What to do about Big Business?

‘Business leaders are serving the short term interests of shareholders at the expense of the wider economy … the failure to adopt a sufficiently long term view is hampering economic growth’. That is BoE Chief Economist Andy Haldane’s summary explanation of current economic failure. It is the inevitable result of accepting false belief that the role of business is to maximise shareholder value at the expense of all other interests.

Anglo-American governments have encouraged the pursuit of that objective since the days of Thatcher and Reagan. It has neither legal nor valid economic theoretical support. Nevertheless it continues to cause enormous damage in advanced economies.  In the UK it has produced the following:
• reduced long term corporate investment especially in research and development
• increased corporate focus on short term deal making, asset stripping, mergers and acquisitions, etc.
• increased focus on aggressive tax avoidance and evasion.
• encouraged the culture of ‘casual dishonesty’, growing corporate fraud and criminality (eg between 2009 and 2013 the 12 global bankers paid out £105.4bn worth of fines to European and US regulators for crimes ranging from mis-selling mortgages to rigging capital markets, and £61.23bn provisions for future fines).
• Reduced quality of employment in real economy: job security, hours of work, wages and pensions.
• Converted corporate management into shareholders by excessive remuneration including unjustified share option bonus schemes.
• Massively increased inequalities of wealth and income which, in this increasingly financialised and globalised environment, extracts from the real economy with no ‘trickle down’ benefits.
• Encouraged avoidance of environmental responsibilities and externalising the costs of pollution whenever possible, thereby contributing to finite resource waste, species loss and climate change.

Addressing these issues is now urgent. It is dependent on burying belief in the primacy of shareholder interests over the common good.  Agency theory is the only theoretical justification which dishonestly depicts the company as a ‘legal fiction’ and therefore directors relate directly to shareholders as their agents, legally bound to work in their best interests at all times. Today, that is the generally accepted understanding. But it’s a lie. The company is a legal fact and directors have legal contracts with the company not the shareholders. Certain wording was added to the Companies Act in 2006 to make it at least conceivable that company directors might be the agents of shareholders. Previous Acts had identified directors’ duties as “to promote the success of the company” end of story.  The 2006 Act added “for the benefit of its members as a whole,” which additional wording is frequently quoted as supporting shareholder primacy. There is no other legal justification, statute or common law, anywhere in the world.

The independent status of a company as a separate legal ‘person’ effectively changes when a majority shareholding is established. The company then in effect, becomes an item of private property owned by the majority shareholder who can do with it as they wish. This enables assets to be stripped out leaving the company unviable, but without liability when the company is closed down.

The changed nature of shareholding since the 1986 computerisation and deregulation of stock markets needs also to be addressed. Previously the average duration of shareholdings was somewhere around 6 years. Today it is around 6 months and becoming ever shorter, shares being nominally held by financial intermediaries with a high proportion of trades being by automated ultra-fast systems. The granting of voting rights to such short term equity holders only serves to reinforce the focus on short term shareholder interests and is against the long term development of corporate enterprise and therefore the economy.

The currently dominant economic theory also argues that the market is the most efficient mode of allocating resources. But that is based on the false assumption that markets are competitive. That same theory argues the benefits of minimised regulation. Consequently, since the 1980s, competition regulation has been severely reduced and underfunded. Markets have therefore been allowed to develop as oligopolies and would-be monopolies, with the result that market ‘decisions’ are not made as a result of competition, but corporate monopolists which seek only to maximise shareholder value. The abuse of competitive markets needs to be outlawed and competition revived and protected.

