Worldwide democracies have been perverted and replaced by the extraordinary concentration of global corporate wealth: "Eight men own the same wealth as poorest half of the world's population".

Such wealth can only be aggregated in corporations with unlimited life. A counterintuitive and peaceful solution for fixing the crisis in democracy and capitalism is to use a self-funding tax incentive for the wealthiest people on the planet to increase their profits. But this would be on condition that they would democratise the wealth of nations for their children who need to survive our ghastly environmental future. It is a compelling win-win deal for both extreme sides of politics.

The ability to seduce the rich to democratise the wealth of nations arises because corporations concentrate wealth in a way accounting doctrines cannot report. This is because accountants only take annual snapshots of corporate profits without reporting their accumulation. They have no requirement to identify investors' time horizons. What is not reported cannot be taxed. Neither can economists like Picketty learn how wealth becomes so concentrated.

Picketty asked the question in his 2017 book: “Why is the return on capital greater than the growth rate?”[i] The extent is astonishing. Picketty reports, "through most of human history, the inescapable fact is that the rate of return on capital was always at least 10 to 20 times greater the rate of growth output (and income)."

A second reason economists cannot explain why the rich accelerate getting richer is that they do not have a word to describe how investors can obtain profits bigger than they require to make the decision to invest. I define such profits as "surplus" (p.36). Economists use words like "excessive" or "super profits" and "economic rent" that are reported by accountants. Another word is required to distinguish profits that are not reported.

I learnt about surplus profits as a financial analyst in the Treasury department of a global corporation in New York City in 1962. It was during the summer break between my two years at Harvard Business School. A prescribed reading in our first year educated me on how foreign investment exported wealth from host nations on a basis that generated "unlimited, unknown and uncontrollable foreign liability" (p.235). This is not in a way identified by the winners of the 2024 Nobel Prize.

The Treasury Department of the global corporation received pitches from international operating units to fund new projects. The foreign exchange risk was not as volatile as it is today. There was a gold standard and fixed exchange rates. Pitches were supported by discounted cash flow analysis for the life of projects. These could be up to thirty years. However, projected cash flows, including the US, were not recognised for any country beyond ten years. This meant projects could receive surplus profits for at least 20 years. Most countries were allocated a shorter time horizon to reflect perceived country risks.

Several countries had a time horizon of only four years. This meant recovering all the funds invested within four years plus an after-tax return above a specified hurdle rate. It also means surplus profits could be generated for 26 years, which would be 87% of the project's life. Surplus profits are not trivial. Penrose identified how a single US investment in Australia generated dividends 260% times greater than the initial investment each year to become "8% of the dollar export receipts in the Australian balance of payments" (p.221).

While surplus profits cannot be taxed, corporations can give them away by creating stakeholder shares. These shares can then be endowed to each voting citizen in each bioregion, creating locally owned and controlled richly democratic stakeholder governed circular economies. It would replace the non-self-funding US tax incentives to develop the complicated Employee Share Ownership Plans (ESOPs). These involve only around 6% of US citizens. In Australia, it would increase wages and salaries by 12% from removing a compulsory deduction for funding pensions.

The tax incentive would be tied to corporations also adopting distributed decision-making that Elinor Ostrom described in her 2009 Nobel prize lecture as "polycentric governance”. This allows organisations to become both self-governing and provide other benefits to all citizens. In this way, corporations achieve the objectives of the US Business Round Table. Corporations would then become what Ostrom described as being "Common Pool Resource" agents. Such CPRs create a basis to protect and nurture host environments from the degradation created by the 8 billion people on the planet.

A way to obtain the above outcomes is to introduce a self-funding tax incentive for shareholders to change corporate constitutions in three ways: 1. A fraction of their shareholder equity is transferred by book entry each year to a stakeholder equity account from which shares can only be issued to voting citizens in the host bioregion of the firm; 2. Shareholders elect two boards, one to manage the business with one vote per share and a second board to manage the corporation with one vote per shareholder. (European corporation may have two boards, but shareholders only appoint one that then appoints the other); 3. Each stakeholder constituency on which the corporation depends for its existence in its host bioregion elects advisory boards to protect their interests, mentor management and establish Key Performance Indicators (KPIs) for the Governance Board.

The democratically elected governance board has no power to manage the business. It simplifies complexity for directors by removing their systemic, direct, unethical conflicts. These arise when directors become involved in selecting and paying auditors who report to shareholders on the integrity of the directors' accounts. Other systemic conflicts arise when a director controls the AGM to hold them to account or approve their appointment and pay. The governance board also provides a more credible way of managing any other conflicts of interest.

