Steward Ownership, Wealth Inequality, and LPE

The vital role of law in both actively creating and potentially mitigating the current crisis of wealth inequality is not adequately acknowledged. The blog post particularly examines the potential contributions of the field of Law and Political Economy (LPE) and the German concept of Steward Ownership (Verantwortungseigentum) in this context.

The Inequality Crisis

Wealth inequality has been on the rise across the globe for several decades now. Today, the world’s richest 1 percent owns around 45 percent of all the world’s wealth (defined as marketable value of assets minus debts), whereas the poorest 50 percent own just around 1 percent of the other half. Even though some countries have reduced the numbers of people living in extreme poverty due to increased incomes, many economic gaps have continued to grow because the very richest amass almost incomprehensible levels of wealth. Needless to say, private ownership (and inheritance) of companies plays a crucial role in this.

To give just one concrete example: In order to reach the wealth of Elon Musk, the average U.S. resident would need to work just about three million years (at the average annual wage of approximately 74.000 $) – which is around ten times longer than the entire existence of the species homo sapiens. In Germany, according to some studies, just two families own more wealth than the poorer half of the German population.

It seems reasonable to call this an “inequality crisis”. Not only because it is blatantly unjust, but also because it is a threat to democracy and society as a whole. To quote the first sentence of Thomas Piketty’s second great book, “Capital and Ideology”: “Every human society must justify its inequalities: reasons must be found because, without them, the whole political and social edifice is in danger of collapsing.” What do Steward Ownership and LPE have to offer in this regard?

Steward Ownership…

Steward Ownership is an alternative, less capitalistic form of private company ownership. This concept has become particularly prominent in Germany in recent years, and is also gaining popularity throughout the EU and across the globe. It is characterized by three structural principles. Firstly, it is property not in the sense of private capital, but in the sense of unrestricted entrepreneurial control. Consequently, the so-called “Stewards” hold their property only for a limited period of time in order to pass it on free of charge as soon as their entrepreneurial involvement ends. In this way, the control always lies with people who actually engage in the company.

Secondly, the entire value created by the company belongs exclusively and irrevocably to the corporation. Private consumption of the corporation’s assets by the Steward Owners – in whatever form – is prevented by a comprehensive so-called “asset lock”, even during conversion or liquidation. Thirdly, the reason for the existence of a company in Steward Ownership is its self-chosen entrepreneurial purpose; producing profits is only a means to this end. This structural “profit-contentment” is remarkable, because – as we will see – it challenges conventional economic logic.

Under current German law (as well as in other jurisdictions), Steward Ownership can only be implemented in a very approximate way and only using elaborate legal constructions. However, after remarkable lobby work, the governing coalition has agreed to introduce a new legal form specifically tailored for this concept: A corporation in Steward Ownership.

…and its Discontents

The German government’s plans to introduce a new legal form for Steward Ownership has been the subject of intense criticism from multiple directions. In addition, Steward Ownership is also predominantly rejected by German legal scholarship. The academic debate about the concept has been exceptionally heated from the outset, and at times downright polemical. Remarkably, the rather obvious connection between Steward Ownership and inequality played almost no role in this debate whatsoever; one exception being an article by Johanna Croon-Gestefeld.

My main proposition is this: One of the most important reasons for this broad rejection of Steward Ownership in German legal scholarship is that it is perceived as an attack on the dominant understanding of prosperity, which Marija Bartl has called the “imaginary of privatized prosperity”. More precisely, it is perceived as an attack on the prime agent of that imaginary, which is the corporation. To make it even worse, this perceived attack can only be executed because it unduly uses corporate law as an instrument to bring about social progress.

There is a lot to unpack and justify in this proposition. I will focus on the role of profits here. As I have indicated already, Steward Ownership does not consider the mere making of profits a sufficient contribution to the common good. Instead, the societal contribution of companies lies precisely in the pursuit of their purpose. On top of that, Steward Ownership appropriates no profits whatsoever to the (steward) owners of the company. Due to the aforementioned “asset lock”, they only receive salaries in return for their labor.

