Social Europe

politics, economy and employment & labour

  • Themes
    • Strategic autonomy
    • War in Ukraine
    • European digital sphere
    • Recovery and resilience
  • Publications
    • Books
    • Dossiers
    • Occasional Papers
    • Research Essays
    • Brexit Paper Series
  • Podcast
  • Videos
  • Newsletter

When capital relinquishes ownership

Bo Rothstein 25th June 2021

As the ownership of firms becomes transferred to algorithmically-controlled index funds, why not put their human employees in charge instead?

capital,ownership,employees,index funds
Bo Rothstein

History shows us nothing is forever. Sooner or later, most social systems bite their tails. The saying that each system contains the seeds of its own downfall seems quite true. Perhaps this is now the case with the system we have come to call capitalism—which can be understood as meaning that those who own the capital used in production also hold power over companies.

The Swedish Companies Act, for example, stipulates that those who sit on the board of a company must only have the interests of the owners in mind. This ownership interest is then superior to the consumer, employee and general interest. For this to work, of course, one thing is required—that there be owners. And it must also be possible to affirm, for those who represent them on the board, what the interests of these owners are.

Two problems have arisen. The first is that more than 80 per cent of share capital on the Swedish stock exchange is now controlled by ‘institutional’ owners, such as pension funds and many different equity funds. The situation is similar in most western countries. The absolute majority of those who have invested capital in these funds cannot be said to perceive themselves as owners of the companies concerned—even less to have opinions on how they should be organised and function.

The professional staff managing equity funds also generally do not have much knowledge of how companies should be run. Their role as ‘deputed owners’ is usually limited to involvement in appointing the people who sit on company boards—and the grounds on which they do so are usually unknown to those who have put their savings in their hands. Transparency and accountability are thus in practice minimal.


Our job is keeping you informed!


Subscribe to our free newsletter and stay up to date with the latest Social Europe content. We will never send you spam and you can unsubscribe anytime.

Sign up here

Index funds

The second problem is that these so-called actively-managed equity funds have been challenged by a new type, ‘index funds’. In a relatively short time these have become very large asset managers—a trend described by stock-market analysts as ‘explosive’. During the 2010s, the proportion of fund capital on the Swedish stock exchange managed by index funds increased from 8 to almost 20 per cent.

Internationally, by 2019 on European stock exchanges index funds held 39 per cent of fund capital and in the United States almost 50 per cent. A US-based index fund is now the second largest asset manager in the world and two others are, together, the largest owners of share capital on the Swedish stock exchange.

Index funds differ in two crucial ways from actively-managed funds. First, no considered decisions are made about which companies’ shares to buy. Instead, the investment strategy is deliberately broad and proportional to the majority of the large companies on the stock exchange. The development of capital is intended to follow the entire stock-exchange index—hence the name.

Secondly, index funds do not exercise any ownership power at all. These funds are characterised by very low fees and, among other things, they do not devote any resources to involvement in appointing members to boards. If equity funds in general can be said to be ‘faceless’ capital, index funds are ‘headless’: an algorithm is responsible for decisions about share purchases.

Sharply attacked

A few months ago, a relevant debate took place in a leading Swedish business newspaper (Dagens Industri). Representatives of certain Swedish actively-managed funds sharply attacked their index-funds counterparts over their lack of interest in the nomination committees which in practice appoint companies’ boards, claiming this showed irresponsibility on their part.

The growth and popularity of index funds however stems from their low fees—and, probably even more, from their having proved very successful financially. Most actively-managed equity funds, in which extremely well-paid stock-market specialists seek to invest where profitability is highest, perform worse than a random number generator. Over the past ten years, meanwhile, in the US stock market index funds have yielded higher returns than the average for actively-managed funds.

In a market as transparent as the stock market, all legal information about a company’s value and future return opportunities is already discounted in the prevailing share price. So statistically there are only three ways to beat the index: illegal ‘insider’ information, luck or clairvoyance.

