On the democratization of corporate entities via inclusive ownership

Given this, that’s why the debate and movements related to the spirit and culture of distinguishing between a society oriented towards capital versus the people gets the necessary policy and political attention, especially ever since the idea of corporate entities operating as legal persons came into being. Because of this, many within societies prefers to see the relevance of companies within societies are judged based on principles of democracy, which include accountability, integrity, and transparency.

Corporate entities and human lives are greatly intertwined – corporate entities/companies as it is for humans are all persons in eye of the law. Companies are proportionally engaged in determining some key aspects of human lives – from where we sleep, to what we eat, what and how we wear, how and where we work, how we commune and communicate, sometimes to how we decide and govern ourselves, the list goes on and on. As it is for us humans, companies have their own rights and obligations, and armed with these “rights,” corporations have increased control over resources, jobs, commerce, political engagements, and even in the making of laws. And the fact that companies have limited liability – this somehow decreases citizens authority over them.

Let me draw our attention to statement that was issued sometime in 1981 and then later in 1997, and the other one  that came in August 2019 — by the Business Roundtable, a group comprising CEOs of most of the largest corporations in the US.

This “Statement on Corporate Responsibility” reads: a group of the CEOs of the largest US firms, recognizes six constituencies – customers, employees, communities, society at large, suppliers, and shareholders – as forming the ‘web of complex, often competing relationships’ within which corporations operate. It accepts the idea that ‘shareholders have a special relationship to the corporation’ but doesn’t allow their interests to trump all others.”

Here is an excerpt from the Business Roundtable statement: “Balancing the shareholder’s expectations of maximum return against other priorities is one of the fundamental problems confronting corporate management. The shareholders must receive a good return, but the legitimate concerns of other constituencies also must have appropriate attention. Striking the appropriate balance, some leading managers have come to believe that the primary role of corporations is to help meet society’s legitimate needs for goods and services and to earn a reasonable return for the shareholders in the process. They are aware that this must be done in a socially acceptable manner. They believe that by giving enlightened consideration to balancing the legitimate claims of all its constituents, a corporation will best serve the interest of the shareholders.”

As it is, this statement is anchored on the need for rebalancing the share of income and wealth in favor of all stakeholders in the manner companies are governed, and hence the case for expand democracy in companies’ ownership and eventually finance and the economy. That is, if left unchecked — corporate greed and interests can destroy the social and economic fabric of communities, where a small group of people owning and running corporations make decisions that increasingly determine overall societies’ economic, social, environmental, governance, policy and political future.

As matters stands, the richest few own disproportionate share of global capital income – including capital gains, dividends, and interests.

While corporate profits that presently go to a small number of ultra-wealthy families are at or near an all-time high, returns on other corporate stakeholders – employees, governments, and other operatives within companies’ eco-systems as a percentage of economies do not match up.

And yes, it is also a fact that those who control these corporations have strong allegiance to profits, executive bonuses, and the value of shares of companies. What happens to employees, what happens to the environment, what happens to the community in which their corporations’ function, what happens to government tax revenue income matters very little.

This type of corporate entities operations, governance and ownership is not an economic model that is sustainable for the long end. Societies can do much better and cohesively while encouraging enterprising spirits and business success at the same time encouraging more transparency, accountability, payment of fair share of tax revenue to the government, etc.

The truth is, we can grow and develop in an economic model that create jobs, increases productivity while corporate are democratized by sharing part of their ownership stake with other stakeholders – employees, customers, suppliers, communities, governments, etc. and all have a say in the decision-making process that impacts their lives, and a fair share of returns to their involvement.

That’s why the US Business Roundtable issued the statement on the purpose of corporations that came in August 2019 redefining the purpose of a corporation to promote ‘an economy that serves all’, among others, it says: “[People] deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity. That the free-market system is the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment and economic opportunity for all.

Businesses play a vital role in the economy by creating jobs, fostering innovation and providing essential goods and services. Businesses make and sell consumer products; manufacture equipment and vehicles; support the national defense; grow and produce food; provide health care; generate and deliver energy; and offer financial, communications and other services that underpin economic growth.

While each of our individual companies serves its own corporate purpose but do share a fundamental commitment to all stakeholders. And so, they do commit to: (i) delivering value to customers; (ii) investing in our employees — starting with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world; (iii) dealing fairly and ethically with our suppliers — dedicating to serving as good partners to the other companies, large and small; (iv) supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses; and (v) generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate.”

