Corporate Culture and Responsibilities

We have witnessed economic history being made. The first period of economic history was driven by agricultural. The second wave was industrialization and technology. The third and very brief period was financially driven. There are not clean breaks in any one period. There is always significant overlap changing with time. In order to examine the economic history of the world we need to understand the central driving force that motivates the majority of the world’s wealth to be valued and allocated in a particular way.

The advent of storage and transportation technology enabled people to ship food beyond their immediate consumption. Still the most important good was primarily food. The ownership of land to produce food dominated the economies of the world for millennium. It was not until the most recent century has the innovations of technology made the production and destruction of things other than food a more dominant economic force. The Industrial Revolution denotes a period referred to as the period when machines were created that could mass produce other goods. Computers are another form of goods that can be produced by machines and become something other than food that is used to create and manage wealth. That period is referred to as the Information Age where the information on the computers is highly valued.

The ability of computers to be networks together empowered people to collect, analyze and distribute information in massively fast ways. The Tech Boom of the 90’s denoted a time where investor place enormous value of what could be done with this information but it did not live up to the billing or reality. I see it as just another chapter in the Industrialized Age. This is not to belittle the innovation of the technology, just to put into perspective the relative importance to world economies.

The Financial Age came on us like a shadow in the night. The financial services industry worked overtime creating as many financial instruments that they could. This area grew enormously fast due to the unregulated instruments and companies that were created. But it all came crashing down with a vengeance. Similar to the Tech Bust, the collapse of the financial system make the Tech Bust look like child’s play.

The Financial Services Industry lobbied for and got several important changes to the Federal Laws that were previously on the books. Insurance, banking and brokerage houses use to be separate entities. In the unregulated environment they could be merged and start their own additional services. The other thing that was created was large financial entities like hedge funds that particularly did not need to have reserves to back up the securities. In an ironic twist, a hedge fund is like an insurance policy against the value going down. However there were no reserves like an insurance company to insure there were sufficient funds to back up that policy.

Others can debate the merits and problems associated with each of the newly created financial instruments. To me the bottom-line is the size and impact of the systemic-risk associated with what was created and the amount of damage that was actually caused by their collapse. Nobody took responsibility for the damage. Similar to an industrial company that argues against environmental laws, the financial industry acted in the same way. The name given to all the high leverage and over values assets was “Toxic Assets”. This is an appropriate name on many levels. It did damage, it has a long and pervasive affect on those affected and it was argued that it was necessary without understanding the risk. In the end the public suffers while the executives got handsomely rewarded and the public is expected to repair the damage.

The executives of a corporation must be held accountable for the performance of the company in the short term and the inherent risk they create in the long term.
Fundamentally a corporation exists to produce goods and services that benefit society. If corporations are allowed to narrowly define their role as creating shareholder value then they do a grave disservice to the society as a whole. Case and point, a corporation can make products that are unsafe but perform well in the marketplace for a time. The stock price would go up from the low cost and good profits. We have had multiple examples from goods made in China that have had serious safety problems. Their codes for materials and safety controls have not had time to evolve but their products are significantly lower cost than those that can be produced in other parts of the world. The balance of trade with China further proves how much corporations like Wal-Mart have exploited this situation, saying it is in the public interests to provide low-costs goods. Well, it is also in the public’s interests to provide safe products and ensure they are produced under the same environmental standards they we also have to abide by.

There is never a good rational for having one party play by different rules while you are forced to play by another.
A corporation must ensure that their suppliers adhere to the same set of labor, environmental and economic rules, no matter where they source the materials.
The best expression to characterize this situation is, “two wrongs don’t make a right”. Too often the argument is made that some group is entitled to favoritism to compensate for past transgressions. The best way to ensure that fair rules are made and they are followed – is to not have privileged classes or favoritism of distressed classes. That becomes a never ending cycle where there is no definition for the word “fairness” anymore. Rhetorically speaking, where does it end?

The worst outcomes are spawned from situations where the rules are not enforced or are circumvented to gain advantage over others. There are acceptable areas for competition and others that are not. Of course that begs the question – What would each be? The best way to answer that would be to provide guidelines. Competition for necessities has moral implications. In that kind of situation, someone that could afford to pay more could easily horde the item and would try to profit by the shortage. This would just exacerbate the situation. The more reasoned approach would be a fair allocation with plans to mitigate the shortage – either by replacement, increasing supply or lowering demand.

