Corporate Responsibility

This post is related to an issue close to my heart.  As an entrepreneur who is on his second employee-owned company, I find the evolution of corporate governance, etc. to be a bizarre mix of raw capitalism and the strange affectation of American's to written law (in this case the idea that corporate Boards are responsibility only to stockholders, etc.).  I met a very interesting person at the Artificial Economics conference and Spain and after some sangria-lubricated conversations my new friend (Gilbert Peffer from U. of Barcelona) sent the following link to me.

http://www.demos.co.uk/publications/reinventing-the-firm written by William Davies.

The book is free for pdf download.  To quote from the introduction -

"The economic crisis that peaked with the banking meltdown of autumn 2008 has been accompanied by some striking renunciations of faith. In October of that year, Alan Greenspan, former Chairman of the US Federal Reserve, declared that ‘the whole intellectual edifice’ on which financial regulation had
rested had collapsed, meaning that he had been ‘partially wrong’ in his policy decisions.1 The following March, Jack Welch, the former CEO of General Electric and poster child of the ‘shareholder value’ movement, admitted that ‘shareholder value is the dumbest idea in the world’.

Greenspan’s confession made greater headlines, but Welch’s was no less significant. The shareholder value creed – the belief that a company’s primary purpose is to maximise its value for the benefit of external shareholders – was as much a part of the neoliberal ‘intellectual edifice’ as Greenspan’s belief that financial markets are self-correcting. The creed, embodied by Welch and articulated in Alfred Rappaport’s 1986 book Creating Shareholder Value, derived from a very limited understanding of what a firm is. At its heart, the shareholder value philosophy presented firms as comparable to any other economic object that could be owned, traded, invested in and profited from. From this perspective, the price of a firm’s stock was the best and most complete representation of its true value, and satisfying shareholder interests was the overriding goal of management.

This perspective blankly ignores a number of critical aspects of how firms work and succeed."

Davies looks at alternative ways to understand ownership and responsibility, with particular emphasis on the role of employee ownership in Britain.  Davies argues that pluralistic ownership concepts are much more suitable for modern needs and in particular for modern corporations where value is mostly intangible, such as people, operational concepts, culture, etc.  So far a very interesting read (I haven't completed it yet) and certainly something that needs discussion as we evolve our understanding of what it means to be a corporation.

Comments

[Dianne Schmidley]

First of all, we don't know that markets are not self-correcting. The government interferes with commerce so much, we don't know what would happen if it just disppeared. Second, what is a neo-liberal...do you mean socialist? Third, what is pluralistic ownership? If it is what I think it is, how do you prevent the owners of multiple shares from having more say-so?

[Wayne Z.]

Markets are a creation of government. Governments create the framework by which markets occur (as compared with commerce, which we can define in a much more simplistic manner to include barter, etc.). So to suggest that governments interfere with markets is a nonsense. The argument is interesting, it suggests that an experiment where government involvement with "markets" be eliminated "may" be worthy of a trial. Libertarian ideals aside, I think history shows less regulation as a chimera, similar to non-enforced regulation, aka Madoff, etc.

I am not really big on labels like neo-liberalism, even less so the quick jump to the boogie man of socialism (is the implication that socialism is bad a priori, especially without a definition of what socialism is?) but here is wiki's extensive discussion of neoliberalism http://en.wikipedia.org/wiki/Neoliberalism. The summary -

Broadly speaking, neoliberalism seeks to transfer part of the control of the economy from public to the private sector,[9] under the belief that it will produce a more efficient government and improve the economic indicators of the nation. The definitive statement of the concrete policies advocated by neoliberalism is often taken to be John Williamson's[10] "Washington Consensus," a list of policy proposals that appeared to have gained consensus approval among the Washington-based international economic organizations (like the International Monetary Fund (IMF) and World Bank). Williamson's list included ten points:

* Fiscal policy discipline;
* Redirection of public spending from subsidies ("especially indiscriminate subsidies") toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and [[infrastructure investment;
* Tax reform – broadening the tax base and adopting moderate marginal tax rates;
* Interest rates that are market determined and positive (but moderate) in real terms;
* Competitive exchange rates;
* Trade liberalization – liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by law and relatively uniform tariffs;
* Liberalization of inward foreign direct investment;
* Privatization of state enterprises;
* Deregulation – abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudent oversight of financial institutions; and,
* Legal security for property rights.

