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Saturday, April 20, 2013

Is the E.U. Relying Too Much on the IMF?

According to the New York Times, the IMF had more influence in the European debt crisis than did many E.U. states. Put another way, Christine Lagarde, head of the organization, became “a quasi head of state.” Without the advice and money from the IMF, the euro might have collapsed. If one could believe the rhetoric, the E.U. itself might have broken up. But the threat to the Union lies not in the euro, but, rather, on the emphasis on the state governments and in particular their respective officials. Indeed, the crucial role of the IMF during the debt crisis may have been in looking out for the interests of the E.U. in contradistinction to the various interests of the state governments. “In the absence of a strong federal government in Europe,” according to the Times, the IMF has helped “impose order on quarreling [state] leaders.” Put another way, if the balance of power in the federal system did not reside with the states at the expense of the federal government, the Europeans would not have had to rely on the IMF so much. For example, Lagarde played an important role, according to the Times, in “overcoming German reluctance to accept proposals intended to strengthen the euro zone, like a centralized bank supervisor.” Because the proposals involved shifting additional governmental sovereignty from the state governments to the federal level, the heads of the state governments faced a conflict of interest in assessing whether to support a federal regulator even though it would be in the interest of the whole.

                                                                    Is the E.U. merely the aggregate of its states?        source: mapperywordpress.com
The parts have so much power that the interests of the whole could be marginalized or even sacrificed to the interest of a part—especially if the part happens to be the most power of all the parts. Generally speaking, the interests of the whole are not identical to the interests of any of the parts. Not only does each part have its own distinctive interest, the whole is more than the sum of the parts, at least when the whole is a federal system and the parts are the states. For one thing, the federal system has dynamics exclusive to its level.

Lest it be concluded that the IMF can or should remain as a protector of the interests of the E.U., it should be noted that the IMF, unlike the E.U., is an international organization. “Historically, Europe took no I.M.F. lending,” Guntram Wolff of Bruegel explains. “Now lending has increased since the beginning of the crisis dramatically. Is it appropriate? That is a very big question.” For one thing, the greater time and money being spent on the E.U. come at the expense of the other donors. Ethically, it may be that the developing countries have more of a claim on the IMF than does Europe. For these reasons and the best interest of the E.U. itself, the Europeans should not become too reliance on the IMF. Confronting the lopsided power of the states at the federal level would be a better option.

Besides risking becoming too reliance on the IMF as a crutch of sorts, Europeans have not all been on-board with the austerity pushed by the international organization. On April 16, 2013, Rep. Hannes Swoboda, Socialist party leader in the European Parliament, said on floor, “We don’t need any longer the I.M.F.” He urged the European Commission to pick up the slack because unlike the IMF officials, the E.U.’s commissioners “are responsible to this Parliament” and thus are more in keeping with democratic principles. He went on to chastise Olli Rehn, the E.U. commissioner for economic and monetary affairs, for having gone along with the IMF in pressing the government of Cyprus to enact a levy on bank deposits below the €100,000 level. Even though Rep. Swoboda and other members of parliament were critical of the emphasis that had been put on austerity in the bailouts, the democratically-elected lawmakers would have preferred to have that policy come from the E.U.'s executive branch rather than from an international organization.    

Setting strict conditions is the only leverage the IMF has to get its money back. In past IMF programs in developing countries, the IMF had been criticized for not having sufficiently oriented its pro-market (ideological?) stipulations to the particularities of the country at hand. Although Lagarde is a European, the IMF itself is not, and thus may fail to sufficiently take into account nuances particular to Europe, such as the principle of solidarity as contrary to austerity being applied to the social programs (i.e., safety net).

Moreover, the so-called troika masks the fact that the European Central Bank and the European Commission are at the federal level whereas the IMF is international in scope and orientation. Just as the federal level is qualitatively (as well as quantitatively) different than the states, the global level is different than the federal level of some states. For one thing, an international organization does not have as many instruments to protect its involvement in a given context, so a desire to impose conditions may take on a life of its own—even at the expense of the intended beneficiaries.

