by Majorie Kelly
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.
More and more people have the sense today that the economic system is rigged. In fact, according to a Marketplace and Edison poll, 71 percent of Americans believe the economic system is rigged against them. What the system is rigged to benefit is capital interests. That bias in favor of capital begins deep in the system. In my 2001 book The Divine Right of Capital, I liken capital bias to the divine right of kings. In the below excerpt, I unpack how a bias toward capital — and against employees and the environment — is embedded in the core lens of the corporate system: financial statements. It’s excerpted with permission from Berrett-Koehler Publishers.
I grew up with bombs in the house. Two, actually. They were part of my father’s collection of antique war implements: a motley assortment of swords, 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 until my dad died and my mother moved out — after eight children had grown up wrestling near those bombs — that we discovered one shell was live. It could 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 by the way an idea becomes antique, intrigued that a concept once considered ordinary can later seem absurd. I find it useful to keep antique ideas around, as a reminder that how we see things today is not how the world will always see them. And conversely, ideas we think of as dead may turn out — 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 royal blue, with a dozen gold crowns stamped on its cover (showing the king’s crown 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 British nobility to locate one another — in space (Winston Churchill residence: Admiralty House, Whitehall), and in order of noble precedence (grandson of Seventh Duke of Marlborough). I think of it as a souvenir from a lost world, not unlike a spent shell. Or a pot shard from Pompeii, dated the year of the eruption. For 1914 was the year World War I would break out, and it would leave five ancient imperial dynasties in its rubble.
The imperial descent began in 1908, when the Ottoman dynasty fell to revolutionary Young Turks. Within three years a revolution would topple the Ch’ing Dynasty in China. By the end of the war in 1918, three European dynasties lay in the dust: the hapless Romanovs in Russia, the Habsburgs in Austria-Hungary, and the Hohenzollerns in Germany. At war’s end, as a member of the Reichstag put it, crowns were simply “rolling about the floor.” The British throne would stand, but its imperial possessions would soon break away to independence. Its aristocracy, as historian David Cannadine wrote, would continue its descent into “decline and decay, disintegration, and disarray.”
To the nobility in my 1914 Whitaker’s, the coming devastation lay yet behind a veil.
To the nobility in my 1914 Whitaker’s, the coming devastation lay yet behind a veil. They were still “the lords of the earth,” still “conscious of themselves as God’s elect.” And they had Whitaker’s to help them keep score among themselves — showing who had the greater nobility. When Americans think of the aristocracy — if we think of it at all — it is as a vague lump of important personages, in which we differentiate a viscount from an earl no more easily than we might tell a paper birch from a shagbark hickory. But Whitaker’s Roll of the House of Lords was numbered in order 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. Baron Sumner of Ibstone.
The list was more than preening: it was the visible symbol of one’s place in the cosmic diagram, a way of knowing who was above whom, and who below, for that was how they pictured all of life. It was a world based on a primary antique idea: the great chain of being. All life had its place in this chain, which stretched vertically from the lowliest peasants up through the gentry and nobility to the king, who was highest of all (His Royal Highness) because he was just below God.
This picture of reality held pride of place for centuries, wrote Johns Hopkins University philosopher Arthur O. Lovejoy in The Great Chain of Being. Like any idea that serves as a base for a society’s worldview, it was less a formally expressed concept than an “unconscious mental habit.” These beliefs, Lovejoy wrote, “which seem so natural and inevitable that they 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. For centuries, society accepted the great chain of being, not as an idea but as a description of reality itself.
Today, we prefer the Forbes 400, ranking individuals from one to four hundred by relative worth. We may read in it the character of the corporate age.
The financial statements are a lens focused on wealth holders, and that lens distorts what it sees — as did the lens of the great chain of being.