This all looks pretty familiar and would suggest libertarian schools of economic policy would find a lot in common with neo-liberalism, hence the opposite of socialism, whatever the heck that means.

Pluralistic, as compared with purely democratic, does indeed allow those with more shares to exert grater influence. However, a company structured with truly involved, truly broad based ownership, where stockholders are not disenfranchised, etc. as well as the business cultural implications is a far cry from large publicly traded corporations as they now function in the US. Take it from me, I've been in both situations as a senior executive, and there is a huge difference. HUGE!! IMMENSE!!! I mean .... Really Big!! ;-)

[Prof. P]

It would be interesting to test the ten points against history. What, for example, could historical analysis tell us about "moderate marginal tax rates" or deregulation. And I mean historical analysis not tarted up economic analysis.

[Adrienne]

Yes, neoliberalism in label and definition is moving away from socialism towards privatization/lack of government involvement. And one of my current pet peeves is the tossing around of the term "socialist". I am so looking for one of the reporter to ask even one of the "users" to give their own definition of what exactly makes a socialist. But I must quibble Wayne with the idea that markets are created by th,e government. I would argue (again from a sociological perspective -smile) that a market is an institution socially constructed in concert with the another constructed institution the (form of ) government. Thus using deregulation as an example - there is, in some space, the perfectly constructed government for a culture or society in which complete deregulation WOULD be optimal and efficient, unfortunatley it appears (based on current results) that the US circa 2008 is not one of them.

[Dianne Schmidley]

Wayne, I agree with Adrienne, markets are NOT created by governments, although governments with their rules and regulations may be designed to protect markets, which is perhaps what you meant. Markets in turn are a critical aspect of human life as T.H. Breen points out in "The Marketplace of Revolution."

Much evidence suggests that markets existed long before the rise of the nation-states or anything like them, i.e. in the form of 'fairs' in the "Middle Ages" and/or nodes of exchange associated with trading patterns, for example, the silk route or the "revolving connubia" in the Pacific which linked many islands together for mutual benefit.

Levi Strauss suggests that 'exchange' (which is what markets are about) tell us a lot about social organization. (Mauss had pointed this out earlier in "The Gift."

Basically, from Braudel's perspective, by the 16th century, governments were already part of the 'froth.' Remember poor old Phillip II?

On another note, have you noticed that the same kind of giveaway of government money can be called a subsidy, an allocation, or a grant? What does that tell us about social organization?

[Wayne Z.]

I think my argument still holds in that we are not talking about forms of exchange, but about complex methods of financial transacting. The idea of a currency as something backed by the governmental institution is clearly at least co-dependent on the existence of a state. So if we are talking about systems of barter or even mercantilism, I might agree that it is not wholly coincident with the state. However, we are a far cry from that and the corporation and financial markets as now understood are wholly and completely dependent on and a product of states.

[Dianne Schmidley]

Currency as a lubricant for exchange is another matter. Cowrie shells were an important form of currency in the South Pacific until recently. Too me, gold is just another form of cowrie shell, rare and treasured by some...which is what give it its worth. The fact that governments became associated with currency is indidental.

[Wayne Z.]

We've found The Nut! This will be discussed Thursday!
Sent via BlackBerry from T-Mobile

[Bill]

The only "free markets" are found in the worlds of organized crime and "black markets"-- participants in those markets make their own rules and enforce their agreements without benefit of government. To them, "government is the problem, not the solution."

For the rest of us, government is very important in shaping and enforcing market rules within which businesses can fairly and profitably operate. These include contract enforcement procedures (courts, standards of contract interpretation, etc.), consumer protection rules, standardization of market practices, oversight of monopolies, environmental laws to protect the public from pollution-based harms (externalities to businesses), food-safety laws to protect consumers, banking and insurance rules (e.g., requirements for minimum capital levels), criminal laws that prohibit a wide range of commercial practices (e.g., slavery, prostitution, fraud,insider trading), etc.

While businesses will grouse about particular rules as being burdensome (e.g., rules limiting their ability to shift pollution costs to the public), they benefit from rules that prevent them from cheating customers or taking on undue risks because buyers' trust is enhanced for all sellers and they know their competitors are subject to the same rules. They also benefit from a healthy consuming class that has enough money to buy products. When all the money is in the hands of a few, the potential for economic growth is limited.

While a balance must be struck between too few and too many rules, libertarians' claimed desire for no-government is clap-trap. We do not want to return to a state of nature.

[Wayne Z.]

Amen!!