Government and Corporate Governance
First Among Corporate Stakeholders
The republican form of government is the highest form of government; but because of this, it requires the highest type of human nature – a type nowhere at present existing.
The government is the primary corporate stakeholder and the final arbiter of what corporations must do.
Corporations must bow to the sovereign.
The state presides over the fate of a company and its investors. The government determines who benefits from corporate actions.
By controlling all corporations within a jurisdiction, government is usually the major factor in determining capital flows.
- In analyzing corporate motivation, we should ask, what does government want?
- Do government actions encourage corporations to issue capital or pay dividends?
- Will government policies upset the balance between supply and demand for capital?
- Which group of stakeholders does the government favor: management, workers, or investors?
Sic Transit Gloria Mundi
Government is constantly changing, and no government lasts forever.
A nation-state may continue for generations through successive dynasties, dictatorships, or elected officials. However, the people in power die or are ousted.
Policies change, and nations undergo metamorphosis.
This unfolding, sometimes sudden but more often slowly, over generations, explains most shifts in capital flows.
In Capital Flow Analysis, we are interested in motives of groups of people that influence the flow of funds.
The Governing Class
When we speak of government, we refer not to the abstract notion of state but to that more or less permanent group of individuals who collectively have power to make and enforce laws and provide public services to the general population.
The fundamental goal of government is the protection, sustenance, and increased material and psychological comfort of those that make up the in-group – the holders, participants, and beneficiaries of government power.
In almost all governments, whether under the guise of democracy, monarchy, or dictatorship, the palaces, mansions, estates, quarters, armaments, benefits, and offices of those in the highest authority reveal grand, lavish, and prominent displays of wealth and might.
The assets that government has at its disposal come from taxation, expropriation, and confiscation of goods and services produced by those subject to its power, extracted by force and coercive persuasion.
The degree to which a government burdens society depends on the number and avarice of the rulers, their emotional and spiritual mind-set, and the quality, scope, and cost of services that they provide.
Too Big To Grasp?
In the United States, the government is large, complex, and to most of its citizens, incomprehensible.
In 2002, there were 87,900 units of the American government at federal, state, county, sub-county, municipality, city, and township levels (Census of Governments”, July 2002, U.S. Census Bureau).
These units handle a wide range of services, including natural resources, fire protection, water supply, housing and community development, sewerage, cemeteries, libraries, parks and recreation, highways, health, hospitals, education, airports, electric power, gas supply, and public transit.
Some public authorities and trust funds manage toll roads, universities, bridges, and transit systems, free from oversight and with independent budgets and sources of income.
The full scope of the American government involves over 100,000 separate governing bodies of all kinds.
Of the 87,900 units included in the census of government, the federal and state governments count as only fifty-one units.
These higher levels of governments, however, can be broken down into more than twenty thousand agencies, departments, and bureaus.
In other words, the full scope of government in the United States probably involves well over one hundred thousand separate units, jurisdictions, agencies, courts, bureaus, offices, committees, commissions, and departments of all kinds, each exercising its own measure of power and sharing to a greater or lesser degree in the spoils.
Laws, regulations, and judicial rulings of this vast officialdom run into tens of millions of pages, which the lawgivers have decreed that all Americans must know.
No individual, including those in government, has the capacity to understand, much less control, the actions of a government as complex as that of the United States.
For the purposes of Capital Flow Analysis, we need to study only those government actions that influence the purchase and sale of securities, but even this is a daunting task.
Multi-layered complexity, sparse reporting, and cultural myths hide much of what goes on in government.
In 1998, the United States was the largest nation, representing twenty-two percent of world GDP.
In that year, the U.S. output of goods and services was almost twice that of China, the world's second largest economy.
Consequently, government in the United States is by far the largest, most pervasive, and most powerful on earth.
The 'Public Servant' Pretense
We are taught in elementary school civics that government, especially our own, is dedicated to serving the interests of the people.
Governments, even those of despots, present the kind, caring face of civic benefactors – tireless, noble, self-sacrificing public servants working for the general good.
However, in Capital Flow Analysis, we should avoid myths and seek to understand the real motivation of those in power.
People in government, like everyone else, look out for their own interests.
Lord Acton famously said, 'Power corrupts'.
It is extremely rare that those with power will not use it, on frequent occasion, to his or her advantage.
All governments abuse authority.
Sometimes this abuse is excessive and grotesque, such as in Soviet Russia and Nazi Germany.
However, more often bad administration is subtle, petty, and either unnoticed or tacitly accepted.
Government propaganda papers over the intentions of those in power.
The masses are predisposed to believe that the government wants to protect small investors, families, the indigent, and the helpless.
There is a common superstition that those in high office are smart, wise, and cognizant of what they are doing.
However, those who have observed at close hand those holding important positions know the truth.
Great nations are often ruled by the incompetent and the unethical.
The Tiffany's Of Corruption
In poor countries, favors of government officials are available for a modest amount by U.S. standards (but not so cheaply when measured in local salaries.)
In the world's largest economy, the price goes up with the standard of living.
In this sense, one might say that the United States is the Tiffany's of corrupt government.
It costs millions to get past the door and buy a presidential pardon, a favorable regulation, or an innocent verdict or suspended sentence after having stolen shareholders' money.
To the average American, government officials are incorruptible simply because the cost is well beyond their means.
