Chapter One
The Sacred Texts
THE PRINCIPLE OF WORLDVIEW
In the worldview of corporate financial statements,
the aim is to pay stockholders as much as possible,
and employees as little as possible.
I grew up with bombs in the house. Two, actually. They were part of myfather's collection of antique war implements: a motley assortment ofswords, masks, rifles, and these two shells—tall as a two-year-old child,standing upright on the long brick hearth in our basement. It wasn't untilmy dad died and my mother moved out—after eight children had grownup wrestling near those bombs—that we discovered one shell was live. Itcould have gone off any time.
These days I collect tamer antiques than my dad: old magazines,cobalt blue Fiestaware. Mostly I collect antique ideas. I'm fascinated bythe way an idea becomes antique, intrigued that a concept once consideredordinary can later seem absurd. I find it useful to keep antique ideasaround, as a reminder that how we see things today is not how the worldwill always see them. And conversely, ideas we think of as dead may turnout—like old bombs—to have an unexpected, lingering power.
The Great Chain Of Being
In my antique idea collection, a prized artifact is my 1914 Whitaker's Peerage,Baronetage, Knightage, and Companionage—a fat little volume of royalblue, with a dozen gold crowns stamped on its cover (showing the king'scrown as distinct from a duke's as distinct from an earl's, and so forth).It's a kind of phone book without phone numbers: a way for the Britishnobility to locate one another—in space (Winston Churchill residence:Admiralty House, Whitehall), and in order of noble precedence (grandsonof Seventh Duke of Marlborough). I think of it as a souvenir from alost world, not unlike a spent shell. Or a pot shard from Pompeii, datedthe year of the eruption. For 1914 was the year World War I would breakout, and it would leave five ancient imperial dynasties in its rubble.
The imperial descent began in 1908, when the Ottoman dynasty fellto revolutionary Young Turks. Within three years a revolution would topplethe Ch'ing Dynasty in China. By the end of the war in 1918, threeEuropean dynasties lay in the dust: the hapless Romanovs in Russia, theHabsburgs in Austria-Hungary, and the Hohenzollerns in Germany. Atwar's end, as a member of the Reichstag put it, crowns were simply "rollingabout the floor." The British throne would stand, but its imperial possessionswould soon break away to independence. Its aristocracy, as historianDavid Cannadine wrote, would continue its descent into "decline anddecay, disintegration, and disarray."
To the nobility in my 1914 Whitaker's, the coming devastation lay yetbehind a veil. They were still "the lords of the earth," still "conscious ofthemselves as God's elect." And they had Whitaker's to help them keepscore among themselves—showing who had the greater nobility. WhenAmericans think of the aristocracy—if we think of it at all—it is as avague lump of important personages, in which we differentiate a viscountfrom an earl no more easily than we might tell a paper birch from a shagbarkhickory. But Whitaker's Roll of the House of Lords was numbered inorder of precedence: from 1. The Prince of Wales; 2.-8. Princes and Archbishops;9.-29. the Dukes; 30.-54. the Marquesses; down through Viscounts,Bishops, and the long list of Barons, ending with 654. BaronSumner of Ibstone.
The list was more than preening: it was the visible symbol of one'splace in the cosmic diagram, a way of knowing who was above whom, andwho below, for that was how they pictured all of life. It was a world basedon a primary antique idea: the great chain of being. All life had its place inthis chain, which stretched vertically from the lowliest peasants upthrough the gentry and nobility to the king, who was highest of all (HisRoyal Highness) because he was just below God.
This picture of reality held pride of place for centuries, wrote JohnsHopkins University philosopher Arthur O. Lovejoy in The Great Chain ofBeing. Like any idea that serves as a base for a society's worldview, it wasless a formally expressed concept than an "unconscious mental habit."These beliefs, Lovejoy wrote, "which seem so natural and inevitable thatthey are not scrutinized," are most decisive of the character of an age.They are so deep as to be inaccessible, so pervasive as to be invisible. Forcenturies, society accepted the great chain of being, not as an idea but as adescription of reality itself.
* * *
Today, we prefer the Forbes 400, ranking individuals from one to fourhundred by relative worth. We may read in it the character of the corporateage.
Like aristocratic society, corporate society bases membership onproperty ownership. In Baron Sumner's era, land was the property thatmattered. Today property takes varied forms and is called wealth, orfinancial assets. So that's the lens through which the corporation viewsthe world: the lens of financial numbers, where it sees the numbers thatbelong to stockholders as the end point of the whole game. The financialstatements are a lens focused on wealth holders, and that lens distortswhat it sees—as did the lens of the great chain of being. Whitaker's lordsdid not see others as gentlemen like themselves. They saw commonersdestined to be ruled. As CEO of Scott Paper, "Chainsaw Al" Dunlap didnot see employees as members of the corporate society. He saw expensesto be cut.
Corporations believe their world of numbers is rational. They fail tosee the irrational bias in the way the numbers are drawn—much as thelords failed to see (or chose not to see) the bias in the great chain of being.A primary bias built into financial statements is the notion that stockholdersare to be paid as much as possible, whereas employees are to bepaid as little as possible. Income for one group is declared good, andincome for another group is declared bad.
