Excerpted from:

* Article: Rethinking Common vs. Private Property. By David Ellerman

This concludes our four part serialization of this important essay, which was started on August 20.

David Ellerman writes, , on Re-constituting the corporation from first principles:

The responsible corporation

“There have been a few — very few — social commentators who have pointed out the roots of the institutionalized irresponsibility in the absentee-owned joint stock corporation.

In his 1961 book aptly entitled The Responsible Company, George Goyder quoted a striking passage from Lord Eustace Percy’s Riddell Lectures in 1944:

– Here is the most urgent challenge to political invention ever offered to the jurist and the statesman. The human association which in fact produces and distributes wealth, the association of workmen, managers, technicians and directors, is not an association recognised by the law. The association which the law does recognise—the association of shareholders, creditors and directors—is incapable of production and is not expected by the law to perform these functions. [Percy 1944, 38; quoted in Goyder 1961, 57]

As indicated by Percy and Goyder, the basic solution is the re-constitutionalizing of the corporation so that the “human association which in fact produces and distributes wealth” is recognized in law as the legal corporation where the ownership/membership in the company would be assigned to the “workmen, managers, technicians and directors” who work in the company.

The bundle of corporate rights

We are now in a position to parse the rights involved in a corporation so that we may consider how the rights might be differently structured in a democratic firm based on first principles. We simplify down to the essentials: the voting rights (to elect the board to select the management and to vote on any other questions put to the owners/members) and the economic value rights which can now be parsed into the net asset value and the profits rights. The net asset value is for the current time but the voting and profit rights need to be broken down into the current rights and future rights after the current time period. Thus we have the following taxonomy:

Corporate Rights

A. Voting Rights

A.1. Current Voting Rights

A.2. Future Voting Rights

B. Value Rights

B.1. Profit Rights

B.1.a. Current Profit Rights

B.1.b. Future Profit Rights

B.2. Net Asset Value.

In the above taxonomy, it is the corporate rights which are being listed, not the non-existent rights to the “ownership” of residual claimancy (see earlier discussion of the fundamental myth). In the conventional joint stock company, these corporate rights (voting + value rights) are property rights represented by the common voting shares that may be owned and freely transferred as any other property rights.

The structure of rights in a democratic corporation

In a democratic firm such as a worker cooperative, the corporate ownership rights are not only rebundled but are assigned on a different basis. The voting rights are assigned on the basis of democratic principle of self-government. The people working in the firm are the only people under the management of the firm’s managers so by the democratic principle, the voting rights to elect those managers (perhaps indirectly through board election) should be assigned to the people working in the firm. Note that this assignment to those people is based on the assumption that those people are playing a certain functional role, i.e., working in the firm. They do not “own” the voting rights as property rights to be held or sold independently of their functional role. It is the same with voting rights in a political democracy. For instance, the voting rights in a democratic town or municipality are attached to the functional role of residing in the town or municipality.

We call rights assigned to a functional role personal rights. Where the entitling functional role is just being a person, then those personal rights are the basic human rights. In a democratic community of work or of residence, then the functional role is working in or residing in the community. In any case, such personal rights may not be sold as alienable property rights since the buyer may not have the entitling role, and if the “buyer” had the entitling role, then he or she would already have the rights on that basis.

The workers in the firm change so the assignment of the voting rights will change with the workforce. The future workers, like the future citizens in a political democracy, do not have to buy their voting rights from the present holders. Hence the separation of the (A) Voting Rights into the (A.1.) Current Voting Rights and (A.2.) Future Voting Rights. It is the (A.1.) Current Voting Rights that are part of the bundle of Membership Rights attached to the functional role of currently working in the democratic firm. The (A.2.) Future Voting Rights would be assigned when the future becomes the present.

The second normative principle, here called the responsibility principle, is just the standard jurisprudential norm of assigning to people the legal responsibility for the results of their deliberate and intentional actions. The intentional actions of the people working in the firm produce the outputs by using up the raw materials, intermediate goods, and the services of the durable goods in the firm. In net terms, the revenue from the outputs minus the non-labor costs for the inputs is the net valued added which can be parsed as: wages + profits. That is the net value of the assets (outputs) and the liabilities (for non-labor inputs) that the people working in a firm are jointly de facto responsible for producing. Hence by the responsibility principle, they should legally appropriate those assets and liabilities and thus receive the net value added. Since they already receive the wages, the additional value accruing to the people in a democratic firm is the (B.1.a.) Current Profit Rights. Thus those rights would also be in the bundle of membership rights assigned as personal rights to the functional role of working in the firm. As one might expect, the (B.1.b) Future Profits Rights represent the future positive and negative products that would be assigned to the future workers who produce them.

Thus on the basis of the first principles of democracy and private property (responsibility), we have accounted for all the rights except the (B.2.) Net Asset Value rights.

Current workers will, to be sure, use up the capital services derived from the company’s assets and that is why they are held legally responsible for those liabilities, but we are now concerned with the rights to the net asset value. This value represents property assets and liabilities accumulated in the firm by production and exchange activities in the past.

The system of internal capital accounts, pioneered by the Mondragon cooperatives [Ellerman 1990], is the means of keeping track of that history in a democratic firm so that the net asset value is owed in varying amounts to current and past members. They contributed to that value through any membership fees paid in and through any profits (or losses) retained in the firm rather than being paid out (or assessed in the case of losses). These claims could be thought of as a form of “internal” debt (like a shareholder’s loan) subordinate to all other (external) debts. Indeed, the internal capital accounts should be interest bearing. Those net asset rights (B.2.) are property rights, not personal rights. One litmus test to distinguish personal and property rights is inheritability. If a member dies, the voting and profit rights (like political voting rights) do not pass to the person’s estate, but the internal capital account balance would be a debt of the company to the estate of the deceased member.

Parsing the rights in capitalist and democratic corporations

Thus we have seen how all the corporate ownership rights are rebundled and assigned in a democratic firm. The current voting and profit rights are bundled together as the membership rights attached to the functional role of working in the firm (in practical terms, usually after a certain probationary period) so the future voting and profit rights would go to future members, and the remaining net asset value rights are captured in the system of internal capital accounts held by the current members. The rights structure in the so-called “capitalist corporation” and the democratic corporation can now be compared point-by-point in the table.

One important thing to notice is that in the democratic firm, the whole notion of the “ownership” of the company has evaporated. The old debate between private and social ownership of companies has been reframed. It is precisely the application of the private property principle to the products of labor that entails the company (implementing that responsibility principle) cannot itself be property. The membership rights are personal rights, not property rights, so a democratic company cannot itself be property. Similarly a democratic town or municipality may own property but is not itself a piece of property.

Hence we have finally arrived at an analysis very different from the usual treatment of privately owned conventional firms versus worker cooperatives or democratic firms. The democratic firm is a democratic human organization, and it is quite muddled and misleading to describe it as a piece of property that is socially or commonly owned. And its “non-ownership” follows from the private property (responsibility) principle applied to the products of labor.”