Can businesses flourish in a world with a cap on personal wealth?

by Rutger Claassen and Ingrid Robeyns

Let’s establish an upper limit on the personal wealth any individual can possess. This is the core principle behind ‘limitarianism’. Limitarianism represents one of the more radical proposals in the debate on wealth inequality. Over the past few years, one of us has developed the philosophy of limitarianism (first in the academic realm, and then more recently also in the public sphere, as regular readers of this blog know). The proposal has since been endorsed, and in some cases further developed, by other scholars and writers, including Thomas Piketty and the Dutch journalist Sander Heijne.

Of course, not everyone likes the idea. One of the most important critiques on limitarianism is that it is unclear whether company owners can continue to hold on to their flourishing businesses in a limitarian world. Or no longer being able to receive exceptionally high pay for running these companies. Think, for example of the $46 billion compensation package Elon Musk received for serving as Tesla’s CEO.

Annemarie van Gaal, described as one of the most well-known businesswomen in the Netherlands and columnist for the influential Dutch newspaper De Telegraaf, claims that with a wealth cap, there will no longer be any business activity:

“But anyone who is willing to take significant risks, endure immense stress, and sacrifice sleepless nights to apply their talent and perseverance in order to reach the top, should be given free reign. These people are the ones who create jobs and ensure that our country remains among the wealthiest in the world. (…). Would top entrepreneurs still be willing to sacrifice years of their lives, take countless risks, and endure hardship if they knew in advance that there’s a limit to their success? No. We will never become a happy society if we allow this.”

But is this correct? Can business owners remain owners of their business under limitarianism? And can their businesses thrive? This is an important question. Because even if there are strong moral arguments for limitarianism, they are not worth much if limitarianism destroys the economy.

First, let’s look at those moral arguments. The most fundamental argument for limitarianism is that very large fortunes cannot be said to be morally deserved. The successes that successful people achieve in their lives are, in fact, dependent on three factors that are entirely beyond their control: their innate talents and abilities, the influence of their parents and social class, as well as the institutions and infrastructures in the communities in which they grow up. Everyone is dependent on a ‘lottery’ in which some are born with more talents and find themselves in a more privileged position, while others are less fortunate. This means that the rewards people gain from their talents are largely the result of factors other than their own efforts. And for this reason, we cannot say that these successes are morally deserved.

Another ground for limitarianism are the bad and harmful effects of wealth concentration. Limitarians have pointed out that wealth concentration undermines democracy and in particular the principle of political equality, as the very rich have ample resources to engage in lobbying, the funding of political candidates, and spending financial resources on influencing the election outcomes. In the worst situations, democracies become prone to influence from the corporate world (‘corporate capture’) – a phenomenon in which political decision-making is controlled by the owners of large corporations.

In addition, it is argued that the lifestyles of the superrich are not compatible with the principle of ecological sustainability. Lucas Chancel estimated that, whereas the average global carbon footprint is 6 tons per person per year, the 1 percent richest have carbon footprints of 101 tons. Estimates of the carbon footprints of billionaires easily surpass 2,000 metric tons, and go all the way up to 31.000 tons. And those estimates do not take the carbon impact of their investments into account; they only look at the polluting effects of their mansions, private jets, and their yachts. For comparison: the average carbon footprint of most Africans is around 1 ton, and we all need to move in the direction of zero.

Lastly, the legal and economic structures of the economy that allow extreme wealth concentration, are the same structures that deprive the government from sufficient public wealth to meet unmet needs of the population. In his ground-breaking work on wealth inequality, Thomas Piketty showed that over the last decades private wealth has grown at the expense of public wealth – hence, at the expense of the government to relieve poverty and provide proper investments in public goods. In addition, there are many policies that benefit the richest (and their companies), but that do not benefit the worst off, such as the abolishment of inheritance and estate taxation, or the consistently lower taxes on income from investments compared to income from labour. And things will only get worse, because we are standing at the eve of the largest intergenerational transfer ever.

Because of these harmful or bad effect of wealth concentration, limitarianism proposes to cap the amount of personal wealth each person can have. This raises the question: where should that cap on wealth be drawn? A precise limit depends on countless factors, but for the sake of this discussion, we will adopt the proposal to set the wealth cap at around 10 million (pounds, euros or dollars). Yet note that nothing in what follows depends on that number: if we were to democratically decide to set the limit at 25 or 100 million, we would still give the same answer to the question of whether businesses can thrive in a limitarian world.

Now, let’s consider businesses. What would be the implications for running a business in a world where no one is allowed to own more than 10 million?

What does ‘running a business’ mean? Any business of a certain size is incorporated, as the ‘Inc’ behind the company’s name indicates. In a corporation, shareholders hold shares, which normally come with two rights. First, shareholders have control rights. Their shares offer them the right to vote in the company’s Annual General Meeting. Through these voting rights, they can control nominations for the board of directors, and the general strategy of the company. Second, shareholders have profit rights. They are entitled to a share of the dividends and hence benefit financially when the company makes profits. The board of the company has the power to decide whether profits should be reinvested in the business or handed out as dividends or share buybacks. But in most countries, shareholders through their control rights and the threat to exit can enforce shareholder-friendly business decisions.

