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Saturday, January 28, 2012

A Future of Regulators at Fault?

The typical case in the U.S. is that the industry being regulated resists being regulated, while the regulators insist on enforcing the regulations. To be sure, particularly strong firms in an industry may propose incremental regulations for strategic advantage—knowing that smaller or less profitable firms in the industry would have more trouble complying financially. The strategic use of regulation is an under-appreciated phenomenon in the de-regulation movement. Perhaps even more bizarre is the case of an industry complaining about lax enforcement of existing regulations and demanding even more. What industry might fit this bill? As a hint, look for a major scandal that did reputational harm to an industry.

In the industry, the firms’ calls for a crackdown must contend with a legacy of a light regulatory touch.” People in the industry question whether regulators have been “too gentle” on the firms. If a firm “runs afoul of the rules, regulators largely rely on the firms to report their own wrongdoing.” It sounds like Andy Taylor’s jail in Mayberry—the keys are hanging on the wall, help yourself Otis (he was the drunk). From 1996-2011, regulators penalized only ten firms, letting scores of others off the hook “because [the] regulators deemed their violations accidental.” The sounds like the work of Andy’s deputy, Barney—find the loot only to lose the criminal.

I am describing the futures industry, whose firms, “ordinarily loath to accept regulation,” decided in the wake of MF Global’s collapse and loss of $1.2 billion of customer money to spearhead efforts for “new oversight as they try to heal the black eye.” In its article, the New York Times describes the existing regulations as nearly non-existent. For example, “firms need not inform customers of the whereabouts of their money.” It is no wonder that prospective customers would be hesitant to enter that arena—hence the firms’ financial interest in additional regulations. The question is perhaps why the regulators had not recommended any to Congress.

Without the usual vested interests thwarting prospective regulations bearing on themselves while Congress stands by and takes the contributions, any additional regulations “spearheaded” by the industry can be expected to be enacted. The question, I suppose, is whether the regulators will feel like enforcing them. With no headwind from the industry, lax enforcement would be an interesting nut to crack. Could it be that regulators exist who don’t believe regulations are very important? Such a mentality would be the opposite of public service—something like agnosticism in religion, only as held by clerics. Such a thing simply is not expected, hence it is worth investigating.

The most likely explanation is that the regulatory agency was “captured” by its industry, and ultimately it was in the interest of the industry itself to come up with something stronger. If so, might it be that once the new regulations are up and running, particular firms or the industry as a whole might want to capture the agency again? Even in following the industry’s “spearheading,” the agency is essentially “captured.” Is it the case in the American system more generally, that agencies are captured by their regulatees whether in increasing or decreasing enforcement? In other words, might the business and financial sectors be too powerful over government for their own good—like children telling their parents when to discipline them and when to let them get away with something?  The sectors—and in particular their largest firms—may be too powerful for a viable republic: TBTG, meaning too big to govern. TBTF might not be the biggest elephant in the living room after all.

Source:
Ben Protess and Azam Ahmed, “Insiders Call For Oversight of Futures,” The New York Times, January 26, 2012. http://dealbook.nytimes.com/2012/01/25/futures-industry-sees-chance-to-shape-oversight/


Wednesday, January 25, 2012

Reining in Corporate Pay: Europe as a Model of Fairness for America

Corporate compensation—executive pay in particular—represents a “clear market failure,” so said Vince Cable, the business secretary in the E.U. state of Britain. While suspected, the sheer explicitness, or blatant manner, of this verdict is itself noteworthy. Moreover, it stands as an opportunity for the E.U. to surpass the U.S. on economic fairness, which is a type of justice (see John Rawls). That is to say, Europe had an opportunity at the time of Cable’s statement to set the E.U. on a trajectory that would make the unfairness in the American system more transparent.

The business secretary, a Liberal Democrat in a coalition government with the Conservative Party, told the British House of Commons in January 2012 that business and investors “recognize that there is a disconnect between top pay and company performance and that something must be done.” In New York at the time, the disconnect was generally taken as a fact of life, given the power of the managerial elite in corporate capitalism (as well as American legislatures). As if attempting to pop this stygian balloon filled with the noxious air of denial, Vince Cable continued, “We cannot continue to see chief executives’ pay rising at 13 percent a year while the performance of companies on the stock exchange languishes well behind . . . (a)nd we can’t accept top pay rising at five times the rate of average workers’ pay as it did [in 2010].” The unfairness, in other words, is at the expense of not just the corporation’s owners, but also the (other) employees—executives being employees too.