In short, even though the IMF has been a force countering the excess power of the state governments in the E.U., this is not a long-term solution for the Union or its states. A federal system functions optimally when a balance of power is achieved and sustained between federal and state governmental institutions. A democracy functions optimally when democratic accountability is not outweighed by bureaucrats, especially if they are in an international organization rather than a government.


Jack Ewing, “Euro Zone Crisis Has Increased I.M.F.’s Power,” The New York Times, April 18, 2013.

James Kanter, “Opposition to Austerity Grows Louder in European Parliament,” The New York Times, April 17, 2013.



Thursday, April 18, 2013

Is Corporate Governance Anti-Democratic?

Assuming all the votes cast in an election are accurately tallied, the pronouncement of the winner would seem to be straight-forward. What it means to have won, however, is considerably more complex. Specifically, is winning getting over 50% of the vote, or should a mere plurality of, say, 38% suffice? It could be argued that a supermajority of 60% or two-thirds is necessary for there to be a discernible will of the people behind the winner. To claim that 51% represents the will of the people seems a bit of a stretch, since almost half of the voters cannot be considered to be of that will. Typically, much is read (or projected) into the 1% over the 50% in terms of a mandate. All of a sudden, 51% of the voters become “the people.”  Certainly a winning plurality of 38% cannot be said to stand for or represent the will of the people, for 38% is a minority in the total votes cast. Yet in Delaware’s corporate law, which is binding for most American corporations, a mere plurality is sufficient for a candidate to be elected to a board of directors. While this arrangement is not ideal, it is a legitimate basis even if some stockholder activists beg to differ.
Writing for the New York Times in April 2013, James Stewart defines losing a board election as “more than 50 percent of the shareholders withheld[ing] their votes of approval.” Stewart expresses his amazement that 41 boards retained directors whose pluralities in 2012 were tantamount to a resounding vote of no confidence--meaning that those directors got less than 50 percent of the votes cast. According to Stewart, those directors “actually lost their elections” and yet were allowed to remain on the boards. It sounds corrupt as well as anti-democratic. “As fiduciaries, we can’t sit by and let the board make a mochery of our fundamental right to elect directors,” John Liu, New York City’s comptroller, said in reference to Cablevision Systems. As manager of the city’s pension funds, which are invested as more than 532,000 shares in the company, Liu wrote to the company concerning three directors whose pluralities were significantly less than majorities. “The fact that all three directors remain on the board suggests that one of the few rights” afforded shareholders is “illusory,” he wrote. The company’s management did not respond. Moreover it nominated the three directors for yet another term.
Although Liu is on solid ground that insiders should not be allowed to subvert director elections. However, he is wrong in his assumption that plurality voting is not legitimate under democratic auspices. Plurality simply means that the candidate with the most votes gets elected to the given seat. Were a board to turn around and award the seat to a candidate who did not get the most votes, that would be illegitimate from the standpoint of democratic principles.
The question here is not that of legitimacy. More to the point, the question regards how much of the total vote on a seat should be sufficient for the candidate with the most votes to deserve the seat from the standpoint of the stockholders. If there are several candidates and none gets the percentage deemed by the stockholders to be sufficient, then presumably a run-off would be held.
Even though a plurality is a legitimate criterion from democratic principles, it may play into the dominance that many managements have over “their” respective boards of directors.   Where there is no stockholder-nominated candidate, management’s nominee can be elected all too easily even without much stockholder approval. Even the presence of stockholder-nominated candidates would not necessarily solve the problem; management could see to it that several “stockholder-nominated” candidates spread out the anti-management vote so the management-nominated candidate can obtain a plurality. Rather than being anti-democratic, that is merely politics.
From the stockholder standpoint, the political solution would be to up the bar on the percentage of votes cast that a candidate must have in order to be elected. Put another way, the dominance in corporate governance typically enjoyed by management (unless management really screws up) could be reduced by routinizing stockholder nominations and increasing the percentage needed for a candidate to be elected.



James Stewart, “When Shareholder Democracy Is Sham Democracy,” The New York Times, April 12, 2013.