Financial Literacy for a Better Retirement

This week – from 5th to 11th October has been set by the International Organization of Securities Commissions (IOSCO) and the World Federation of Exchanges (WFE) as the World Investor Week. It is a week meant to promote investor education and protection. Capital Markets regulators and stock exchanges across the World are engaging communities to raise awareness about the importance of financial literacy and how it can improve life outcomes, encouraging people to make savings and investments as part of their lives. A the DSE we are using the week to engage the public to the fact that financial literacy, financial inclusion, inclusive economic growth, and share prosperity goes together and could be enhanced when many in the society knows how finance works.

While we are on this, let’s be reminded that the 1st of October was an International Day for Older Persons.  Therefore, in today’s article we will link these two aspects which are all relevant to our lives. Read on:

Our priorities, goals and needs change constantly as we journey through life. Lifestyle choices like cars and holidays occupy and dominate our thinking early on as we start our career, then as years go-by imperatives such as renting, buying or building a house come along.

After that we have education for our children, health care for us and our families and all the things that goes with growing families and expanding responsibilities. All the while, we have to keep an eye of the possibility of a comfortable retirement with some form of “financial freedom”.

Juggling these competing financial needs, on a limited and finite income stretches most of us to the core. However, the part of the secret to succeed in these challenges lies in starting early, making plans and sticking, as much possible, to those plans. Have you ever heard words such as “financial freedom”, “the freedom fund”, or “the Rule of Seven”? – where you are encouraged to make regular and sustainable savings in pursuing to create a fund which is made up of investments in income producing investments (i.e. dividend paying shares, income-earning cash (i.e. fixed deposits and treasury bills), bonds, real estate’s rental income, royalties, etc) whose ultimate objective is to enable you live a relatively similar life as the one you had when you were earning regular income from your day job during the active career years.

What I am saying is that you should get into the good habit of saving and investment, early in life. The earlier you start the better, because the small amounts you save and invest– with a compounding effect – turns into large sums over time. When you are trying to accumulate wealth for future, the longer you have your money invested the more it will grow in value.

The other advantage in starting early is the mindset it helps create. You begin to see savings not as some sort of luxury but as an essential part of your overall financial plan and execution. Basically, savings and investment should be an integral piece of your planning and seen as important as your rent, or loan repayments or, school fees. The best way to approach this is to have personal plans and create the budget to support implementation of those plans. If there won’t be conscious and deliberate efforts to ensure all these are put down on paper – then the follow-through would also face challenges. Unfortunately, most of us, approach matters of income and spending via focusing on the short-term, the here and now, where we act as if what is here now is far important to what lies ahead of us not so long down the line.

Because of lack of plans or the habit of putting matters on hold until the last minutes, or according priority to matters that are not, we end up spending money on things that we do not even need or know about. In this context, getting the basics i.e. personal planning, budgeting and budgetary control is essential.

Earlier [above] I introduced the concept of compounding, in accounting and finance this is a key term, and this is how it works — let us assume that your savings are kept in the form of bank deposits with a fixed term and your return is interest earnings. In this case, there will be the effect of compounding interest – meaning that the interest you earn each period is added to your principal and re-invested, so that the balance doesn’t merely grow, it grows at an increasing rate. It is the basis of everything from a personal savings plan to the long term growth of the stock market. It also accounts for the effects of inflation, and the importance of paying down your debt. What it also means is that the earlier you start savings the better. Let us assume that you are now in your early 30s and started saving, your chances of getting enough funds, not only for retirement, but also for buying/building a house, taking children to good schools, etc are much higher relative to if you started savings at 40s where the struggle to achieve financial freedom will be far much higher. Now, personal and financial planning is key – setting out your goals, setting out the plan to achieve the said goals and prioritizing objectives for executions.

But before you proceed with any savings plans, you have to map out your action plan for getting there. In other words, you need to determine if you have the spare cash to make savings. Thus, you need to construct your personal balance sheet and cash flow statement that seek answers to some important questions to see where you financially stand. Only once you have paid off all your short-term debt and you have income left over should you consider saving.

So, first thing you need to consider, is to settle your finances and outstanding high interest debts. This is not a rule but a prudent advice because if you have debt that is costing you say 20 percent in interest per annum and your invested savings is growing at more than 20 percent per annum and you can liquidate your invested savings to repay the debt, you are then doing very well, but this is often difficult to achieve and thus it is advisable or rather recommendable for you to take a simple approach, which says invest your savings, do not borrow or get into debt to make a saving investments. Look at your current financial position, i.e., your personal balance sheet and cash flow statement to understand where you stand.

In any case, even if you are on your 40s or 50s, you still have 20 or 10 years before retirement, and there is still quite a lot that can be done. It is never too late to start, what is important is that you have to have a sensible savings and investment strategy, act on it and seek help from financial advisers, when needed.