Back in July last year, this site pondered what would replace the public company, formerly the most powerful institution in the economy (see http://www.gordonpearson.co.uk/11/what-will-replace-the-public-company/). Its numbers had halved over the past decade and the number of small and medium sized firms’ initial public offerings had declined by more than 80%. Shareholders’ funds appeared to be no longer of much worth to the public company, the flow of money having been reversed so that shareholders, and indeed the whole financial sector, were now taking rather than investing, Nevertheless, media interest in the FTSE100 and other stock market indices continues unabated, even though they only measure betting activity on such as M&A rather than real new investment. A posting last month offered a reasoned explanation of how democratic capitalism, which had delivered so much and promised so much more, appeared now to be approaching the buffers – http://www.gordonpearson.co.uk/20/democratic-capitalism/.
The still dominant Friedmanite version of capitalism is now being seen to self-destruct with its array of naïve beliefs and illegality. Company law (eg Companies Act 2006) charges company directors, Friedman’s ‘corporate officials’, with the legal duty of looking after the best interests of the company having regard to the long term and to the interests of all stakeholders. Friedman argued they had no other duty than to make as much money as possible for shareholders. Friedman clearly won hands down against the law, and that despite the fact that ‘corporate officials’ have legal contracts of service and employment with the company, not its shareholders, and those contracts invariably charge them with the duty of looking after the company’s best interests.
When the directors of Cadbury, a perfectly healthy and viable business, recommended the sell out of their company to Kraft they were acting with criminal disregard for the law. They compounded their crime by accepting multi-million pound pay offs for recommending the sell out – a clear conflict of their personal interest with those of the company, another legal transgression. Why are they not all in prison? The answer is because Mr Friedman has trumped the law. But Friedmanism is starting to fray at the edges and such activity may not long be protected.
Mainstream politicians claim belief in the market’s ability to provide our needs and wants so long as it is left free from outside interference. They argue for the lightest of ‘light touch regulation’ if entrepreneurial talent is to be encouraged to flourish. It’s not clear whether they are naïve innocents or cynical opportunists with an eye only for the next election. Either way, over the past three decades, they have destroyed any prospect of a truly competitive economy, for example systematically reducing and limiting the Office of Fair Trading. Instead of competitive markets subject to independent regulators acting for the common good, we now have monopolistic markets fixed and abused by corporate criminals.
This site has made sporadic mention of the excesses of Glencore, the world’s largest commodity trader. The first was of its IPO valuing the company at around £70bn and noting it had been smart enough to pay (quoting the Financial Times) “almost no corporate taxes on its trading business for years in spite of bumper profits.” The FT also reported how Yury Ognev, head of Glencore’s Russian grain unit, successfully “encouraged” Moscow to ban wheat exports in order to force prices up and enable Glencore to recover its bet on rising wheat prices, albeit at huge cost to those struggling to survive elsewhere in the world. Glencore is big enough to fix supply, and therefore prices, of strategic minerals such as nickel, zinc, platinum, chrome and copper as well as being highly influential in thermal and coking coal, and since its acquisition of Viterra, they are even more powerful in grain markets, adding starvation to many millions whenever it’s profitable so to do. The already weak and poor are paying for Glencore’s growth and for CEO Glasenberg’s £71m dividends received from his Glencore shares which were part of his personal take from the IPO.
Glencore are by no means the only one profiting from monopolistic abuse. Investment banking has brought the whole financial sector into the spotlight, with criminal charges and fines arising from market fixing and mis-selling. The brazen anti-competitive behaviour of the ‘big four’ auditors demonstrated by the PwC chairman’s complacent message to the effect that if an auditor was required to certify the accounts as really true and fair, companies would have to pay a whole lot more for their audit certificates. Moreover, audit, professional accounting and management consultancy, the activities of the ‘big four’, is a combination of activities, riven with conflicts of interest, which a few decades ago were simply not allowed. The list of monopolistic abusers and their criminal offenses is endless, extended almost every day in the financial and business pages.
Now, as though to flag the matter up even for the least financially or business oriented members of society, we are presented with the elegant example of horsemeat. In principle there’s not a lot wrong with horsemeat. It’s not poisonous. It looks pretty much like cowmeat, and we can’t really taste the difference. But, for some us, the idea of eating horses is stomach turningly offensive. As well as that, we are really angry about being told our burgers are all beef when they’re actually part horse. We don’t get so excited about audit certificates being misrepresentative, no matter how much they cost. And we seem prepared to tolerate Glenmcore illegally pushing the price of wheat up out of reach of the poorest. But horsemeat! There are limits!
It would be good if those limits had finally been identified. Free and open markets are free and open to criminal activity of all sorts, whether it’s a small time abattoir in Rumania illicitly feeding horsemeat into the mix, or the biggest investment bank in the world dishonestly fixing markets they control. Light touch regulation won’t fix it. And heavy regulation will genuinely risk stifling entrepreneurial energy. We don’t need huge new layers of bureaucracy dreamed up by politicians, whether naïve innocents or cynical opportunists. But we do need the law to be properly enforced, rather than being trumped by some second rate Chicago economist. And we also need the punishments to be truly exemplary, so that the risk of prolonged and painful punishment outweighs the probable gain from breaking the law. Such punishment won’t affect the virtuous, but it might rein in the corrupted.
The Glencores, Starbucks, Amazons and the rest are global businesses, exploiting global markets which are, so far, naked in terms of global constraint. But that’s for another posting.