POLITICIANS HOPE SHAREHOLDERS WILL DISCIPLINE MANAGERS. THIS IS A COWARDLY COP-OUT AND WILL NOT WORK.

There has been an alarming decline in corporate ethics, especially amongst those corporations that are subject to investor scrutiny.
Over more than 20 years, the behaviour of top managers in a majority of large companies that are quoted on stock markets has noticeably deteriorated.
Instances include notorious cases of misinformation and fraud such as Enron and many others. But below the level of outright criminality, corporations and their leaders have been responsible for behaviour that can be argued to be unethical and sometimes downright immoral. Top executive pay has roared away without any restraint - and in Britain and the US has become totally detached from that of their colleagues at lower levels. More seriously, there has been no connection between corporate performance and rewards. Over more than 20 years, aggregate sales and profit growth of the largest companies has scarcely kept pace with GDP growth, whilst investor dividends and executive pay have consistently roared ahead. In the UK, it is clear that long term investment has been the victim and employees at large have become cannon fodder.

We are learning that investment banking and some other parts of the finance industries commonly indulge in behaviour that ranges from downright illegal to merely corrupt and immoral. And of course, the investment banks have ruined the global economy and caused poverty and misery for hundreds of millions across the world. All of these things have happened when investors could had voted against them but didn't. Why? Because they are part of the problem, not the solution.

We know Investment banking is institutionally corrupt. But what about other industries?

Safety and environmental destruction. Examples....

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, but private rail operators continue to run the most expensive services in Europe whilst receiving large government subsidies.

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. Banks have made switching accounts so difficult that many people don't try - a clear distortion of competition.

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 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 were signally missing under British leadership.

Exercising vast power over politicians, undermining democratic institutions.

The revelations about phone hacking, corruption of the police and exercising undue influence over politicians has been fully exposed in Britain by the Guardian newspaper and particularly the Levison enquiry into media ethics.
But behind the scenes in most countries, but especially Britain and America, a vast army of corporate lobbyists seeks to bend legislation in the interests of their paymasters. The food, tobacco drinks and pharmaceutical industries are guilty, along with many others of seeking to distort facts and push their products. The defence industry has indulged in serial bribery, selling arms to dubious regimes and strong-arming the British government to ignore its misdeeds. Unfortunately, Britain's strongest remaining industries are Big Pharma, banking and arms, all of which have been revealed to be serially immoral.

Finally, the UK 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"

Have shareholders held directors to account?

Given the litany of malpractice above, the answer has to be an emphatic NO!
This is despite the fact that they have the right to vote directors off boards and veto pay increases. And the sorry saga continues. GlaxoSmithKline have recently been fined $3billion in the United States for corrupt practices and bank HSBC has also been accused in the US of massive world-wide money laundering. Still, little action has been taken by “shareholders” who seem a remarkably incurious bunch. It is public outrage which has finally stirred politicians from their complacency.

So why do politicians expect shareholders to improve matters?

It beggars the imagination, being rather like a definition of madness as constantly repeating the same mistake and expecting a better result each time.
But one good reason is that they are frightened of interfering in “The Market”, preferring to stand back and blame others for the disgraces. This is partly a matter of ducking responsibility to act on behalf of society, partly a misguided belief in the power of The Market, and partly ignorance and naivety. But mostly, they have been scared of taking direct responsibility and annoying the markets.

Why won't shareholders take responsibility?

The reasons are quite simple:

These are very convincing reasons as to why shareholders (more like share-shufflers) in the investment markets are not keen to exercise the role of honest brokers between share owners and corporations. In some cases, their own practices would not stand up to scrutiny, in others, their own remuneration practices are as disgraceful as those of the managers they are supposed to control. There are some investment industry bodies that can take a stand, but their role is advisory, because they are not share owners either.

Politicians must get real.

The latest person to make a fool of himself is Vince Cable, UK Industry minister. He has vilified the corruption of the banking industry and produced his solution, that “shareholders” must exercise control over directors!
Until politicians step up and accept their responsibilities to create independent bodies with statutory responsibilities for intervening on behalf of Society to rein in the “Corporatocracy” that is rapidly reducing democracy to a sham, it is certain that little will happen to stop the corruption and damage caused by over-powerful corporations.

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