Like many undergraduate students who came from a working class background I went through a stage wherein I adopted many of the values espoused by my “left” leaning professors. I have to admit I was also profoundly influenced by a book titled Sweden: the Middle Way by Marquis Childs that was touted to be the way of the future by many leading intellectuals in the academic world.
I would have described myself as a “capitalist” until I was probably in my 50’s. Around that time I began to question some of the actions, developments and values that began to emerge in the corporate world. I retained, and still do, the fundamental belief that the providers of risk capital are entitled to a return as are the providers of labour. Similarly, a business is entitled to earn a profit provided it “plays by the rules” and treats its employees fairly and with dignity. Most fair-minded people would agree that a modern, industrialized society can only evolve if there is a harmonious “marriage” between the providers of capital and the providers of labour. Clearly, each component needs the other despite their frequent disagreements and altercations.
During the past couple of decades, however, many disturbing events within the corporate world began to emerge. Probably these forms of what I call “corporate malfeasance” have always existed but were heretofore largely hidden from the general public. It is apparent that we live in a society wherein “white collar” crime is looked upon differently than other forms of criminal activity. The reason, I suspect, is that white collar crime rarely involves physical violence.
All too frequently we read about another large corporation being fined millions, and occasionally billions, of dollars for such egregious activities as falsifying their financial records, insider trading, deliberately polluting the environment and various forms of fraud. What I find upsetting is that in virtually every case where charges are laid the charges are civil and target the corporation. Rarely are criminal charges laid against the senior executives who either hatched the scheme or, at the very least, were well aware of the scheme but turned a blind eye. For some of these executives, it seems, paying a seven figure fine is simply part of the cost of doing business. And who actually pays the penalty while the crooked executive walks away unscathed? The company’s shareholders, of course.
I find it astounding that there have not been more shareholder revolts or at least the firing of some of these executives who, in some cases, should be residing in the cell next to Bernie Madoff. The U.S. Justice Department seems reluctant to prosecute these top level white collar crooks, preferring to lay civil charges against the corporations. The Toronto Globe and Mail’s European Bureau Chief Eric Reguly wrote a column titled “Banks’ bad behaviour won’t change until executives do the perp walk.” In the piece he commented, “So if fines don’t work, and regulators and government prosecutors won’t put the most corrupt companies out of business, what is needed to clean up the banks? That’s easy. Toss the bastards in jail or close the offending individual bank business for a few months or a year.”
Another factor that should encourage more shareholder revolts is the outrageous compensation packages enjoyed by most senior executives in today’s corporate world. Executive compensation has reached levels that can best be described as obscene. According to the 2014 AFL-CIO publication “Executive Paywatch” the average U.S CEO was paid 331 times more than the average worker. This ratio was 42 times more than the average worker in 1982. Even in situations where shareholder value declines during a particular CEO’s tenure, the hefty bonuses seem to continue. Furthermore, even on those rare occasions when a CEO is sacked for underperformance, he/she usually exits with a “golden parachute” worth several million dollars.
There appears to be a groundswell of advocacy groups today that favour establishing minimum wage legislation. If this is a reasonable objective, then why not set maximum wage and salary limits? The Greek philosopher Plato addressed this issue nearly three thousand years ago when he stated in his treatise “Laws” that no man should have more than four times the wealth of any other man.
Another group clearly culpable in creating the 2007/2008 financial “meltdown” but who also walked away from the mess unscathed was the rating agencies. There are several firms in this industry but the three dominant players are Moody’s, Standard and Poor’s and Fitch. Major institutional investors such as pension plans and mutual funds rely heavily on these firms for advice on where to invest the funds they administer.
These firms, particularly Moody’s, were given the contract to rate “collateralized debt obligations” an investment instrument promoted by the Financial Products division of American International Group generally referred to as simply AIG. Some cynics suggested AIG stood for arrogance, incompetence and greed. These CDO’s were in most cases rated at AA which is high enough to meet the criterion usually acceptable to institutional investors. Not long before the collapse of Lehman Brothers which, incidentally, was the largest bankruptcy in recorded history (more than $700 billion) the content of many of these CDO’s was an alarming 80-90 percent sub-prime mortgages and other “toxic” instruments. Is it reasonable to believe S & P did not know the content of the investment vehicles they were rating? I think not. When there are millions of dollars in professional fees at stake, greed often trumps ethics.
