Friday 21 October 2016

Growing corporate power is a big concern

The complexity of what they do is giving planet-spanning mega firms more clout these days, writes Dan O'Brien

Published 11/10/2015 | 02:30

Volkswagen Group of America President and CEO Michael Horn
Volkswagen Group of America President and CEO Michael Horn

The consequences of the rise of corporate power were much in evidence last week. A new worldwide plan to clamp down on tax avoidance by multinationals made headlines on Monday. Europe's de facto supreme court on Tuesday came down against big data companies sending European citizens' personal information across the Atlantic for fear American spies access it.

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These cases come hot on the heels of the scandal of Volkswagen deliberately building into millions of its cars systems designed to fool tests for noxious emissions.

Add longer-term concerns about two industries of particular relevance to this country - big finance and big pharma - and one doesn't have to be an excitable hard-leftist to be increasingly worried about the use and abuse of corporate power.

Why are companies becoming more powerful and what can be done about it?

Many factors are at play in giving businesses more clout, but two stand out - the growing number of planet-spanning mega corporations; and the increased complexity, and hence opacity, of what many businesses do.

Start with the rise of the multinational. This has been one of the biggest economic changes in the world over the past 70 years. It has not only made some companies much bigger vis-a-vis those who make and enforce their rules - national governments - but it has made it easier for them to play governments off against each other and to exploit differences in rules that exist across different jurisdictions.

None of this is to say that multinationals are inherently bad. Far from it. On a global basis, they do many good things - binding economies and countries closer together, generating innovation and driving efficiencies - and for the countries that are successful in attracting them, they bring jobs and opportunities for local suppliers. But as with all powerful entities, they need to be checked and balanced.

Among other things, that requires rules which are fairly set and properly enforced. But because ever more economic activity is happening across borders, while rules are still mostly set within borders, the capacity to check and balance companies operating in multiple jurisdictions has weakened.

This has had many consequences. Hyper-inventive tax avoidance is just one. Many multinationals stack their corporate treasuries with clever accountants who are paid to exploit loopholes across the globe which allow them to reduce their companies' world-wide tax liability. As more companies have international operations, avoidance appears to be waxing. In an age of austerity, public tolerance for it is waning.

Last week saw the publication of a global plan to curb the practice. Commissioned by the Group of 20, a club comprising the largest economies in the world which was established after the crash of 2008, the 'Base Erosion and Profit Shifting' (BEPS) plan is a recognition that when activity globalises, rules must follow suit if they are to remain effective.

All of this is in Ireland's long-term interests. No other developed economy is as dependent on multinationals. They account for a bigger share of employment than in any other OECD country and because they account for a full 90pc of everything that is exported from this economy, they are the single most important factor in making Ireland the dynamic trading economy that it is today.

Attracting so much foreign investment has brought huge benefits and has been the State's great economic policy success, but it also comes with downsides. A small country that hosts many of the world's biggest companies and which has become so dependent on them for employment and income has certain vulnerabilities. Vulnerabilities tend to be exploited by those who can benefit from doing so.

The best protection the Irish authorities have against multinationals seeking unfair advantage or unwarranted concessions is to be able to point to hand-tying external constraints. And the best constraints are law-based constraints. That is where the EU comes in, as its law is the only form of international law anywhere in the world that really constrains what sovereign states do.

Telling corporate executives when they come looking for preferential treatment that EU laws and rules simply won't allow it is one of the best protections a small country has against being taken advantage of.

Among the most important EU rules in this regard are those which prevent governments from giving taxpayers' money to private companies. While these rules were originally designed to stop countries subsidising home grown companies (in the hope of giving them an advantage over foreign competition), in Ireland's case their most important role is to limit multinationals threatening to locate new operations elsewhere or, worse still, relocate existing ones if they don't get a subsidy.

The second big factor that has caused corporations to become more powerful is complexity. As economies develop, people and businesses tend to become more specialised as they burrow deeper into silos which are necessarily dark and obscure for those on the outside.

As with the rise of multinationals, there is much good that comes from specialisation, particularly in terms of increased productivity. And lest anyone be in any doubt, the reason we live infinitely more comfortable and healthier lives today than those of our forebears is because of the productivity miracle that began at the time of the industrial revolution.

But specialisation has downsides, too. It makes keeping tabs on people and companies much harder, as the moneymen have demonstrated so clearly, and so painfully. Among the main reasons for the western financial crisis of 2008 was that too few people understood some of the financial products being peddled and the supposedly super-sophisticated trading strategies being used in big finance.

What goes on the nooks and crannies of finance these days is fully understood by only a handful of highly remunerated specialists. Regulators are constantly playing catch and the best ones are often lured over to the industry where they can earn many multiples of their public sector salaries.

But it is not only outsiders who are in the dark. So complex has finance become that the managers of the people at the coal face all too often don't understand what their subordinates are up to, hence the frequent revelations of rogue traders losing kings' ransoms before they are found out (and there are plenty more rogue trader cases that never come to light as they are covered up by firms to limit reputational damage).

The Volkswagen case illustrates the complexity problem in a very different industry.

The car in your drive is the product of, quite literally, trillions of euro of research and development spent by many companies over many decades. It is a miracle of technology and innovation in its own right. But such is the complexity of the modern vehicle that even within the auto industry nobody understands the functioning of every aspect of a car. It is for this reason that the wrongdoing of the handful of people in VW who rigged the emissions measurement equipment were able to get away with it for so long.

Addressing the problem of regulating increasingly complex activities is even more challenging than regulating globalised companies, not least because so many industries are changing at such a rapid pace.

Before the enactment of whistleblower legislation last year, this column advocated adding US-style financial incentives for those who flag wrong-doing in the financial services industry (in America, whistleblowers get a percentage of the fines that are imposed on companies as a result of their revelations, and the sums can run to tens of millions of dollars).

Although that did not happen, the case for US-style incentivisation of whistle blowing covering all sectors - private and public - is stronger than ever. It is one of the few tools available to lessen the temptation for those with specialised knowledge to do wrong. If erring experts feel certain that they won't be rumbled by plodding regulators, they are likely to be less willing to risk wrongdoing if one of their own can get rich by doing the right thing and bringing it to light.

As with any kind of power, more of it tends to lead to more misuse and abuse. That is as true of corporations as it is of governments. The challenge to design systems of checks and balances that function effectively in an increasingly complex and increasingly borderless world is huge, but it must be pursued.

Sunday Independent

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