Years ago, I told Pietro, my eldest son, that we could write a book together, discussing our different ideas. He set aside the idea as uninteresting, but probably much of the material that I would have liked to put in the book will come out in our two blogs.
Yes Pietro, thank you for your warm welcome to the blog community, and also for all the technical assistance you gave me. You are right when you say that we don’t always agree: on food, the World Bank, and many other things. In your entry you forgot some of my worst “sins”: I have been also working for multinationals like Exxon, visiting the Usa as guest of the Reagan government, and having important roles in companies whose main purpose is profit.
This is exactly what I would like to discuss. In one of your posts in Italian, you say that problem for the world economy does not come from corrupted managers, but from the “honest” managers who “by law” are supposed to make profits for their company, and so poison the environment, destroy tropical forests, take advantage of the consumers and so on.
No, I don’t think that this is a correct description. There is no law which compels a company to act for profit, as there is no law that compels an individual to seek its own profit: but most do, because this is a natural way of behaving. Simply, managers of companies are supposed to do the interests of their equity holders (the owners of the company), who are just persons, like you and me, and have the same priorities as we do when we decide to rent a house, to buy or sell, but not to steal.
Where is the limit to our (or the companies’) behavior? We can have a moral limit (and many managers I met felt it) but this is not enough. So we have the laws and we have authorities who are supposed to enforce them. This is the way in which the human community works, with a mix of personal egoism (companies are also called “juridical persons”) and collective regulation.
This is how the system works, in general. Of course the world might be better if we all, managers or individuals, were generous and uninterested as Saint Francis, but I am afraid that this is not happening and will not happen. But, even so, the system works pretty well, having generated all the progress that we have witnessed since the first industrial revolution.
Something however is going wrong in the most recent decades, generating the kind of resentment you show in your blog. The system does not guarantee anymore the preservation of natural resources, fair opportunities for the entire world population, not even an adequate protection for the clients of the corporations, the consumers. Why is this happening? I do not pretend to give a complete answer, but I see at least two reasons.
The first is that politics, good politics I mean, is getting too weak. The national level is not enough to regulate most of the behaviors of the corporations on the global scene. We would need much stronger, not weaker international organizations. Of course the other solution would be to disrupt the global market and bring every transaction down again to a national or subnational level. But I cannot imagine how this can be done. We live in a global world (otherwise I would write in Italian, it is much easier for me), the Chinese and the Indians will make it even more global even if we retire in our nutshell, so we have to fight for our ideals in the international arena.
The second reason is that there is an excess of financiarisation. For every “real” transaction between two countries (for instance a barrel of oil traded in Rotterdam or even a sac of pepper sold on the commodities’ market in Dehli) you have ten times that price in financial transactions in the global market. Financial transactions are just gambles. Even equities and other financial stocks are not traded any more on the basis of the long term value of the company, but just looking for short term opportunities. Managers do not respond any more to shareholders who expect to see how their company will be worth five years from now. They will be confirmed of fired by institutional investors (bankers or other people to whom we gave our money to manage, hoping for the highest possible yeld) who want to see a profit here and now. To understand the difference, imagine a company which operates exploiting natural resources, for instance, cutting wood. If your owners (the shareholders) want to get a long term profit, you will cut as much as possible, but without depleting the forest. Otherwise, you will destroy everything, just to maximize this year’s sales. And the same example can be used for other investments, in technology, research, human capital.
How can we change this system, that somehow must be changed? That’s a nice question. Ethical funds can be a part of the answer, but just a part. Destroying the corporations certainly is not.
Donato Speroni
You say that “There is no law which compels a company to act for profit”. I’m not sure if this is true.
A little googling found that, in Maine, USA, under Section 716 of the business corporation act:
“…the directors and officers of a corporation shall exercise their powers and discharge their duties with a view to the interests of the corporation and of the shareholders…”
However, in Australia, under the Corporations Act, a corporation is compelled to act “in the best interests of the corporation”.
In Canada, they must act “with a view to the best interests of the corporation.”
The theme seems to be that directors of corporations are required to act in the interests of the corporation. As a legal entity without a body, a corporation has quite different interests to a human, or an animal.
So, if a corporation produces a product that is addictive and harmful to humans, but produces a good profit, it would probably be in the interests of the corporation to sell it.
At least the law in Maine included the phrase “and of the shareholders”. Presumably, even shareholders need to eat healthy food, drink clean water and breathe unpolluted air.
I’m sorry for the long delay in answering. Your comment got lost in a sea of spam, and my son Pietro recovered it. The basic rules for corporate bodies are not different from the ones for the physical persons. People are expected to act in their own interest – and codes are there in order to avoid that the clash of self interests get out of hand and damages the society as a whole. In the Italian Civil Code, for example, as in all the codes coming from the Latin system, the correct behavior (for instance if you have to take care af the interests of an underage) is referred as the one of “bonus pater familias”, the good father of the family. The pater familias should act for increasing the wealth of the family, but with a long term view, taking into consideration the interests of the community, the environment, etc.
In theory, directors of a corporate body are be expected to act in a different way. It’s in the interest of the company and of the shareholders to preserve the community where it is operating, otherwise it will perish.
Why this theory often does not work? Because the shareholders are very often, specially for the biggest companies, not real people who want to keep their share of the company for a long time, but institutional investors like investment or pension funds, whose directors are rated every three months on their ability to make as much money as possible from their portfolio. They have just a short term view, and don’t give a dam if a company fires it’s best personnel in order to face a short term crisis, or if it depletes the resources of the land. In any case, a few months later they will have cashed their investment and sold their shares. As I said in my post, it’s difficult to change this situation. But there re ethical funds which are expected to behave in a better way.