The private sector might be very creative and find alternatives to alleviate a shortage quicker that the government. But the reality is, most corporations left to their own devices would probably use this opportunity to raise prices and act only in their self interests. There is no motivation for them to do otherwise. So the only choices are to find a way to motivate a corporation to act responsibly during a shortage or the government needs to do the allocation. Unfortunately, neither is an optimal choice. Again governments are made up a people that are corruptible or are corrupt already. Therefore some groups within the government may take advantage of the situation for their own gain or purpose.
Even government oversight of companies seems to fail because the agencies tasked with monitoring the companies are easily bought off, bribed or threatened. What is needed is more individual participation by regular citizens and minimizing tenure of regulators. Further, the real answer is transparency. The most stressful times are those when necessities are short and the people need to know that everything is being done to mitigate the situation and ultimately resolve it. Transparency has the dual role of providing oversight and giving the people effected more confidence in the system.

We can easily imagine that shortages are going to grow in size and across more necessities. The time to determine how we are going to deal with these situations is best done before they happen. I hope that we all take this coming crisis seriously. Most of the world’s population already lives with regular shortages of the most basic necessities.
A panel combined with private individuals, representatives of corporations and the government should monitor shortage situations and should have the authority to control the allocation and mitigation.
The role of business in this situation is to provide innovation, research and analysis. Government would collect data, control inventory and provide distribution when appropriate. Private individuals are there to provide oversight and ensure that transparency is maintained and improved.

4. Individual Responsibility

The biggest thing that all citizens should realize is their individual responsibility to have respect for the limited resources of this world and their role in using everything in moderation.
Everyone needs to actively participate and help pass on this attitude to their children.
There are several forms of an entitlement mentality. The “Haves” have the entitlement mentality that they have more money therefore they are entitled to special privileges. The “Have not’s” that are on government support programs feel that it is the government’s responsibility to take care of their basic essentials – housing, heating, fuel, medical care and education.
There is a different mentality that would be helpful to society and to everyone in it. Once referred to as “Work Effect”, people should feel that hard work, ingenuity and personal responsibility are virtues. If someone is getting assistance then they should respect the fact that others are helping them and that they should be grateful of that. It is a slap in the face of those other people to feel entitled.
The whole concept of insurance is intriguing. An individual during their life may choose to spend money on amenities, vacations and more extravagant items then they really need. Alternately, they could also have planned ahead for possible downturns in the income or for medical emergencies. The choice would have been to buy an insurance policy. There are insurance policies for practically every type of contingency. At the extreme you could buy so much insurance that you bankrupt yourself. The problem that most people have is the leverage of risk. It is responsible to insure your family against possible problems. Now insurance itself is becoming a problem. The cost for the insurance is rising rapidly and the insurance carriers are increasingly minimizing their risk and putting more on you. I agree in principle that people should act responsibly and carry insurance but the dilemma now is the corporations have abused their positions and cannot be trusted.

AIG is a perfect example; they either got into businesses that they did not understand or they thought too short term when they are suppose to be the professional at assessing long term risk. If either of these is true then why should we trust the insurance companies to insure us? The amount of the federal bailout of AIG is $160B and counting as I write this. So we face the dilemma of acting in a responsible way but we have to have faith in the system and institutions, which there is little to trust now.

Trust and faith are two principles that takes years to build but can be destroyed in a heartbeat. Basically the concepts presented here require a leap of faith that we can achieve the structure described. That structure requires the entire pyramid to be built. If only part of it is built then you should be worried that a group of people are trying to manipulate the system to their own advantage. The warning signs of abuse are the high executive compensation packages. This is no more that legalized theft. The higher the salaries the more motivation there is to be creative regardless of risk, especially when risk is not part of their performance formula. So we have a systemic problem between corporations and the individuals that rely upon them.

This section of the book addresses the behavioral aspects of a monetary system. It is unrealistic to put forward a theory about economics without evaluating its chance of success given human nature. Just because someone has more money or has been successful in a particular business does not mean they are either principled or honest. Nor can it be assumed that these people are smarter or have the best of intentions to help society as a whole.
The expression “Absolute power corrupts absolutely.” says a lot about the danger of putting too much power in any one individual’s hands. So no matter what system that is put in place, it must have extensive safe guards against abuse of power. Abuse can be simply excessive compensation, someone that tries to change the rules to benefit themselves or their associates.

