Ruthlessness, Magnanimity and Capitalism
As the world inches toward another recession, it looks for new answers on the economic jousting of companies around the world
At the height of the economic crisis in 2008, there was rising speculation, on all continents, about the death of capitalism – at least of the US-style capitalism predicated on a ‘winner-take-all,’ ‘take no prisoners’ model. A capitalist model based on ruthlessness and a general absence of compassion and magnanimity was increasingly viewed as a failure in light of the collapse of the global financial system, the need for massive bailouts by the major central banks, and the explosion of income inequality in the US and Europe.
There has been much speculation about what might replace US-style capitalism. In 2008, there was no consensus. There is even less consensus today, as many major economies continue to stagnate, and with a new recession looming. At first, the European model – ‘compassionate capitalism,’ as it were – was touted as the next phase of evolution. Capitalism did not have to be ruthless – or so the narrative went – and it definitely could be magnanimous. Of course, the European model itself is today failing, with rising speculation about its survival, as well as that of both the Eurozone and the EU. The welfare state is on the verge of collapse throughout Europe, as country after country has been pressured by the so-called ‘bond vigilantes’ to eliminate budget deficits and greatly reduce public spending – especially on social programmes.
Is the Chinese model the wave of the future? Many believe that it might be, given the dramatic growth of the economy of the Middle Kingdom during the past three decades. But that growth has been driven by government spending at all levels. Moreover, Chinese freedoms continue to be limited; China’s social safety net is porous and underdeveloped; income inequality is growing rapidly; and corruption is even more prevalent than in Europe or the US. A recent Associated Press report highlighted that leaving China is at the top of the wish-list of the wealthiest Chinese. Many of these wealthy Chinese are moving their families and capital out of the country in order to get foreign passports; that is, in order to leave China quickly if and when necessary. If the wealthy wish to leave, then this is likely not the model for the future.
So what, at this uncertain moment in global economic affairs, will be the capitalist model of the future? How ruthless should it be? How magnanimous should it be? What roles will governments play – particularly in regulating ruthlessness and magnanimity? The answers to these questions may provide some of the basic considerations in the great debates on the future of the world’s political economies.
There is a common saying in business: “Nice guys finish last.” Does this necessarily mean that in order to succeed, companies and – more importantly – the people who run them must be ruthless and adopt a ‘take-no-prisoners’ approach? When he was the CEO of American Airlines, Bob Crandall once stated that competition is about “killing your competitor.” Joseph Schumpeter talked about the importance of creative destruction. The competition that matters – and supposedly benefits society as a whole – is the one that overwhelms previously successful companies. In short, companies and their executives need to be ruthless in order to succeed; or, more broadly, ruthlessness is a critical aspect of competition in economic life.
At this time of writing, large companies in Europe and the US continue to sit on record stockpiles of cash – reluctant to invest and hire at the precise moment when economies and the general welfare require just that. These companies are confused about the future. They lack the confidence to take risks. But, fundamentally, these companies do not at all appear to be magnanimous – in the sense of trying to help to turn around their national economies and raise the condition of the people.
Forbes annually produces a list of the richest people in the world. Are any on this list truly ruthless according to the true meaning of the word? Probably not – especially when one considers that the list does not include despots, drug lords or other heads of organized crime syndicates. Has Carlos Slim or, say, even John Paulson – who has moved high into the ranks of billionaires since 2008 by making large bets against the US housing market, and on the American banks bailed out by the Federal Reserve – been cruel, merciless or vindictive? Perhaps in the eyes of some. But have these men murdered anyone? Have they tortured anyone? Have they destroyed an economy or country?
Many very successful businessmen and women who have created enormous wealth by starting or growing companies or through financial engineering, have also made large contributions to society through their foundations or other forms of philanthropy. Indeed, more and more of the world’s wealthiest individuals and families are donating more and more of their wealth. Bill Gates and Warren Buffett, respectively the second and third richest people in the world (according to Forbes), have started the “Giving Pledge” initiative, through which they have invited the very richest to commit to leaving most of their wealth to support numerous charitable activities. There are at least 69 billionaires who have signed up thus far. (Interestingly, wealthy Americans tend to be more generous than non-American billionaires with their wealth – and also less susceptible to the creation of dynasties; yet they are generally viewed outside of America as more cutthroat competitors.)
