Chapter 3

Introducing the Universal Fund

The Universal Fund we envision (we will call it the Fund, with a capital “F”) in many ways resembles a typical mutual fund—ultimately, we hope, a very large one. Mutual funds are a type of “pooled investment vehicle” that brings together money or other valuable assets from many different investors so it can be invested collectively. The typical mutual fund is organized as a company with shareholders. (Mutual funds are also called investment companies. However, where other companies produce and sell cars, software, or shampoo, the business of a mutual fund or other pooled investment vehicle is to hold investments, often in other companies that do sell cars, software, or shampoo.) Like a standard mutual fund, the Universal Fund we propose would hold an investment portfolio. The assets in this portfolio would consist mostly of stocks of public and private companies. But the Universal Fund could also hold small amounts of bonds, cash, or other assets.

1. A Universal Fund for All Citizens

As in the case of a typical mutual fund, the Universal Fund would have shareholders. But these shareholders would not be limited to the relatively wealthy, self-selected investors who pay to purchase shares, as with a typical stock investment. Citizen-share ownership would be a privilege available to every US citizen eighteen or older who goes to the trouble of registering to become a citizen-shareholder,¹ just as the right to vote is a privilege available to any citizen who complies with the voter registration process. Of course, it would be possible to apply other criteria for becoming a citizen-shareholder. Citizen-shares could be made available to US citizens of any age, including minors, or to all legal residents of the US. Another possibility is that citizen-shares could be subject to “means testing” and distributed only to those who fall below certain income or wealth thresholds. While the precise design of the Fund would be determined by its founding funders, we do note that the decision to include a means test cuts against the goal of equal participation in the Fund by a broad range of citizens. As a default, our plan envisions all US citizens eighteen years or older being eligible to become citizen-shareholders. There are several reasons why we advocate this, but an especially important one is that our plan for Citizen Capitalism does more than equalize influence and income. It also seeks to reinvigorate civic society and encourage support for the capitalist system by empowering, engaging, and inspiring widespread citizen participation in the governance of our corporate sector.

The current proposal focuses on a Fund for United States citizens. Similar plans could easily be adopted by other nations: one could imagine an Italian Fund or a UK Fund. Other nations, such as Norway, Singapore, and Mexico, have already created state-owned “sovereign wealth funds” that invest on behalf of their citizens. So, it would not be surprising to see a foreign Fund created before one is created in the US. It is further possible to imagine Funds with a regional basis—a European Union Fund or a Caribbean Community (CARICOM) Fund, for example—or even a Global Universal Fund.

While sovereign wealth funds are close analogs to the Universal Fund, they differ in two key ways—sovereign wealth funds rely on government action to bring them into being, and they are typically funded by proceeds generated from natural resources, such as oil or mineral extraction. The Universal Fund is cut from a different cloth. It is a private ordering venture that does not necessitate government funding and relies entirely on the voluntary participation of willing funders and shareholders. The voluntary nature of our particular proposal for a privately created Fund is culturally and economically suited to the US. Moreover, for good or ill, many Americans identify with their nation and fellow citizens more closely and warmly than with the rest of the world. They are comfortable with programs like Social Security, Medicare, and K-12 public education, which equalize income and opportunity within US borders. Programs that move American resources abroad are more controversial.

2. Assets Acquired from Donations

Another key element of our proposal is that the Universal Fund would acquire the securities in its portfolio primarily from shares donated by companies and from donations by individuals, especially high-net-worth individuals. This is an important aspect of our plan, because it means Citizen Capitalism does not rely on government funding. It is a private ordering innovation that relies only on the voluntary actions of individuals and companies.

Several factors indicate that if a Universal Fund were created, donations would be likely. First, if legislation was passed making donations to the fund tax-deductible, donors could enjoy tax deductions.² This would be especially important for attracting corporate donations. Consider the fact that corporations already purchase $400 to $600 billion of their own shares every year. If those shares were donated to the Fund instead of retired, these corporations could claim tax deductions potentially worth $100 billion or more annually.