Like aristocratic society, corporate society bases membership on property ownership. In Baron Sumner’s era, land was the property that mattered. Today property takes varied forms and is called wealth, or financial assets. So that’s the lens through which the corporation views the world: the lens of financial numbers, where it sees the numbers that belong to stockholders as the end point of the whole game. The financial statements are a lens focused on wealth holders, and that lens distorts what it sees — as did the lens of the great chain of being. Whitaker’s lords did not see others as gentlemen like themselves. They saw commoners destined to be ruled. As CEO of Scott Paper, “Chainsaw Al ” Dunlap did not see employees as members of the corporate society. He saw expenses to be cut.
Corporations believe their world of numbers is rational. They fail to see the irrational bias in the way the numbers are drawn — much as the lords 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 stockholders are to be paid as much as possible, whereas employees are to be paid as little as possible. Income for one group is declared good, and income 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 corporate worldview. These statements reveal, to a remarkable degree, the unconscious mental habits of the corporation. They merit a closer look.
There are also two kinds of people: employee people and capital people.
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 people and capital people. Instead of designating gains to one as costs and gains to the other as income — which contains an invisible bias — we might designate them 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 — profits not 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 different ways 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 — its bottom line — as maximizing returns to employees. It would do so in part by driving capital income down as low as possible. That’s the nature of the equation, to reduce costs, and to increase profit. Note that in this equation, capital income is relatively secure: it’s a cost of doing business that must be paid. But it’s also fixed, so if the corporation does well, capital doesn’t share the gain. Employee income has been put at risk: if there aren’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. If employees were given incentives to cut costs and increase revenues — knowing they’d pocket the gains — the company might become enlivened. Capital providers are in no position to increase revenues or cut costs, so giving them incentives to do so makes little sense. It’s also simply more logical to lump capital providers with materials providers. Both are suppliers, people outside the daily workings of the company, providing resources for its use.
[I]ts structure it defines insiders and outsiders.
We might observe here the unconscious power of the equation, for by its structure it defines insiders and outsiders. Whoever gets lumped with materials becomes a commodity — an object conceptually outside the corporation, to be purchased at the lowest possible price, to be used to enrich the bottom line of the insiders. In our redrawn income statement, capital becomes 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 it unconsciously locks us into that view. Drawing it as we do today represents a choice: to view capital providers as those who are the corporation — and to 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 two sides must be exactly equal. But in a way it makes sense: every asset a company has is either owned outright (thus is represented by equity) or has debt against it (and is represented by liabilities). Thus liabilities and equity added together equal assets.
But employees don’t appear on the balance sheet at all.
Stockholders are represented on the balance sheet by equity, which is supposedly a reflection of what they own (in truth they own far more — the value of the corporation as a whole). But employees don’t appear on the balance sheet at all. They simply don’t exist — much as commoners did not exist in the Roll of the House of Lords. When a corporation looks around and records everything it has of value (its assets), it doesn’t see 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 be portrayed as a wholesale destruction of assets, rather than as an elimination of pesky expenses.
In accounting terms, employees have no value. Money has value, objects have value, ideas (intellectual property) have value, even some airy thing called goodwill has value. Employees, by contrast, have a negative value: They appear on the income statement as an expense — and expenses are aimed always at a singular goal: to be reduced.
If it’s the balance sheet that renders employees invisible, it’s the income statement that turns them into an enemy of the corporation. The reason is simple: every dollar paid out to employees is a dollar that doesn’t go to profits for stockholders. And common law (judge-made law) says public companies must maximize returns to shareholders. Every time an employee asks for overtime pay, or a raise, or benefits, he or she is acting as an 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 income statement in a different design:
Capital income + Employee income =
Revenue − Cost of materials
Instead of viewing either labor or capital as a commodity, we’ve made them both the bottom line. They’re both insiders now — both considered full-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 to distribute it, presumably negotiating for it. The new design means employee income is put at risk. It also means employee gains are limitless. And it means employees are likely to start asking tough, market-based questions: Who contributed to the company’s success recently? When was the last time stockholders put any real capital in? How much have they already made off their contribution?
Employees are not asking these questions today. The financial statements do not encourage them to do so. Nor does corporate governance allow them a voice in income allocation, because they are defined as outsiders.
