Electronic copy available at: http://ssrn.

com/abstract=2032815

1


A More Ethical and Profitable Approach to Corporate Finance

By
Robert Ashford
Professor of Law
Syracuse University College of Law
Syracuse, New York 13244
(Tel.) (w) (315) 443-1111
(Tel.) (c) (315) 677-4680
rhashford@aol.com
2012

I. INTRODUCTION

This paper provides a brief summary of a little-understood approach to corporate finance
that the chief executive officer a major credit-worthy company could undertake to enable his/her
company to operate in a more ethical way while enhancing corporate profitability. It covers
only the highlights. A fuller explication of the analysis underlying this approach is provided in
other writings.
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.

The approach involves a process of learning, teaching, and implementation:

1. learning the more profitable and ethical means of financing the employment of capital
and labor,
2. teaching that means to a critical mass of leaders in business, government, labor
organizations, and other social institutions,
3. promoting the implementation of modest changes in the present system of corporate
finance that would enable credit-worthy companies to enhance their profitability and
share value by enhancing the earning capacity of their employees and customers, and
4. including some implementation of the modified system of corporate finance within the
business planning of CEOs company.

The implementation of the modified system of corporate finance would require no taxes,
redistribution, or government command. With the modified system of corporate finance,
companies would be free to continue to meet their capital requirements as before, but they would
have an additional, more ethical and profitable, market means to satisfy their capital
requirements. If widely understood by market participants, this additional means could be
voluntarily employed to:


1
Broadening the Right to Acquire Capital with the Earnings of Capital: The Missing
Link to Sustainable Economic Recovery and Growth, ( 39 Forum for Social-Economics. 89
(2009). (Earlier version available on SSRN). Binary Economics: the New Paradigm, (1999) with
Rodney Shakespeare (University Press of America)

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1. enhance the earning capacity of the participating companies, their employees and their
customers,
2. promote more sustainable, environmentally friendly, and more broadly shared growth and
prosperity,
3. reduce poverty, welfare dependence and the need for government expenditures, taxes,
and other transfer payments,
4. enhance the value of equity investments and reduce the risk of borrowing, and
5. enhance the credit worthiness of national governments and their ability to raise revenue.

If the CEO of a major corporation were to initiate and maintain its leadership in this
process of learning, teaching and implementation, that CEO and that major corporation would be
widely credited with leading the world out of the present economic crisis and into a sustainable
future of greater and more broadly shared prosperity, ecological harmony, distributive justice,
and reduced strife.


II. A MORE PROFITABLE APPROACH TO CORPORATE FINANCE, THE
DISTRIBUTION OF EARNING CAPACITY AND ECONOMIC GROWTH:

The more ethical and profitable approach to corporate finance begins with several
propositions that are not controversial:

1. Profitable, competitive business practice employs a mix of labor and capital according to
their relative contribution to production.
2. By reason of technological advance, one goal of profit maximizing is to produce more
with more productive capital and less labor.
3. With technological advance, production becomes increasingly more capital intensive.
4. Profitable business planning requires investing in capital that pays for itself (i.e.,
returns the financial investment needed to acquire it) in a competitive time period.
5. The purpose of corporate finance is to enable corporations to acquire capital before they
have earned the money to pay for it.;
6. The choice of financing sources is among retained earnings (approximately 70 +%),
borrowing (approximately 25 +%, or sale of stock (usually less than 5% and in some
years negative).
7. Almost all capital of any nations major corporations and of the worlds corporations is
acquired with the earnings of capital and very little is acquired with the earnings of labor.

The more ethical and profitable approach to corporate finance continues with several
propositions that are true, but not as widely recognized, and that may prove controversial
because they seemingly defy widely shared preconceptions. First consider two ways of
understanding the role of capital and labor in production, distribution and growth: Although
(beginning with Adam Smith and continuing through J ohn M. Keynes to the present day), most
people believe that the primary role of capital in contributing to per-capita economic growth is to
increase the productivity of labor, there is another way to understand the primary role of capital:
namely to do an increasing portion of the total work done. Thus, according to a widely shared
perception, per capita growth might be understood by the example of a person sawing ten boards
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per hour with a hand saw and one hundred boards per hour with a machine saw. Thus, human
productivity has increased tenfold. Alternatively, however, per capita growth might be
understood by the example of a person hauling a sack one mile on his back, and leading a horse
that is hauling ten sacks, or a driving a truck that is hauling one thousand sacks the same distance
in a fraction of the time. Thus, in one important sense, per-capita growth can be understood as
capital increasing labor productivity; but in another important sense, per-capita growth can be
understood as capital doing an ever increasing portion of the total work done and as being
capable of distributing an increasing portion of the income derived from production.