Second, even if donations to the Fund were not tax-deductible, corporations that donate would still be perceived as more socially responsible. It is hard to imagine a more effective way for a company to signal its interest in benefiting society and the nation than by donating some of its shares to the Universal Fund. Donations to the Fund would serve a signaling function that the donating corporation cares about broader societal interests, and this would particularly be the case for pioneer funders.

Individuals, too, have reasons to donate. This is especially true for the ultrawealthy. Consider the Giving Pledge for billionaires recently organized by Bill Gates and Warren Buffett. The Giving Pledge is a “commitment by the world’s wealthiest individuals and families to dedicate the majority of their wealth to giving back.”³ At the time this book went to print, it had attracted 184 signatories from twenty-two countries, each of whom pledged to give away at least half of their wealth.⁴

Finally but critically, although the Fund initially may be small, it is structured to grow. Corporations and individuals will continue to make donations over time. Meanwhile, when citizen-shareholders die, their interest in their citizen-shares reverts to the Fund. This helps the Fund preserve its assets and allows it to issue new citizen-shares to US citizens who reach the age of eighteen without significantly diluting the value of existing citizen-shareholders’ interests. The Universal Fund will snowball, continually increasing in size until it ultimately provides citizen-shareholders with both a significant source of supplemental income and a personal stake in our capitalist corporate system.

3. Pass-Through of Portfolio Income to Citizen-Shareholders

Like the investment portfolio of a typical mutual fund, the Universal Fund portfolio would generate income. This income would come mostly from the dividends declared by the companies whose shares are held by the Universal Fund, along with cash received from corporate share repurchases and interest payments from any bonds or other debt instruments it owns. And, like a typical mutual fund, it would “pass through” this income to its citizen-shareholders.

For example, after the Fund receives enough donations to reach some predetermined starting threshold—say, a $3 trillion portfolio—it would start to distribute all portfolio income to its citizen-shareholders on a periodic, proportionate basis. For example, assuming that the stocks in the portfolio yield dividends amounting to 2.25 percent annually on a $3 trillion portfolio, and that approximately 225 million Americans would qualify for and actually become citizen-shareholders, the Fund would generate per capita income of $300 annually for every American citizen who registers. But if only a portion of the eligible citizens registered for Citizen Capitalism, the annual income that each citizen-shareholder receives could be more significant.

This means, most obviously, that the Fund would be an ongoing and growing source of income to citizen-shareholders, providing a stream of financial benefits throughout each citizen-shareholder’s life, from age eighteen until death. Of course, the amount of income citizen-shareholders would receive each year from the Fund would vary. Relevant factors include both the size of the Fund and the size of the investment returns generated by the Fund portfolio. Both are likely to increase over time.

4. Citizen-Shares Cannot Be Traded, Gifted, or Bequeathed

Citizen-share ownership would be a privilege of US citizens that cannot be bought or sold, any more than the right to vote can be bought or sold. As legal experts put it, citizen-share ownership would be an “inalienable” right.⁵ It could be decided that the privilege of citizen-share ownership should be revoked in certain circumstances, just as the right to vote can be revoked. But as a general rule, each citizen is allowed to hold one and only one citizen-share. Moreover, citizen-shares are held for life and cannot be sold or traded away. Upon the death of a citizen-shareholder, their citizen-share would revert to the Fund (thus marginally increasing the value of all other citizen-shareholders’ interests in the Fund portfolio, just as the issuance of new citizen-shares to new citizen-shareholders would marginally dilute all other citizen-shareholders’ interests). Similarly, citizen-shareholders are not allowed to trade away the rights that come with citizen-share ownership. They could not, for example, use their citizen-shares as collateral to borrow money or enter “derivative” contracts that require them to make payments based on the income a citizen-shareholder receives from a citizen-share.