In current practice, profit rights and control rights are typically bundled: whoever has one right also has the other, as the shares entitle the holder to both. This bundling may seem to make it impossible for any one person to hold control of a company whose value exceeds 10 million euros. Imagine a company whose shares are worth 50 million euros. As soon as the founder would have to sell 40 million euros of shares, they would only be left with 20% of the control rights. They would be outvoted on any major policy change by the persons who hold the other 80% of the shares. Limitarianism would then seem to kill off the dream of any founder who wants to retain control. And if, like Annemarie van Gaal, we believe that such founders are brilliant entrepreneurs who should be empowered to rule over their companies with absolute authority, then limitarianism presents an insurmountable problem.

Fortunately, there are other options. The ‘one share, one vote’ principle is only one way to organize a company. For control rights and profit rights can be unbundled. Indeed, this already happens frequently in the heartland of capitalism, with dual-class share structures. Every company can create different share classes: some shares then come only with voting rights, others come only with profit rights. Take Meta. Mark Zuckerberg’s personal package of shares has only 13% of the profit rights, while it represents 61% of the voting power in Meta.

By unbundling voting and profit rights, any founder of a company could, as soon as the company’s value exceeds 10 million euros, change the share structure. Progressively, as the company grows, the shares that only give financial benefits could go to others, while the founder retains control through shares holding voting rights. What are the options for how this transfer could be done?

One option would be that, as soon as the 10 million threshold is surpassed, the tax authorities would tax the founder in kind. The profit shares would be transferred to a collective fund, i.e. a Sovereign Wealth Fund. Out of this fund, dividends could be paid to all citizens, as the Alaska Permanent Fund Corporation does, which holds the shares of its major oil operating company. In this way, the above-limits wealth would directly benefit all citizens.

There are other options. A company founder could also pre-empt in-kind taxation by the state, by donating the above-limit shares. Yves Chouinard, Patagonia’s founder, upon his retirement donated the shares to a trust. Foundation-owned companies are a well-known phenomenon in Denmark, and, to a lesser extent, Germany. Large foundation-owned enterprises in Denmark are stock-listed (such as Carlsberg or NovoNordisk) but a majority of control rights lie with the foundation. A founder would lose direct control over the company, but their vision for the company could remain the leading principle – the ‘purpose’ – anchored in the charter of the foundation, protected by the foundation board’s control. Moreover, the founder or their family could themselves sit on this foundation board.

Finally, above-limit profit shares could also be donated to workers through Employee Stock Ownership Plans (ESOP), so as to benefit workers specifically. Here too voting shares could remain with the founding entrepreneur. In the US, it is estimated that around 6500 ESOP’s help 14 million employees to 2.1 trillion in assets; by no means a small feat. A limitarian policy could boost this phenomenon even further.

Would this also address the worry that family companies as we know them will no longer be possible in a limitarian world? Family companies, so the argument goes, are a special type of company, whereby it is important that the company culture and traditions can be safeguarded. Yet as long as the control rights remain fully within the family, there is no reason to worry that the specific character of family firms would be threatened by limitarianism. The family could choose for any of the above strategies to transfer the profit rights above the limitarian threshold – yet the control will fully remain in the family.

No lack of options, then. Whatever option the founder chooses, control would remain with them. This much is enough to show that limitarianism is compatible with business freedom as-we-know-it, allowing entrepreneurs to fulfill their personal dreams with their company, while parting with the profit rights.

There is a long-standing belief that voting rights and profit rights should go hand in hand – that anyone with a “skin in the game” should also have a proportional say in decisions. In a provocative analysis, the Financial Times called Meta’s dual-class share structure a ‘dictatorship’, since it deprives investors of their voting rights. This critique assumes that those who bear financial risk by holding profit rights should also have a say in governance. Yet Meta continues to attract investors without offering them voting power, as do the publicly traded steward-owned companies in Denmark mentioned earlier.

Taking this advice to heart, one could wonder – once profit rights have been transferred, why might a founder still wish to retain control? If the profits go to citizens (through a Sovereign Wealth Fund), workers (through an ESOP), or a foundation, then why not also give the control rights to these parties? Critics of shareholder capitalism have since long argued that shareholders, empowered by their right to vote and incentivized by their right to reap the profits, have steered companies in short-termist directions, riding rough over the interests and rights of other stakeholders, such as workers, consumers, and – through environmental carelessness – future generations. From this perspective, control rights could also be given to a set of (company-relevant) stakeholders, so that their interests are protected.

This taps into proposals to make Sovereign Wealth funds more democratic, to use foundation-control for societal purposes (this is called ‘steward-ownership’), or increase workers’ voice in companies. Only then would companies be run ‘in the interests of all-affected’, which is a standard principle of democracy. As we saw, capping wealth is itself motivated by the corrupting effect of large wealth on democratic principles. While limitarianism is compatible with continuing entrepreneurial control, we think that extending democratic principles to the design of companies, would bring an even deeper realization of the good society that limitarianism aims for.

You may think that heavy political interventions would be needed for these new company forms to take root. However, this is not necessarily the case. Limitarianism is first and foremost a moral idea. Even if governments don’t act on it and cap wealth, entrepreneurs – especially retiring ones – face moral choices of their own. Instead of selling their company to the highest bidder, they can also convert it into a steward-owned one, or set up an ESOP. In light of the large number of retiring entrepreneurs in the years to come, we would move closer to the realisation of limitarianism by a generation of successful entrepreneurs who leave a more-than-decent inheritance to their own children but repurpose their excess wealth to society.

NB: a Dutch version of this blogpost is forthcoming in the Dutch magazine Vrij Nederland.