Category Archives: Competition

Accounting profession, Audit profession, Company Law, Competition, Corporate Governance, Economics, Merger & Acquisition, Regulation

The Criminal Company

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The threat to the world’s liberty today comes from the monopolistic power of unregulated corporates. That is exercised mainly through banks such as Goldman Sachs and financial intermediaries and traders such as Glencore. A year ago the Financial Times ran a series of articles showing how Glencore fix commodity prices for their own profit and everyone else’s loss. The Russian wheat and corn harvest being threatened by drought, the FT reported how Glencore made speculative long term proprietary trades in wheat and corn. When wheat prices failed to rise sufficiently for a profit to be made over the period of Glencore’s trade, their man in Moscow ‘encouraged’ the Russians to ban wheat exports. That had the desired effect forcing prices up sufficiently to enable Glencore to close its earlier bets at a decent return. The obvious side effect of the price rise was that the struggling millions had to struggle that bit more. That’s the Glencore way of doing business. (See http://www.gordonpearson.co.uk/28/glencore-and-their-ilk-are-screwing-the-world/)

Glencore is currently in the throes of taking over of its associate company Xstrata, one of the world’s largest mining and metals companies. Xstrata is already big enough to fix supply, and therefore prices, of strategic minerals such as nickel, zinc, platinum, chrome and copper and is highly influential in thermal and coking coal. Using the Glencore business method, they will together be able to create and exploit prices of all these commodities and more. And with Viterra also acquired, they’ll be even more powerful in the grain markets, adding starvation to the millions already struggling for survival.
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Company Law, Competition, Corporate Governance, Economics, Management Practice, Moral Hazard, Political Decision

Free Markets Controlled by the Unaccountables

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How does a basic item of clothing, say a shirt, come into existence. Where does the cloth come from? And the colours or dyes, the buttons and thread, the machines that cut the fabric and the machines that stitch the bits together? And who dreamed up the designs and how did they get printed on the fabric? And what brought all these things together to produce the finished article? And how did it get distributed to people wanting such a shirt? The answer to all those questions is, of course, ‘the market’. No other form of economic organisation gets anywhere near that level of efficiency or provides a comparable degree of choice. All the tools of central planning and control of the former communist states, proved incapable of organising the production and distribution of shirts that people actually wanted to buy. That is the beauty and power of the market for something as simple as a shirt. For more complex products, and most products are, the competitive advantage of the market over any alternative, is far greater even than that.

The thing that makes the market so effective is competition: the existence of alternative suppliers of cloth, dyes, thread, machines and the rest. Without competition , the market would be no different from the central planning and control system. That failed not only because of its inherent inefficiency and proneness to bad decisions, but because the empowered bureaucracy was vulnerable to self-interested, even corrupt and illicit decision making. Monopolists are in exactly the same position: inefficient and vulnerable, and likely to take corrupt and predatory decisions to further their avowed aim of maximising shareholder wealth.
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Banking, Competition, Corporate Governance, Economics, Political Decision, Regulation

Who Rules the World?

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A news item on budget day, commanding all of two column inches on an inside page of some of the national press, was of far greater importance than anything Mr Osborne had to say. It reported the completion of Glencore’s acquisition of Viterra, Canada’s largest grain handling company. Glencore has ways of making money as reported previously on this site (see http://www.gordonpearson.co.uk/28/glencore-and-their-ilk-are-screwing-the-world/). Briefly, they bet on the future price of a commodity in a market they can fix. They then fix the price and take the profit. The example given in the previous posting was Glencore’s bet on future wheat and corn prices. Despite Russian harvests in 2010 being threatened by drought, prices didn’t rise sufficiently for Glencore to profit, till Yuri Ognev, the relevant Glencore executive, “suggested” to Moscow they might be well advised to ban wheat exports. Two days later exports were banned and prices rose by 15%, enough for Glencore’s profit. That’s how Glencore works. An unfortunate bi-product of Glencore’s price rise would be added numbers starving to death in the Horn of Africa and elsewhere.

Glencore, the world’s largest commodity trader, listed in London but successfully avoiding UK taxes, is currently taking over its associate company Xstrata, one of the world’s largest mining and metals companies. Xstrata’s London IPO ten years ago established it from day one in the FTSE100. Its boast is that over the past decade it has grown faster than Amazon, largely by acquisition. It is now big enough to fix supply, and therefore prices, of strategic minerals such as nickel, zinc, platinum, chrome and copper and being highly influential in thermal and coking coal. Glencore with Xstrata will be able to create and exploit prices of all these commodities and more. And with Viterra on board they’ll be even more powerful in the grain markets, adding starvation to the millions already struggling for survival. The already weak and poor will pay for Glencore’s profitable growth. But they won’t be alone: we all will pay.
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Competition, Corporate Governance, Economics, Political Decision, Shareholder Value

Budgeting for Naked Greed

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All sorts of hares are set loose in the run up to the budget: removal of the 50% income tax rate, ending of national pay settlements in the public sector, imposition of a mansion tax, a clamp down on stamp duty avoidance, and so on, not to mention the various stimulus–austerity alternatives. Debate centres around the clash of two different motivations: the desire to get the economy going again, and the desire for fairness and equity, or not. All this punctuated by outbreaks of naked greed by the likes of Bob Diamond. Sometimes those motivations are opposed and sometimes they coincide. Underlying this cacophony, there are simplistic party dogmas, clearly based on half understood or partly remembered ideas from undergraduate economics. Blind faith in ‘free and open markets’ is one such tenet which quite ignores reality: freedom from government interference inevitably results in monopolistic control and predation, a far worse limit on freedom than that imposed by democratically elected government. Check out the audit industry, or the Glencore-Xstrata merger, and have fear.