So we ought, perhaps, to be careful to distinguish between the truly ruthless and the hyper-competitive. To be sure, one can find numerous examples of modern-day malfeasance by companies and their senior executives. To take an obvious example, British Petroleum (BP) – even prior to the Deepwater Horizon disaster in the Gulf of Mexico in 2010 – had a dismal safety and environmental record. The Deepwater Horizon explosion killed 11 people on the rig, and caused tens of billions of dollars in damage in and around the Gulf of Mexico. In both 2001 and 2005, Multinational Monitor named BP as one of the 10 worst corporations in the world, based on its environmental and human rights records.
BAE Systems has been investigated in the UK by the Serious Fraud Office on the use of political corruption in order to help to sell arms to Chile, Saudi Arabia, South Africa and other countries. In 2010, BAE Systems agreed to pay £257 million in criminal fines to the US government, and £30 million to the UK government. Under a plea bargain with the US Department of Justice, BAE was convicted of felony conspiracy to defraud the US government. US District Judge John Bates said that the company’s conduct involved “deception, duplicity and knowing violations of law […] on an enormous scale.” Like many arms manufacturers, BAE has been criticized by various human rights groups for the human rights records of governments to which it has sold equipment.
Basic fraud has been as ubiquitous as bribery. Some of the classic cases at the beginning of the 21st century include Adelphia Communications, BNY Mellon, Enron, Global Crossing, Merck, Nicor Energy LLC, WorldCom and Xerox. But once again, do these companies and their executives deserve to be put in the same league as the really ruthless political tyrants of the past and present?
Companies may well cross the line in order to engage in illegal activities for advantage. Frank Easterbrook and Daniel Fischel classically argued that there might be circumstances in which it is rational for a company to break the law. In simple economic terms, if the expected value of breaking the law exceeds the expected value of abiding by the law, then a rational person will break the law – no moral principles involved; just greed. Consequently, companies might entertain breaking a law or two as a means of creating or sustaining their competitive advantages.
Milton Friedman, recognized as one of the all-time leading neoconservative economists, disagreed. In 1970, he wrote: “In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to their basic rules of the society, both those embodied in law and those embodied in ethical custom.” In other words, the senior managers who run corporations have the obligation to make a profit within the framework of the legal system.
Both intellectual positions – rational law-breaking and duty-based observance of the law – and, to be sure, the practical actions of companies highlight the importance of rules and laws; or, in other words, the importance of governments and public authorities. For if markets – and hence ‘capitalism’ – are circumscribed and defined by the rules and laws in place at a particular point in time and in a particular country, then governments use laws and regulations to point business behaviour in what they perceive to be beneficial directions. Naturally, as mentioned, this does not necessarily mean that companies always abide by the rules, or that they will move in the desired direction. Indeed, given the diversity of goals among different governments, there are often conflicts among the laws of different countries. This causes tensions and uncertainty for companies, and makes it more difficult for any one country to enforce its rules and laws on global corporations (although the US and the EU are evidently best placed to do so in virtue of the size and importance of their domestic markets.)
Enforcement is oftentimes more critical than the rules themselves. But enforcement can be a tough slog. Exacerbating the difficulty of winning cases in the courts and thus strengthening enforcement are the political pressures on regulatory agencies to go easy on companies. It was arguably not, after all, a dearth of regulations as such that contributed to the financial crisis in 2008. Rather, it was weak enforcement. In the US, financial service companies have invested heavily in lobbying, and have been major contributors to political campaigns. It is conceivable, as a result, that these companies were successful in influencing politicians in both parties to pressure the heads of the regulatory agencies to be less vigorous in their enforcement of their respective regulations.
