Here is my response to the eight "Issues to Consider in Promoting OTC Reforms" archived at http://cog.kent.edu/CogStrategyConf6-8May2001/BinnsPaper.htm My response to each of the issues raised by David Binns are under the same eight headings he used as set out below:
1 Ownership Reforms vs. Negotiated Contracts
I do not believe that it "is necessary to overhaul the entire concept of private property rights". I agree that the "goals could be achieved through negotiated contracts as with BOOTs or similar mechanisms". My preferred approach is to use a tax incentive to provide investors with a bigger quicker return and profit with less risk by changing existing firms to an OTC. The tax incentive required is quite modest as set out in the Appendix of my book Democratising the Wealth of Nations http://cog.kent.edu/lib/TurnbullBook/TurnbullBook.htm and in my articles published in refereed academic journals, refer to:'Stakeholder Governance: A cybernetic and property rights analysis', Corporate Governance: An International Review, Blackwell, 5:1. pp. 11-23, January, 1997. http://papers.ssrn.com/sol3/paper.taf?ABSTRACT_ID=11355 This was selected for re-publishing in Corporate Governance: The history of management thought, R.I. Tricker, ed, Ashgate Publishing, 2000, London. Refer also to: 'Should Ownership Last Forever?', Journal of Socio-Economics, 27:3, pp. 341-363, 1998. http://papers.ssrn.com/paper.taf?abstract_id=137382
2. Surplus Value
This section is headed "Surplus Value" which is quite a different concept from "Surplus profits" discussed in the section and this may explain some of the concerns. Surplus value is all the cash generated by productive assets in excess of all costs except institutionally imposed transfer payments of interest and taxes. Surplus value includes all surplus profits but surplus profits can arise without any surplus value being produced. This odd situation can arise when an investment does not produce sufficient cashflows to pay back it costs but the operating surpluses are not produce until after the investment time horizon. Surplus profits only arise after the investment time horizon by definition.
I agree that "higher returns might be justifiable in successful companies to mitigate risk of failed investment elsewhere", but such higher returns do not require the capture of surplus profits. Surplus profits by definition arise AFTER the time the investor requires ANY return to provide the incentive to invest. The bigger the risk then the shorter the time so the point raised about "increased risk for entering developing markets" simply means that surplus profits can arise quicker. It can thus make the introduction of OTCs more urgent and valuable in avoiding developing countries exporting economic value and scarce foreign exchange earnings much more then they need to do so.
3. Transaction Costs
Contrary to the assertion that "transferring their ownership on a annual basis after 10 years would introduce significant transaction costs in OTCs, such costs would be trivial. All that is involved are book entries in the equity accounts of the company to apportion equity claims between the "investor" and "stakeholder" classes of shares.
However, I agree that there could be non trivial costs in re-capitalising OTCs through the formation of "offspring" corporations into which assets and management were transferred. However, I believe that these costs would be significantly less than the transaction costs and investment banker fees paid in mergers and acquisitions.
The cost of splitting off parts of firm into an offspring firm is incurred frequently with the Mondragon cooperatives. This is undertaken to avoid the dis-economies of scale by splitting firms to create an offspring company when the number of employees approaches 500. The Mondragon cooperatives have been found to be more efficient than investor firms.
Up until the middle of the 19th century all companies except those with a English Royal charter were all formed with a limited life and so required re-capitalisation. In Australia unincorporated limited partnerships in Queensland were required to be re-capitalised every seven years to allow minority investors to get their money back if required and for controlling investors to change management as required. Investors would not put their funds under the control of managers who did not do the right thing by them.
4. Problems With BOOTs
This issues raises the problem of controlling shareholders stripping assets out of corporations in which they have a shrinking equity as occurs at the end of leasehold investments. This should not be problem because:
(i) Of the introduction of a watchdog board to veto any related party transactions that strip value from the company. The World Bank has posted my article on watchdog boards on its Anti-corruption strategies web page at http://www.worldbank.org/devforum/files/struc-and-eth.pdf Refer also to Corporate Charters with Competitive Advantages', St. Johns Law Review, St. Johns University, New York City, 74:44, pp. 101159, Winter, 2000. http://papers2.ssrn.com/paper.taf?ABSTRACT_ID=245691
(ii) The executives, managers and employees are beneficiaries of the ownership transfer. They have deferred and escalating equity interest (ie the are "deferred residual claimants") and they are in control. As managers they have the capability and incentive to thwart any asset stripping by influential investors. Indeed, the opposite could be the problem with the employees nurturing assets so as not to reduce their productive capacity until later in their operating life when they personally obtain a larger equity interest!
(iii) Any controlling shareholder will obtain pro-rata rights to take up equity in successor "offspring" corporations that take over the operations of the progenitor company and so any assets stripping would also strip value from their rights to acquire equity in successor enterprises.
5 Ownership Distribution Among Stakeholders
It makes political and distributional sense to distribute ownership as widely as possible. But is makes good business and practical sense to limit distribution to stakeholders who are noted in the records of the company such as its employees, customers, suppliers including those providing infrastructure services in the community. Not only are all these people stakeholders of record but the market value of their custom is in the books of the company to allow stakeholder equity to be distributed pro-rata to the economic value. Stakeholders would be issued points according to their customer like "fly-buys" that voters could redeem into stakeholder shares.