In amongst all this, Vince Cable, the nearest thing the coalition has to a non-dogmatic, avuncular influence on the economy, is trying to make sure the better off shoulder more of their share of the burden, while those at the bottom of the heap are given some respite, which would also, coincidentally, have some immediate stimulus effect. One Cable initiative is to curb the excesses of executive pay by making it subject to shareholder control. Executive greed is certainly out of control, and on the face of it, restraint by shareholders doesn’t sound unreasonable. But it wouldn’t have the effect Vince intends.
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Competition, Corporate Governance, Economics, Merger & Acquisition, Political Decision, Real economy, Regulation

Blind faith is destroying British industry

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Peter Mandelson, writing in the New Statesman (‘Mind the gap’,20.2.2012), expresses the problem for the UK left in one plaintive sentence: “We still have to have faith in the basic model of an open and competitive market.” Well, no we don’t! Misplaced faith in such broad generalisations is what got us into this mess and is still keeping us there. Mandelson sounds very like Transport Secretary Philip Hammond proclaiming his fervent belief in “free trade and open markets” when he announced the award of the £1.4billion Thameslink contract to Siemens, rather than to Derby’s Bombardier, UK’s last rail producer. Blind commitment to such generalised dogma has led us into all sorts of destruction from which it will be difficult to escape. German and French politicians aren’t so naïve. Nor, when push comes to shove, are the Americans – ask General Motors!

The combination of ‘open’ and ‘competitive’ is itself problematic. ‘Open’ suggests a minimum of control and regulation, but for a market to remain ‘competitive’ requires specific control and regulation. This is because the natural unregulated outcome of competitive markets is for the most successful competitor to become dominant. The natural outcome of competition is monopoly. Competitive markets used to be protected by the Office of Fair Trading (OFT) and the Competition Commission, acting to prevent the establishment of dominant market positions. For example, a merger or acquisition which would result in a market share of 20% or more warranted their consideration. The current legislation specifically allows the creation of dominant market positions. The only restrictions apply to the abuse of a dominant position, or the operation of a price fixing cartel.
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Competition, Corporate Governance, Economics, Management Theory, Regulation, Taxation

Sustainable Wealth of Nations

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During the initial phase of industrialisation, Adam Smith argued that a nation’s supply of ‘wants and conveniences’ depended mostly on the ‘skill, dexterity and judgment’ of its workers and the extent to which they were employed. His example was the pin factory in which, through specialisation of work tasks, productivity could be multiplied many thousand fold, so that workers in an industrialised nation could enjoy a hugely enhanced standard of living. Smith argued that the wealthy should pay a greater portion of their income in taxes so the nation could provide education, for example, for the less well-off to compensate for the ‘mental mutilation’ caused by the boring, repetitive nature of their ‘specialised’ work.

So how did we get from that position, identified by the father confessor of industrial capitalism, to where we are today, with the Bob Diamonds, Fred Goodwins and Philip Greens of our world being paid zillions for not very much, the less well-off paying proportionately most in taxes and today’s pin factories run by ‘ruthlessly hard-driving, strictly top-down, command-and-control focused, shareholder-value obsessed, win-at-any-cost business leaders’? One explanation is provided in The Road to Co-operation.
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Accounting profession, Banking, Co-operation, Competition, Corporate Governance, Economics, Political Decision, Regulation

The Road to Co-operation: Escaping the Bottom Line

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This book (http://www.gowerpublishing.com/isbn/9781409448303) is about a new direction for market capitalism, based on co-operation rather than the neoclassical idea of maximising self- interest. It is not argued from a moral or ethical standpoint, but has a hard-nosed foundation in economic theory. The Road leads from the predatory capitalism we suffer today to a co-operative and far more productive capitalism we could enjoy tomorrow.

Predatory capitalism is the inevitable result of encouraging almost anyone to trade in almost anything, not just sub-prime, but actually worthless, even imaginary, financial “products”. The aim is to create a fever of anticipation which sucks money out of the real economy (manufacture, distribution etc) into bubbles of speculation in derivative or imaginary “products” or in mergers and acquisitions.
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Accounting profession, Audit profession, Banking, Company Law, Competition, Corporate Governance, Regulation

Monopolistic Complacency and the Big Four

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A couple of “industries”, audit and management consultancy, which have deliberately entwined themselves round each other and called themselves ‘professional services’, have developed strongly monopolistic tendencies. The degree of industry concentration is truly remarkable: the four leading firms employ around 650,000 people, earn revenues of over US$100 billion, and take around 80% of the global market for large and medium businesses, plus a huge involvement in public sector consulting.

The big four ceased to be truly competitive decades ago. They now exist for the benefit of their own people, rather than their customers. It’s a carve up comparable to the various cartels and closed shops which existed in the City of London prior to the ‘big bang’. It seems unlikely to last much longer.
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