It could be argued that the 13% annual increases in executive pay are a function of an increasing proportion of company stock options in the compensation. If the profits are languishing, the theory goes, the value of the options should be zero (i.e., unexecuted). However, what if the next group of executives, or even the economy over all, “performs” such that the options held by the previous executives then become valuable? Moreover, what do options cost non-management stockholders in terms of dilution? I suspect that options are “an easy way out” relative to cash compensation. The question is thus whether the practice can be reined in.

Under Vincent Cable’s proposals, shareholder votes on executive pay would be binding. Seventy-five percent, rather than a mere majority, would be needed for approval. I have never understood why the American states limit such votes to “non-binding,” as if the business judgment rule trumps property rights on compensation. Given that CEOs typically control their boards, whose job it is to oversee the executives for the stockholders, treating the property owners of the corporate wealth as if they were a focus group or a meaningless straw poll in Iowa seems misguided at best—and supportive of an institutional conflict of interest centered on the executives. To be sure, the suggestion made by Chuka Umunna, Vincent Cable’s counterpart in the Labour Party, to have employees as part of executive compensation committees also incurs a conflict of interest—one centered on the employees who have an interest in wanting “payback” for the decades of unfair compensation. Conflicts of interest can work both ways—inflating and deflating deserved compensation.

My main point is the following: Were Europe to strengthen investors’ property rights—including disallowing proxies held by managements for such votes on account of the conflict of interest—the fault running through American political economies and civil societies would become more transparent (i.e., more obvious). “We have  been clear that executive pay must always be fair and transparent, and that high pay must be for outstanding, not mediocre, performance,” John Criby of the Confederation of British Industry—a business lobby group—said. “Millions [of pounds] for mediocrity does a disservice to the reputations of hard-working businesses.” Indeed, it does a disservice to the society as a whole—particularly in terms of what it stands for. Can you imagine the U.S. Chamber of Commerce coming up with such a statement? It is a pity, particularly in terms of systemic risk, that a lack of enlightened self-interest in the vested interests on such a “clear market failure” exists in America. For this reason, “Europe as a Model” is not such a bad thing, certain rhetoric (of the usual suspects) to the contrary.

In Vermont and Wisconsin at the time of Vincent Cable’s speech in Britain, movements were underway to amend the respective constitutions (as well as that of the U.S.) to make it clear that corporations are not “legal persons.” I believe it would follow that money is not speech, though the amendments ought to make this explicit, given the tendency of justices to invent legal doctrines and the sway of money in legislative halls. Polls at the time showed 71% of the people across the United States were opposed to the Citizens United (unlimited corporate political contributions) decision of the U.S. Supreme Court two years before (almost to the day). Lest those movements get cocky, their leaders should be aware that huge corporate “war chests” used to buy politicians, commentators, and air time may mean that even such a supermajority’s popular will may not be sufficient. If so, it is unlikely that anything like Vincent Cable’s proposals would see the light of day in America. Accordingly, I have pointed out here the value in merely having an alternative displayed in Europe, even if the benefit is limited to wakening Americans up to the grip of corporate capitalism in American societies.

Source:
Julia Werdigier, “British Government Works to Rein in Corporate Pay,” The New York Times, January 23, 2012. http://dealbook.nytimes.com/2012/01/23/british-government-looks-to-rein-in-executive-pay/


The European Debt Crisis: Europe's Leaders in Pictures

                                         
                                          Can you identify the narrative in the video?

Tuesday, January 24, 2012

Free Speech in Europe: Criminalizing Denials of Genocides

While the world continued to look on—like an impotent rich man who cannot afford Viagra—as a genocide was taking place in Syria (i.e., the systemic killing of a group—in this case, of pro-democracy demonstrators), France’s state senate approved a bill on January 23, 2012 criminalizing the denial of officially recognized genocides, which according to the state includes the Nazi Holocaust and the Turkish killing of Armenians beginning in 1915. In the twenty-first century, fining people and putting them in prison for not wanting to remember things so horrible evinces the same kind of nationalist thinking that had led the twentieth to be the bloodiest century. In contradistinction to that decadent century, turning a new leaf following the Arab spring in the twenty-first is a far better strategy.

Beyond the obvious matter of free speech, which admittedly is not absolute even in America, it should be asked whether law is an efficacious means of barring or changing thoughts. On the day of the vote, a study was released at the Bundestag in Berlin reporting that twenty percent of that state’s population was still anti-sematic. I don’t believe penalizing that prejudice itself (i.e., as a belief apart from any conduct) by the state’s police power forces any change at that level. At most, people would simply hide it—and how would such repression burst out in conduct? I submit it would be better simply to ignore the thoughts and concentrate on conduct.

