TOWARDS A BETTER CAPITALISM:
CORPORATE MORALITY BECOMES A POLITICAL TOPIC. ARE THERE "GOOD" AND "BAD" BUSINESSES?
New Labour leader Ed Miliband recently made a distinction between "Good" and "Exploitative" businesses...
This remark has stirred up a positive storm of criticism. Typical of the tone is the following:
Commenting on Ed Miliband's speech at the 2011 Labour conference, Miles Templeman, Director General of the Institute of Directors, said:
"We would like to know how Ed Miliband plans to identify and reward 'good' companies over 'bad' ones. In practice, we think he would find this neither straightforward nor desirable. He should have more faith in customers and investors to decide. In the modern business place price is not the sole determining factor affecting people's buying and investment decisions. Consumers and investors are better equipped and better informed than ever to impose discipline on firms than any government. Instead of proposing that the state makes choices that are likely to be simplistic and wrong he would be wiser to find ways of boosting competition so that the customer remains king.
John Longworth, director-general of the British Chambers of Commerce, said: "Talk of 'good' versus 'bad' companies misses the point. All businesses that create wealth, pay their taxes and comply with the law are good companies."
Mr Miliband was also criticised by the Blairite wing of New Labour and predictably, Lord Digby Jones, ex head of the Confederation of British Industry said the speech was a "kick in the teeth" for firms.
These broadsides were nothing to the storm of vitriol from the financial markets and the mainly right wing UK media, which have weighed in describing Mr. Miliband as anti-business. The overriding message seems to be, "Competition is the best means of assuring good behaviour; let the Market and customers decide".
Are the critics right?
First, some ground rules: What is a "good" company?
There is a plethora of international research that defines good enterprises and shows how their behaviour leads to long term high achievement. From a wide range of evidence the characteristics of sustainable high achievers are internationally constant:
- They put the interests of their employees and customers first, knowing this is the best way to create value for all stakeholders.
This means that they consciously endeavour to understand their customers' needs and to provide them with simple, clear, good value. - They are socially cohesive. They treat their employees as partners and seek to involve them closely in the business. Involvement provides all employees with a sense of satisfaction and meaning from their work.
- They invest heavily in employee development. Most senior appointments are from within to preserve knowledge and continuity.
- They value the contributions of all employees, recognising this through constant feedback and fair pay systems with moderate differentials.
- Top managers do not cut themselves off in lavish offices with displays of power - they are closely involved with employees at all levels and seek out their views constantly. All employees are encouraged to innovate and experiment to improve the existing business from the "inside".
- They are financially conservative and invest in the existing business for the long term. They grow primarily by innovation and organic extension - not by financial deals and big mergers.
- They abide by high legal and ethical standards, regarding ethical behaviour as the most important factor in relations with customers, staff, the community and the environment. They are concerned to make a positive contribution to the Society(ies) that harbour them. This includes not avoiding corporate taxes.
Compared with these criteria, there are many good companies in the UK - but too few of them are to be found amongst banks and large corporates that are quoted on the stock market.
There is a phalanx of excellent and highly ethical companies - amongst them retail superstar John Lewis Partnership, bank and retail organisation Co-operative Group, many family companies, mutually owned organisations and locally-based organisations with their roots in the community.
But there are too few by far amongst the larger publicly quoted corporates.
The evidence: Big companies and the finance industries
Let us first take a step back and examine what has happened over the last 30 years to the environment for finance and big business. This period was notable for the remarkably small ideological gaps between the New Labour Party created by Tony Blair, and the Conservatives of Margaret Thatcher. Both were dedicated to the proposition that free markets were the best way of ensuring prosperity and dismantled many of the governance structures of the post-war period.
So New Labour befriended the banks, large corporations and the very rich, and, with the strong support of Conservative politicians, let the finance industries rip.
Then came the collapse of the banking system caused by lax regulation, consumerism, rampant greed and the deterioration of moral Values in the face of a Tsunami of money. In the process, most of the theories behind free markets have been conclusively shown to be fatally flawed.
This global disaster was the culmination of a period when many governments retreated before the pressures of free-marketers dedicated to the proposition that unfettered competition in unregulated markets would be good for all in society. The results have been terrible for all but a tiny minority of the super-rich.
Here are a few examples of the results of letting the market decide, and consumers act as the arbiters of behaviour.
Let's start with the finance sector:
A big early scandal following financial market liberalisation in the 1980's, was mis-selling of personal pensions. Millions were misled into swapping secure pensions for risky personal plans. The industry was forced by government, eventually and unwillingly, to compensate millions of people.
