Wednesday, April 28, 2010

A Thought About Corporate Capital

When we think about the modern corporation we tend to think that the stock holders are those who have invested in its capital. Much of recent management effort has been directed to maximizing the return on the capital investment of those who invested in the corporation stocks.

It occurs to me that employees also invest capital in the corporations for which they work, not only in employee stock plans but also in terms of the investments in development of their own skills and knowledge which they put to the use of the corporation. They risk that capital, as we have discovered with folk who worked for years for corporations only to be laid off with knowledge and skills the worth of which had depreciated over time. The remuneration of staff of corporations then should be seen as repayment for the value of their time and effort, but also for the investment in human capital that they have made and its risk incurred by its dedication to the corporation.

How about government? Well, governments invest in roads and services without which the corporation would not be profitable; those investments are at risk as some of the rust belt cities clearly demonstrate. Governments obtain operating costs for those investments in the form of taxes and fees for service but do they not also deserve a return on investment commensurate with the risk that was involved?

How about those firms and individuals that do business with the corporation. There is, at a minimum, social capital in the market institutions through which they interact with the corporation and sometimes much more investment directed toward the success of the corporation. I suggest that both buyers and sellers (and often government) invest in building these institutions through which they successfully interact.

Perhaps directors and managers of corporations should consider how most appropriately to allocate risk and return among all those who invest in the corporation and the institutions on which it depends.

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