Unpacking Biases in Financial Statements
This decree is held in place by the structure of the financial statements,which we might think of as the conceptual foundation of the corporateworldview. These statements reveal, to a remarkable degree, the unconsciousmental habits of the corporation. They merit a closer look.
The stripped-down structure of the income statement is this:
Profit = Revenue - Costs
We might begin by making a few things visible that are invisible here.In simple terms, there are two kinds of costs: labor costs and materials.People and objects. There are also two kinds of people: employee peopleand capital people. Instead of designating gains to one as costs and gainsto the other as income—which contains an invisible bias—we might designatethem both as income. So we may restate the equation:
Capital income = Revenue - (Employee income + Cost of materials)
There's also something invisible on the capital side: retained earnings—profitsnot given out as dividends but retained for the corporation's use.Thus we have:
Capital income + Retained earnings =
Revenue - (Employee income + Cost of materials)
Common algebra teaches us that we can draw an equation in differentways while retaining its essential meaning. We might, for example,draw it this way:
Employee income + Retained earnings =
Revenue - (Capital income + Cost of materials)
Using this income statement, a corporation would define its purpose—itsbottom line—as maximizing returns to employees. It would do so inpart by driving capital income down as low as possible. That's the natureof the equation, to reduce costs, and to increase profit. Note that in thisequation, capital income is relatively secure: it's a cost of doing businessthat must be paid. But it's also fixed, so if the corporation does well, capitaldoesn't share the gain. Employee income has been put at risk: if therearen't profits, employees don't get paid. But if the company does well,employees do well.
It might make more sense to draw income statements this way. Ifemployees were given incentives to cut costs and increase revenues—knowingthey'd pocket the gains—the company might become enlivened.Capital providers are in no position to increase revenues or cut costs, sogiving them incentives to do so makes little sense. It's also simply morelogical to lump capital providers with materials providers. Both are suppliers,people outside the daily workings of the company, providingresources for its use.
* * *
We might observe here the unconscious power of the equation, for by itsstructure it defines insiders and outsiders. Whoever gets lumped withmaterials becomes a commodity—an object conceptually outside the corporation,to be purchased at the lowest possible price, to be used to enrichthe bottom line of the insiders. In our redrawn income statement, capitalbecomes the outsider. Employees become the insiders.
An equation is simply an equation. We can draw it any way we like.But the way we draw it says a great deal about our worldview—and itunconsciously locks us into that view. Drawing it as we do today representsa choice: to view capital providers as those who are the corporation—andto view labor as a commodity.
* * *
The balance sheet reveals a similar capital-centric bias. Its structure is this:
Assets = Liabilities + Equity
The balance sheet is a funny beast in that it must balance. The twosides must be exactly equal. But in a way it makes sense: every asset acompany has is either owned outright (thus is represented by equity) orhas debt against it (and is represented by liabilities). Thus liabilities andequity added together equal assets.
Stockholders are represented on the balance sheet by equity, which issupposedly a reflection of what they own (in truth they own far more—thevalue of the corporation as a whole). But employees don't appear onthe balance sheet at all. They simply don't exist—much as commonersdid not exist in the Roll of the House of Lords. When a corporationlooks around and records everything it has of value (its assets), it doesn'tsee employees. It's commonly said, "Our employees are our greatest assets,"but this isn't true in accounting terms. If it were true, layoffs would beportrayed as a wholesale destruction of assets, rather than as an eliminationof pesky expenses.
In accounting terms, employees have no value. Money has value,objects have value, ideas (intellectual property) have value, even some airything called goodwill has value. Employees, by contrast, have a negativevalue: They appear on the income statement as an expense—and expensesare aimed always at a singular goal: to be reduced.
If it's the balance sheet that renders employees invisible, it's theincome statement that turns them into an enemy of the corporation. Thereason is simple: every dollar paid out to employees is a dollar that doesn'tgo to profits for stockholders. And common law (judge-made law) sayspublic companies must maximize returns to shareholders. Every time anemployee asks for overtime pay, or a raise, or benefits, he or she is acting asan enemy of the company's fundamental mandate.
Changing the Narrative
It doesn't have to be this way. For a moment, let's reimagine the incomestatement in a different design:
Capital income + Employee income =
Revenue - Cost of materials
Instead of viewing either labor or capital as a commodity, we've madethem both the bottom line. They're both insiders now—both consideredfull-fledged members of the corporate society, with a claim on profits.Now we have something that resembles a competitive internal market.We also have a natural partnership between stockholders and employees.Profit flows naturally to both—and the two parties must find a way todistribute it, presumably negotiating for it. The new design means employeeincome is put at risk. It also means employee gains are limitless.And it means employees are likely to start asking tough, market-basedquestions: Who contributed to the company's success recently? Whenwas the last time stockholders put any real capital in? How much havethey already made off their contribution?
Employees are not asking these questions today. The financial statementsdo not encourage them to do so. Nor does corporate governanceallow them a voice in income allocation, because they are defined as outsiders.