Based on the less widely understood, conception of per-capita growth, three important
propositions can be advanced:

1. Both labor and capital do work.
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2. Although advancing technology may be understood as making labor more productive,
advancing technology may also be understood as invariably making capital more
productive than labor in task after task (which explains why profitable corporations
continually employ capital to replace and vastly supplement the work of labor).

3. The prospect of a broader distribution of capital acquisition with the earnings of capital
carries with it the prospect of more broadly distributed earning capacity in future years,
which in turn will provide the market incentives to profitably employ more capital and
labor in earlier years. In other words, the more broadly capital is acquired with the
earnings of capital, the more an economy will grow.

It is important to understand that the foregoing third proposition is relatively new in the
history of economic thought. It is not found in the works of Adam Smith, Karl Marx, Alfred
Marshall, J ohn M. Keynes, Milton Friedman, J ohn K. Galbraith or any of their followers. It
identifies a distinct cause of economic growth uniquely premised on the distribution of capital
acquisition with the earnings of capital. The closest correlative drawn from the foregoing
authors is the Keynesian analysis that holds that a broader distribution and/or redistribution of
income may promote growth. But unlike the Keynesian analysis, the analysis underlying the
growth principle based on the broader distribution of capital with the earnings of capital requires
no government redistribution, taxation, borrowing, command, or other market intervention. It
materializes as a direct result of corporations voluntarily deciding to operate in a potentially
more profitable manner by ethically including their employees and customers in the process by
which they acquire capital with the earnings of capital. Moreover, for reasons explained in the
references in footnote 1, there is reason to believe that the resultant growth from broadening
capital acquisition with the earnings of capital would be substantial indeed much greater than
the incremental growth that might be obtained by increased reliance on the present left- or right-
wing growth strategies or any mix of the two.

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The assertion that capital does work does not negate the fact that both capital and labor are
generally needed to complete specific kinds of work, or the fact that labor is needed to invent, build,
install, operate, maintain, store, repair, manage, and finance capital. But the labor work involved in
inventing, building, creating, installing, operating, maintaining, storing, repairing, managing, and
financing capital is not the work of the capital itself.

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III. THE PRESENT GLOBAL FINANCIAL CRISIS:

The foregoing analysis has an important but little-understood bearing on the present
global financial crisis. Among the aspects of the crisis are recession, sluggish growth, business
failure, excessive private and sovereign debt, high unemployment, poverty, and (hovering in the
background) environmental degradation. During recessions, periods of sluggish growth and
even in times of modestly robust growth, credit-worthy corporations experience a reduced rate of
return in large part for the following reason: At diminishing unit costs, most of these companies
could profitably produce much more of the goods and services that people would purchase if
they had the earning capacity to do so; and if they could do so, the market value of the shares of
these companies would substantially increase. One transcendent antidote to these troubling
financial aspects would be the rational prospect of sustainable, economic growth, which in turn
would be justified by the broadening distribution of sustainable consumer earning capacity.

The mainstream strategy for promoting economic recovery is a composite left- and right-
wing mix of government policies and subsidies that promote (1) capital acquisition with the
earnings of capital primarily for corporations and well-capitalized persons (generally in
proportion to their existing wealth), and (2) primarily jobs (but by no means the best or highest
paying jobs) and various forms of welfare redistribution for poor and middle class people. If the
understanding of production, distribution, and growth advanced in this paper has validity, then it
follows that in a market economy in which production is becoming ever more capital intensive,
sufficient earning capacity to purchase all that can be produced cannot be distributed by jobs and
welfare alone. The missing element in these strategies (that could easily be added without extra
cost to anyone) is to distribute earning capacity by broadening the distribution of capital
acquisition with the earnings of capital i.e., to provide poor and middle class people with
practical, competitive access to the same institutions of corporate finance, banking, insurance,
loans and guaranties, and favorable tax and monetary policy (presently routinely provided to
people primarily in proportion to their existing wealth ) so that poor and middle class people can
also enhance their earning capacity by acquiring capital with the earnings of capital and thereby
enhance the prospects of sustainable economic recovery and growth. Major credit-worthy
companies are uniquely positioned to provide this access in an ethical and profitable way.

