The Economics of Jesus

I believe that Christ’s gospel is as much an economic ideal as it is a construct for defining proper behavior. If we’re to become the people Christ intended, we’ll not only feed the hungry, clothe the naked and heal the sick, we’ll strive for common ownership in productive resources, decision-making processes and the resulting value created. The benefit of doing so extends beyond support to those who require succor. Enterprises that are owned by insiders—employees, for example—behave as though they possess a social conscience. Here’s why.

I lived in Japan during a time when the country was under intense criticism for its export surpluses. Detractors accused the government of unfair trading practices ranging from high import duties to an overly complex product approval process. One of the most interesting complaints, however, was that Japanese corporations had a lower cost of capital. While the observation was certainly true, it wasn’t due to any government intervention or policy. Rather it was a reflection of the unique ownership structure of many companies there. As an investment banker, I knew firsthand how cheaply Japanese corporations could borrow. Many were issuing Euro Bonds with attached warrants that gave issuers a borrowing cost lower than that of the US Treasury. While this was easy to demonstrate, the reason wasn’t as easy to explain, but let me try.

There’s an interesting book written by the Japanese economist, Michio Morishima, entitled Nihon wa Shihonshugi Dewanai (Japan Is Not Capitalist). As the title suggests, Morishima’s contention is that Japan is not a capitalist nation, at all, but is actually quite feudal in its mindset and approach to national and corporate governance. This is so, in part, because Japan went through an incredibly long feudal period and continues to be influenced by it. Its government machinery, for example, is dominated by large—and often competing—ministries. Yet, the most notable example of feudalism’s influence on Japan is the existence of what is referred to as corporate “keiretsu” groups.

Prior to World War II, Japan’s military production was concentrated among a few highly diversified and industrialized enterprises known as the Zaibatsu. Some of their names—Mitsubishi, Mitsui and Sumitomo, for example—are familiar today, because they continue to exist despite the post-war efforts of the US government. After the war, Japan was ordered to break up the conglomerates, a requirement that was accomplished in form, but not in substance. As companies were spun off, they simply divvied up their shares to each other, resulting in a latticework of equity holding among the former Zaibatsu components. At the center of a typical keiretsu group is a bank and trading company, but it will also include a range of heavy manufacturers, high-tech companies, mining and other primary industrial enterprises and others.

Much can be said about this corporate structure, but what’s important here is to note that large Japanese companies are owned primarily by insiders. I once compared the equity structure of IBM with that of NEC, one of Japan’s largest high-tech companies. At the time, while over 80% of IBM’s stock was held by institutional investors—mutual funds, pension funds, insurance companies, Taft-Hartley Plans and the like—Over 80% of NEC’s shareholders were insiders, including suppliers, distributors, employees, and various vendors.

How does this change the way a corporation behaves? First, it allows the company to plan for the long-term. Institutional investors are impatient and will sell shares of a company once it hints at a weak quarter. This forces public companies to engage in behavior that is often uneconomical and seemingly irrational. At one public company where I worked, pricing was often slashed—sometimes by as much as 50%—ahead of each quarter-end in order to achieve revenue targets. Our customers knew this, of course, and delayed purchases in order to negotiate heavier discounts. Sales, therefore, were lumpy, with nearly all revenue coming within the same few weeks. The upshot is it was difficult to plan beyond a three-month horizon.

Insiders, on the other hand, demand little more than stability and longevity. They’re willing to overlook short-term reductions in revenue and profit, as long as company policies insure long-term success. Several of Toyota’s shareholders, for example, are responsible for distributing and selling the company’s vehicles. What do they demand as investors? I’m sure they wouldn’t mind if Toyota showed income growth and dividend increases, but that’s not important to them. Their first priority is that the company continues to improve vehicle quality and competitiveness. After all, they want products that sail out the door. In recent years they’ve been willing to forgo short-term profits associated with gas-guzzling SUV sales in order to devote resources to a new world order based upon higher gas prices. Other shareholders include parts suppliers, who see themselves as much more than order-taking vendors, but as partners who must assist Toyota in the auto design and manufacturing process.

In this way, the needs of inside investors are far different than that of a mutual fund. Going back to my explanation of why Japanese corporations were able to get cheap funding, the answer is this: Their investors were from the same keiretsu groups and provided capital for reasons that went beyond a simple rate of return.

Consider what would happen if employees held most of the shares of the companies where they worked. At the very least, it’s a way to combine Adam Smith’s invisible hand with Christ’s admonition to put our neighbor’s interests equal to our own. I believe the gulf between haves and have nots would diminish as a result, but there are other benefits, too. If a company’s employees were its primary shareholders, would its CEO dare to spend a million dollars of corporate funds to throw his wife a birthday party on a Greek island? Of course not, but that’s exactly what happened at Worldcom. Would a utility dare pollute the water its employees drink, if its workers were also its shareholders? Not likely, but that’s exactly what PG&E did.

I would love to see government policies that attempt to put ownership in the hands of employees. It could happen overnight, if there were tax advantages to doing so. In the meantime, I will bank at a credit union, purchase products from co-ops and seek insurance from mutual companies.