Wednesday, April 17, 2013

A Weak Economy As a Competitive Advantage to the Largest Corporations

Size matters, at least in the business world. This is not a call to lewdness at work for the most well-endowed. Rather, the size I am referring to here is organizational. At the very least, the largest corporations can perform differently than smaller firms in an economy. In April 2013, it was clear that the biggest companies were outpacing smaller ones. Analysts estimated profits for the 100 largest companies in the Standard & Poor’s 500 stock-index to rise 6.6% in the second quarter, while earnings for the bottom 100 were expected to fall by 1.6 percent. Of all the profits earned by the companies in the S&P 500, 22% would be coming from the 10 largest companies, enabling them relatively more wherewithal with which to gain still more market share. Put another way, beyond a certain point, organizational size can protect or buffer a company in the midst of a languid economy. It is not only the market mechanism that accounts for this phenomenon.
One benefit enjoyed by the big corporations is being able to profit from other markets around the world and thus make up for a slow market at home. Smaller firms, with little or no access globally, are more constrained in the sense of being limited to the conditions of the domestic economy. Additionally, large companies enjoy easier access to credit. A bad economy need not keep the biggies from making investments in expanding operations still more, hence building on their existing size-advantage. There appears to be a certain threshold in organizational size beyond which the size of a company's operations can act as a buffer mitigating the negative effects of a slowing economy. It may even be that the market mechanism itself rewards size, and in so doing facilitates the shift from competition to oligopoly or even monopoly in a given market. This does not necessarily result in greater efficiency in business or benefits for the consumer.
Once an organization reaches a certain size, diseconomies of scale kick in. Further increases in size bring disproportionate increases in costs, which counter the earlier economies of scale. As argued by Thompson in Organizations in Action (1967), as organizational size increases, the cost of integrating the various divisions and departments increases more than proportionately. In fact, coordination and integration can become virtually impossible once an organization has reached a certain size. For example, banks like JPMorgan and Bank of America may be so large that they cannot be effectively managed, not to mention in a cost-efficient way.
In addition to the impact from the market mechanism and business, federal legislation can benefit the largest corporations disproportionately or even exclusively, thereby widening the gap between the "haves" and "have nots." For example, federal budget-cutting tends to hurt small business more than large corporations. Also, large corporations like G.E. can afford to lure tax experts away from the IRS in order to minimize the corporate income tax liability. In fact, G.E. got away with zero tax in 2010, despite having earned billions of dollars in the U.S. that year. 

Furthermore, large corporations have considerably more lobbying power than do small companies. With some strategically-placed political campaign contributions, a large company can get its particular situation explicitly exempted in proposed tax legislation. In some cases, the companies or their lobbying group have even given the tax-writing Congressional staff the legislative language--saving the staff some work.

 A large corporation can even create a sustainable competitive advantage for itself by getting Congress to increase the tax burden on smaller firms! Applied to the formulation of regulations by regulatory agencies, a large company with exclusive access to domestic and even international market data can "give" it to the regulators, who depend on such data in crafting regulations that will be effective in the market. Of course, the company can use its informational asset as leverage with which to sway regulators to soften the regulations in a way that benefits the company over its competitors. Even the prospect of future, well-compensated employment can influence a regulator to see to it that the future employer will not face regulations that are too costly. Otherwise, the eventual salary of the regulator-turned-regulatee could be lower amid the lower profits from costly regulations. This use of assets to sway regulators to go easy on the company (but not its competitors!) is known as the strategic use of regulation. I submit that organizational size facilitates such use because the assets that can be used as leverage are more valuable to regulators.

The power of large corporations over public policy and regulations is not the market mechanism at work; rather, it is a manifestation of plutocracy at the expense of representative democracy and the public interest. In a plutocracy, the good of the part trumps the good of the whole. This is suboptimal for the whole because the interest of a part is not necessarily in line with the interest of the whole. Accordingly, public policy can be justified in countering the “artificial” advantages of organizational size in the political arena. Furthermore, even the size bias of the market mechanism and business itself could be reduced or even countered as per the public interest in more competitive markets in place of oligopolies and monopolies. This would take thinking systemically from the perspective of the public interest.