The tax incentive cost is recovered from taxes paid on dividends gifted to stakeholders, with other stakeholders reducing or eliminating their welfare costs. Because the incentive costs are recovered, they can be made sufficiently large so shareholders can achieve higher, quicker, less risky profits by endowing stakeholders five per cent of their equity each year.

The stakeholder boards provide a way to privatise regulation and advise the governance board, independent of management, on how well management provides other benefits stakeholders.

Corporations would then take on ecological characteristics in three ways:

1. adopting polycentric self-governance like all living things;
2. Creating offspring corporations like biotas. Firms would grow their business through their offspring entities funded by dividend re-investment plans and from new investors. Offspring firms also provide succession planning for shareholders, management, and stakeholders.
3. Like all biotas, possess limited life. A five percent endowment per year creates a 20 year life. This time limit, without a tax deduction, was adopted by US corporate charters after the War of Independence.

I have twice proved the practicality of raising high-risk start-up enterprises with investment contracts limited to 15-year leases. The first was Saxonvale Vineyards Limited. It was funded in 1969 and publicly traded in 1975. The second was Barwon Cotton Limited funded in 1979 and publicly traded in 1984. I was also a 1983 founding co-owner of Australian Film Underwriting Pty. Ltd. We funded half a dozen films with investors only obtaining copyright revenues for seven years to minimize reporting costs.

Distributing surplus profits to citizens creates a process to fund a universal corporate well-being dividend for all citizens. It would reduce the need for taxes, welfare payments and big government. The US State of Alaska illustrates the potential. In 2022, every resident over 12 months obtained a dividend of USD3,284 from a single pipeline business. If a similar dividend was obtained from four other enterprises, it would exceed the US minimum wage.

The endowment of surplus profits directly to only citizens would allow a majority of the UN's seventeen Sustainable Development Goals (SDGs) to be achieved.

No new laws are required to introduce polycentric governance. Significant business examples exist in leading jurisdictions. It is only the corporate constitution that needs changes. Examples of such distributed decision-making are the Mondragón Corporacion Cooperativa in Europe, The John Lewis Partnership in the UK and VISA International based in the US.

Each example has survived business cycles for over half a century to provide evidence of their competitiveness and resiliency. These features are consistent with why evolution universally develops distributed decision-making in all living things. It allows them to become self-regulating, self-repairing to some extent, self-reproducing, and self-governing.

I have twice changed corporate constitutions to introduce polycentric governance. The first was in 1974. I became the unpaid CEO of the unincorporated Australian National Ski Federation. I federated the self-governing state bodies into a non-profit incorporated Australian Ski Federation. Australia became a self-governing member of the Fédération Internationale de Ski. The FIS was in turn a member of the self-governing Olympic Committee, that self-selects its members. Olympic sports illustrate how the insights of Ostrom can be extended from local self-governing clubs to a global authority through nested networks of autonomous organisations. They both cooperate and compete creating win-win outcomes for all stakeholders.

Polycentric governance allows the emergence of this paradoxical behaviour described as “Tensegrity”. Tensegrity allows stakeholders to obtain benefits while maintaining shareholder primacy. Unitary boards deny tensegrity to make it invisible to their researchers. Biologists recognise it as “The architecture of life”.

Fixing Democracy by Democratising Capitalism is consistent with the governance proposals of Larry Fink, the CEO of BlackRock. BlackRock is currently the largest fund manager in the world managing $US11.5 Trillion. In a 2018 letter to the CEOs of the companies BlackRock had invested in, Fink identified "Group Think: as a problem. He wanted: "A new model of corporate governance". He named one of his executives I reported to for another investor in the UK in 2002. This was when I was commissioned by the London-based New Economics Foundation to author one of their public policy booklets on "A New Way to Govern: Organisations and Society after Enron".

My policy booklet explained why Fink stated in 2018: "Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate." This is only common sense. No business can exist without stakeholders. But unitary boards promoted as "best practice" shut out stakeholder voices to deny Fink's wish "to bring other critical stakeholders to be brought to the table".

It's time to radical reduce inequality to democratise and purify capitalism. Ecological constitutions would create self-reliant self-governing bioregional ownership and control of corporations. It would allow every citizen of the planet to participate in local self-determination of sustainable populations in each bioregion and how to best protect and nurture the environment to perpetuate biodiversity that included humans. This provides a reason for green votes to join the extreme left and right to vote for a shareholder driven richly democratic stakeholder self-governing society.

References

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