Our Blueprint Proposal
By Lynn Stout and Sergio Gramitto
Business corporations are legal persons that can aggregate enormous resources, rival nation-states in power, and live in perpetuity. They have been essential to creating railroads, the electric grid, antibiotics, and the internet, and are currently developing self-driving cars and cures for cancer. They provide enormous benefits to humanity, including investment returns, employment opportunities, tax payments, useful goods and services, and transformative innovations. They are capable of serving not only past and present, but also future generations.
Yet today, business corporations often seem to serve the interests of a few to the exclusion, and sometimes the detriment, of the many. Stock ownership is becoming concentrated in the hands of the ultra-wealthy, contributing to rising wealth and income inequality and allowing powerful individuals to exercise outsized political influence. Demands for greater shareholder returns are driving corporations to neglect and exploit stakeholders like employees, customers, creditors, and communities, reducing employment and social welfare. Limited liability invites them to ignore the external costs of their activities, while a focus on immediate financial results reduces corporate reinvestment and research and development.
These are not inevitable consequences of the corporate form, but the result of relatively recent changes in the investment sector that keep corporations from realizing their full potential to benefit humanity. Reduced transactions costs and federal tax rules have created massive institutional intermediaries that supposedly serve long-term investors, but hold shares for short periods and seek immediate returns. They have also encouraged diversification that discourages most investors from exercising an active role in corporate governance. Securities Exchange Commission (SEC) regulations have empowered powerful hedge funds that relentlessly push companies for short-term share price increases, driving many firms to "go private" and discouraging others from going public in the first place. Other SEC rules have created an unaccountable "proxy advisory" industry that shares the hedge funds' short-term focus. Meanwhile, disclosure and executive compensation rules that emphasize financial results have encouraged firms to ignore external costs and to minimize "expenses" like payroll, tax payments, customer support, pollution abatement, and research and development-"expenses" that generate substantial social benefits.
We offer a utopian-but feasible-proposal to better align the operations of business corporations with the interests of a broader range of humanity. The heart of the proposal is the creation of a Universal Fund into which individuals, corporations, and state entities could donate shares of public and private corporations. The Universal Fund would then distribute a proportionate interest in the Fund-a Universal Share-to all members of a class of eligible individuals (for example, all citizens over the age of 18), who would then become Universal Shareholders. Like a typical mutual fund, the Universal Fund would "pass through" to its Shareholders all income on its equity portfolio, including dividends and payments for involuntary share repurchases. Unlike a typical mutual fund, however, the Universal Fund would follow an "acquire and hold" strategy and could not sell or otherwise voluntarily dispose of its portfolio interests. Similarly, Universal Shareholders could not sell, bequeath, or hypothecate their Shares. Upon the death of a Universal Shareholder, that individual's Share would revert to the Fund.
A Universal Fund would temper the political power of the ultra-wealthy and redistribute income and wealth more equally. It would also allow average investors to play a larger role in corporate governance and in setting corporate priorities. This could be done by requiring the Universal Fund's managers to vote the shares of companies held in the Universal Portfolio as Universal Shareholders direct, at the Fund's expense. This would create incentives for new proxy advisory firms to enter the market. These new proxy advisory firms would cater to and aggregate the votes of Universal Shareholders, who would be more long-term, more diversified, and more concerned about the external costs and benefits of corporate activity than short-term institutional investors or undiversified hedge funds.
The outcome would be a corporate sector that promotes greater income and wealth equality; reinvests and innovates more; is more sensitive to external costs imposed on employees, customers, and taxpayers; is more sustainable and socially responsible; contributes less to political corruption and rent-seeking; and allows average citizens to feel invested in, and supportive of, the capitalist system and the business sector. The Universal Fund would integrate the interests of natural persons and corporate legal persons in a manner far more symbiotic and mutually beneficial than is possible today.
A Short Presentation