5. Lobbyists and Unions

The economy was subdivided into three groups – Government, Companies and Individuals. Obviously there are other groups that play a significant role in the economy. For discussion purposes these other groups will be a subdivision of the “Individuals”. Individuals typically belong to many groups and may join and leave any one of these at various times. We, as individuals, struggle to find groups that help support our own attitudes. The groups themselves change with times. They change leadership and the nature of your previous association with that group understandably changes with your own evolution of thoughts and the groups’ changes.
Ordinary citizens may belong to the bowling league, church groups, political groups, social clubs, etc. Powerful people look for other associations that can have significant impact on the entire economy. As a person’s influence grows, they naturally seek out other like-minded people as associates and to leverage their influence. OPEC (Organization of Petroleum Exporting Countries) is such a group. OPEC is a good example of a group, at one extreme, that is directly trying to influence the economies of many countries. So it should not be a surprise that there are other groups that are trying to influence the world economies in other ways.

Freedom of Speech

Freedom of speech plays an important role in the American society. It protects the rights of people to speak out on issues and to form groups to influence public policy. Of course it is not that simple. Under the same protection, individuals can use this right to insight riots and promote destruction of people and property. The same protection extends to the media and groups that may have disproportionate influence on public policy. The question becomes, how can you continue to safe-guard this right while protecting us from corruption of the system?
Two primary elements have the greatest influence on public policy – money and organization. Life is not always fair. If a group has both these elements then they can be very effective in directing policy to the ends that the group wants. Lobbyists for industries, foreign governments and unions have had unusual success in this way. We may elect the public servants but they quickly forget the constituents that they serve and are influenced inordinately by special interests groups. It’s a numbers game. A great deal of money is necessary for campaigning and communicating to the electorate. This translates to vote down the line. Large organizations help with the communications and focus the message on particular issues. Obviously if the message coincides with that group’s stance then this also translates to votes when needed.
The problem centers on the conflict between democratic principles and freedom of speech. If special interests groups confined their lobbying to the general public it is one thing. However, the public gets circumvented when lobbying goes directly to elected officials. The public official, in turn, develops a policy that may serve only a small group of people and not the majority and there was no democratic process involved.
Votes of elected official are basically bought when a lobbying group contributes to the official’s re-election fund or provides gifts in one form or another. Gift giving has been recognized as a corruption of the system and laws have been instituted to limit that, but abuses still occur. Even if contributions to campaigns were limited, there would still be disproportionate influence by lobbying groups because it is more efficient to work with a smaller group of people that can have multiplying affects on communicating messages to greater numbers of like minded people. At the end of the day, there is a trade-off between the principles and the pragmatic. It is easy to be idealistic but it’s hard to always adhere to the principles in the practical world. Latitude is necessary in putting principles into practice. Unfortunately, the influence of lobbying groups can easily translate into a severe corruption of the system and have the affect of creating significant policies that hurt the majority of people.
I have to admit that I understand and am conflicted on both side of this challenge. There is always a need to hear coherent arguments about issues that a special interest group can provide. There is also that practical need to be able to efficiently communicate. On the other side there is the democratic principle and the protection of the silent majority. The silent majority rarely gets involved in issues before it is too late and the damage has been done. Worse yet, politicians have become deliberately evasive about their stands on issues and their actual voting records. Policy and funding gets buried and mixed in a particular bill. Then the politicians claim that they had to compromise and vote a particular way in order to get other things passed. This game is particularly worrisome. The terms “transparency” and “accountability” uniquely describe the challenge. The complexity is used to hide and justify their actions. A deeper discussion is needed to understand the challenge of democracy.
The fundamental issue about the democratic principle is the role of an elected official.
• They are either voted in to use their Best Judgment and we are elected them because we trust their judgment. Then they could act independently to vote on any and all issues as they see fit.
• Or they are elected to represent the majority opinion. If this is the case then they should be polling the opinions on all issues. If this is not practical then, at least, we should be polled or we should be able to individually vote on all major issues.
The role of elected officials seems to be weighted towards the Best Judgment approach, at least in the minds of elected officials. If you were to ask the general population then they would say – elected officials should represent the majority opinion. The challenge is a matter of education and communication. In the ideal world everyone would have an obligation to understand both sides of an issue and provide our opinions to the elected officials. The elected officials’ responsibility would be to ensure that the general population got the information necessary to thoroughly understand the issues. Democracy only works if the people that vote understand what they are voting on.
Sadly, when the majority is apathetic or ill-informed then the elected officials are right to use their own Best Judgment. This however should not be an excuse. If elected officials deliberately hide relevant information from the public then democracy is lost because the opportunity for the general public to effectively participate is lost and the elected representative is not accountable for their vote. I would contend then that the people that avail themselves the opportunity to understand issues should be provided that information and they should have the opportunity to influence the vote of elected officials.
Therefore, there is always a shared responsibility between elected officials and the public. Elected officials should always be transparent and accountable. The public should always try to be educated about issues and provide their opinions in the most constructive ways. Democracy only works if the public participates in the dialogue and entire process. Politicians are understandably quick to make life easy on themselves. There is only so much time so there has to be a minimum level of responsibility.
With that in mind, elected officials should be held accountable in a number of more specific areas:

    a. Gathering the best information
    b. Understanding the issues and consequences of a particular direction.
    c. Packaging the information in a format they the public will understand.
    d. Determining the relative importance of an issue then communicating that information to the general public on important issues.
    e. Gather the opinions on important issues and calling for a vote on the most important issues.
    f. Following the vote of the public that chooses to participate by voting.

