8 March 2024

Every adult a share-owner

By Shirley R. Letwin & William Letwin

To celebrate the 50th anniversary of the Centre for Policy Studies and the 10th of CapX, we’ve been republishing CPS pamphlets by some of the most influential figures in the history of British conservatism. For this week’s edition, we’ve republished Chapter 1 of Shirley Robin Letwin and William Letwin’s 1986 pamphlet, ‘Every adult a share-owner’.

A key feature of 1980s privatisation was the diffusion of ownership, with substantial shareholdings passing to employees and the general public. In this report, the distinguished Anglo-American academics Shirley Robin Letwin and William Letwin proposed a radical version of democratic privatisation – ‘Universal Share Ownership’. They defended it both on grounds of liberal political principle, and as a means of embedding broad support for free markets and private ownership. 

Suppose that every adult in Britain acquired £100 worth of shares in some British company. Suppose that, apart from undertaking not to transfer those shares for five years, each adult enjoyed all the rights of a shareholder. He would receive regular dividend payments. He would be entitled to vote for directors of the company and to question or criticise the management’s policies at annual general meetings. He would receive frequent mailings from the company, reporting on its performance, informing him how to interpret such reports, explaining his rights as a shareholder, and inviting him to take advantage of certain privileges. To put every adult in this position is the objective of Universal Share Ownership (USO).

How would USO affect the character of Britain?

USO would, first of all, give every adult a sense of increased independence in relation to his economic environment, a sense at present confined to a few. Unlike a bank deposit or an insurance policy, a share gives its owner a direct stake and active voice in the management of an enterprise of his choice. It gives its owner a definite relationship to a business. A firm that would otherwise be a remote abstraction – a name, a set of buildings seen from the outside if seen at all, an entity enigmatically discussed in the back pages of the newspaper, an organisation directed by unknown magnates – becomes instead an operation in which the shareholder has a measurable interest, and which, as an active participant, he comes to see more clearly, closer to the inside.

Just as voters in a democracy sense that they exercise some control over how they are governed because they have the power, at the very least, periodically to turn the rascals out, so shareowners acquire an enlarged sense of being in control of their lives. By being a shareowner, a person becomes a freer man.

To value freedom is to hold that every adult ought to have a sense, accurate rather than illusory, of controlling his own life. In the past, certain advocates of free government maintained that nobody could enjoy real political or economic independence unless they owned land. Today, in an industrialised society, this is no longer feasible nor necessary. The ideal of independent proprietor-farmers has yielded to the ideal of a property-owning democracy.

Not all forms of property however can serve that ideal equally well. Title to one’s dwelling – which some 60% of British households now possess, thanks partly to the policies of the present Government – is in many ways desirable and commendable. But it does not give one a direct interest in, or what is more important, a right of control over, productive enterprises. In other words, owning one’s home does not, like owning shares, involve one in public economic life.

Further, the vast majority of British adults own investments in bank accounts, life insurance, unit trusts, and pension funds; and they thereby, though often unknowingly, possess indirect claims on shares owned by such financial intermediaries. But here again, however rewarding such investments are financially, they do not and can not give their owners a sense of enjoying a rightful and potentially active voice in determining the policies of the nation’s enterprises. In short, the ideal form of a property-owning democracy in today’s world is a share-owning democracy.

Some might question whether a share-owning democracy could be effected by USO, as it would put into the hands of every adult only a miniscule fraction of a company’s shares, far too little to lift him even into a back seat, let alone the driver’s seat. But if that argument carried any weight, it would also be a fatal objection to political democracy. In fact, although no single voter can by himself determine the outcome of a general election, the majority or even plurality of voters do; and even a relatively small minority of voters can influence the Government’s policies. Similarly the majority of shareholders can show out the existing management, and a concerted minority can force it to re-examine its conduct.

Groupings arise among shareholders, akin to political parties, that amplify the otherwise feeble voices of isolated individuals. Besides, shareholders dispose of some weapons sharper than those available to electors: they can claim legal redress against malpractice by directors, they can invoke the help of various regulatory agencies to launch official investigations of how their company is being managed, and they can, whenever they choose, withdraw from the company by selling their shares – which, if done by many shareholders at the same time, depresses the share price and thus threatens the existing management. For all these reasons then, USO is a practical step toward a share-owning democracy, one in which all adults enjoy real power to influence directly the business firms of which they are the employees and customers.

As the number of shareholders in Britain increases, the case for universal share-ownership becomes more urgent. As long as hardly anyone owned shares, the vast majority without them could comfortably ignore the difference between those eccentrics and themselves, supposing they even noticed it. But now, when many adults, even if still a minority of the order of one in ten, visibly do own shares, those outside their number are more likely to feel excluded and to resent it. As share-ownership grows more common, and is regarded as normal, to be without shares grows more painful – just as those who today lack refrigerators, television sets, or cars may well regard themselves as relegated to the position of outsiders. Therefore wider share-ownership, desirable as it is, constitutes a powerful argument for universal share ownership.