The high cost of corrupting U.S. officials provides large corporations and organized crime with significant economic advantage.
Parsing Corruption
One public interest organization, Transparency International, publishes a yearly index on national corruption, based on opinions collected from executives, academics, and other biased observers.
The corruption index should be adjusted for the size of the economy.
Rated on a scale of one to ten, with ten being the most corrupt, Indonesia received a score of 8.1 in 2003, compared to 2.3 for the United States and 1.0 for Canada.
Although the U.S. corruption index is more that three times that of Indonesia, the U.S. has a GDP that is fifty times greater than the less developed Asian nation.
One might argue that, if the corruption index were adjusted for the size of the economy, measuring malfeasance in dollars per capita, the American government would rank among the most notorious.
The small businessperson, ordinary investor, and retiree living off social security, as individuals, lack the means or power to influence government decisions, either by bribery or by vote.
However, the CEO of a multi-billion dollar corporation can spend enough of shareholders' money to lobby Congress and regulatory agencies effectively.
He or she may purchase influence by means of a sizeable contribution to a venal politician or by offering a job to a crony or relative of a useful government functionary.
Corruption Unseen
In practice, most corruption is not so crass as to involve the naked barter of favors for value.
Rarely is there an exchange of money or a fur coat in a back alley for an official benefit.
Rather, most corruption is unobtrusive — a seemingly harmless good turn today in expectation of possible access and a hearing when it may be useful.
A typical event was the request made by the Clinton White House to Vernon Jordan, a director of Revlon Corporation, to find employment for Monica Lewinsky, the intern with whom the President was sexually involved. Mr. Jordan did arrange a job offer from an affiliate of Revlon, but as might be expected, there was no legally discernible quid pro quo, and charges of abuse of power were, of course, not forthcoming.
Corruption may be as simple as receiving a paycheck, year after year, while holding a pointless office – a sinecure of no economic or practical merit.
Corruption may be as simple as receiving a paycheck while holding a pointless office.
There need be no sleazy payoff to rouse the tabloids or to elicit a verdict in a judicial proceeding.
Most corruption is banal and ordinary – within law and custom, exempt from legal sanction, passing unreported and unnoticed, within the boundaries of artfully crafted codes of ethics.
There is even a U.S. Office of Government Ethics. (See: http://www.usoge.gov/home.html)
Furthermore, some advantages received by government officials would seem to be beyond reproach, such as the delivery of an independent academic study on a matter of interest to a certain official.
Such research may make an official look good to a superior, enhancing a career, while engendering a positive feeling and improved access for the provider of an act of civic cooperation.
Government employees, in doing their job, must deal with the citizenry and, in this dealing, relationships develop and access is granted.
Each week, at home and abroad, thousands of government officials are invited to attend or speak at seminars, workshops, luncheons, and other occasions, thereby increasing their visibility, public importance, and contacts – all of which may lead to eventual promotion and advancement, during and after their government service.
Careers in Regulation
Regulation is, it itself, a form of corruption, since the regulators make their jobs more secure and give themselves more power by issuing an endless stream of rules.
As regulations become more complex, employment opportunities expand for enforcement officials, rule interpreters and implementers, and (on leaving public service) compliance lawyers, lobbyists, and fixers.
Corruption, of course, is in the eye of the beholder and relative to the customs of each country.
Hundreds of thousands of civil servants in obscure sinecures do not regard themselves as dishonorable.
It is doubtful that many of the hundreds of thousands of civil servants, grant-holders, and contract consultants that live a comfortable life, tucked away in obscure sinecures in the unnumbered crevices of the colossal American bureaucracy, have any reason to regard themselves as dishonorable.
There are many in government who are self-sacrificing, altruistic, ethical, competent public servants that are examples of the highest standards of human conduct.
However, in a corrupt society, the votes of superfluous timeservers far outnumber the votes of the few heroes that are presented as examples to justify higher taxes to cover salary increases for the less qualified.
Bureaucrat-Executive Bonding
For the purposes of Capital Flow Analysis, we should note that professional corporate executives, using the wealth of large companies to influence bureaucrats and politicians, are in a better position to gain approval for the practices that make them rich than are the millions of small, long-term shareholders at whose expense they profit.
It is not a level playing field.
We are right in presuming that issuers dominate the market.
The employee-managers of the major American public companies are avidly interested in becoming rich, even at the expense of small stockholders.
Among other things, they rely upon short-term price appreciation to give value to their stock options and bonus schemes, thereby buying the approval of fund managers that exercise the votes of the remote, unmindful ultimate owners.
Government office-holders see powerful employee-managers as one of the few groups with the wherewithal to influence their otherwise (to the average citizen) highly principled conduct.
Corporate executives keep politicians content by forcing stock prices upwards and by distributing favors.
Since the government retains final power over corporations, the employee-managers must keep the bureaucrats and politicians content, which is not difficult as long as the stock market continues to rise and they have cash and favors to distribute.
When stock prices fall too fast or too far, the government tends to fault corporate managers, rather than acknowledge defective government policies of taxation and oversight.
Stock market reforms that created the Securities and Exchange Commission were in response to the crash of 1929.
The Sarbannes-Oxley Act enacted after the collapse of the Great Bubble of the 1990s was a similar governmental blame-shifting response to falling stock prices.
