Evidence of Economic Oligarchy

Max Weber

A recent study of concentration of corporate control says that 737 entities have accumulated 80% of the control of the 43,060 Transnational Corporations (TNCs) listed in the Orbis database. I describe the methodology of the authors here, and it appears to be a sensible contribution to the task of identifying control in the complex ownership structures that make up the economy. There are valid criticisms of the results, but I believe it provides evidence that we live in an Oligarchy.

A correspondent points out that the analysis gives credit for ownership, and thus control, to financial institutions that are not really in the ownership business. Mutual funds, and stock brokers holding stock for customers are two good examples. So are insurance companies, which invest in stocks as part of their business, and which may operate variable annuities, essentially mutual funds. These entities are not long-term holders, and have little interest in control of the companies whose stock they hold. Their most important vote is not with their proxies, but with their feet. It is easier and better to sell stocks than to try to control them. This is a serious problem for the paper. My correspondent is right that these kinds of companies are included in the database, and many of them rank in the top 50 holders. Even worse, The Depository Trust Company ranks 39th on the list. That is the company which keeps track of stocks held in street name. It has no voting rights, and thus no control over anything.

The authors of the control paper discuss this issue briefly:

In the literature on corporate control there is a debate on weather [sic] financial institutions really exert the control associated with their ownership shares. On the one hand, they are not supposed to seek an active involvement in the companies’ strategies. However, some works argue that institutional investors, including banks and mutual funds, do exert control to some extent.

Page 31 (cites omitted). That isn’t a satisfactory answer for stock held by mutual funds, let alone The Depository Trust Company and other brokerage account holdings, which only the shareholder can vote.

Stock ownership is far from the only indication of control of corporations. There are many other important factors, some of which are not open to study. These include friendship networks, interlocking membership on boards of directors, management independence from shareholders because of dispersed, disorganized and disenfranchised ownership, personal relationships among corporate managers, socialization of members of the economic elite and many others.

The authors of the control paper do not make the argument that they have proved anything about control in the sense of ability to vote their shares in corporate elections.

… [I]n this work, by control we mean how much economic value of companies a shareholder is able to influence. … [T]he shareholders with a high level of control are those potentially able to impose their decision on many high-value firms. The higher a shareholder’s control is, the higher its power to influence the final decision. In this sense, our notion of control can be related to Weber’s definition of “power”, i.e. the probability of an individual to be able to impose their will despite the opposition of the others.

Page 31 (cites omitted)*. It seems to me that this explanation is a somewhat better answer to the objection of my correspondent. Power in this sense is not just associated with ownership, but there is no doubt that ownership is a factor in determining power. Because ownership is not the only factor determining control, the paper does not correctly identify the entities and persons who have actual power. Furthermore, measuring control solely by ownership will give incorrect rankings of power.

That means that other entities should be substituted for those identified by the paper, or added to the list, and that the rankings are probably wrong. The actual number of entities with high levels of control could be larger or possibly smaller than the group identified in the paper. In either case, the number is miniscule. The authors say:

The interest of this ranking is not that it exposes unsuspected powerful players. Instead, it shows that many of the top actors belong to the core. This means that they do not carry out their business in isolation but, on the contrary, they are tied together in an extremely entangled web of control.

Page 32. This paper supports the proposition that the people who run a tiny number of entities control an immense amount of wealth, wealth in the form of TNCs, that can easily be used to influence political outcomes important to the concerns of the group. They are tied together through ownership, among other links. It is part of the answer to a question raised by another paper, how can there be an oligarchy inside a democracy?
*Here is a discussion of Weber on power and dominance.

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