The HBO featurette, “Too Big To Fail” traces the path taken by the high and mighty of Wall Street and the US Financial system in the aftermath of Lehman’s collapse and the subsequent ‘nationalisation’ of mortgage lenders Fannie Mae and Freddie Mac. In its opening credits a clip of former US Federal Reserve Chairman Alan Greenspan saying that regulation for regulations’ sake would destroy the financial markets sets the tone for somber viewing.
Greenspan, along with US Treasury Secretary Lawrence Summers and SEC Chairman Arthur Levitt saw to it that risky financial derivative products and swaps were de-regulated and – according to some – laid the foundations for what was to be the great financial crisis of 2008.
While he may have had his critics; that the dismantling of the regulatory structures that Reagan started has resulted in some startling instances of corporate malfeasance and fraud is undeniable. From WorldCom & Enron and recently to Goldman Sachs and the AIG bailout point to a startling trend in High Street bailing out Wall Street. It is against this backdrop that the articles make for such interesting reading.
The Economist article “The Company that ruled the waves” is an interesting read because it talks about what will happen in the future; by analyzing what has happened in the past. The monolithic East India Company was the first truly global multinational organisation. It paved the way – in its own way – for much of what we take for granted in management practice.
Promotion on the basis of merit, frugality, and a dedicated management cadre – trained specifically for their jobs – are ideas that the conglomerates of today have just started to wake up to 150 years after they were espoused by the Company.
Offshoring – cotton grown in India and spun in Lancashire; a grouse of the early Swarajists – was a company innovation. As was its system of building ports and warehouses to conduct businesses where it went – a precursor to FDI today. Even in India, much of its profits were channeled into infrastructure that, although built for the British, nonetheless did aid in the integration of India in to a single country much later on.
It also was a trading organisation that created markets for tea, silk, spices and aided in a balance of payments surplus for Britain. It influenced policy decisions and lobbied. Its ability to work around troublesome rulers in India and bribe or lobby its way out of regulation in England, is perhaps the foremost proponents of the school of thought currently practiced by the likes of Nira Radia today.
The article is perhaps a bit gushing in its praise for an organisation that according to the British themselves was “bloodthirsty and inhumane”. However, to the authors credit he does succinctly put across the point that the reason for its success was its dual nature – merchants ran the show and the government backed it up. It correctly sums up many salient pros and cons of such an organisation – and more importantly the ploys used by it and its detractors to ultimately put it to rest. It paints a deft picture of a much maligned organisation – and tries to ask questions about why such organisations are coming back in fashion today. It is thought provoking and engenders some debate as to the future and viability of large public limited corporations.
This is also a theme mirrored in the another Economist article “The Endangered Public Company”. It talks about how listed public organisations – the greatest inventions of the 20th Century – no longer are thought of as the great money-making machines that they once were. The article lists the three main reasons for this; over-regulation, the demand for super-transparency and most importantly the rise in alternative ways of financing and organisational structuring.
While the article does tend to over simplify a hugely complicated issue, it does get its main premise right. The public limited corporation is gone. In its place private equity-led and sometimes government backed megaliths now bestride the earth like colossi.
“The fault lies, not with our stars, but with ourselves”.
Over the last decade as globalization and privatisation have become catch-phrases to do business by, the world seems to have moved away from selling and on to profiteering. The article points out that owners and managers seldom have goals that are aligned. A far worse situation is that policy-makers and managers agree even less. Soaring corporate profits are a sure indication that there is a lack of competition in the industry. Competition leads to lean organisations and slimmer profits. While politicians want competition – which is good for the people and gets them the votes; managers root for monopolies and look for ways to get them past legislation. A knee-jerk reaction to this sneakiness usually is the sort of over-burdensome legislation that Greenspan was talking about. To get around that legislation – which sometimes work against the company – the great public limited company is now threatened.
Another aspect of this standoff is the widening right between the rich and poor. Since the 1980s the tax rate for the richest Americans has reduced by 60%, while the cost of living has gone up. Unrestricted speculation and risky investments only make a bad situation worse.
A leaked CitiGroup memo [shown in the Michael Moore documentary “Capitalism: A love story”] warns that despite the US being a plutocracy – the “other 99%” still have one vote each. Each passing day brings uncertainty. Since all major investments are near-permanent; with rising uncertainty – the value of waiting for more information increases; and thus stops investments and growth. Hence the great IPOs of the past will probably not see an equal in future. Even Facebook wasn’t good enough.
The hard but sure way to get out of this mess would be fiscal reform and a monetary union. But the EU – which has tried it already – is an example of how a good thing may be spoilt. A monetary union without fiscal policy uniformity – if not hegemony – is useless. Globalisation too has not borne the fruit promised. It certainly did not make equitable wealth distribution a reality.
In the end Adam Smith’s invisible hand has failed. Collectivism would see us back to the days to Big Tobacco and Big Pharma. That too didn’t work. The state-owned organisations where government funds become productive in private hands and private equity is more responsibly used under state supervision seem to be the way out. But that will start a troublesome debate on what the modern world has come to.