The potential problem of trading away citizen-shares or the rights that come with them could be addressed by making contracts to sell shares or the rights that accompany shares legally unenforceable, meaning the contracts cannot be enforced in court. This is not as radical an idea as it may sound. Many types of sales are legally unenforceable—for example, you can’t enforce a contract to buy someone’s vote in a political election. Making a contract of sale for something legally unenforceable can be a highly effective way of discouraging trading in that something, especially when the contract requires the something to be delivered in the future. Most buyers would not likely want to pay good money for the right to receive income from a citizen-share if they can’t be sure that, when the time comes, the selling citizen-shareholder has to deliver the income.

Gifts or inheritances of citizen-shares also would not be allowed. This does not mean that citizen-shareholders could not use the money they have received in any way they want—if they decide to give their earned dividends away to family or friends, that is their choice and prerogative. Upon a citizen-shareholders’ death, however, their citizen-share reverts to the Fund. Meanwhile, corporations and individuals will continue to make donations over time. The net effect is that although the Fund initially may be relatively small, it is structured to grow over time. The portfolio is like a lobster trap—assets go in, but they can’t come out. This helps the Fund preserve its assets while issuing citizen-shares to new citizen-shareholders. The Universal Fund is designed to grow in size until it ultimately provides each citizen-shareholder with a meaningful return and consequently a significant personal investment in the corporate sector and our capitalist system.

Importantly, it also means the sole economic benefit enjoyed by citizen-shareholders by virtue of their interest in the Fund would be a proportionate interest in the income the Fund generated from its portfolio of stocks. Citizen-shareholders of necessity are long-term investors.⁶ Nor is their income from their share guaranteed. Rather, it would be determined by the long-term performance and distribution policies of the underlying corporations whose stocks were held in the portfolio—giving citizen-shareholders an ongoing economic interest in the health of the US economy and the corporate sector.

5. Fund Administrators Cannot Trade and Have Limited Discretion

Under our proposal, the Fund would be run by professionals whom we call administrators, who would be tasked with executing only limited, predetermined functions. Their duties and compensation would look very different from the duties and compensation of most mutual and pension fund managers today.

The Fund would be carefully and deliberately structured to minimize the risk that administrators might use it to pursue personal agendas. This starts with their compensation. Fund administrators would receive a fixed fee for performing limited, predetermined tasks. This means, for example, administrators’ compensation must be unrelated to either the assets in, or the income generated by, the Fund portfolio. They would not have any financial interest in trying to inflate either the portfolio’s size or its returns. This avoids the perverse short-term incentives discussed in chapter 2, which can distort the behavior of so many mutual and pension fund managers today.

Similarly, the procedures for selecting and retaining Fund administrators would be chosen to keep them independent, ethical, and dedicated to authentically representing citizen-shareholders’ interests. For example, administrators could be periodically elected by citizen-shareholders, drawn at random from the citizenry as jurors are chosen, and/or selected to represent certain demographics. They might also be subject to meeting minimal qualifications, term limits, or age requirements. These need not be conventional age requirements; there might be advantages, for example, to requiring a certain percentage of administrators to be between the ages of eighteen and thirty, and another percentage over sixty. Administrators could also be removed for unethical or inappropriate behavior. And, the Fund would be structured to be as transparent as possible: financial statements; administrators’ identities, backgrounds, and potential conflicts of interest; and fund decision-making processes would all be disclosed and available for public inspection.

Finally, Fund administrators would not be given discretion to buy and sell assets in the Fund portfolio in an effort to reap trading profits by “beating the market.” Assets would enter the portfolio only through donations and exit only through transactions initiated and controlled by third parties (for example, a merger agreement requiring the portfolio to exchange shares it holds for shares in another company or for cash). Should the Fund find itself with too much cash or other non-stock assets in its portfolio, Fund administrators would be directed to convert these assets to stocks through some neutral trading rule like “purchase a proportionate amount of all the stocks in the S&P 500” or “purchase the stocks already held by the portfolio.” In other words, the administrators’ job would be just that—passive administration, including such activities as maintaining a list of citizen-shareholders and periodically distributing income from the portfolio.