The public has some very specific responsibilities as well:

    a. Apathy is unacceptable. The public has to gather information from the elected officials and from independent sources so they can judge the honesty and competence of their representatives and help the representatives in a constructive way.
    b. The public should actively participate in discussion groups on a voluntary basis to explore the merits of various proposed solutions to problems and issues.
    c. They should actively gather and challenge their representatives to ensure their understanding of issues and their position on them.
    d. The public should always hold elected officials accountable for their votes and how they package bills.

6. Role of Financial Institutions

Recently Barney Frank described the role of financial institutions as the intermediaries between productive endeavors and investors. This role defines as a means to an end. Barney illustrated how the financial process has become an end in itself. This was an interesting perspective. It highlights the emphasis that has shifted to focus on an illusion. The illusion is what makes you stronger or weaker as a society. The role of the financial institution runs parallel with the role of money and the monetary system. At the most basic level people might barter for goods and services. Money and financial institutions act to provide a more efficient way to provide capital and make payments. In the end, a financial institution provides a service to parties that want something in return for what they provide. Therefore, I have to agree that financial institutions are a means to an end.
An investor might argue otherwise, that their motive is to derive an income or a return on their investment in a particular financial institution. Switzerland and the Bahamas would be examples of countries that have finance as their primary business. If we assume this is true then they must provide a unique service for their banks to differentiate themselves from other global banks. The most obvious differentiated service would be to provide anonymity to the depositors. This would be an end in itself also. Anyone trying to avoid taxes or discovery of money obtained illegally would necessarily want to hide what they have accumulated. Money laundering would also be classified this way.
Money stuffed under a mattress may make it safe but it does not help the individual or others that might benefit by its use. So there are more productive ways to do things. Choices have to be made. Money obtained illegally can be put to productive and useful purposes. But does that justify the money laundering process?
People are entitled to find safe investments for their money and expect a reasonable return. Investors and savers that invest in financial institutions are conducting a legitimate and productive activity. This should not be confused with the illegitimate ends.
However, we should question the rates that financial institutions charge for their service. If we think of the finance process/financial institutions as an ends then we would believe that they are entitled to charge as much as the market will bear. If we think of it as a means then the rate they should charge should just be a function of risk and much lower. Put another way, as an “end” fewer people would have access to the capital that financial institutions provide. As a “means”, more people would have access to the same capital and benefit society greater. Therefore there is an inherent problem with thinking of financial institutions as an End in itself.
A caveat to this line of reasoning is human nature. The few people that control the capital can too easily discriminate who they choice to lend or the rate that they charge. They have also used the opportunity to extract exorbitant compensation for the job they do. Another consideration is the competency of money mangers and their ability to assess risk properly. “All financial institutions should maintain appropriate levels of reserves for unexpected market variations and poor judgment on the part of money managers.” There is room for competition and some institutions doing better than others thereby getting rewarded for their success.
Thinking of our financial institutions as an End creates an environment that is too volatile and unstable. When the discussion starts with the basics we can build from there to establish priorities. It then provides a perspective to our discussion. The bare essentials for survival are water, food, shelter and heat. Money used to provide the essentials are therefore absolutely necessary. Money used as capital to build facilities that provide these essentials are investments that need to be made on a continual basis and should have the highest priority for any society. There are also operating costs that go along with the normal operation of the facilities. This also needs to be budgeted appropriately. Since our entire system is so dependent on an efficient financial system, we must think in terms of its operations as an essential part of our society. Transparency, accountability and regulation to control abuse and minimize volatility are therefore just as essential as the other basic essentials to ensure the health of our society.
The perspective we need is to make a choice as to what parts of the society are essential and which parts are elective. The “means” matter as much as the ends for the essential parts. Financial institutions facilitate the operation of the society like blood flowing to our organs. People that argue for financial institutions to act in a completely free wheeling market driven way are like cancer to the body. In reality limiting capital to just a chosen few starves vital nutrients to the organs and is not efficient. Efficiency is getting as much blood to every part of the body that needs it.

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