We Should Care About Corporate Ownership

We Should Care About Corporate Ownership


Firms are often uninspected but they wield great influence over our world. I suggest control over a firm's corporate leadership would be a productive way to influence operations. For example, with adopting safety regulations for AI development or emissions standards for oil production. Below, I sketch an argument for focusing on corporate leadership and suggest how it is an appropriate stance to adopt.

You Should Care About What Companies Do

Anyone who cares about meaningfully interacting with the future should care about the corporation. More precisely, they should care about the incentives of corporate leadership, the board, and how a given firm comes to make decisions. Rather than taking the view that regulation would address meaningful change, I believe that firms do in fact hold much power. They meaningfully impact the material world - and those of us who are motivated should explore how we can influence them. The case of activist investing suggest some ways forward.

First, let's address some assumptions. I assume that you are motivated to impact the world, however that may be. The core of it would be an interest in improving wellbeing, preventing risks to humanity, or some other goal that forwards humanity. Materially, that suggests an agenda of abundance such limitless energy, shelter, and having more of the things that we need to flourish.

If so, then to interact with this substance of material production is to interact with firms. Firms, in other words, are to be seen as the basic unit of analysis in our view.

There are several reasons for doing so. Take the case of ExxonMobil, whose control and influence over supply chains bear a massive impact on the globe. Their corporate decisions necessarily affect how they function, which in turn clearly affect the world at large.

While regulation is important, it is not a panacea. Governments may be able to lay down laws which aid and mould private actors - but they are limited. They are limited in speed, for regulation is often a laggard, or at least not always a leader relative to developments in the private sector.

If we care about interacting with production now, then regulation would be seen as a medium to long term mechanism. What remains in the now is how firms make decisions.

Besides regulation, firms are also fairly opaque and wield large forms of discretionary power. Consider how many day-to-day decisions are made internally, perhaps by a tech giant such as Alphabet. In any given day, it is not like public scrutiny is brough to bear on the operations of the firm. Through this, one can at least concede that firms wield the ability to make decisions on how things are done.

And this matters because what firms do can impact all of us. Alphabet manages a search algorithm which moulds how information flows to consumers. Likewise, AI firms make decisions which could have large effects on humanity.

So, firms matter because they have power of some sort.

Who Exactly Is In Charge?

But this leads to another question. If firms have influence, who exactly is wielding said influence? Perhaps to some degree the state and regulation ultimately does so, but let us put that aside - considering the scope of our discussion.

One answer would be on the owners of the firm. And I think that inspecting the board and leadership of a firm is how we can trace the key influences on a given firm.

Simply put, the theory is that the firm makes decisions based on its incentives and pressures. These incentives may be shaped by the will of those that own the firm itself. Who owns the firm? It is a tangle of competing and varied interests - which may intersect at the level of the board of directors and its executive suite.

For while certain board members may simply be representatives for the ultimate owners of the firm, the board is the layer at which decisions turn into enforcement. It is the layer at which the executive suite is influenced, which in turn affects the macro-decisions of the firm. It is also the stage at which decisions are vetoed, votes expressed, and agendas competed over.

This could explain why tracing the ownership of large firms to asset managers is not very productive. Critiques that institutional asset managers are responsible for the decisions of large firms do not seem very useful. In part, it is because of the observation that institutional asset managers are themselves beholden to investing mandates. The set-up is such that they are merely allocators, rather than active managers in the operations of a given firm.

As an aside, one might then explore influencing asset managers themselves. But this is also a messy issue. The push for the use of ESG labelling is one that some see as a predominantly BlackRock agenda. There has also been some pushback on the role of ESG to meaningfully influence matters. More can be said in a later piece.

So if we remain at the level of a firm's board, rather than tracing ownership to passive capital allocators, then it suggests that we can influence firms at said level.

This has already played out in recent months. Take the case of OpenAI and how it ousted its CEO, Sam Altman. Certain board members initially instigated the exit of Altman. It was also through pressure on the board that said members were replaced and Altman eventually reinstated.

A lesson would be that the board is the level at which influential decisions are made.

To those familiar with the case, Microsoft might be said to be the ultimate owner of OpenAI. Through massive financial backing, they are the ultimate decision-maker over the firm. Yet this insight is not very troubling for our view. First, we may simply be led to focus efforts on Microsoft's board instead. Second, it is still useful to understand how exactly Microsoft acts on OpenAI.

In other words, we've come to view the firm as a sort of asymmetric, varied political battleground. The votes are unevenly distributed and unevenly exercised. The demographics and key agents are not voting blocs, but are instead made up of other private institutions, founder-owners, and some parts of the public.

Within this landscape, is an opportunity to enact control. Just as how private interests have historically maintained control over firms, so may we - who are motivated by a myriad of possible altruistic intentions - take action to exercise control.

How might we do so? For example, imagine that we would like to maintain certain safeguards over AI development by a certain publicly listed tech-giant. We would then be inclined to focus on gaining seats at the board. But how can this intention be turned into an actionable and substantial plan?

Activist investors suggest a way to do so.

Activist Investing: A Possible Solution

First, it is not that we need to control a simple majority of a firm's voting shares outright. Activist investors have displayed the ability to take minority stakes in firms. Couple this with a public campaign and nominations to the board may be secured. This is often done in conjunction with appeal to other incumbent owners, such as perhaps the previously described institutional investors. It also becomes clearer what bloc would need to be overcome. For in the Altman case, the board was internally divided even without the need to introduce a new party.

A minority stake and exploring activist campaigns thus suggest promise.

A nimble and lean approach also requires less capital. This would help with reducing the barrier to entry and enacting such a plan.

At this point someone might have an objection - in that this course of action is undemocratic. The thinking is that this mechanism is not publicly accountable. Just as how private firms and wealth undemocratically wield influence, so would such an approach be undemocratic.

But this view is wrong.

The choice is not between undemocratic action and democratic action. It is between one form of undemocratic action against another. In that sense, it becomes clearer that given our motivations of enacting change, this is merely yet another mechanism of change. It is also not the case that firms would somehow be free of private influence in the absence of our actions. They are already being influenced by other parties. We recognise them as certain billionaires, those with vested interests, and corporate owners themselves. We can also vote for regulatory change on the one hand, while still pursuing this mean of corporate influence. It is not clearly mutually exclusive.

Second, it seems necessary to explore corporate influence because of the fragmented nature of global markets. Multinational corporations are often able to take flight and shelter under select tax havens. This international cover allows the corporation to maintain influence over its operations while simultaneously escaping regulatory checks.

Short of calling for a re-ordering of the international order and how state borders function, it seems we are left with addressing the firm as it is. This is as opposed to calling for regulation that would prevent, for example, capital flight.

Divestment is not a very strong option. Funding and ownership of the firm may come from several sources as well. Sovereign wealth funds, private capital, and other foreign institutional asset managers exist. Those with less qualms may then simply pick up the slack if a divestment initiative was disparate and isolated.

So, it seems we should also lean towards engaging with firms, rather than simply divesting from them.

In summary, firms wield influence over our material world, such as through control of supply chains and innovation. In turn, firms may be influenced through (perhaps partial) control of their corporate leadership. If we believe in influencing the operations that firms carry out, then we should explore how we can influence the incentives of a firm.

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