What to do:
• Remove voting rights from shares until held for a minimum of 6 months.
• Remove “for the benefit of its members as a whole” from Section 172 of the Companies Act.
• Reinstate the single limited liability per group – ie when a company acquires a subsidiary it legally accepts full legal liability for the activities of that subsidiary.
• Renew and reinforce the regulation of competition (eg via a renewed Office of Fair Trading, and Monopolies and Mergers Commission etc), properly funded so that competition is revived and maintained.
• Regulators to investigate and reverse any significant examples of loss of competition eg where a single operator has greater than 25% market share. This was the rule prior to 1986, but is more important now with new technology facilitating abuse.
• Where conflicts of interest are also involved take action to separate:
1. Separate retail banking from investment banking – making it clear that BoE support as lender of last resort is only available to retail banks which maintain ratios of liquidity as agreed with BoE.
2. Re professional services: separate Audit from Accounting and from Management Consultancy.
3. Review privatised public services to ensure genuinely competitive operation and remove any conflict of interests between public service and private shareholders.
• The adoption of German style two-tier board structures would be a hugely positive step,  with employees having a proportion of the votes on the supervisory board (carrying strategic rather than operational responsibility).

A View on Jeremy Corbyn

I may not be a member of the Labour Party, but I am impressed by Jeremy Corbyn. So far he has demonstrated a lot of guts throughout the current bout of political hysteria at Westminster.

It was obvious when he was elected by Party members that he did not have the support of New Labour MPs and their like in the media and other segments of what Roosevelt referred to as Organised Money. That was the point of his election. He marked a different approach from the Blairites. Slick handling of the media is not his prime concern. He is more about promoting the interests of the disadvantaged and needy, reining in the excesses of the wealthiest 1%.

So what has caused the current group-think bout of hysterical demands that he should go? The only explanation I have heard is that he did not show leadership during the EU referendum campaign. Well, it is true he refused to join the over-the-top scare campaigning of the other so called ‘leaders’ like Johnson and Gove, Osborne and Cameron. They all grabbed headlines during the campaign by their childishly dishonest use of statistics. Corbyn acknowledged the EU was far from perfect – 7½ out of 10 – but refused to join in the lies and hysteria.

So, as a disinterested observer, I find his behaviour throughout to be quietly impressive. It seems improbable that he is motivated by anything other than the simple desire to let Labour Party members express their views over the leadership of their Party. He must have been sorely tempted to step down – if I were him I certainly would have, and with great relief. But I lack the sheer guts and tenacity it must take to change the direction of national politics.

There is an Alternative

According to the current edition of the Economist, Britain appears to be questioning the wisdom of its devotion to ‘the liberal economic credos of its recent past.’ Those are the credos which include free trade with open access to unregulated markets, minimised public sector, and so on and so forth – the whole baggage of neo-liberal economics to which the Economist itself is committed.

This questioning was prompted by popular responses to the threatened closure and disposal by Tata of its British steel operations. They were said to be losing around £1m a day, at least in part as a result of Chinese dumping cheap steel on UK markets. The outrageous suggestion had been made that the Brits should protect their domestic industry by charging an import duty on Chinese steel so as to at least level the playing field. Thus the classic dichotomy was drawn up between the two childishly simple minded economic ideologies: free trade on the one hand; protectionism on the other. These are the tips of the two ice-bergs of neo-liberalism and totalitarian communism. Continue reading There is an Alternative

The Importance of Competitive Markets

The general purpose of all business should be to innovate and grow, developing technologies, employees and products, delivering value to customers and shareholders as well as for the common good (which includes for future generations living on this planet), through their operations in competitive markets. This is a worthwhile aim from which the economy as a whole and the general population should benefit. That is the arguable aim of ‘light touch regulation’. It is ‘light’ so as to avoid the bureaucratic strangulation of competition and the benefits that flow from it.

But there is a huge flaw in this reasoning. The basic assumption is that unregulated markets are competitive. But the reality is somewhat different.  While most markets are competitive when they first emerge, as they mature, the most successful players achieve greater market shares and in due course become dominant. Such markets are not at all competitive, but are in effect controlled by monopolistically empowered leviathans. Continue reading The Importance of Competitive Markets

Impending Disaster, made in Davos, by Bilderburg

Our world is headed towards disaster. That appears to be widely accepted; as are the reasons for it and what should be done to change direction to a safer, more sustainable, future. The Green Party exists for little else. All that is lacking is the power to achieve that change. Disaster is defined in many different dimensions: climate change, global population growth, unsustainable inequality of wealth and incomes within and between nations, global food insecurity and many other measures of impending doom. The underlying reason why those in power steer their disastrous course, always assuming they are not motivated solely by their own short term self-interest, is their belief in a fundamentally flawed version of what was formerly known as political economy.

