As an academically qualified neoliberal economist and management ‘scientist’ employed as a corporate executive with strategic management responsibilities – ie what Milton Friedman referred to as a corporate official – J Brigham (forgive this degree of anonymity) is presented with all sorts of exciting decision opportunities. They include possibly fraudulent dealing that could be tremendously beneficial for shareholders. The whole purpose of her job is ‘to make as much money for stockholders as possible’ to quote Friedman again. So how should those decisions be made?
The analysis for such decisions aims to calculate the net present value resulting from proceeding with a deal, compared with the calculation of not proceeding. Typically, Brigham admits, the more the net gain, the greater its apparent illegality. But such decisions need to be assessed clinically, without clouding its measurement with qualitative adjustments such as ethical values or what Brigham refers to as ‘religious considerations’.
If the deal could be shown to be fraudulent, then the company would risk being fined, but only if the fraud is uncovered. So the calculation of net present value of going ahead needs to be adjusted by a calculation of the anticipated fines, reduced by the probability of discovery, as well as taking into account the considerable number of years between gaining the benefit and paying the fines. Having carried out all those due calculations, decisions to go ahead would, according to Brigham, almost invariably be persuasive.
But what if she were to be held personally responsible for the fraud and punished accordingly? Would that change her decision? ‘Well, of course it would, but the decision was actually taken and implemented by the company, which is a legal person in its own right. It’s the company that must pay.’
That argument is worth consideration.
An earlier posting on this site noted the twelve global banks paying over a $100billion in fines with no ‘corporate official’ being held personally responsible. Also a few days after JPMorgan’s agreed settlement of $13bn of fines for fraud and criminality, CEO Jamie Dimon and colleagues were invited by the Duke of York for dinner and entertainments at Buckingham Palace. Corporate officials, it seems, are not regarded as personally responsible for corporate crime, apart from the very occasional apparatchik who is made an example of and treated as a ‘bad apple’.
But probable the biggest crime of all is the invention of the false theory which makes such frauds the legal responsibility of the company, rather than the corporate officials who take the relevant decisions. In other words, the biggest criminals of all were the Friedmans of this world.
Neoclassical economics was bad enough, being based on the scientific pretence of mathematical modelling. That required all manner of ridiculous assumptions to be made starting with the all seeing, all knowing, rational, self-interested homo-economicus and the profit maximizing corporate business. Friedman himself accepted that the neoclassical explanation was unreal, but its lack of realism was of no consequence. What mattered was its ability to predict. His erstwhile Chicago colleague, Robert Lucas, provided an elegant retort to that, in answer to the Queen when she asked why economists had not predicted the 2008 crash. The reply was that economics predicted that such events were unpredictable.
Under that neoclassical regime, corporate officials could still exercise their discretion as to how those maximized corporate profits might be distributed. They should be allocated as deemed to be in the best interests of the company. That would be by investment in R&D, the development of new products, processes and markets, as well as investing in the training and education of their people, plus retaining funds within the company as insurance against the inevitable rainy day. All such decisions were allowable under the neoclassical profit maximizing regime.
But Friedman and colleagues put a stop to that by their declaration that corporate officials had no responsibility other than to make as much money as possible for shareholders. That, and a whole raft of other simplistic declarations form what is frequently referred to as neoliberal economics. Shareholder primacy, free markets with open access, minimized government participation in the economy and its regulation, minimised flat rate taxation, the argument that it costs the state twice as much to do anything as it costs private business, etc etc. All such neoliberal concepts have been adopted by Anglo-America since the 1980s.
Maximizing shareholder take, rather than profits, has the great advantage of being extremely simple and unambiguous. And it has a fundamental impact. It removes the discretion corporate officials have over the distribution of profits All surpluses are deemed to be the property of shareholders and should be returned to them as fast as possible, thereby reducing long term investment and focusing all on the very short term. Hostile M&A dealing becomes more or less irresistible.
Theoretical justification was invented by asserting that corporate officials (ie company directors) were agents of shareholders rather than the company, despite the fact they invariably had legal service contracts with the company, not shareholders, requiring them to act in the company’s best interests at all times. The inconvenient fact of those legally binding agreements was side-stepped by a theoretical construct – no less ridiculous than most other parts of neoliberal theory – that the company didn’t in fact exist. It was famously described as ‘a centralized contractual agent in a team productive process’ and a ‘legal fiction’. The neoliberal Institute of Economic Affairs even went as far as admitting the company’s existence, but claiming it to be a ‘slave’ with no legal rights. Company directors therefore reported direct to shareholders. Though obviously untrue, it became a key plank in the neoliberal promotion of shareholder interests.
But when it comes to committing frauds, the company suddenly comes back into legal existence as the principal involved in such activities. Corporate officials then cease to have significance, despite the obvious fact that it is they who take the criminal decisions on behalf of shareholders. It has even been suggested that limited liability – that a shareholder’s liability is limited to the purchased shares – applies to corporate officials when taking corporate decisions.
Back in 2010, this blog noted the problem with financial derivatives such as credit default swaps and collateralised debt obligations [‘Going for Goldman’ 18.4.2010]. They had been deliberately invented to mislead and defraud. The same year posts noted the fraudulent Repo 105 dealing, the rape and pillage of Cadbury and Boots as independent UK companies, the corruption of audit, and an endless list of corrupted companies. All that criminal activity took place in accord with the Friedmanite theory, which also deliberately avoids wider and longer term considerations such as the social and ecological systems it operates within and which it is destroying.
Brigham read a draft of this post, but she made no comment.