The answer to the world’s financial crisis lies not in regulation and regulators, as Brown, Gordon and the EU are convinced. The problem at its root is not as they believe or declare, that there is not yet enough financial regulation. There is stacks of the stuff all over the shop. The problem is much simpler to resolve than that. It’s simply that owners of businesses have become disconnected and disempowered, while executives and directors have taken over and become all-powerful.
Regulators are merely proving a hindrance and a distraction taking up too much of everyone’s time and space. The Enron scandal, for example, led to a huge boost in financial regulaton. The sub-prime crisis proves that it has solved nothing.
The task now is to facilitate owners back into the frame – to permit them to monitor the day to day decisions of directors and executives. Pre-the internet and the IT revolution it was not possible for this to happen. Now hourly, daily, weekly or monthly reports can be supplied to owners – not just the annual report, assembled by a highly paid PR company, signed off by a multi-million salary chief executive. The reason is that owners have a crucial role to play in risk-taking, which is not being taken advantage of. Owners above all want stability, as do governments and consumers.
Executives on stratopheric bonuses have the incentive to take risks which have a high chance of paying bigger short-term returns – combined with a higher chance of bankrupting their businesses longer term. In 9 out of ten years they make more money. On year 10 though the business crashes and they’re mincemeat. It is not just a case of rebalancing incentives as some regulation-minded people are saying, or that there is a lack of transparency. The subprime crisis did not lack transparency. It’s just that the people carrying the ultimate risks – the owners and shareholders of the businesses – were not party to the decision-taking.
It all goes back to the thinking of Karl Marx who divided the economy into two parts – the Capital and Labour. Capital was hated for being too powerful, acting in its own interests to crush the interests of Labour. Labour had to organise to reverse the balance of power.
Labour did organise, and did reverse the balance of power – but to such an extent that Capital is no longer even allowed to be present or party to the decisions that deploy it.
Marx’s concept of ‘Capital’ should now be updated and replaced with a more modern one – where people and money are not seen as two entirely separate entities in conflict with each other (in the modern developed world most people own things, have pensions invested in industry as well as working in jobs), and business should be seen not as exploitation of one interest group by another, but as a cooperative venture which needs the interests of owners as a stabilising influence on the short-term risk-taking tendencies of executives and directors.
The world doesn’t need more of Gordon Brown’s Cultural Marxist bureaucrats breathing down its neck. It needs the opposite, the demise of the regulation that removed owners from the running of business in the first place, and the re-establishment of their natural interests in preventing excessive risk-taking. Only then will Enrons and sub-prime mortgage crises move along to become a thing of the past, or at least a less common event than they have become.
Brown is so wrong about this being a lack of transparency. There never was so much data available for decision-takers. The IT revolution has enabled Executives and others to know precisely where they are in the risk ballpark. It’s just that these operators are gambling with someone else’s money and not their own. If their bets win, they earn big payoffs. If their bets lose, they lose little or nothing – maybe their jobs but then they can simply move on to another one. They are quite obviously incentivised to increase the level of risk until it hits hazardous levels.
The key to resolving the sub-prime crisis and to preventing future similar crises is to rediscover the influence of ownership. Unlike executives and many directors, owners want longterm gains, at low risk. They want to make money, but even more so, don’t want to lose what they have. Their interest needs to be brought back into the equation. To do that, owners need to made more powerful than they currently are.
One way for that to happen is for them to become more demanding and activist towards the directors of the corporations they own.
(Another more controversial way would be for society to tolerate higher levels of individual or family wealth so that owners are more easily identifiable, and not so much of the economy is based on impersonal corporate structures. One reason for the fast growth of Middle Eastern and Asian economies is that they accept the existence of wealthy individuals as a necessary part of a stable and growing economy. Families for all their failings are good at providing the stability that fragile situations require.)
Todays Wall Street Journal shows that this kind of thinking – of owner activism at least – is happening, as of right now. In the Managing section, in an article titled ‘Activists Broaden Scope’, written by Erin White, the story is that
Activist shareholders are broadening their sights ahead of the annual-meeting season, with resolutions and vote campaigns targeting operating issues, such as succession planning and risk assessment.
The moves are prompted by shareholder anger over the subprime-mortgage meltdown. Investors say directors didn’t adequately monitor executives as risk mounted……’
I feel like saying something rude to such cop-outs (libel laws prevent journalists from questioning statements of lack of knowledge by the corporations involved). Of course they bloody well knew what was going on. These guys ain’t stupid. They make huge sums from excessive risks being taken, and 90% of the time they get away with it. It’s the same story with the French Societe Generale. It is unlikely to come out publicly, but of course the senior management understood the risks the traders were running. But with the bonus and status structures in place, the free gamble with other peoples’ money is bound to happen if there is nothing in place to stop it from happening.
Only owners have the right motivation and would be able to monitor the corporations’ day to day operations in the way that would be necessary to limit excessive risk-taking. Governments and regulators wouldn’t have a chance of fulfilling the role successfully. It’s a ludicrous suggestion from Gordon Brown that they could do so.
The problem is not transparency as Gordon Brown says, and the EU. It is not lack of regulation. Endless regulation and form-filling across the financial services industry worldwide, has achieved nothing in preventing the next crisis. The essence of the problem is still that owners have been removed from the equation, partly for practical reasons that owners in the past pre-technology world, could not possibly have known all the details of the businesses they employed directors to run, but also for political reasons.
The WSJ goes on
They (owners) want directors to reveal more operational details so investors can better assess the potential for future blow-ups.
‘We are looking more towards the actual operations of the companies, more than just the quick, more pedestrian corporate-governance fixes,’ says Jennifer Odell, assistant director of Corporate Affairs for Laborers’ International Union of North America.”
Here we have owners representing the workers whose pensions they are responsible for, wanting to get involved in acting as a counterweight to the gambling tendencies that have become ubiquitous amongst corporations.
I doubt Karl Marx could have imagined a world where the labourers owned the capital, and where the managers were damaging the interests of the workers by ignoring them – the owners. His view was of an older world were the relationships were different – and yet that’s exactly what we have today. It’s time his ancient political concepts about ownership were dropped and dropped urgently. Bureaucracies like the EU that see the sub-prime crisis as an opportunity for yet more regulation and governance, should realise that they have in fact caused the problem by holding on to cultural marxist beliefs too long.
The mantra used to be ‘let managers manage’ when unions were overpowerful. The revolution in the 1980s which started in Britain brought that about. The western world now needs to move on to the next stage, and inhibit managers anew but this time more positively by ‘letting owners own’, creating more long-term growth at lower risk.
If we don’t, other parts of the world which understand and tolerate the power of the owner to decide, will adopt more efficient levels of risk, and outgrow and outperform the west. The sovereign funds of Asia and the Middle East are moving in and buying up chunks of the west’s economy because they understand the power of ownership in business to ensure that the right risks are taken. The west with its latent marxism still underlying many aspects of our regulatory culture needs to catch up or be left behind.
A new era of ownership activism is surely going to be part of the new dawn that’s breaking in America. Obama will surely be one of the first to back these trends.