Nobel laureate Paul Krugman flagged up one of the most basic errors of the currently dominant Friedmanite take on neoclassical economics [‘Challenging the Oligarchy’, Krugman, New York Review of Books, 17th December, 2015]. Friedman had argued that the development of monopolistic businesses was of no importance since it made no real difference. Krugman identifies that as one of Friedman’s fundamental errors. A complementary Friedman error was to claim business had no responsibility other than to make as much money as possible for stockholders. No wonder discredited ex-Barclays CEO Bob Diamond regarded Friedman as his ‘favourite economist’!

Market power has huge implications for economic behaviour. Failure over the past three decades to pursue anti-trust regulations vigorously has been a major reason for the economic trends we are now experiencing. Krugman identified two as of major importance: the financialisation of business and the ever increasing degree of inequality. Neither is sustainable in the long term, but it is unclear how their termination will be achieved.
Continue reading Impending Disaster, made in Davos, by Bilderburg

Fighting for Fairness in 2016

Fighting for fairness and social justice for the population at large may be a minority concern at Westminster, but it has considerable appeal beyond that bubble. The problem is how that legitimate, democratically supported pursuit might be achieved, without any un-British revolutionary disturbances. That is the recurrent problem for Parties seeking social justice for all. Traditionally, they only come to power following prolonged periods of social injustice. And the only Parties currently onside are the Greens and Corbyn-led Labour.

We’ve been here before. The 1929 Wall Street crash followed by Hoover’s austerity driven Great Depression. That ushered in Roosevelt’s presidency and the stimulus driven New Deal, the second wave of which he introduced as follows:
“We had to struggle with the old enemies of peace – business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering. They had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that government by organised money is just as dangerous as Government by organised mob.” Was that really 1936?

That quotation is borrowed from “What a Waste”, a study of the disastrous social effects of outsourcing of public services to private business interests reviewed in the previous posting on this site. It also includes a quote regarding the disposal of public assets from Joseph Chamberlain in 1885:
“Some of them have been sold; some of them have been given away by people who had no right to dispose of them; some of them have been lost through apathy and ignorance; some have been stolen by fraud; and some have been acquired by violence.”
Continue reading Fighting for Fairness in 2016

Outsourcing: What a Waste!

Occasionally I have read stuff which seems so timely and apposite to work on which I am then engaged, that I’ve been motivated to provide an aide memoire of the text. This posting provides such a review of one 2015 text; it is not a summary and includes some personal interpretation; it is more a personal aide memoire of the opening chapter.

The book starts off with two rivetingly relevant-to-today quotes, one from 1936, the other from 1885.

Reading Review: What a waste: outsourcing and how it goes wrong, Bowman et al, 2015, Manchester University Press

Chapter 1 Outsourcing: organised money and disabled government

“We had to struggle with the old enemies of peace – business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering. They had begun to consider the Government of the United States as a mere appendage to their own affairs.  We know now that government by organised money is just as dangerous as Government by organised mob.”  F D Roosevelt, announcing the Second New Deal, October, 1936.

“The common rights of ownership have disappeared. Some of them have been sold; some of them have been given away by people who had no right to dispose of them; some of them have been lost through apathy and ignorance; some have been stolen by fraud; and some have been acquired by violence.  Private ownership has taken the place of these communal rights, and this system has become so interwoven with our habits and usages, it has been sanctioned by law and protected by custom, that it might be very difficult and perhaps impossible to reverse it.  But then, I ask, what ransom will property pay for the security which it enjoys?” Joseph Chamberlain, Birmingham Town Hall speech, January, 1885.

1.1 Introduction: The text addresses new problems created by outsourcing public services to private contractors. It considers the gap between efficiency rhetoric and delivery reality and between public service and the outsourcers’ profit maximising and tax manipulation.

Continue reading Outsourcing: What a Waste!

Beyond Predatory Capitalism

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