The 2008 banking crisis and its aftermath revealed serious problems in the operation of the economic system. This has led to widespread criticism of flaws that were previously tolerated or only recently revealed. Problems like corporate tax avoidance, excessive executive pay, and payday lending appear to evolve because there are no limitations on business practices that do not break laws or regulations, although they are widely regarded as socially unacceptable.
At present it takes a long time to address such problems; they are often tackled in a piecemeal fashion, or not at all. There are many reasons for this, but, however it occurs, the result is poisoned and polarised relationships between government, business, and society. Indeed, a recent (April 2014) opinion poll, carried out by Populus for the Financial Times, showed that the majority of voters distrusted big business, and wanted tougher action taken against irresponsible corporate behaviour.
Doing nothing will not help business. It will not make politicians’ lives easier and, above all, it will not solve problems. Nevertheless, tackling mistrust will be difficult. For that to happen, we need a new forum for looking at policy and individual cases. In the following paragraphs, we outline how this could be established.
Awareness of the need to improve some corporate behaviour is, of course, not new. Investigations have usually followed crises, and subsequent recommendations have normally been, at least partially, implemented. The measures taken to improve governance and oversight have not, however, prevented or anticipated the banking crisis, the phonehacking crisis, or the meat adulteration scandal of 2013. There have also been many initiatives over the years to try to define and implement corporate social responsibility, and to codify good corporate governance. These undoubtedly provided some benefits, but did not prevent major problems.
We therefore propose to start from the opposite end, to see if one could define what is clearly unacceptable or irresponsible. The advantage of doing this is that defining the limit of acceptability enables business and society to have a rational discussion about addressing existing problems, and to anticipate and avoid future problems.
Over a period of some six months, we examined, with a group of colleagues, several examples of business behaviour that have been criticised, such as payday lending, corporate tax avoidance, high pay and private equity takeovers of care homes, and measured them against the following definition of unacceptable capitalism:
Unacceptable capitalism is action or inaction relating to the operation of individual capitalist enterprises or the oversight of such enterprises, by individuals, companies, regulators or legislators, which involves significant, foreseeable risk of material harm to the interests or wellbeing of stakeholders including shareholders, employees, customers, suppliers, the host community, and the environment.
The common feature of the cases we examined was a serious mismatch between the formal regulations and legislation governing the behaviour of companies, and the social acceptability of that behaviour. We also found that the definition of ‘unacceptable capitalism’ provides a useful litmus test of what business behaviour is socially acceptable, and what is not.
Using a multi-skilled team, including lawyers, accountants, economists, tax experts, academics, and people with experience in management or employee relations, proved effective in quickly analysing issues that cross a range of legal, regulatory, and social boundaries. This approach, applied when a problem emerges, or even earlier, could therefore make any subsequent work by regulators and legislators easier and more efficient, by providing a concise, objective summary of a problem, with recommendations for further regulatory, legislative or other action.
We therefore propose the establishment of a Standing Commission on Responsible Capitalism. It would look at existing and emerging problems, and decide whether the activities involved were socially unacceptable. In cases where an activity failed this test, the commission would try to help those concerned to come to some accommodation. Where accommodation proved impossible, it would set out concise arguments for legislative or regulatory interventions. Once in operation, the commission would, ideally, be able to address problems as soon as they arose, and help to find constructive solutions. The establishment and operation of the commission would incur some costs, but we consider it important to avoid creating a large, bureaucratic organisation.
Such a commission would bring many very positive benefits. These include the provision of a constructive, impartial framework for problem-solving, which would enable companies to address problems such as high and low pay and corporate tax avoidance in a neutral setting. It would provide policymakers with analyses of problems, and recommend a basis for action, without taking away the scope for further scrutiny. Furthermore, it could give advance warning of problems before they became significant, and facilitate improved governance, to help business and society work together more closely and more productively.
Assuming further work being done during 2015 and with government, or other civil society, backing, we believe the commission could come into operation in 2016.
———————————
Please send comments to: Stephen Hockman QC [email protected] and Rod Dowler [email protected]
———————————
The idea of a Standing Commission on Responsible Capitalism has considerable merits. I presume it might operate a little like the Takeover Panel, which has a moral force, though, as I understand it, incomplete legal authority. It operates in a U.K. framework.