USO would in yet another way foster the consensus that constitutes the foundation of a property-owning democracy. USO would effectively counteract the opposition to a free society that is fostered by some few declared enemies, and by many others who inadvertently threaten it by demanding massive intervention to iron out inequality. Socialists have patently lost the intellectual argument, as is indicated by the efforts of the Labour Party and TUC to re-clothe socialism in non-collectivist garb, as for instance by giving nationalised industries the new name of ‘public enterprises’.

Yet old habits of thought and feeling die out slowly, especially among people whose minds are attuned to practicalities and indifferent to theory. It is still habitual for many, when they notice that some are better off than themselves, to conclude that this inequality can only be explained by oppression and injustice, and to respond to it with envy and resentful anger. Preaching against such ideas and emotions does little good. By now, a different method of persuasion is needed, a method that is enticing rather than admonitory. And that is what USO can provide.

If every adult owned shares and thereby possessed a definite stake in a capitalist enterprise, he would have that much less reason to put his trust in agitators and charlatans who picture capitalism as a regime imposed by the few on the many. If every adult owned shares, each one’s resistance to such propaganda would be fortified by that of his neighbours, just as their common experience as shareholders would make them less vulnerable to envy and bitterness.

Universal share ownership would thus tend to demolish the ‘we-they’ myth, the notion that the country is divided into two classes permanently at war. This notion, that capitalists always flourish by making workers always suffer, does not stand up to a number of unmistakeable facts. Pay and conditions of work in Britain today are dramatically better than in the past, chiefly because of competition rather than collective bargaining or government regulation.

Weekly hours have been reduced within a century or so by half, holidays have lengthened, schooling goes on longer, retirement comes earlier, and the burden of physical exertion has been radically lightened by ‘capitalist’ machinery. An ever larger fraction of the work-force does white-collar jobs in relatively luxurious settings. Real incomes of employees, both in and out of trade unions, have multiplied; standards of private consumption, of cars, clothing, TV and holiday travel, rise to ever higher levels. Yet in the face of all such evidence the we-they syndrome persists.

It is sustained partly by the view that the interests of workers must clash with those of owners because increased wages must cause diminished profits, a view which, though tautologically correct at any instant, is false over any stretch of time. It refuses to acknowledge that profits help to fuel investment, and that increased investment (in viable enterprises but not in dying ones artificially resuscitated with public grants) leads to increased productivity, which free labour markets translate into increased wages. Workers infected by ‘we-they’ attitudes are able to see neither that they benefit, as their employers do also, when their company earns a reasonable rate of return on capital, nor that protracted failure to do so will inevitably force any company to shrivel or go into liquidation.

They are blind to the consequences of exacting unrealistically high wages: companies facing consumer resistance or stiff international competition will lose sales, diminished profits will dry up the flow of investment and condemn the company to a deteriorating and out-dated plant, or management will replace over-priced jobs with labour-saving machinery. Far from being hypothetical, these consequences are witnessed in the statistics on business failures, industrial output, and unemployment.

Despite this, as we have said, the ‘we-they’ syndrome survives.

It could be dislodged by making every adult a share-owner. What lends credence to the myth of class conflict is not inequality but the qualitative gap between those who recognise themselves as owners of productive capital and those who, because they own none, feel excluded from and by ‘the system’. If that division were to disappear, the ‘we-they’ myth would in time evaporate. Ownership of shares, even of a few, would put the small shareholder on a continuum with the biggest shareholder. Though small ones might well still envy the big, it would no longer be the worst kind of envy – that of the outsider, excluded from a world which is at once alluring and unapproachable. USO would make every adult a capitalist.

A person who sees himself as a capitalist cannot be utterly indifferent to the success of the system in which he takes his place. Like anyone who owns his own house, he would be disposed to look after his property, and would be outraged by any attempt to deface or destroy it. As an employee-capitalist, he would be less inclined to regard his boss as an antagonist, less liable to shirk, cheat, or do malicious damage. In short, his ownership of shares, and the visible stake that they gave him in a capitalist enterprise, would counteract, most simply and effectively, the divisive and destructive attitudes which have over the years been encouraged by the enemies of capitalism.

What would make the shareholder’s stake in capitalism visible to him, more than merely the piece of paper that certifies his ownership, are the interests and information connected with ownership. Just as the man who plays the football pools looks eagerly at the game scores, so the shareholder has an incentive to take a serious interest in the progress of his company.

Owning anything also gives one a rational interest in understanding it. Shareholders’ desire for understanding is partly satisfied by the managers of any widely-owned company, who have an immediate interest of their own in explaining to shareholders how the company works. Unless they can explain their record cogently and convincingly, they will lose their capacity to raise equity capital, whereupon the company (and with it their own careers) will either decline or be taken out of their control. In other words, the managers of a company have compelling reasons to engage in a constant effort to inform shareholders about the economic situation that their company faces and that they as shareholders accordingly face. Although the effort to inform may sometimes be corrupted into an effort to misinform, that vice is generally held to a tolerable level by the exertions of dissatisfied shareholders, the investigative passion of financial journalists, and official enforcement of company law.