Then the swindling and misinformation turned into a torrent. Here are just a few examples
The Bank of Credit and Commerce International was wound up for money laundering and a litany of financial crimes; with huge losses to small investors. Just in case anybody might suppose that is past history and things have changed, Lloyds Bank has recently been forced to make a £3.2 billion provision against mis-selling Payment Protection Insurance. Other banks will also have to pay £ hundreds of millions for the same scam, despite their attempts to evade responsibility.
Small business customers have been warned about complex and risky interest rate insurance schemes.
Precipice bonds, robbed naïve investors of millions. Hidden bank charges have been a constant source of scandal. During the great credit boom, banks and other lenders induced millions to take on unaffordable credit for housing and consumption.
The investment industry is also riddled with swindles - insider trading is has been rife in certain quarters, stock market analysts in the US ripped off millions of smaller investors with misinformation - and most recently UK institutional investors have been accused of rigging their charges so high that customers such as pension schemes are being denied anything like the returns they should receive. The unwillingness of institutional investors to support technology and long term lending has hollowed out the once-great technology industries.
Lest readers are suffering from an excess of bad news; there are a few "good" banks, like the UK Co-operative Bank.
But the influence of these is massively offset by the credit crunch and collapse of the global banking industry on the back of grossly irresponsible lending and speculation, leading to the monstrous enrichment of the culprits and untold misery for hundreds of millions.
Surely large corporations with millions of customers and subject to investment market scrutiny provide better examples of "good" behaviour?
It would take too much space to chronicle the history of "bad" behaviour by non-financial corporations, but here are a few pertinent examples:
Safety and environmental destruction.
The UK rail industry was privatised in the 1980's on claims that private industry would provide more efficient services. The first scandal was the massive rip-off committed by train leasing companies. This was followed by gross underinvestment and incompetence in maintenance of the network, culminating in a series of high profile train smashes. Eventually it was decided to return the network to public ownership.
British Petroleum was feted as an example of corporate responsibility, earning itself the reputation of a scrupulously "green" corporation, nicknamed "Beyond Petroleum". Then.... the truth came out in a series of environmental disasters in the Arctic, the Gulf of Mexico and a massive refinery explosion in Texas, killing many staff. It became apparent that these disasters were the result of underinvestment in maintenance and safety combined with slack management. And in early 2012, the Norwegian government has focused on poor safety practices in a BP North Sea rig. BP is not alone - Shell has been criticised for causing massive environmental and human damage in parts of Africa.Consumer "Choice" and value
The much-trumpeted benefits of competition do not seem to have been universally beneficial to consumers. For example, privatised electricity utilities' customers are faced with a bewildering spectrum of tariffs which only serve to confuse and make informed decisions about switching suppliers almost impossible. All of this is against a background of constant price increases, many of which are difficult to understand. Mobile telephone companies have time and time again been forced to stop overcharging customers. Even supermarkets, supposedly competing vigorously have recently been found to be providing false discounting information. It is clear that many large companies act to distort the market by denying consumers information and acting in informal cartels.Threatening public health
Britain and the United States are facing a massive obesity crisis, caused by many food manufacturers supplying fatty, sugary and high fat products. The UK is facing serious alcohol - induced health problems, affecting young people especially. The main cause? Cheap alcohol. The tobacco industry has just re-entered the public domain. After a disgraceful history of attempting to suppress medical data about smoking and mortality, the industry are now quietly lobbying government to stop the de-branding of tobacco products.
There have been frequent scandals regarding the behaviour of pharmaceutical companies; ranging from paying doctors and academics to "push" drugs and obscure concerns about drug side effects, pushing drugs such as Tamiflu that had very limited effectiveness.Tax avoidance
It has recently been estimated by a UK Parliamentary committee that large corporations have indulged in massive evasion of UK tax, amounting to over £20 billion annually. The UK Revenue seems to have colluded with this disgraceful behaviour. In addition, super-rich individuals with UK business interests seem able to avoid tax with impunity. Both corporations and individuals are supported by a massive band of tax lawyers, whose skills far exceed those of the depleted and relatively modestly-paid UK Revenue staff.