Responsible Capitalism in a global framework may be more difficult to pin down. The old saying (Gresham’s Law) : “Bad money drives out good” is applicable to standards of behaviour too.
Since the repeal of Glass-Steagall (despite subsequent changes in the USA), the financial services industry has been running in blithe disregard of the matter of conflict of interest. John Kay, in today’s FT (9th July 2014), has written a nice piece on that subject. Globally, it will be difficult to pin down what I might call the cowboys in that industry (and I don’t think the Chinese will take any notice of anything anyone else asks them to do, even if they’ve agreed to it previously).
Discipline may be imposed in some ways by the USA authorities, as in the case of BNP Paribas, but if people really want a free trade world, what they have done is oppressive and the dollar’s dominance is unreasonable. Cynics will say that the USA is hypocritical and out to subvert non-USA banks.
I suspect that voluntarism will not work in this field. Tough legislation is what is needed to keep people on the straight and narrow. The financial services industry will need to shrink very substantially, to eliminate the parasitical aspect of its nature. Conflict of interest will need to be legislated against (goodbye, light touch regulation).
Chairmen in a corporate entity (and shadow directors) will need to be responsible for the acts of all their underlings and risk being put in jail (to eliminate sub-prime mortgage-type scandals) and the Chairmen ought not to be able just to walk away from the scene of the crime.
A duty of care (cf Islamic financial techniques) needs to be legislated for in lending and other financial dealings – though this is easier said than done if you are cutting out possibilities of conflict of interest – but it might prevent asset booms happening. We need to get away from the mantra of “You may lose your house if you do not keep up the payments on your mortgage”, though the Bank of England appears already to be doing something about better checks for affordability.
That’s enough for now.
I think there are many excellent ideas in this proposal. However I note
that the emphasis here is entirely on Corporate responsibilities. I
believe there is a broader issue for the Commission to consider, that of
Government behaviour.
Since the 1980s both Conservative and
Labour administrations have been selling off public assets and
outsourcing public services under the explicit assertion of greater
efficiency and the implicit assertion of ‘market liberalisation’ and
more generally of the alleged benefits of ‘shrinking the State’. There
are many ‘irresponsible’ aspects to this past and ongoing programme.
For asset sales these include:
–
assets of long term financial value to the taxpayer are lost to private
or institutional investors (often foreign, often non-tax-paying).
Everyone surely understands that ‘selling off the family silver’ for
short term gain is normally not financially sound.
– asset sales are often underpriced, the recent Mail privatisation being a spectacular example
–
the funds gained from privatisation usually end up in the general
Treasury pool for current, ie short-term and recurrent, expenditure
rather than for long-term capital investment.
– key infrastructure
assets such as railways, energy and water utilities end up with a high
level of foreign investment. Most governments around the world for
obvious reasons protect their key infrastrucure from excessive levels of
foreign ownership.
For outsourcing (or franchising) of public services the list of irresponsible aspects includes:
–
outsourcing programmes do not generally result in improved services or
cost efficiencies, often turn out to be more expensive than initially
expected, and generally have soft and financially advantageous (to the
provider) exit provisions when privatised or franchised services go
belly-up. There have been many examples of this in recent service
outsourcings in health, social care, justice, railways.
– the
taxpayer has to pay the large overhead cost of professional staff
required to set up and manage outsourced services: a thick layer of
regulators, lawyers, tax advisers, contracts management, etc.
Additionally there is the overhead cost of outsourcer’s/shareholder
profits.
– wages of already low-paid staff tend to fall even further behind in outsourced services.
–
there is a fundamental conflict of interest between private companies
whose objective is to maximise short-term investor/shareholder profits
and the public provision of optimal, long-term public services.
– huge amounts of public money have been, and continue to be, squandered in expensive PFI projects
These
two lists go on and on, and exemplify the irresponsible management and degradation, by
governments of all hues, of the mixed economy which is the foundation
block of post-war western capitalism.
To all this we can add the
irresponsible deregulation of financial services together with the
present government’s lame endeavours to bring the financial industry
back under some sort of effective control. And when it comes to
Corporate tax avoidance I do not think we should be unduly harsh with
companies who quite legally game the system. The real responsibility
lies with the government’s ongoing failure to do anything about it in
terms of effective legislation with teeth, and in fact recent changes
have actually made such avoidance easier.
I do hope the Commission will also address these important broader issues.