On Thursday Ed Milliband wrote about capitalism
in the FT
, and Dave and Boris gave speeches about it. FT
deputy editor Philip Stephens penned a thoughtful piece
on the morphing of financial crisis into a global political one as politicians flunk the challenge of thorough-going financial reform; Lex noted laconically
that over the last decade Goldman Sachs, that day announcing a 58 per cent fall in earnings, had paid employees twice what it had made in net profits (doubling their amounts in the process). Meanwhile, The Guardian
’s Zoe Williams wrote about supermarket profits (and therefore top pay) being indirectly subsidised by state benefits to cashiers and shelf-stackers to supplement poverty wages. Murdoch paid out hundreds of thousands of pounds to settle 18 phone-hacking cases. And Kodak filed for protection from bankruptcy.
Just another day in the life of post-crunch capitalism. It’s all here: the out-of-control pay, the toxic imbrication of politics and business, the overweening overconfidence and fallibility of top bosses, the headlong march of globalisation – and the infuriating inability of politicians to see to the nub of the issue.
As the FT’s Stephens notes, all ‘the talk of “responsible” capitalism, of rebalancing economies and constraining the rewards of the super-rich, falls short of anything resembling a grand plan. The ambition is to make do and mend.’ None of the parties has a clue about the symbiotic relationship between markets and organisations, which means that they have little useful to say about the public and private sectors either. Ironically, Labour has been the worst custodian the public sector ever had, imposing on it the crudest kind of private-sector performance management, while Cameron’s claim that only Conservatives – ‘those who get the free market’ – are equipped to make capitalism fairer is just risible. As in domesticating the the feral rich by appointing a previous Murdoch editor as press secretary, Dave?
From robber barons to Tea Party, capitalists have always been capitalism’s worst enemy, which has relied on contrarians, humanists, trade unions and others to soften the most abrasive edges and prevent itself from auto-destructing. They are still getting it wrong. As John Kay acutely observed in the same week, we constantly overestimate the advantages, and longevity, of large companies, and the merits of scale and centralisation generally. The big question now is whether not just the banks but any number of other global industries have become just too big either to fail or to be reined in. Having increasingly turned ‘political decisions over to the highest bidding lobby [and allowed] big money to bypass regulatory control’ (Harvard’s Jeffrey Sachs, in another telling piece
in the FT
last week), does the polity retain the wit or will to act on these insights, firstly to prohibit any further industry concentration and second, preferably, to start breaking existing ones up?
Attempts to deal with the other manifestations of capitalism are equally namby-pamby. Yet the outlines of a new settlement are perfectly clear. Corporate governance needs wholesale reform. As Tony Hilton pointed out in a brutally logical piece
in the Evening Standard
, executive pay is now so complex that no one can understand or properly compare it. So amend governance codes to make flat rates of pay – no bonuses or side deals – a norm with which companies are obliged to comply or explain why not. Of course the workforce should be represented on remuneration committees. People who work for a company have far more at stake than most shareholders, who are no more ‘owners’ of, or even investors in, firms than racecourse punters are owners of the horses they bet on. The average holding time for a US equity is 22 seconds, according to SocGen; 70 per cent of UK equities are held abroad or by short-term traders. The secondary market provides no extra capital for companies. To expect the majority of shareholders to give a toss about executive pay a) is as pointless as pushing on string, and b) there’s no justification for it anyway.
The other necessary element of governance reform is equally evident. It is stated unequivocally in Roger Martin’s important 'Fixing the Game', which shows how an ideological fixation on shareholder value has, paradoxically, ‘reduced shareholder value, created misplaced and ill-advised incentives, generated inauthenticity in our executives, and introduced parasitic market players. The moral authority of business diminishes with each passing year, as customers, employees, and average citizens grow increasingly appalled by the behavior of business and the seeming greed of its leaders. At the same time, the period between market meltdowns is shrinking.’
As Martin points out, giving executives stock options is tantamount to encouraging sportsmen to punt big on the result of the game they're playing in. The incentive to use any means to get a result (in the case lever the stock price upwards) is irresistible – that's what CEOs are supposed to do. The only way to kick the habit is to destroy the expectations market by outlawing stock options and prohibiting earning guidance to the City and Wall Street. And, by the way, ban pension funds and public investment vehicles from investing in hedge funds whose fees aren’t adjustable downwards when they fail to deliver the promised rewards (lastest calculations are that over the last decade hedge funds consumed all the returns they created).
Break up the oligopolies (making barriers to entry, and therefore eventually profits, much lower); alter corporate governance to dethrone shareholders and prevent companies being looted by managers in cahoots with short-term traders (thus benefiting shareholders in the long run); ban CEOs betting on games whose outcomes they can easily manipulate. These are the minimum actions needed to bring capitalism back under control and return it to its proper role – servant, not master.