This business of insiders and outsiders is key.
This business of insiders and outsiders is key. As cultural historian Edward Said notes, the fundamental tool of an imperialist order is turning the natives into outsiders in their own land. “For the native,” he wrote in Culture and Imperialism, “the history of colonial servitude is inaugurated by loss of the locality to the outsider.” And because of that outsider’s presence, “the land is recoverable at first only through the imagination.”
Stories are at the heart of how we view the world, Said wrote, for “the power to narrate, or to block other narratives from forming,” is what defines culture. The great chain of being was the narrative of the old world, and implicit in it was the notion that all must accept their place, no matter how low. The financial statements are the narrative of the corporation, and implicit in them is the notion that employee income must be kept in its place, that is, as low as possible. The concept of divine right once kept other social narratives from forming. Our own version of divine right — the mandate to maximize profits for shareholders — blocks other corporate narratives from forming.
But they exact a toll in flesh and blood.
Financial statements are nothing more than a mental construct, a picture 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 last decade and a half, the proportion of employees making poverty-level wages has climbed substantially, and in the mid-1990s it stood at an alarming 30 percent. That’s almost one in three working people, making wages that 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 and mid-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 to externalize all possible costs onto the community. Costs placed on the corporation show up on the income statement, and diminish the bottom line. That’s bad. But costs placed on the community are invisible: the financial lens doesn’t see them, so they are of no consequence in the corporate worldview.
Let’s say Texaco drills in Ecuador — which it did for two decades. If Texaco had to pay to clean up the environmental mess, that would be bad. Environmental remediation is expensive. Thus the logic of the income statement dictated that contaminated “produced water” wastes (water brought up in the process of drilling) were dumped untreated into the Amazon’s rivers and streams — in the astonishing amount of four million gallons each day. The same logic dictated that toxic drilling muds were buried untreated — though this virtually assured the destruction of groundwater aquifers. Aquifers, rivers, and streams are not assets of Texaco. They do not appear on the balance sheet, so their destruction need not be written off. That destruction is invisible in the corporate lens.
That lens also fails to see the consequences for human and animal life: cattle dead with their stomachs rotted out, crops destroyed, streams devoid of fish, children with anemia because sources of protein have been destroyed. “All during the dry season,” a clinic doctor in the region told The Village Voice in 1991, “[children] come in here with pus streaming from their eyes and rashes covering their bodies from bathing in the water.”
If something shows up on the financial statements, it matters.
Damage to the fabric of life happens offscreen, as it were. This allows the corporate worldview to maintain the myth that social issues are soft (not businesslike, not important), while financial issues alone are hard. If something shows up on the financial statements, it matters. If it doesn’t show up, it doesn’t matter. Translated into human terms, this means that what affects stockholders is important; what affects everyone else is not important.
Saying this is the corporate worldview is not the same as saying everyone in business personally thinks this way. Individual managers might be very caring, and indeed many are. But the lens of the financial statements forces them to see, and to behave, in certain ways, regardless of their personal beliefs. The lens forces them to put aside their humanity and 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 natural and correct to discriminate in favor of shareholders, and against employees 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 — never imagined we could (horrors!) add and subtract in different ways — it’s because we don’t think of these concepts as ideas. We think of them as reality.
The great chain of being, in its day, seemed like reality. It was a picture of reality that seemed so natural and inevitable that it was not scrutinized. Its bias was so pervasive as to be invisible — as the bias toward stockholders remains today. We see it not only in the corporation, but in treaties like the North American Free Trade Agreement, which puts financial concerns at the core and puts labor and environmental concerns into side accords. We see it in a business press that has trumpeted an era of 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 community assets do not. That the people who work at the company every day are 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. That the corporation’s current worldview is rational, natural, inevitable.
One hopes these notions turn out, some day, to be our own antique ideas. Today they retain their invisible, almost mythological power. We live with them like bombs on the hearth.