Flawed share governance and incentive rights

Perpetual governance and incentive rights is a flawed approach that is commonly adopted with shares of ownership.

Critique

Perpetual governance and incentive rights is a flawed approach that is commonly adopted with shares of ownership.

Shares of ownership under capitalism

Shares are used to determine who owns a capitalist organisation. These shares also represent governance and incentive rights. Shares give holders the right to influence how the organisation is operated by deciding who sits on the board of directors. Shares also give holders the benefit from any appreciation in the value of shares due to the growth of the organisation. Shareholders could also benefit from dividend payments that get paid out by the organisation.

Giving every contributor perpetual governance and incentive rights

If everyone receives shares that give them perpetual governance and incentive rights the amount of historical shares that get rewarded would constantly increase over time. This means that future contributions would be increasingly rewarding a larger and larger amount of historical contributions. At some point these historical contributions become excessively over compensated and are being rewarded at the expense of future contributions. The incentive to contribute to this organisation could keep reducing over time due to the financial burden of rewarding historical contributions. A company that is able to keep growing larger would be able to get away with this approach for longer as there would be more incentives available to compensate the new contributions and a growing amount of historical contributions.

Rewarding only some contributors with perpetual governance and incentive rights

If only some contributors receive shares this leads to an environment where some contributors are being excessively rewarded whilst other contributors are being exploited. This approach is more common in capitalism. Earlier contributions are often rewarded with most or all of the issued shares of ownership. Future contributions are then given little to no shares. This creates an environment where future contributions can be perpetually exploited. This approach of rewarding some contributions with shares and not others is inherently unfair as it means earlier contributions get the full benefit of the organisation's growth whilst future contributions get little to none of that benefit. In some cases the future contributions might even be more impactful and responsible than the earlier contributions for growing the organisation, only exacerbating the unfairness of this approach.

Exacerbating inequality

Permanent governance and incentive rights lead to situations where earlier contributions can be excessively rewarded at the expense and exploitation of future contributions. These governance and incentive structures can lead to an increasing amount of inequality due to an unfair distribution of governance and incentive rights between contributors that have helped to operate and grow the organisation.

Unfair ownership inheritance

Perpetual governance and incentive rights are also problematic due to inheritance. An owner may pass on their shares to someone else that has made no contributions to the organisation at all. The person that inherits these shares may also have no understanding or involvement in the organisation and how it operates. These individuals would inherit shares that give them perpetual influence over the organisation. Organisations are reliant on the goodwill of these new shareholders and that they are aligned with the priorities and motives of the organisation. Individuals that inherit these shares would perpetually benefit from other people's contributions regardless of whether they make any contributions to the organisation at all. These new owners can become a deadweight loss to the company as they never need to contribute towards the organisation but they still get to perpetually extract out value from the growth and ongoing success of the organisation.