Flawed share governance and compensation rights

Perpetual governance and compensation rights is a flawed approach that is commonly adopted by companies that are limited by shares.

Critique

Perpetual governance and compensation rights is a flawed approach that is commonly adopted with companies that are limited by shares.

Shares of ownership

Shares are used to determine who owns an organisation. These shares also represent governance and compensation rights that last in perpetuity, they will not lapse or expire. 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 compensation rights

If everyone receives shares that give them perpetual governance and compensation rights the amount of historical shares that get rewarded would constantly increase over time. This means that future contributions would be increasingly compensating a larger amount of historical contributions. At some point these historical contributions become over compensated and are being excessively rewarded at the expense of future contributions. The incentive to contribute to this organisation could reduce 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 a growing amount of compensation that is available to compensate the new contributions along with a growing amount of historical contributions.

Rewarding only some contributors with perpetual governance and compensation rights

If only some contributors receive shares of ownership this leads to an environment where some contributors are being excessively rewarded whilst other contributors are not being treated similarly. This approach can be common in companies that are limited by shares. Earlier contributions are often rewarded with most or all of the issued shares. Future contributions could then be given little to no shares. This creates an environment where future contributions are never treated in a similar way to earlier contribution. 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 could be more impactful and responsible for the success of the company over the earlier contributions, this only exacerbates the unfairness of this approach.

Exacerbating inequality

Perpetual governance and compensation rights lead to situations where earlier contributions can be excessively rewarded at the expense of future contributions. These governance and compensation structures can lead to an increasing amounts of inequality due to an unfair distribution of governance and compensation rights for workers that received no shares but that helped to operate and grow the organisation.

Unfair ownership inheritance

Perpetual governance and compensation 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 motivations of those that operate the organisation. Individuals that inherit these shares could 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 any growth or ongoing success of the organisation.