Citizen Capitalism’s overall approach of relying on passive administrators to manage the Fund and its portfolio generates one last and substantial advantage: it ensures that administrators’ fees should be quite low. As we propose it, the administrators’ job is even more limited than the tasks done today by the “passive” index mutual fund managers that do not trade but simply buy and hold the stocks listed in a particular index like the S&P 500. Index funds typically charge their shareholders extremely low fees. Indeed, the fees are so low they are typically measured in “basis points” (a basis point is 1/100th of 1 percent). Vanguard and Charles Schwab, for example, offer exchange-traded funds (ETFs)—a kind of index fund that are like mutual funds but trade like stocks—that charge management fees of only 3 to 5 basis points annually. Similarly low expenses would be associated with administering the Universal Fund.⁷

6. Citizen-Shareholders Determine How the Portfolio Votes Its Shares

Finally, we come to a critical component of our plan that distinguishes it from the typical Universal Basic Income (UBI) or wealth redistribution proposals. Under Citizen Capitalism, citizen-shareholders would receive more than just an economic right to an equal share of the income paid to the portfolio. They would also receive a proportionate political right to vote the stocks held in the portfolio in shareholder meetings. Our plan would give citizen-shareholders a powerful voice in corporate governance—and importantly, it would be a diversified, human voice.

We fully recognize that, without more incentive, few individual citizen-shareholders would bother informing themselves about what’s going on in the companies whose shares are held in the portfolio, or even with voting their shares. Good corporate governance is a shared or “common” good that, as every beginning economics student soon learns, tends to be under-provided. Shareholders know the time, effort, and resources they put into becoming informed and voting in corporate elections are costs they bear alone. Meanwhile, the benefits of better long-term corporate returns and more responsible corporate behavior are shared by all. They also understand that the odds of their individual vote making a difference are slim to none. Our plan is designed to counter these patterns. It not only gives citizen-shareholders an interest in corporate stocks, it also allows them to easily vote those stocks in corporate elections in a collective and informed fashion by using a qualified proxy advisor.

A well-designed proxy advisory service could go a long way to overcoming this apathy. As we saw in the previous chapter, proxy advisory services exist today. They research companies, develop guidelines for casting votes in corporate elections, and actually cast the votes of the vast majority of shares held by mutual and pension funds. However, these services are not currently available to individual investors. Moreover, as discussed, proxy advisory services in many ways reinforce existing patterns in the corporate governance system. As a reminder, the vast majority of individuals who own stock directly don’t bother to vote, while those who invest through mutual or pension funds delegate the unwelcome task of share voting to their fund managers. Fund managers, in turn, typically care only about buying a stock whose price will soon rise so they can sell and make a quick profit—preferably, by tomorrow. They may or may not particularly care about the company’s impact on other companies, on long-term profits, on customers or employees, on society, or on future generations.

Having the Fund approve and pay for any qualified proxy service used by citizen-shareholders would create incentives for the development of new proxy services that cater to the authentic interests of long-term, diversified, socially concerned citizen-shareholders. In fact, the one exception to Fund administrators having no discretion could be that they would be given the power to set requirements for the proxy advisory services retained by citizen-shareholders, as well as the discretion to decide what fees the proxy services could charge. This is an important exception because the manner in which citizen-shares are voted should match the long-term perspective of the Fund. Proxy services are a key part of this puzzle. The proxy services we want to serve citizen-shareholders would have to be organized as nonprofits, completely transparent, and free from significant conflicts of interest, and their fees would have to be paid only by the Fund. Setting the fees to be paid to the services requires a bit more discretion, but provided the Fund administrators are carefully selected, compensated, and required to use fair and transparent decision-making processes, they would have little room to run amok.

In this chapter, we have laid out the bare bones of our proposal for the creation of a Universal Fund that is explicitly designed to equalize participation in capital markets, provide a counterweight to short-termism, and offer a stream of returns to participating citizen-shareholders. In the next chapter, we explain why we believe the Fund can be successfully funded by relying on private donations from both corporations and individuals.