Divine Right of Capital
This page is for quotes from the book The Divine Right of Capital (2003) by Marjorie Kelly
To judge by the current arrangement in corporate America, one might suppose capital creates wealth - which is odd, because a pile of capital sitting there creates nothing. Yet capital-providers (stockholders) lay claim to most of the wealth that public corporations generate. They also claim the more fundamental right to have corporations managed on their behalf. Corporations are believed to exist for one purpose alone: to maximize returns to shareholders. This principle is reinforced by CEOs, the Wall Street Journal, business schools, and the courts. It is the law of the land - much as the divine right of kings was once the law of the land. Indeed, "maximizing returns to shareholders" is universally accepted as a kind of divine, unchallengeable mandate.
Major public corporations have evolved into something new in civilization, structures more massive, more dominant in the world than our democratic forefathers dreamed possible. They left us little guidance on governing these institutions - the word "corporation" appears nowhere in the Constitution - because only a handful of American corporations existed when that seminal document was written. Washington and Jefferson governed a nation of farmers, in which most nonagricultural businesses were indeed "private," run out of the parlor, or in the barn, as part of the private household.
In the current narrative of the corporation, it works like this: A corporation exists to generate profit. Profit belongs to stockholders, but they leave part of it in the corporation to fund growth. So a portion (about a third) is paid out as dividends, and the rest is kept as retained earnings. Those earnings are generated by the income statement, and retained on the balance sheet, where they are added to shareholder equity. Equity is what stockholders initially contributed when they purchased shares from the company. And by the magical closed loop of accounting, equity grows, year after year, while stockholders never contribute another cent out of their pocket.
Ergo- Stockholders "create wealth" without lifting a finger.
We call this "return on equity," or ROE. It is designed to continue into infinity.