It would be my preference not to allow any body corporate ownership of stakeholder shares to allow citizens with a vote where the enterprise is located to enrich and reclaim democracy. This would require corporate suppliers and customers to in turn distribute the stakeholder points to their employees. Organisations providing "infrastructure services" would distribute their patronage of stakeholder equity in such a manner. It is by this means that citizens would obtain both local ownership and control of corporations and so integrate them into local political processes instead of corporations being indirectly controlled through laws made by governments in various jurisdictions. At present large corporations are poorly accountable to any one when institutional investors are their major shareholders as institutions are beholden to corporations to expand their business.
6. Ownership Is Often impermanent, Not Perpetual
This point re-inforces the point that ownership is never for ever and should never be for ever! OTCs provide a way of institutionalising this point for corporations in a constructive way by involving the individuals on who any firm depends for its existence in the ownership and control of the firm. The arguments are developed in detail in my articles:'Stakeholder Co-operation', Journal of Co-operative Studies, Society for Co-operative Studies, 29:3, pp 18-52, (no.88), Manchester, January, 1997. http://papers.ssrn.com/sol3/papers.cfm?cfid=196284&cftoken=90592070&abstract_id=26238 and 'Stakeholder Governance: A cybernetic and property rights analysis', Corporate Governance: An International Review, Blackwell, 5:1. pp. 11-23, January, 1997. http://papers.ssrn.com/sol3/paper.taf?ABSTRACT_ID=11355
As to the question "To what extent might the OTC diminish the liquidity of markets?" the answer is that it would substantially increase liquidity. Instead of around 80% of cashflows being re-invested within the firm and not being exposed to market forces most corporate cashflows would be distributed through the market for investor to re-invest in offspring or other entities. This is how OTCs greatly increase the efficiency of corporate capitalism as set out in my very early articles such as : 'Eliminating Foreign Ownership', Growth, Committee for the Economic Development of Australia, No. 26, Melbourne, pp. 1-13, December, 1973. 'Controlling World Corporations', Jassa, Australian Society of Security Analysts, January/February No. 1, pp. 21-25,.1974, 'Making the Securities Industry a Growth Business', Australian Stock Exchange Journal, February, pp. 34/5 & 40, 1974. 'Multinationals: Fading out with a Profit', Development Forum, United Nations, Geneva, p.3, June 1974.
New investors would purchase investment shares as they should do now on the expected present value of future cashflows. However, many indulge in speculation to create considerable volatility on the stock exchange. I expect that OTCs would help dampen out such volatility by introducing a realty check on future expectations.
New employees would obtain their pro-rata share of stakeholder equity just the same as long standing employees if stakeholder equity was distributed on a pro-rata basis as described in point 5. All other participating stakeholders would likewise obtain their pro-rata equity within and between stakeholder categories.
7. Ownership Is Often Hard To Track
OTCs would replace the practice of issuing stock options to some greater or smaller extent depending upon each individual situation. This is because all employee in an OTC obtain deferred equity entitlements in a manner provided by options but without the need to contribute money! Options do not provide rights to take up new equity until exercised whereas stakeholder equity could and this could be quite valuable from the need to form "offspring" enterprises to develop intellectual and other property.
With stakeholder shares displacing options to some degree the need to track ownership should be reduced. But I don't really understand the problem of it being hard to track ownership rights. Airlines keep track of fly buy points, firms keep track or share plan entitlements and pension plans. I would have thought that e-commerce is making this easier all the time.
8. Might OTCs Be Most Appropriate For Privatisation Transactions Or Foreign Direct Investment?
I invented the OTC concept specifically as a technique for Australia to attract more foreign investment but on the basis that over time there was less foreign ownership as detailed in one of my very first article: 'Avoiding Foreign Takeover Controls and Ownership', Journal of the Institute of Directors in Australia, February, 1973. It was developed in the articles mentioned in point 6 above and my very first academic article: 'Time Limited Corporations', Abacus: A Journal of Business and Accounting Studies, Sydney University Press, 9:1, pp. 28-43, June, 1973. This focus followed in later articles such as: 'Fading Out with a Profit-Planned Corporate Obsolescence', The Canadian Forum, 55:651, June, pp. 14-16, 1975.
When former socialist countries began to transform I wrote articles proposing that OTCs and CLBs provided a way to gradually capitalise socialism to avoid "shock therapy". Refer to 'Re-Inventing Corporations', Journal of Employee Ownership Law and Finance, 2:4, Fall, 1990, pp. 109-136, National Centre for Employee Ownership, San Francisco. Translated in Czech and published in Podniková Organizace, Prague, 1991 and an extended version of 'Re-inventing Corporations', Human Systems Management, IOS Press, 10:3, pp. 169-186, 1991. 'Flaws and Remedies in Corporatisation and Privatisation', Human Systems Management, IOS Press, 12:3, pp. 227-252, Netherlands, 1993. 'Democratic Capitalism; Self-financing local ownership and control', Human Systems Management, IOS Press, 12:4, pp. 333-348, Netherlands, 1993.
By applying the concept to domestic as well as foreign firms discrimination is avoided between the two. This avoids problems with international agreements and economists who seek "level playing fields" for market forces.
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