In 1762 the French philosopher Jean-Jacques Rousseau wrote his famous pamphlet The Social Contract. In this text he built upon the experiences of his native Geneva to try and create a political philosophy that encourages spreading power more equally around society for sovereign peoples around the world. For communities the size of a Swiss canton his idea of a single social contract might have worked very well indeed. But over the course of the last two-and-a-half centuries, we've learned that's not necessarily the case for nation states, let alone our current global superpowers and multinational corporations. We believe the social contract should first of all be implemented at the level of companies.
What is a company? What can it be? And what should it be? Nowadays these kinds of questions seem to be the exclusive domain of tax consultants and accountants. It wasn't always like this though. The word "company" itself suggests more high-minded motives like companionship and togetherness, the idea that it's better to take risks together than on your own.
Some echoes of these higher virtuous ideals can still be found in companies around the world. In East Asia for example, struggling business owners will often decide to suck up losses, rather than "lose face" by sacking loyal workers. In Europe, several local family businesses have managed to survive and thrive in their respective fields. In the United States, politicians for decades have extolled the virtues of the mom-and-pop shop on main street, traditionally seen as the anchor of American towns and the backbone of the economy.
Contrast this with the current state of the global food industry. Research by Dutch magazine De Groene Amsterdammer shows how the global supply of food commodities is increasingly dominated by only four major companies: adm, Bunge, Cargill and Louis Dreyfus. More than 70% of grain traded worldwide passes through their warehouses. On top of this, they're also heavily involved in the supply of coffee, sugar, rice, cotton, soy, meat, etc. But most importantly, they dominate the financial markets around these commodities.
Likewise, increasing consolidation in the tech industry has led to several recent scandals about data, privacy, and manipulation. Alas, every time it's discovered that the likes of Facebook and Google have trespassed on our privacy and civil liberties without our knowing consent, most of us throw our hands up in the air and say "well, what are you going to do?"
This level of centralization would fit a Soviet-style planned economy, not a self-proclaimed free market. No surprise then that some of the most compelling critics of this system are libertarian thinkers . And it must be said, their Perfect Libertarian Utopia does sound like an appealing alternative. In this realm, all social and economic problems are dealt with through contracts encoding mutual consent between free citizens. Government will only interfere when asked to mediate contractual disputes, or to protect basic freedoms like speech and assembly. Oh, and property. Because in Perfect Libertarian Utopia, protection of property is a basic right on the same level as freedom of speech.
We believe that on the whole this libertarian utopia is a worthy cause. But if all social relations could be turned into contracts, we see no reason to stop at property. Indeed, we believe that our current system of property relations can also be replaced by contracts between free citizens. And if the goal is to prevent a Soviet-style concentration of power, it is absolutely necessary to do so. Because there's already thousands of years of proof that our current system favours concentration of property, and concentrated property favours concentrated power.
However, there's also centuries of proof that suggests our concept of property is very hard to reform. But unlike earlier attempts at reform, our proposal for a new kind of ownership is focused specifically on shares in a company's ownership. The precedent for such a contractual approach to dealing with companies may be found in the law concerning securities. Securities are contracts based on an underlying asset, such as a stock or bond, that are traded on a market. Options are an example of a security where the owner of an options contract has the right to buy or sell an underlying asset for some fixed price at some time.
When an owner of a security believes that a company has violated the fairly narrow terms of the securities contract, they are entitled to sue. For example, investors recently sued Theranos for securities fraud on the basis that the company misled them about the its product and financials. This violated options contracts these shareholders had made with the company. But it shouldn't just be options holders who can enforce accountability by treating property like contracts. All shareholders should get this privilege of encoding their rights and obligations into the terms of ownership.
Replacing property titles with contracts leads to several practical benefits for every actor in the economy. Existing corporations would be able to protect themselves against activist shareholders and position their company away from a quarterly reporting cycle towards something longer term. Corporate directors would be able to buy themselves a bit of time and relief by writing these humane provisions into their corporation's ownership structure. Likewise, entrepreneurs would be better protected against hostile takeovers and unfair competition, allowing startups the time and space to grow to their full potential.
A key example of how a more contractual approach may be better for all companies, even big companies, may be found in the realm of private equity. Take Toys R' Us, a major international chain of toy stores. Several years ago, a consortium of private equity buyers bought a majority stake in the company, appointed their directors to the board, saddled the company with debt, and forced Toys R' Us to pay them a hefty fee for "consulting" services. The result was that despite Toys R' Us's still thriving business, the company was recently forced to declare bankruptcy. Several towns and villages have lost an anchor of their local economy, thousands of employees have lost their jobs, and the private equity owners have made a substantial profit. Had the owners of Toys R' Us had a contractual share agreement rather than property titles, one that had written in obligations to the communities, employees, and customers, none of this would have happened. A similar set of circumstances − even involving some of the same private equity firms − happened to the world-famous guitar maker Gibson, driving it towards its own bankruptcy.
Shares with incompatible terms would not be easily exchanged for each other. Increased friction in the buying and selling of shares due to these incompatibilities would put a natural break on our current situation of unfettered mergers and acquisitions. Absent the creation of specialized markets with fixed terms, the process by which financial capital is instantly and seamlessly transferred from one party to another would slow down significantly, creating a transaction cost that encourages reflection and compliance in the market.
Companies would be forced to explicitly express their values in a legally binding manner. This makes it transparent to consumers what they are actually buying from a company when they buy their products. Consumers would be able to evaluate how a company's actual values compare with those they espouse through manipulative advertisements and branding.
But it's not just consumers that would benefit. Companies would be able to draw up contracts that distribute risk between themselves and other stakeholders more fairly. Companies would then be encouraged to simplify existing complex mechanisms of ownerships. And by reducing the burden of complexity that hinders retail investors from participating in shareholder governance, more ordinary people would be able to claim ownership over the corporate actors in their society.
Finally, this proposal makes it more manageable to hold corporations and financial institutions accountable to the law. Increased friction and reduced liquidity make it easier to inspect transactions because they would be occurring at a slower rate. And with an especially punitive regulatory burden, shareholders may seek to write these provisions directly into the share contracts themselves. Doing so would give companies the ability to self-regulate in a meaningful way, as opposed to what they promise before government councilors and committees.
Using shareholding contracts instead of our antiquated system of property titles, every company would have to clearly define their own terms of ownership. When every company makes this exercise for themselves − small business or megacorporation, non-profit or cooperative − it will lead to a true Cambrian explosion of social contracts. Only in such a climate of diversity and experimentation might we discover the solutions that truly achieve Rousseau's stated goals: "What man loses by the social contract is his natural liberty and an unlimited right to everything he tries to get and succeeds in getting. What he gains is civil liberty and the ownership of all he possesses."