Given existing trends, there are strong reasons to believe that the share of capital on the world’s stock exchanges held by index funds will continue to increase. But what will this increasing percentage of ‘headless’ ownership mean for our businesses and society at large?


We need your support


Social Europe is an independent publisher and we believe in freely available content. For this model to be sustainable, however, we depend on the solidarity of our readers. Become a Social Europe member for less than 5 Euro per month and help us produce more articles, podcasts and videos. Thank you very much for your support!

Become a Social Europe Member

One thing is clear: if nothing is done, given increasingly weak and uninterested owners, financial rewards for the business-leadership layer can only become more astronomical. They will have no strong counterweight of active owners against such rent-seeking.

Hiring capital

So if capital is increasingly abdicating de facto from governing companies, who will govern them? One possibility, of course, is their employees. Companies that are managed and/or owned by their employees have been studied empirically for four decades. Overall, such companies are doing very well financially and, especially, in terms of staff wellbeing and commitment.

The idea, found variously in Karl Marx and Milton Friedman, that the power of a company is based on the ownership of the capital used, is, as the ingenious American economist David Ellerman has shown, completely wrong. In a market economy, capital can hire (that is, employ) labour and then the power lies with capital. But in a market economy, those who want to start and run a company can equally rent (that is, borrow) the capital and then the working staff decide on production.

Index funds, increasingly in the ascendancy in modern economies, serve as lessors of capital to companies. The corporate-governance vacuum they reveal provides an opening to advance the conversation about the genuine democratisation of working life. The best candidate for stepping into that vacuum is the force of those who are actually governed day to day in our business enterprises—the white- and blue-collar employees in the workplace. 

Trade unions have been strangely ambivalent about taking on this challenge to date. New civil-society organisations which glimpse the potential of a more substantial economic democracy should also enter this conversation on the side of employees and help make it happen.

An earlier version of this article in Swedish was published in Dagens Nyheter

Bo Rothstein
Bo Rothstein

Bo Rothstein is professor of political science at the University of Gothenburg.

You are here: Home / Economy / When capital relinquishes ownership

Most Popular Posts

Visentini,ITUC,Qatar,Fight Impunity,50,000 Visentini, ‘Fight Impunity’, the ITUC and QatarFrank Hoffer
Russian soldiers' mothers,war,Ukraine The Ukraine war and Russian soldiers’ mothersJennifer Mathers and Natasha Danilova
IGU,documents,International Gas Union,lobby,lobbying,sustainable finance taxonomy,green gas,EU,COP ‘Gaslighting’ Europe on fossil fuelsFaye Holder
Schengen,Fortress Europe,Romania,Bulgaria Romania and Bulgaria stuck in EU’s second tierMagdalena Ulceluse
income inequality,inequality,Gini,1 per cent,elephant chart,elephant Global income inequality: time to revise the elephantBranko Milanovic

Most Recent Posts

transition,deindustrialisation,degradation,environment Europe’s industry and the ecological transitionCharlotte Bez and Lorenzo Feltrin
central and eastern Europe,unions,recognition Social dialogue in central and eastern EuropeMartin Myant
women soldiers,Ukraine Ukraine war: attitudes changing to women soldiersJennifer Mathers and Anna Kvit
military secrets,World Trade Organization,WTO,NATO,intellectual-property rights Military secrets and the World Trade OrganizationUgo Pagano
energy transition,Europe,wind and solar Europe’s energy transition starts to speed upDave Jones

Other Social Europe Publications

front cover scaled Towards a social-democratic century?
Cover e1655225066994 National recovery and resilience plans
Untitled design The transatlantic relationship
Women Corona e1631700896969 500 Women and the coronavirus crisis
sere12 1 RE No. 12: Why No Economic Democracy in Sweden?

Foundation for European Progressive Studies Advertisement

Discover the new FEPS Progressive Yearbook and what 2023 has in store for us!

The Progressive Yearbook focuses on transversal European issues that have left a mark on 2022, delivering insightful future-oriented analysis for the new year. It counts on renowned authors' contributions, including academics, politicians and analysts. This fourth edition is published in a time of war and, therefore, it mostly looks at the conflict itself, the actors involved and the implications for Europe.