Nelson Schwartz, “As Wall St. Soars in Tough Era, Company Size Is a Big Factor,” The New York Times, April 15, 2013.

Monday, April 15, 2013

JPMorgan’s Management: Overly-Defensive From Weakness?

According to the Wall Street Journal, at JPMorgan, the largest U.S. bank by assets, revenue in the first quarter of 2013 fell 4% from the same period a year earlier. The mortgage squeeze affected the firms' overall results. Net-interest income, which reflects the amount a bank makes from its loans, dipped 6%, to $10.9 billion, from a year earlier. Even so, J.P. Morgan's net income rose 33%, to $6.53 billion, or $1.59 a share, as a jump in investment-banking income and a cut in expenses helped cushion the mortgage pullback.

The full essay is at "JPMorgan: An Unethical Monstrosity?"

On the Roles of Mentors and Sponsors in Leadership Development

In the corporate world, distinguishing between a mentor, sponsor, and leader can be difficult. As people can get carried away in describing their roles, it is necessary to clearly demarcate the three. According to Sylvia Hewlett , mentors “act as  a sounding board or a shoulder to cry on, offering advice as needed and support and guidance as requested.” A sponsor is “a powerfully positioned champion” who offers “guidance and critical feedback.” Although appropriating “champion” from sports does not fit, the distinction between critical feedback and “support and guidance” is worth exploring.
A mentor’s task is mainly to offer support. The figure comes from the “Glenda, good witch of the North” archetype.  In contrast, a sponsor may be critical, albeit still for the benefit of the sponsored. Unlike a mentor, a sponsor is willing to go to bat for the sponsored. In going out on a limb, a sponsor expects the performance and loyalty in return. Hewlett states that unlike a mentor, a sponsor believes in the person being sponsored. I find it difficult to believe that a mentor does not believe in the person being mentored. Rather, the difference between the two roles has to do with how much the sponsor is willing to do for the person being sponsored than the mentor is willing to do for the mentored. A sponsor is more invested in the sponsored, and thus willing to put more on the line. As Hewlett observes, the person being sponsored reflects back on the judgment of the sponsor, so the sponsor has more to lose than does a mentor. Even as the two roles can be distinguished, they both are worlds away from leadership.
Even though some theorists apply leadership to two people (i.e., a dyad)—one person being the leader and the other being the follower—Hewlett treats leadership as tantamount to reaching the upper echelons of management. Therefore, leadership is the goal that a mentor or sponsor has in mind for the person being mentored or sponsored. It is crucial to remember that leadership is not mentoring or sponsoring.  Nor is leadership “coaching”—another misappropriated term from the exciting world of sports.
Unlike mentors or sponsors, organizational leaders necessarily occupy positions that are characterized by the power vested in them. An executive, for instance, is simply a manager who has a significant amount of power. An executive still manages, and is therefore still a manager.  The position’s breadth of coverage, and thus power, permits the occupant to have sufficient influence to be reckoned organizationally as a leader too. That is to say, a leader’s vision for the organization can have some traction, given the leader’s “height” in the organization. A person need not be in such a position or be able to formulate and sell a vision in order to mentor or sponsor another employee. This is not to say that mentors and sponsors cannot play an important role in developing leaders.
Not every person is capable of formulating a vision sufficient to serve as an abstract destination for an organization. Not everyone has sufficient credibility in their person to have their vision serve as an attractor. Followers must trust in a vision capable of serving as the organization’s destination. It follows that the individuals who become leaders should be responsible and of mature judgment. Leaders should not be chosen lightly. Mentors and sponsors can serve important roles as potential leaders are filtered within an organization. Earning the trust of a mentor or sponsor is a first step toward earning the trust of an organization, its board of directors, shareholders, and even the general public. The highest leadership role in an organization, being among other things the figure head, is particularly oriented to the organization’s environment. It is crucial therefore, that an organization’s leader be trusted societally rather than merely by the employees. Mentors and especially sponsors can serve as de facto organizational filters in assessing trustworthiness and credibility of potential leaders at close range. Therefore, even though mentor and sponsor roles are not depicted on organizational charts, the two roles should not be trivialized and relegated.