To acquire capital with the earnings of capital, well capitalized people use

1. the pre-tax earnings of capital,
2. collateral,
3. non-recourse corporate credit,
4. market and insurance mechanisms to diversify and reduce risk, and
5. a monetary policy intended to protect private property.

The same institutions and practices that work profitably for well-capitalized people can also
work profitably for all people. Moreover, in an economy operating at less than full capacity, if
capital can competitively pay for its acquisition costs out of its future earnings primarily for
existing owners, it can do so even more profitably if all people are included in the acquisition
process.

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Because present demand for the employment of capital and labor is dependent on demand
for consumer goods in a future period, a voluntary pattern of steadily broadening capital
acquisition promises more production-based consumer demand in future years and therefore
more demand for a fuller employment of labor and capital in earlier years. Thus, if the
techniques of corporate finance (presently used to for the benefit corporations and their existing
share owners to acquire capital with the earnings of capital) were opened competitively to all
people then, the present demand for capital investment and employment would increase in
anticipation of the broadening distribution of capital income to poor and working people with
unsatisfied consumer needs and wants. Accordingly, a broader distribution of capital acquisition
and income strengthens the promise of capital to pay for itself with its future earnings, makes
profitable the employment of more capital and labor, and enhances the prospects of sustainable
economic recovery and enhanced growth. It will also therefore increase the market value of
well run corporations and their shareholders within the growing economy

IV WHAT CAN A WELL-MEANING CEO OF A MAJ OR CREDIT-WORTHY DO TO
ENABLE HIS/HER COMPANY TO OPERATE IN A MORE ETHICAL WAY WHILE
ENHANCING CORPORATE PROFITABILITY?

Even with complete corporate authority based on fully informed shareholder ratification,
a CEO could not profitably or ethically initiate a corporate capital acquisition business plan
structured to include its employees and customers until the laws underlying the system of
corporate finance were modified to allow for their profitable inclusion. Although the necessary
modifications are modest and could easily be obtained once the underlying logic is understood,
the modifications would require national legislation of the sovereign in which the corporation is
incorporated. Nor could the CEO profitably or ethically proceed under such a modified system
without a critical number of other participating companies and other market participants
proceeding with the same understanding.

These facts prompt a return to several of the points made in the Introduction. One way a
CEO can operate his company more ethically and yet profitably (indeed, more profitably) is to
include its employees, customers, and neighbors in the corporate finance process whereby the
corporation acquires capital with the earnings of capital. This ethical choice (of including, rather
than continuing to exclude, those people) can be realized, but only if a process of learning,
teaching, and implementation as briefly outlined above is first undertaken.

V, BENEFITS

The benefits to be derived from the successful process of learning, teaching, and
implementation fall into two categories: systemic and company specific. The systemic benefits
include the benefits listed in the five categories listed in the Introduction. In addition, to the
extent participating companies include employees in their capital acquisition plans, they may
experience benefits by way of greater productivity and loyalty and lower wage demands.
Moreover, to the extent participating companies include customers in their capital acquisition
plans, they may experience greater customer allegiance. Further, to the extent participating
companies include employees and customers in their capital acquisition plans, they may be given

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tax credits to the extent that dividends paid on employee and customer shares are either taxed to
the recipients or used to reduce welfare payments.

VI. COSTS

The educational process to achieve the understanding of the critical number of managers
of other companies, and leaders in business, labor, and government would also be relatively
small a fraction of expenditures already devoted to company advertising and public relations
and perhaps not an incremental expense, but rather a substitute for expenditures already planned
regarding the dissemination of other information.

Once the ownership-broadening concepts are understood by a critical number of people,
it would also be necessary to persuade governments such as those of the USA and the UK to
make modest changes in the existing institutions of corporate finance that they maintain. The
changes would not involve increased taxation, government market intervention, compulsory
actions on the part of citizens or private companies, or increased government spending. With
sufficient breadth of understanding, the modest governmental changes would not be difficult to
achieve. Once the changes were made, the companies would be able to finance their capital
requirements in a profitable way that would enhance the earning capacity of their customers and
enrich their shareholders. There would be costs of implementation, primarily by way of
fiduciaries acting for the benefit of the new owners, but these world be far outweighed by the
increase in profitability of all participating companies.

VII. CONCLUSION

If the CEO of a major corporation were to initiate and maintain its leadership in this
simple educational process, that CEO and that major corporation would become widely credited
with leading the world out of its present economic nightmare and into a sustainable future of
prosperity, ecological harmony, distributive justice, and relative peace (excluding religious and
racial based conflict). The public relations benefits would be enormous.