Can a company be fiercely competitive – short of ruthless – and at the same time also be required to care for more than just its shareholders; that is, for other stakeholders like employees, customers, suppliers, the environment? Would this be in the best interests of companies, their senior management and their shareholders?
The advocates of Corporate Social Responsibility (CSR) will answer with a resounding yes. And it seems that more and more companies are answering yes as they adopt and more fully develop CSR strategies and procedures. Today, being hyper-competitive but not at least somewhat magnanimous is a recipe for disaster. Magnanimity – in the form of CSR policies – is viewed by a growing number of executives as critical for creating and sustaining a competitive advantage. The proliferation of social networks and their amplifying effects on good and bad news only make sharper the accent on reputation. Even Milton Friedman alluded to this possibility, stating that “it may well be in the long-run interest of a corporation that is a major employer in a small community to devote resources to providing amenities to that community or to improving its government. That may make it easier to attract desirable employees, it may reduce the wage bill or lessen losses from pilferage and sabotage or have other worthwhile effects.”
But what role for governments here? Is the trend toward CSR a reflection of voluntary actions by companies or a response to tougher laws – such as Sarbanes-Oxley in the US? Perhaps the move toward CSR has been driven by a self-defence strategy. Companies and their executives know what happened to the tobacco companies in the US as they were forced to pay fines in the billions of dollars. Hence, fearing class-action lawsuits, or legal actions by government, a company’s senior management may point to its CSR policies as a legal defence. If this be so, then this once again speaks to the import of rules and laws and their enforcement; and, of course, the import of governments and public authorities. And so we observe that companies can well be compelled to behave more ‘ethically,’ and in the process to also act more magnanimously by considering the welfare of a much larger number of stakeholders. But governments cannot count on the goodwill of companies. They must work together – at least the governments of the G8, if not the G20 – to harmonize their rules and laws. For any single government acting alone will face opposition, as special interests align to argue that tougher measures or enforcement will place their domestic companies at a competitive disadvantage.
For example, tucked into the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 is a provision requiring US-listed oil, gas and mining companies to reveal what they pay to governments around the world for permission to tap resources. Not surprisingly, oil companies have been lobbying to have this provision removed – claiming that it is ‘excessively burdensome’ and places them at a competitive disadvantage, as there are no comparable requirements in other countries.
The Dodd-Frank case study highlights a more serious problem confronting governments: even minor provisions requiring some transparency do not sit well with major companies that make enormous profits by collaborating with corrupt and ruthless despots. Indeed, while companies may not necessarily be ruthless according to the exact meaning of the word, many companies have shown no hesitation to engage in commercial activities with despotic and truly ruthless regimes. The pursuit of profit is integral to capitalism, and profits are pursued wherever they can be found.
If governments – particularly those in the West – are to adopt new rules and enforce them in order to push companies and capitalism in a more magnanimous direction, then magnanimity must extend beyond the borders of these countries. The new rules should not tolerate bribery, corruption and collaboration with despotic regimes. Governments should cooperate to harmonize and strengthen their enforcement of these rules. Penalties should be prohibitive. And to level the competitive playing field, foreign companies that operate in countries without comparable rules should face prohibitive trade barriers.
Transparency should play an important role in all of this. The Dodd-Frank Bill was on the right track. Light does act as a disinfectant – a disinfectant that can go a long way in this age of the Internet and Twitter. An active and involved citizenry can play a major role in keeping companies honest. Boycotts can be organized quickly and on a large scale with today’s technologies. One need look no further than North Africa this past year to see the potential.
We can tolerate and possibly even encourage hyper-competition – Schumpeter’s ‘creative destruction.’ And while there is scant evidence of true ruthlessness (properly defined) among today’s companies, governments across borders ought to work to stamp it out where it exists, and to push these companies – slowly and surely – toward a magnanimity that is increasingly – and in any event – in their reputational self-interest.
Fred Lazar is Associate Professor of economics at the Schulich School of Business, York University (Toronto).