DOWNLOAD HERE

Hans Böckler Stiftung Advertisement

The macroeconomic effects of re-applying the EU fiscal rules

Against the background of the European Commission's reform plans for the Stability and Growth Pact (SGP), this policy brief uses the macroeconometric multi-country model NiGEM to simulate the macroeconomic implications of the most relevant reform options from 2024 onwards. Next to a return to the existing and unreformed rules, the most prominent options include an expenditure rule linked to a debt anchor.

Our results for the euro area and its four biggest economies—France, Italy, Germany and Spain—indicate that returning to the rules of the SGP would lead to severe cuts in public spending, particularly if the SGP rules were interpreted as in the past. A more flexible interpretation would only somewhat ease the fiscal-adjustment burden. An expenditure rule along the lines of the European Fiscal Board would, however, not necessarily alleviate that burden in and of itself.

Our simulations show great care must be taken to specify the expenditure rule, such that fiscal consolidation is achieved in a growth-friendly way. Raising the debt ceiling to 90 per cent of gross domestic product and applying less demanding fiscal adjustments, as proposed by the IMK, would go a long way.


DOWNLOAD HERE

ILO advertisement

Global Wage Report 2022-23: The impact of inflation and COVID-19 on wages and purchasing power

The International Labour Organization's Global Wage Report is a key reference on wages and wage inequality for the academic community and policy-makers around the world.

This eighth edition of the report, The Impact of inflation and COVID-19 on wages and purchasing power, examines the evolution of real wages, giving a unique picture of wage trends globally and by region. The report includes evidence on how wages have evolved through the COVID-19 crisis as well as how the current inflationary context is biting into real wage growth in most regions of the world. The report shows that for the first time in the 21st century real wage growth has fallen to negative values while, at the same time, the gap between real productivity growth and real wage growth continues to widen.

The report analysis the evolution of the real total wage bill from 2019 to 2022 to show how its different components—employment, nominal wages and inflation—have changed during the COVID-19 crisis and, more recently, during the cost-of-living crisis. The decomposition of the total wage bill, and its evolution, is shown for all wage employees and distinguishes between women and men. The report also looks at changes in wage inequality and the gender pay gap to reveal how COVID-19 may have contributed to increasing income inequality in different regions of the world. Together, the empirical evidence in the report becomes the backbone of a policy discussion that could play a key role in a human-centred recovery from the different ongoing crises.


DOWNLOAD HERE

ETUI advertisement

Social policy in the European Union: state of play 2022

Since 2000, the annual Bilan social volume has been analysing the state of play of social policy in the European Union during the preceding year, the better to forecast developments in the new one. Co-produced by the European Social Observatory (OSE) and the European Trade Union Institute (ETUI), the new edition is no exception. In the context of multiple crises, the authors find that social policies gained in ambition in 2022. At the same time, the new EU economic framework, expected for 2023, should be made compatible with achieving the EU’s social and ‘green’ objectives. Finally, they raise the question whether the EU Social Imbalances Procedure and Open Strategic Autonomy paradigm could provide windows of opportunity to sustain the EU’s social ambition in the long run.


DOWNLOAD HERE

Eurofound advertisement

Eurofound webinar: Making telework work for everyone

Since 2020 more European workers and managers have enjoyed greater flexibility and autonomy in work and are reporting their preference for hybrid working. Also driven by technological developments and structural changes in employment, organisations are now integrating telework more permanently into their workplace.

To reflect on these shifts, on 6 December Eurofound researchers Oscar Vargas and John Hurley explored the challenges and opportunities of the surge in telework, as well as the overall growth of telework and teleworkable jobs in the EU and what this means for workers, managers, companies and policymakers.


WATCH THE WEBINAR HERE

About Social Europe

Our Mission

Article Submission

Membership

Advertisements

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641

Social Europe Archives

Search Social Europe

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Follow us

RSS Feed

Follow us on Facebook

Follow us on Twitter

Follow us on LinkedIn

Follow us on YouTube