch worth? One dollar, it turned out. That was the purchase price—plus a percentage of profits for seven years—when Omnicon sold the London branch to Law and his cohorts after the merger. They renamed it St. Luke’s, and posted a sign in the hall: Profit Is Like Health. You Need It, But It Is Not What You Live For. All employees became equal owners. Ownership for St. Luke’s is a right that is free, like the right to vote. Every year now the company is re-valued, with new shares awarded equally to all.¹⁵

Thus we see how the presumptions of property hold up in the knowledge era: The fiction that outsiders can own a company, which is nothing but a network of human relationships, is a house of cards. Employees themselves are the cards, willingly holding the place together, even as stockholders walk off with the wealth that the employees create.

How long this will be sustainable remains to be seen. But for the time being, employees remain hypnotized, believing themselves powerless, and accepting (Shazam) that stockholders have sole and despotic dominion.

We accept this because we operate from the unconscious assumption that corporations are objects, not human communities. And if they’re objects—akin to feudal estates—then they’re something outsiders can own, and the humans working there are simply part of the property. Either you own property or you become property; there is nothing else in a property-based world.

We’re not aware that we’re holding such a picture of reality until someone like Andy Law or Evan Brown stands up to stockholders and says, “We are not your property.” Such gestures are reminiscent of the founding fathers standing up to Great Britain and saying, “America is no longer your property.” What seems solid melts under challenge. In the heat of confrontation, the notion of owning human beings slips away—like ice melting. Or like an incantation fading, once we have broken its spell.