This business of insiders and outsiders is key. As cultural historianEdward Said notes, the fundamental tool of an imperialist order is turningthe natives into outsiders in their own land. "For the native," he wrotein Culture and Imperialism, "the history of colonial servitude is inauguratedby loss of the locality to the outsider." And because of that outsider's presence, "theland is recoverable at first only through the imagination."
Stories are at the heart of how we view the world, Said wrote, for "thepower to narrate, or to block other narratives from forming," is whatdefines culture. The great chain of being was the narrative of the oldworld, and implicit in it was the notion that all must accept their place, nomatter how low. The financial statements are the narrative of the corporation,and implicit in them is the notion that employee income must bekept in its place, that is, as low as possible. The concept of divine rightonce kept other social narratives from forming. Our own version of divineright—the mandate to maximize profits for shareholders—blocks othercorporate narratives from forming.
Financial statements are nothing more than a mental construct, apicture of reality that makes companies add and subtract in certain ways.But they exact a toll in flesh and blood. And that toll is rising. In the lastdecade and a half, the proportion of employees making poverty-level wageshas climbed substantially, and in the mid-1990s it stood at an alarming30 percent. That's almost one in three working people, making wagesthat can't adequately feed and clothe their families.
The problem isn't limited to low-wage employees. For most Americans,wages have been falling for decades. Between the late 1970s andmid-1990s, income declined for a depressing three out of five Americans.Ideas do have consequences.
Why Environmental Damage Is Invisible
Those consequences affect the community and the environment as well.That's a result of a second major bias built into the financial statements:The corporation aims to internalize all possible gains from the community, and toexternalize all possible costs onto the community. Costs placed on the corporationshow up on the income statement, and diminish the bottom line.That's bad. But costs placed on the community are invisible: the financiallens doesn't see them, so they are of no consequence in the corporateworldview.
Let's say Texaco drills in Ecuador—which it did for two decades. IfTexaco had to pay to clean up the environmental mess, that would be bad.Environmental remediation is expensive. Thus the logic of the incomestatement dictated that contaminated "produced water" wastes (waterbrought up in the process of drilling) were dumped untreated into theAmazons rivers and streams—in the astonishing amount of four milliongallons each day. The same logic dictated that toxic drilling muds wereburied untreated—though this virtually assured the destruction ofgroundwater aquifers. Aquifers, rivers, and streams are not assets of Texaco.They do not appear on the balance sheet, so their destruction neednot be written off. That destruction is invisible in the corporate lens.
That lens also fails to see the consequences for human and animallife: cattle dead with their stomachs rotted out, crops destroyed, streamsdevoid of fish, children with anemia because sources of protein have beendestroyed. "All during the dry season," a clinic doctor in the region toldThe Village Voice in 1991, "[children] come in here with pus streamingfrom their eyes and rashes covering their bodies from bathing in thewater."
Damage to the fabric of life happens offscreen, as it were. This allowsthe corporate worldview to maintain the myth that social issues are soft(not businesslike, not important), while financial issues alone are hard. Ifsomething shows up on the financial statements, it matters. If it doesn'tshow up, it doesn't matter. Translated into human terms, this means thatwhat affects stockholders is important; what affects everyone else is notimportant.
Saying this is the corporate worldview is not the same as sayingeveryone in business personally thinks this way. Individual managersmight be very caring, and indeed many are. But the lens of the financialstatements forces them to see, and to behave, in certain ways, regardless oftheir personal beliefs. The lens forces them to put aside their humanityand see in business terms—disregarding social costs if there are financial(that is, shareholder) gains at stake. It leads them to believe that it's naturaland correct to discriminate in favor of shareholders, and againstemployees and the community.
* * *
What is lost is at first recoverable only in the imagination, as Said noted.If we've never questioned the ideas implicit in the financial statements—neverimagined we could (horrors!) add and subtract in different ways—it'sbecause we don't think of these concepts as ideas. We think of them asreality.
The great chain of being, in its day, seemed like reality. It was a pictureof reality that seemed so natural and inevitable that it was not scrutinized.Its bias was so pervasive as to be invisible—as the bias towardstockholders remains today. We see it not only in the corporation, but intreaties like the North American Free Trade Agreement, which putsfinancial concerns at the core and puts labor and environmental concernsinto side accords. We see it in a business press that has trumpeted an eraof great prosperity, while one in three workers made a poverty-level wage.
Our mental habits take many bizarre (indeed, dangerous) forms,once we think to notice them: that company assets matter, while communityassets do not. That the people who work at the company every dayare outsiders, while those who never set foot in the place are insiders.Most of all, that this is the only way corporations can see the world. Thatthe corporation's current worldview is rational, natural, inevitable.
One hopes these notions turn out, some day, to be our own antiqueideas. Today they retain their invisible, almost mythological power. Welive with them like bombs on the hearth.
Excerpted from The Divine Right of Capital by Marjorie Kelly. Copyright © 2001 by Marjorie Kelly. Excerpted by permission. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Copyright © 2001 by Marjorie Kelly. All rights reserved.
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