An example of the slippery and evasive behaviour of many large corporates is the evidence given by Barclays CEO Bob Diamond to the UK Parliament that Barclays Bank paid over £2 billion in UK tax. In fact this was not corporation tax - Barclays only paid £113 million on corporate profits of £11.6 billion. The higher figure was taxes paid by Barclays employees! The excuse is often used that UK investors would be outraged if companies did not avoid tax. This speaks volumes about the ethical standards of the investment industry!Underinvestment, poor performance; grossly unjustified and unfair rewards
The prime stock market in Britain is the FTSE 100. It might be expected that companies on this market with highly paid directors would be the best run and best performers. Nothing could be further from the truth. The FTSE 100 was launched in 1984. Since that date, nearly 90% of the original companies have left the index for reasons of poor performance, break-up, takeover, often by foreign companies, and simple failure due to mismanagement. The number of high technology and manufacturing companies has dramatically declined, as UK investors are unwilling to support complex technology requiring consistent long-term support.
There is rock-solid evidence that aggregate profit and sales growth of FTSE 100 companies have been mediocre, at or just below the rate of GDP growth. But there have been big increases in investor Dividends and particularly in CEO pay. The pay increases are totally unjustified by performance and dividend growth has come at the expense of investment. British companies in general invest at a far lower level than those in all other developed countries. The long term results have been very damaging. The biggest failures have been in companies in the science, technology and industrial sectors. Once there were 25 industrials, now there are 3.
"The lesson for the investor is that the apparent permanence of the FTSE 100 is an illusion. Unlike in the US, very few companies have achieved top 100 status through organic growth or technological innovation. Equating membership of the FTSE 100 with "blue chip" status is and always has been a non-sequitur. Globalisation has left the FTSE 100 in limbo. The FTSE 100 does not represent the best of British companies, but it does not have the breadth or spread of the global indices either. It does not capture the growth opportunities of other markets and investment in it is not low risk"
. (Max King, Investec, 2006). Since then, the situation has deteriorated further. There is now solid evidence that companies with a strong family influence markedly out-perform larger UK quoted enterprises. (Credit Suisse research)
Over the last 20 years there has been a steady flow of failures. For example Marconi, Rentokil, Invensys and ICI have failed along with many more once great UK companies. The entire UK motor industry failed over 30 years.. Rover, the last British mass manufacturer, failed catastrophically amid accusations of fraud by top management.. BMW, Volkswagen, Tata industries, Nissan and Honda have brought skills and discipline to running companies that was signally missing in UK owned companies.Finally, the Private Finance Initiative
introduced by the Conservatives and supported by New Labour, has proven to be a long term financial disaster, with poor quality work and long term costs that will cripple organisations in the health service and many schools.
The scandals of the PFI have been compounded by secrecy and lack of transparency, public relations spin and market abuse because of imperfect information all cloaked in a shroud of "commercial sensitivity"
To return to the attacks on Mr Miliband
The main arguments seem to be that a combination of informed consumer pressure, investor scrutiny and legal threats will keep companies honest and competently managed. The criticism is couched in tones of outraged virtue - Mr Miliband's comments are "unfair" and "anti-business".
Much of this outrage is deliberately disingenuous:
- Investors (who are not the real "shareholders") are part of the problem, not the answer. The pre-eminence of their rights above those of all other stakeholders in UK corporate law tends to deflect serious criticism and condone anything that is to the short-term benefit of investors.
- It should plain that efficient markets depend upon transparency and perfect information. Nothing could be further from the truth in the real world - players use many ruses to confuse and manipulate consumers - many of whom are lacking the experience and education to understand product and pricing misinformation
- The law is far too easy to evade. Companies with good lawyers can steer very close to the edge of legality and far beyond good ethical standards. Very few companies or individuals or corporations are brought to book for misinforming customers. Regulators have historically been far too lax.
But the point that seems to have been totally ignored by the critics is morality.
Much of the behaviour chronicled in this article is not actually illegal. This includes much tax avoidance and most consumer misinformation. But surely Society as a whole ought to expect high levels of morality from the large corporations that have such an influence on our wellbeing?
So power to your elbow, Mr Miliband; would that more politicians had the courage to take on the mighty battalions of corporate self-interest!
Rather than being anti-business, it seems that Mr Miliband is actually spelling out the truth - there are many, many bad enterprises that rip off their customers, damage communities, undermine the economy, exploit their staff and harm the environment. To claim that unregulated free markets and customers will discipline finance and industry is total self-interested moonshine. The general public and the economy as a whole can only benefit from a radical change in standards of corporate behaviour. And sadly, industry leaders seem not to realise or accept their responsibilities.
Mr. Miliband's next task should be to spell out in more detail what he means by ethical corporate behaviour so that the electorate fully understands what acceptable standards are. He and other politicians must do this because it is quite clear that companies and their representative institutions will not.
