The Divine Right of Capital: Dethroning the Corporate Aristocracy

Rating:
Summary: Unclear; Very Confused; Muddled Thinking
Review: Wonderful example of how undisciplined, muddled thinking can create unsound arguments, based on invalid premises, that yield conclusions that will confirm one's biases. Perhaps in a follow-up book, the author will "prove" that the world is flat. An early mistake: She declares that it is (mostly) false that stockholders fund major public corporations, noting that shares trade in secondary markets. Accordingly, she draws the conclusion that there is no reason that corporations should maximize the interests of stockholders and minimize the interests of shareholders, and that it would be just as appropriate to put the interests of employees first. In fact, clear economic thinking reveals that successful corporations do make the interests of employees a high priority, because a corporation with unhappy employees has difficulty retaining employees, which makes for an unsuccessful company. Further, when a corporation raises capital, it often does so by means of a public offering of securities, which is really an agreement between the corporation and the stockholders where the stockholders give the corporation money in exchange for the right to an ownership interest in the corporation. Whether the shares stay in the hands of the original purchaser or whether the purchaser sells them in secondary markets is not germain; whoever holds the shares holds the right to the ownership interest, which may yield value through appreciation, sale or dividends. If you think her argument that it would be equally appropriate for a corporation to maximize payments to employees and minimize the interests of stockholders, just try this little exercise: Form a coproration and attempt to raise capital to run the corporation (including to pay employees). Then tell the potential investors of your plan to minimize value to stockholders. Then count how many of these potential investors actually invest their money in your corporation. (Hint: if you guessed more than zero, you're too high.)