In 1976, Peter Drucker wrote a book ambitiously entitled The Unseen Revolution: How Pension Fund Socialism Came to America. It was one of his least successful books, and he later retitled it more modestly The Pension Fund Revolution. This was sort of plausible in that when he wrote it 25 per cent of US company equity was owned by pension funds (by 1990 it was 40 per cent), but wholly wrong that it betokened a revolution. It should have been called ‘pension fund capitalism’, to reflect the fact that the funds were instantly captured by the fund-management industry – trustees, fund managers, shareholder proxy advisory services and even hedge funds, which incomprehensibly pension funds are permitted to invest in and even worse lend shares to for voting purposes – to become, ironically, an integral part of the short-termist shareholder-value ecosystem that has distorted our economies, impoverished the 99 per cent and fostered the populism that now threatens our entire democracy.
But 50 years on, could something like Drucker’s pension fund revolution be on the cards today?
A couple of years ago, a second slim volume appeared under another alluring title: Citizen Capitalism: How a Universal Fund Can Provide Influence and Income to All. One of its three authors was the late, much lamented Lynn Stout, Cornell law professor and writer of the definitive and self-explanatory The Shareholder Value Myth (I wrote about it here).
Their proposal was in concept a simple one: ‘to respond to the crisis of declining American civic engagement, unity, and financial security’ by setting up a universal fund, voluntary and open to all citizens, that would assemble a portfolio of stocks, at the beginning chiefly from corporate and individual donations, and distribute the resulting dividends and other proceeds as income to members. The fund wouldn’t sell or trade its shares, and nor would citizen-shareholders, whose holdings would revert to the fund on their death.
Crucially, however, individuals would have the right to vote the shares held in the portfolio. Part of the point of the fund would be to build stable, long-term holdings for companies, at the same time providing incentives for individuals to vote their shares accordingly. This, they argue, would be a step towards liberating corporations from ‘the tyranny of shareholder value’, the better to serve the broader social interest. By making the voice of ordinary shareholders heard in the boardroom, citizen capitalism, they hoped, would empower ‘a new class of long-term, diverse shareholders who can change the direction of corporate America, making corporations more citizens’ servants – and less citizens’ masters’.
While modestly well received when it appeared, the book promptly disappeared from view at the end of 2019, blown away in the gale of panic unleashed by Covid. That might have been that. But as we have discovered, one of the most surprising qualities of Covid is its magical ability to turn things that were previously unthinkable into not only thinkable but eminently and urgently doable ones.
One such suddenly doable project is ‘levelling up’, or ‘refloating the middle classes’, as it would be in the US. While last year’s furloughs and grants of various kinds effectively functioned as emergency bungs to bail out some of the most disadvantaged in the system, these don’t remotely touch the longer-term income and other inequalities that the pandemic has brutally outed – and will need fixing in fairly short order if democratic capitalism is to have a future.
Right on cue, enter in the last few months the notion of ‘Universal Basic Capital’ – a national endowment that, picking up on citizen capitalism, would channel equity contributions from philanthropists and companies into a fund, roughly modelled on a sovereign wealth fund or Alaska’s Permanent Fund, for the benefit of individual citizens.
For proponents, UBC has several advantages over the more current idea of Universal Basic Income, being both more practical and in the long term more far-reaching – an unusually favourable combination. It’s more practical, politically and otherwise, both because the concept is already familiar from mutual and soveign funds, and, more importantly, it doesn’t require extra taxes or compete with other causes for existing funds. Moreover, as proponents as different as hedge-fund meister Ray Dalio and left-wing economist Joe Stiglitz can agree, if the fund were allotted equity stakes in companies bailed out during the pandemic, the public would rightly share in the upside potential of recovery in return for bearing the downside risk during the crisis. On the same grounds, how about it taking a small stake in start ups, too? Didn’t Nobel economist Herbert Simon estimate that 80 per cent ‘of the income we enjoy comes not from the efforts of living individuals or existing corporations, but from this shared inheritance’?
Universal capital could also be much more far-reaching than UBI in its effects, at least over time. This is because it goes with the grain of capitalism rather than fighting it. Thus it is not re-distributive (altering the distribution of wealth already created), as with UBI, but pre-distributive (permanently altering the basis of wealth creation in the first place). As it accumulates over time, the fund becomes a force for individual levelling up, which, at least in the active citizen capital model, would be reinforced as long-termist ownership and share voting begin to correct the dysfunctions of today’s corporate governance.
Finally, in so doing the fund would reorient the corporation away from its misguided and destructive obsession with the present and honour its most extraordinary feature, its ability – when properly managed – to function not only as a wealth creator in the here and now, but also ‘as a vehicle for the present generation to altruistically pass forward resources through time to benefit those who will live in the future’.
The cost would be small, the effects large, though gradual, and they ought to appeal to both right and left. As Dalio notes: ‘[The fund idea is] an odd duck that is neither capitalist nor socialist. And the fact that you can’t so easily label it is one of its more appealing aspects’. It should be on the agenda of any progressive party that has an interest in fairness and working to correct the short-termist bias of today’s corporate governance. Unfortunately, given the UK’s non-existent record of institutional innovation since the founding of the Open University in 1969, and the Labour Party’s crisis of timidity, it is unlikely to happen here. So the best we can hope is that it is taken up by President Biden’s policy wonks, or gains traction in the shape of the voluntary model of Stout et al, thus giving us something we can copy without having to look too brave about it.