Legal scholarship has approached these ideas with great reluctance. That comes as no real surprise, because according to the classic “division of labor” between public and private law, company law serves – not only, but – primarily profits. More precisely, its’ most important task is to protect the shareholders and reduce their agency costs, because the shareholders are perceived as “owners” who are entitled to any profits. How these profits have been achieved is of little interest for “core” company law, because the common good should be promoted by public law.

The same is true for the fate of profits: If anything, they are meant to be re–distributed via tax law and the social security system as a whole. The fact that Steward Ownership dares to reconceptualize the ownership of corporations, the role of profits and the primary, so to say pre-distribution of profits is obviously conceived as an egregious instrumentalization of corporate law, in the sense that it goes far beyond any acceptable “substantive approach”.

LPE Perspectives

I argue that this criticism would not have had to be so fundamental if mainstream legal scholarship had taken into consideration certain LPE perspectives and insights that I will now put up for discussion. Shareholders are not the “owners” of the company. Instead, the company belongs exclusively to the corporation, which is a separate legal person. Shareholders only own shares, which are a bundle of specific rights in relation to the corporation.

This might sound rather apparent – like something we don’t need any specific LPE-perspective for. But it is not generally accepted (one example being the broadly undisputed jurisdiction of the German Federal Constitutional Court concerning the so-called “Anteilseigentum” (share ownership), namely in the “Mitbestimmungsurteil” (codetermination-judgment) from 1979). And what’s more important: It is not at all trivial. Because once we accept the “absence of any property nexus” (Paddy Ireland) between shareholders and the company’s assets, it is increasingly difficult to legitimize the fact that the corporation on principle attributes the profits generated in that company to the shareholders.

Naturally, legal scholarship has many (economic) arguments in store to justify this pre-distribution of profits without (explicitly) reverting to any “property nexus”. Most importantly, shareholders are considered risk-bearing investors and so-called “residual claimants” (which basically means they are last in line when it comes to claims on the corporation’s profits). However, LPE-scholars call these arguments into question, too.

First of all, they do not principally consider shareholders “investors” of the company. Shareholders might be investors, but only if they have issued their shares directly from the company and not – as it is normally the case – on the “secondary market”. Secondly, shareholders do not principally bear a higher risk than other stakeholders. The regular diversified portfolio of shares is commonly seen as a source of steady income, not as a speculative financial instrument. Third, considering shareholders the only “residual claimants” of operating companies is misleading because other stakeholders make firm-specific investments too, which in fact cannot always be protected through explicit contracting – the most obvious example being workers.

Once we take these criticisms into due consideration, what becomes apparent – even if we don’t agree with every single argument – is the fact that the specific way in which the traditional corporation collectivizes property has nothing “natural” to it. In fact, these LPE-perspectives cast doubt on the very differentiation between a (seemingly) neutral pre-distribution via corporate law on the one hand and a (too) substantive re-distribution especially via tax law on the other hand. Maybe they should bring up the question whether the hierarchical, temporal ordering of this widely accepted binary might be rather deceptive than enlightening.

Outlook

One question remains: How can Steward Ownership be perceived as an attack by certain interest groups if it only offers an additional alternative, which has no effect on existing corporation law whatsoever? I think the main reason brings us back to what Piketty wrote: It is the fact that very few things are as fiercely defended as privileges whose holders fear that they cannot properly justify them. They desperately want to avoid setting foot onto the slippery communicative slope where these privileges could be questioned at some indefinite point in the future.

This same, lingering fear, that any discussion about concepts like Steward Ownership might eventually lead to the “abolish[ment of] all property rights or at least all corporate ownership of assets” (Marietta Auer) is highly influential in the legal debate, too. My last plea is that we make ourselves aware of the charged relationship between this attitude and the fact that Article 14 of the German Grundgesetz explicitly calls on the legislator to constantly update the property regime in order to incorporate societal change. The German constitution is not an obstacle in this case, but much rather an invitation. In fact, the democratic legislator has a responsibility to provide “corporate infrastructure”, that is morally plausible and functional legal forms, which are – by definition – not just economic, but social institutions.