For a brief moment near the end of January 2015, I was taken aback when it was reported that Standard and Poor’s rating agency had pleaded guilty to fraud and agreed to pay a fine of $77 million. But on closer examination I discovered this was a civil case and once again the executives responsible for designing the scheme were not held responsible. It was, of course, the company’s shareholders who indirectly paid the fine. Ultimately, S & P paid fines totalling $1.38 billion to settle government allegations that it knowingly inflated its ratings of risky mortgage investments that helped trigger the financial crisis of 2007. As is usually the case, it will be the company’s shareholders who pick up the tab. Are these and other forms of corporate misbehaviour now acceptable components of America’s corporate culture?
Recent findings by reputable researchers have confirmed the increasing frequency of fraudulent labelling in the food industry. Recent massive recalls of frozen fruits and vegetable products in the U.S. have raised consumer anger, not to mention serious illnesses and in some cases death. While suppliers frequently claim these incidents are unintended mistakes, only the most naïve consumers would attach much credence to this explanation. What would be the manufacturer’s motive for engaging in this type of fraud? The explanation is simple; profit maximization.
As I was about to conclude this piece, yet another corporate scandal surfaced. Volkswagen, the world’s largest automaker, got caught trying to circumvent EPA emission standards to enhance their market position and thereby increase corporate profits. Should criminal charges be laid against those executives who hatched this scheme and/or approved its implementation? Damn right they should. Will they? Time will tell but I’ll give anyone ten to one odds they won’t.
At about the time the VW debacle hit the headlines, U.S. Deputy attorney general Sally Yates announced the Justice Dept. would change course and probably lay criminal charges against Wall Street’s white collar criminals. I’m skeptical, but I’m rooting for your team, Sally, and I sincerely hope you can make it happen.
One final observation. It is clear that the overriding feature of corporate culture in many, if not most, large companies today is profit maximization at any cost or what most CEO’s choose to call “increasing shareholder value.” They forget to add, “at any cost.” In early July, 2015 corporate behemoth Microsoft announced it would be terminating 7800 employees. It wasn’t enough presumably that they laid off 18,000 employees during 2014. How does one describe this sort of behaviour? How about corporate insensitivity? The senior executives who make these decisions seem to ensure their own jobs are never in jeopardy. But hundreds of these “victims” of downsizing will likely suffer from financial and emotional stress during the coming weeks or months as they try to find employment elsewhere.
Another disturbing and very relevant “downside” to 21st century capitalism is the grossly unreasonable and unfair distribution of wealth. Forbes Magazine estimates there are now approximately 450 billionaires in the U.S. while several million U.S. residents are homeless and forced to sleep under bridges, in doorways and in public parks. Clearly, there are justifiable reasons for some people acquiring more wealth than others. Some are smarter, some work harder and some are just plain luckier than others. But there is something fundamentally wrong with an economic system that allows a discrepancy in wealth of this magnitude.
While the majority of these corporate scandals have occurred in the United States, they are by no means unique to any one nation. In the recent past the U.K. financial industry was rocked by the discovery that a group of traders had for several years been manipulating the LIBOR interest rate structure and making billions of dollars illegally at the expense of unsuspecting consumers. Around the same time, a “rogue” trader (Bruno Iksil) employed by the U.K. branch of U. S. investment bank J. P. Morgan Chase, made highly risky “bets” that resulted in losses of at least five billion dollars. Mr. Iksil had the distinction of being referred to as the “LONDON WHALE.” He is one of the few white collar criminals who actually ended up in a prison cell.
The Noble Laureate economist Joseph Stiglitz has for several years been a vocal critic of the despicable behaviour of many in the Wall Street investment banking community. He compares Wall Street to Las Vegas and Atlantic City casinos. It is also reported that investment bankers frequently refer to their investment decisions as “making bets.” While some may see an element of humour in this analogy it is no laughing matter. Investors need protection from the many unscrupulous bankers, traders and others who prey upon the unsuspecting and trusting members of our society. It is long overdue for government agencies to get serious about cleaning up the mess.