Europe has had a tendency to codify thoughts as if they belong to the state. In America, that realm is province of the “thought police” that sprang up (as self-appointed) during the 1990s as “political correctness.”  At least with political correctness (such as in saying humankind rather than mankind, and Native American rather than American Indian), the self-appointed enforcer can be told to go to hell. The natural reaction to being accosted in such a presumptuous and pernicious way is to say precisely that which is not desired by the aggressor. Adding the police power of the state to enforce certain beliefs by penalizing others is dangerous not only for society itself, but also for individuals in terms of our quality of life free from anxiety. The over-reaching may even be immoral; it is certainly weakness.

A person may be able to control one’s own conduct more than one’s ideas or beliefs. Besides the futility of law in going after a person’s interior mental life, that domain is inherently beyond the unwanted control of another person. The French law would include up to a year in prison and a fine of about $58,000 for anyone who denies an officially-recognized genocide. Is the reach of the law limited to public speeches or published writings, or are people of France to feel anxious at private parties in their own home? In terms of general anxiety, the law could cost the state’s entire population. Is effectively adding the Turkish killings nearly a century before to the German Holocaust worth this in France? It is not as if that E.U. state borders Turkey.

Therefore, behind the 127 to 86 vote is a rather basic category mistake with respect to jurisprudence. Taking the law beyond its native domain to enforce one’s agenda using the police power of the state undercuts law itself, and thus contributes to the downfall of its legitimacy, even in its proper realm. In other words, in over-reaching, a government can wind up with even less influence over its people through even criminal law.

Additionally, a refusal to respect another’s inalienable right to have certain ideas or beliefs is to treat the rational nature (i.e., thoughts or beliefs) itself as merely a means to one’s own designs, rather than as an end in itself. According to Kant, this is immoral because of the value that is rightfully in reason because it is the assigner of value and thus has absolute value. Treating that which has essentially undefined value (as the source thereof) as having value only in so far as it fits with one’s own ideas or beliefs is wrong.

Might it be, Nietzsche would surely add, that modern moralizers are immoral rather than what we take ourselves to be? Who are the aggressors—les esprits méchants et perniceux? Might it be that human beings are far too presumptuous in what we think we know to venture into any other man’s head with impunity? Am I understood? This medicine is not meant for the weak, Nietzsche warns, who nonetheless have an uncontrollable urge to dominate. These new birds of prey are not entitled to dominate, and yet they somehow convince the strong—through thou shalt not—to be ashamed of those thoughts come out of their innate, self-confident strength. Be ashamed of who you are. The strong self-overcome their most willful instincts in order to experience the pleasure of power that naturally goes with their strength. The weak who seek to dominate, on the other hand, are driven by their instinct to overcome the resistance of others by passive aggression (owing to the weakness of the instinct, which they can’t seem to resist anyway) and cruelty (including genocides). Hitler was weak, but so too is the presumption to punish others for their beliefs in retaliation. Birds of a feather, these new birds of prey most certainly are. It is amazing they can even fly.

“By aiming at more [in pride],” Augustine proclaims in City of God (bk 14, ch.13), “a man is diminished.” Pride, by the way, is not self-confident strength, for self-overcoming is blocked by self-idolatry. Perhaps expressing the belief in over-reaching, which is an idea of the immoral and weak, should itself be punishable by a year in prison. This would probably only strengthen the belief, which in turn would weaken the believer even as he or she presumes to be more moral as a self-denying martyr. Lest the advocates of victims become ourselves victimizers (e.g., the Crusaders), it is a good policy for a general population to keep an eye on us too, for we can get quite carried away as moral zealots without realizing how we are affecting others (i.e., rational nature of others). That there have been (and will be) victims of horrible things in the world, does not give anyone the right to punish others for their thoughts or beliefs, for such intangibles are our inner castles, not to be treated like sand by pushy waves.

Fortunately, good sense prevailed and the French Constitutional Council struck down the law that would have criminalized the denial of the Armenian genocide by the Ottoman Turks. “We consider the annulment of the legislation by the Constitutional Council as a step that complies with the principles of freedom of expression and research, the rule of law and international law in France,” the Turkish Foreign Ministry said after the Council’s decision. This statement is ironic, given that the accession of Turkey into the E.U. had been held up in part out of concern in Europe that Turkey was not yet sufficiently ensconced in Western values. Perhaps it should have been asked whether France should be a state of the E.U.

