The Divine Right of Stockholders
Stockholders fund major public corporations--true or false?
False. Or, actually, a tiny bit true--but for the most part, massively false. What's intriguing is that we
speak as though it were entirely true: "I have invested in AT&T," we say, imagining AT&T as a steward of
our money, with a fiduciary responsibility to take care of it. In fact, "investing" dollars don't go to AT&T
but to other speculators. Equity "investments" reach a public corporation only when new common stock is
sold--which for major corporations is a rare event. Among the Dow Jones Industrials, only a handful have
sold any new common stock in thirty years. many have sold none in fifty years.
The stock market works like a used car market, as accounting professor Ralph Estes observes in Tyranny of the
Bottom Line. When you buy a 1993 Ford Escort, the money doesn't go to Ford, it goes to the previous owner.
Ford gets the buyer's money only when it sells a new car. Similarly, companies get stockholders money only
when they sell new common stock, which mature companies rarely do. According to figures from the federal
reserves and the Securities and exchange Commission, about 99 percent of the stock out there is "used stock".
That is, ninety-nine out of one hundred "invested" dollars are trading in the purely speculative market, and
never reach corporations.
So, what do stockholders contribute, to justify the extraordinary allegiance they receive? Very little. And
that's my point. Equity capital is provided by stockholders when a company goes public, and in occasional
secondary offerings later. But in the life of most major companies today, issuance of common stock represents
a distant, long-ago source of funds, and a minor one at that. What's odd is that it entitles stockholders to
extract most of the corporation's wealth--forever. Equity investors essentially install a pipeline, and
dictate that the corporation's sole purpose is to funnel wealth into it. The pipeline is never to be tampered
with and no one else is to be granted significant access (except executives, whose function is to keep it
flowing). The truth is, the commotion on Wall Street is not about funding corporations. It's about extracting
from them. The productive risk in building businesses is borne by entrepreneurs and their initial venture
investors, who do contribute real investing dollars to create real wealth. Those who buy stock at sixth or
seventh hand, or one thousandth hand, also take a risk--but it is a risk speculators take among themselves,
trying to outwit one another like gamblers. It has little to do with corporations, except this: Public
companies are required to provide new chips for the gaming table, into infinity.
Marjorie Kelly is Editor of Business Ethics: Corporate Social Responsibility Report,
PO Box 8439, Minneapolis, MN 55408, Phone 612/879-0695 Fax 612/879-0699.
This article is adapted and excerpted from The Divine Right of Capital.
Published Nov. 2001, by Berrett-Koehler Publishers.
Signed limited first edition copies of The Divine Right of Capital is available at