Understanding of one particular company is a spur towards acquiring an understanding of the general economic set-up. The more a shareholder becomes familiar with the workings of a company of which he owns a part, the more he comprehends the workings of other companies, and how the operation of each is related to that of others. Thus he comes to understand important aspects of how a market economy works.

Consideration of how a particular company decides to invest a certain amount, and in certain sorts of capital equipment, promotes a generalised recognition of the function of capital in production and the role of profits in providing funds for investment or attracting external finance. In this way, the shareholder also acquires some general understanding of the relation between risk and profits, ignorance of which accounts for some of the most serious misconceptions about capitalism.

To the informed shareholder it becomes clear that profit is not a ‘rip-off’ extorted by a capitalist conspiracy but rather the legitimate reward for putting capital at risk. Other general economic relations impinge on the attention of shareholders, such as, to mention only two, the interplay between changes in the interest rate and fluctuations in share prices, and the ways that the balance of trade can influence the rate of interest.

In short, the shareholder, because he is being regularly informed about his company, tends to acquire an understanding of how capitalist enterprises work. He is no longer an alien in a world whose language he cannot understand. Even if he works on a production line and earns wages toward the bottom of the scale, he no longer feels like an outcast nor is he readily seduced by those who maintain that the sole remedy for all discontents is to destroy ‘the system’ and replace it with another. USO would thus help to sustain political stability.

The shareholder’s personal interest in the value of his shares, and his incentive to understand the various commercial and economic circumstances that affect it, is reinforced by his power to govern his company. That power, stemming from his right to vote for directors and to vote on specific matters of policy as vital, for instance, as takeover bids, makes him aware that he plays an active part in determining the company’s conduct. Making every adult a shareholder would thus serve as a specific antidote to the passivity and lassitude that overcome dependents of a welfare state. It would encourage a more active, enterprising attitude to economic affairs.

Shareholders could normally be expected to exert their influence so as to promote the efficiency of their company; that premise underlies USO, just as an analogous premise underlies universal suffrage. But whereas politics exhibits not a few instances of self-serving factions that try to milk the public purse, this disorder (short at least of outright fraud) is less likely to occur in a widely-held company. For instance, a blatant attempt by employee-shareholders to push through a policy of excessive wages or thinly disguised feather-bedding would be resisted by the mass of shareholders who are not employees of that firm. Moreover, recognise, along the lines of the golden goose parable, that they would profit little by destroying the profitability of their company. To the extent that it may be desirable, as some believe, that employees should have some direct representation in management, the safest and most productive way to establish that is by making all workers shareholders.

Resistance of a similar sort should offset any attempt by shareholder-customers to force through a commercially unwarranted reduction in the company’s prices. Even if a housewife’s interest in cheaper soap powder would in the short run be greater than in her dividend, she and her like could be outvoted by the mass of shareholders who are not among the company’s customers, as well as by shareholders whose private interest as customers is outweighed by their interest as receivers of dividends.

So again, to the extent that it might be desirable for consumers to exercise some influence over company policy, it would be safer and more productive that such influence be exercised by customers within the body of shareholders (which presence USO would guarantee) rather than by consumers consultative councils or consumers’ pressure groups outside the company.

Overall, the shareholder’s pressure on management, after USO was instituted, would be most likely to concentrate, as it does already in widely held companies, on urging management to strive for higher earnings. And this is as it should be because – leaving aside monopolies, profits simply by raising their prices – Increased earnings come about by increased efficiency, that is by turning a given flow of inputs into a more valuable stream of outputs, Increased efficiency thereby benefit shareholders and employees and customers and the public at large.

USO would tend further to improve general economic efficiency by stimulating investment. It would have this effect for the simple reason that people’s taste for any particular object of expenditure depends on its being familiar to them; the whole industry of advertising rests on this proposition. Familiarity grows with practice: as people increasingly watched television in their friends’ homes, they increasingly wanted it for themselves.

The same is likely to happen in the case of share ownership.

As USO went into practice, as the great mass of Britons became for the first time shareholders in their own right, and as they came to recognise the benefits of share-ownership, their taste for acquiring investments should gradually grow. As that taste increased, individuals would be disposed to spend more of their income on investments. Moreover, that expenditure would rise still further as real personal incomes rose. And it would be stimulated even further by the decline in brokers’ fees that is fairly certain to follow the deregulation of Britain’s financial markets, the so-called ‘Big Bang’ scheduled for this October.

All in all, USO could be expected to reinforce the foundations of a free society and to enhance the efficiency of the market economy.

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Shirley Robin Letwin was an American academic who taught at the University of Cambridge and the LSE.

William Letwin was an American academic who ended his career as Professor of Political Science at the LSE.