Sources:
Scott Sayare and Sebnem Arsu, “Genocide Bill Angers Turks as It Passes in France,” The New York Times, January 23, 2012. http://www.nytimes.com/2012/01/24/world/europe/french-senate-passes-genocide-bill-angering-turks.html

Scott Sayare, “French Council Strikes Down Bill on Armenian Genocide Denial,” The New York Times, February 29, 2012. http://www.nytimes.com/2012/02/29/world/europe/french-bill-on-armenian-genocide-is-struck-down.html

Monday, January 23, 2012

Extrapolating from the Arab Spring to CSR

Richard Branson, founder of Virgin Atlantic and a myriad of other companies, sees a natural extension or follow-through from the pro-democracy protests in the Middle East and North Africa to more corporate social responsibility. As much as I would like to think that the twenty-first century proffers a new world, I think we have to acknowledge the weight of the political, economic and social strictures that we have uncritically inherited.

According to USA Today, “Branson says it took him seven years to realize businesses are part of the problem as they focus narrowly on profit and exhaust natural resources. Now, he believes the world has changed in the last several months, with revolutions in the Middle East, the earthquake and tsunami in Japan, riots in London, famine in East Africa, and debt crises around the world. He quotes the band REM: "It's the end of the world as we know it … and I feel fine." Seven years? Branson has been thinking on all cylinders. Even if businesses are not part of the problem, the default of business is to make profit by turning resources into products to be consumed. This is the raison d’etre (i.e., the reason for being) of the modern corporation. Viewing its inherent function, as per its design, as part of “the problem” may simply be due to the sheer magnitude of a large corporation’s operations. In other words, a large foot is apt to leave a large footprint.

Moreover, changes in government, protests, natural disasters and a systemic overreliance on debt-financing by governments do not necessarily mean the end of the world as we know it. I wish this were so, but people in power have a nasty habit of retaining it, even if under subterfuges if necessary. For example, the military rule in Egypt at least as of the beginning of 2012 may put the “revolution” in 2011 in perspective. That is to say, the old guys are still in charge, so how much of a revolution was it? Furthermore, it would be naïve to believe that the corrupt relationship between business and government in Japan has been expunged by the post-tsunami clean-up. It is doubtful, for example, that TEPCO has been born-again as if baptised by the tsunami.

The larger point Branson is making in his statement is that corporations will no longer be part of the problem because the world as we know it is no more. He cites several instances of corporate social responsibility to make his point. However, the business of business is still to make money, and much of CSR is still essentially marketing writ large. Without changing the design in corporate law, it is foolhardy to believe in a brave new world of corporate capitalism. It is at the very least a stretch to assume that pro-democracy protests or changes in government will somehow convince business executives to engage in CSR. Even in terms of corporate or “stakeholder” democracy, the linkage is tenuous because the expectation that governments should be democratic does not extend to corporations because the two are typically viewed as different domains. So to Branson, I would say, nice job with your companies and even on CSR, but let’s not get carried away on some jet to nirvana. As much as we would like to see the world remade rather than carrying on with baggage from the twentieth-century, we would get further toward this goal by keeping our legs on the ground.

Source:
Kathryn Caravan, “Branson’s ‘Screw Business As Usual’ Has High Points,” USA Today, January 23, 2012. http://www.usatoday.com/money/books/reviews/story/2012-01-22/richard-branson-screw-business-as-usual-book/52745386/1


Sunday, January 22, 2012

Credit Downgrades in the E.U.: Blaming the Messenger?

On January 13, 2012, “S&P stripped France and Austria of their prized triple-A credit ratings and reduced the ratings of seven other [states in the euro-zone], including Italy, Spain and Portugal. Germany, Finland, the Netherlands and Luxembourg were spared, along with Belgium, Estonia and Ireland,” according to the Wall Street Journal. Italy was downgraded from single-A to triple-B-plus. "We think there are elements missing in their analysis … when it comes to the growth strategy … there is no space for maneuver for fiscal impetus but we believe that a growth strategy will have to rely mainly on structural reforms," Olivier Bailly, an E.U. Government spokesman, told reporters. The Journal also reports, “Bailly also called the timing of the S&P decisions ‘very odd’ citing fiscal policies adopted to weather the crisis in the downgraded countries as well as the two successful debt auctions in Spain and Italy last week. ‘We think that there is a strange timing in this announcement considering the signals from the markets,’ Mr. Bailly said.” The “very odd” and “strange timing” reference a tacit political motive behind S&P, which the European officials point out is an American company.

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.