Corporations don't have owners in the same way they used to. The most popular explanations for the unraveling relationship between conservatives and big business are political. Global corporations no longer recognize themselves as American or care about advancing the national interest. Executives oppose Donald Trump and donate to Democrats, while Republicans find their ranks filled increasingly by the working class. Capital has gone woke, advancing socially progressive causes at all costs.
All that likely plays a role. But beneath the political, and driving it, is a justified, if poorly articulated, panic among conservatives about a serious tear in the fabric of capitalism. Corporations no longer have owners.
Conservative respect for corporate decision-making assumes the existence of shareholders whose interests and incentives are decipherable, whose rights to control their property deserve deference, and whose pursuit of their self-interest is expected to produce results also in the public interest. In his canonical 1970 essay, The Social Responsibility Of Business Is to Increase Its Profits, Milton Friedman explained: In a free\u2010enterprise, private\u2010property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible.
When Friedman wrote in 1970, 75 percent of U.S. corporate stock was held in the taxable accounts of American investors. Today, only 25 percent is still held the old-fashioned way; foreign ownership has risen from 5 percent to 40 percent, often by sovereign wealth funds, and the balance sits in a wide variety of pension systems, retirement accounts, and nonprofit endowments. Those accounts tend not to hold actual shares in actual firms. Their assets are often passive investments in mutual funds and ETFs or, for the largest investors, stakes in hedge funds that themselves hold equities, even if just for a few milliseconds. For many small investors, 401(k) retirement accounts offer only passive options.
Who owns Apple, and who hired Tim Cook as CEO? Vanguard is the company's largest institutional holder, but that is not an owner. The investors on whose behalf Vanguard holds shares may be owners, but they often don't know it and they certainly don't act like it. Say Vanguard holds shares for a teacher pension fund. Is that fund an owner, or are the teachers, or are the taxpayers, who must meet their commitments to teachers regardless of the fund's value?
In short, Apple does not have owners, as Friedman meant the term. Or, put more broadly and precisely, the "ownership" of public companies today does not mean what ownership in a company typically once meant. The financial plumbing ensures that Apple's dividends eventually reach accounts in proportion to the shares held in those accounts, but that represents little of the return from owning Apple stock. Conversely, few who own Apple stock have ever conveyed their desires to their agent, Cook. Apple stock lives on a secondary market where traders pass it around in circles, creating paper gains dumped quickly into shares of other companies.
So when Apple chooses to lobby Texas on transgender issues, or to help China suppress protests, on whose behalf is it acting? The executives debating these questions don't know or care what the legal owners think. They are focused on their own politics, their reputations within the firm, and the likely response by prominent figures in media and the culture. Without owners, corporations cease to be an arena for private action and become just another front in political and cultural battles, on ground tailor-made for progressive victories.
Under these conditions, conservatives have neither a political nor a philosophical reason to respect and defend corporate prerogatives. The problem with the ESG fad is only partly that the ESG goals are bad for business and bad for America. It is mostly that the exercise is not corporate governance at all, but rather public policy-making by other means, lacking any democratic legitimacy.
Capitalism needs owners. We must find a new story to tell about what corporations are, who controls them, and for whose benefit they are run.
A good place to start might be more formally separating the concepts of operational control and financial benefit. This already occurs with many financial instruments: A bond, for instance, entitles its holder to cash flows from a firm, but not to any ongoing say in how the firm operates (other than in certain extreme cases). Some firms issue multiple classes of shares, allowing founders to remain in charge even as they sell off equity to raise cash. No laws of nature require that the investors holding claims to future profits also be the same people setting corporate policy or selecting the CEO.
If policy-makers move beyond that conceit, a range of reforms becomes possible. In one direction, certain classes of shareholders could be disqualified from exercising control. Passive asset managers, state pension funds, foreigners — all could make investments and earn returns without being given a say in how a corporation acts. Lest one think this incompatible with capitalism's unique capacity to generate innovation, consider that OpenAI (creator of the "ChatGPT" artificial-intelligence bot) is controlled by a nonprofit board.
Others not holding a traditional financial stake could be given a seat at the table. Founders could retain a role in perpetuity. Models of co-determination popular in some European countries grant workers a substantial role in governance, not because they own shares, but because they have at least as great a stake in the firm's success. The community in which a firm operates might likewise deserve consideration.
Broadly speaking, the founders and owners of closely held, private corporations continue to behave in the way a well-functioning system of capitalism expects and needs them to. But for widely held, public corporations, the set of actors legally entitled to exercise control bears little resemblance to the set that anyone would choose to put in charge for the sake of either economic growth or the common good. Fortunately, policy-makers do have a choice.
Oren Cass is the executive director of American Compass.