Sylvia A. Hewlett, “Mentors Are Good. Sponsors Are Better,” The New York Times, April 13, 2013.

Sunday, April 14, 2013

European Central Bank As Supervisor: Conflicts of Interest

Wolfgang Schäuble, the German finance minister, raised additional concerns in April 2013 about a proposal to create a single banking supervisor for the European Union. About 150 large banks would be under the direct supervision of the European Central Bank, which would also have the power to intervene to oversee smaller lenders. This proposal had been set as a precondition for states to draw on the E.U.’s bailout fund, the European Stability Mechanism, to recapitalize struggling lenders directly. To analyze Schäuble’s potential stumbling blocks, it is necessary to understand the conflicts of interest that are involved.
                                                                                 Wolfgang Schäuble, the German finance minister, active at the E.U. level. Source: The Telegraph.
First, at the time Schäuble made known that Germany had additional concerns, he was expected to ask for more scope for the state legislatures to hold the E.C.B. accountable. Because he was a minister of the Bundestag at the time, there is an institutional conflict of interest involved in him holding back a federal amendment unless the Bundestag gets more authority in holding the E.C.B. accountable. Put more simply, his proposal could be a power-grab for himself and his colleagues in the Bundestag. This conflict of interest would not exist if the state legislatures already did not enjoy so much power at the federal level through the European Council.
There would be no such conflict of interest were Schäuble to propose that the European Parliament have greater authority to hold the E.C.B. accountable in its role as bank supervisor. As the members of the EP are directly elected by the citizens of the E.U., this alternative would reduce the democracy deficit, which has been a criticism of the E.U. more generally. One federal body would be holding another one accountable. To the extent that the state governments already hold too much power in the E.U.’s legislative process, turning to the EP rather than the European Council (or the state legislatures) would be a step toward balance in terms of state vs. federal competencies (i.e., domains of authority).  
On the other hand, the example of the U.S. shows how centuries can allow for consolidation at the federal level, with the state governments being relegated to local matters. To forestall the E.U. from going down this path, permitting a majority of state legislatures to act as a check on a federal body would be a step in the right direction. Similarly, the justices sitting on the E.C.J. could be sitting state constitutional court justices so the state level is not forgotten in federal jurisprudence.
Increasing the direct involvement of state legislatures at the federal level could be consistent with moving toward a balance in state vs. federal power. If the state legislatures are to hold the E.C.B. accountable as a federal regulator of banks, additional competencies, such as taxation on a qualified majority basis, could be granted to the E.U., and the use of the veto on the Council circumscribed more generally. This would reduce the likelihood of institutional conflicts of interest when a particular state objects to a federal proposal.
Second, Schäuble was expected to propose that the E.C.B.’s supervisory and monetary roles be clearly separated. Here, the institutional conflict of interest applies not to Schäuble or Germany, but to the E.C.B. itself. Where the central bank’s monetary policy conflicts with the bank’s supervision of the banks, the latter should not be allowed to interfere with the former, and vice versa. The danger here is that the proposed separation would be a mere firewall, which the highest officials at the bank could overrun by using their authority over both divisions.
Alternatively, another federal regulatory body could be created to supervise the banks, while the E.C.B. concentrates on monetary policy. Lest the European Stability Mechanism introduce too much politics in the central bank, the new regulatory body could handle the bailout too, which would include holding the banks receiving funds accountable in how the funds are used. This was a major oversight in the bailout legislation passed by Congress in 2008; the banks could do virtually whatever they wanted with the taxpayer money.
In conclusion, careful attention to institutional conflicts of interest can indeed be a salient part of public policy analysis. It is necessary to first identify the potential conflicts, which in turn requires knowing what an institutional conflict of interest is. Ideally, a federal system of governance should have no institutional conflicts of interest. If left in the system, such conflicts have a tendency to corrupt the system over time.


James Kanter, “New Concerns From Germany Over European Banking Supervisor,” The New York Times, April 12, 2013.