Thursday, September 01, 2005

*On the Power of Corporations*

I have to make a confession. Today was probably the first time I've managed to stay awake during the Company Law lectures with my particular schedule that's today. It's definately not that the lecturers are boring but simply that the confluences of factors that make up Thursday is very uncondusive to me staying awake during that particular time-slot. What with, 1) Wednesdays being my free day which means I tend to sleep in and not be able to sleep till like 3 a.m. the next day, 2) 9 a.m. tutorials on property law *urgh*, I simply cannot find myself getting excited about land law, 3) Company Law lectures straight after.

So it came as a very pleasant surprise that I managed to keep awake during lectures today and found myself rather enjoying it. Well, possibly because I dozed off half-way through tutorials. It was a very interesting lecture on the powers of directors (nigh unlimited) and the attempts of the law and statutes to curb them.

The relevancy of this topic should really surprise no one, especially when one considers the number of corporate scandals that have JUST involved abuses of power by directors. The awful ones would have involved them destroying the company e.g. Enron, Parmalat, WorldCom. But there are also others which are not entirely clearcut e.g. the use of poison pills and share dilutions to fight off hostile takeovers.

As it is, these are very fascinating issues, not least because of the manner in which "justice" is being enforced in the US, most famously associated with New York's State Attoney-General suing these companies for breach of duty. The latest scalp he collected is KPMG, one of the big four auditing firms which settled out of court for USD 455 million. To be honest, I don't really think KPMG was doing anything wrong, it was helping their clients make use of tax loopholes to minimise their taxation, whether this be dodge or evasion you decide. But he practically single-handedly killed off one of the original Big Five i.e. Arthur Andersen, of Enron infamity, simply by launching a criminal suit against it. It was eventually acquited by the US Supreme Court but it's now a very pale translucent ghost of its former self.

But leaving this aside for the time being, what really disturbed me was a throw away comment the lecturer made with regards to the power of corporations which he compared to as being as powerful as entire nations. And I think this is a major fallacy that needs to be put to rest because it very severely overstates the power of a company while underestimating just how powerful the nation-state still IS even in this era of Globalisation.

The most famous advocate of this proponent has to be that of Naomi Klein as put forth in her now bestselling book, "No Logo" where she castigates corporations for making us their slaves through the use of brands to stupify us into being compliant consumers. And one of the statistics very commonly used is that which first appeared back in December 2000 by the Institute of Policy Studies in Washington, D.C. which argued that 51 of the world's 100 largest economies were companies. That is a scary thought...only if it were indeed true.

The biggest fallacy in that statistic is that it compares the sales of the companies to a nations gross domestic product (GDP). And this is a gross mistake to make because it essentially compares two incomparable claims, inflating the 'wealth' of businesses while deflating that of a nations. Simply put, a countries' GDP is 'value added' i.e. economist do not simply add up the wholesale prices as it goes through the supply chain as it would overstate the true value of the products. Hence, as it passses through each supply stage, the extra value each stage produces is added on rather than the total figure which would be double counting.

So instead of simply looking at how much General Motors sold, one should instead look at how much of that was truely adding value to the business cost. So yes, you need to subtract the raw materials they used because they are in the business of selling cars not those raw materials. Which gives us the following result. On total sales of USD 185 billion, it's real added value ('equivalent' to a country's GDP) falls to a much lwoer figure of USD 42. Royal Dutch/Shell's total sales were a staggering USD 149 trillion but it's real value addedness was a mere USD 36 BILLION.

So eventually a study by UNCTAD concluded that as of 2000, of the world's 100 largest economies, 29 were corporations, and only 2 were in the top 50.

Of course, some might still say that, hey, that's still pretty mind boggling, even though the numbers are lower, it's still pretty scary and who's to say there won't be a time when it becomes true.

And really Members of this House, there's a really simple reply to this. Just over a century ago, there was a multi-national corporation which had its own armies and navies and effectively conquered an entire continent and an entire region, setting themselves up as the effective rulers of India and South East Asia. Really, the time of the East India Company is over.

Any state has coersive powers beyond what any corporation today can dream of. A state can force its citizens to pay taxes or even to kill and starve them. But much as Naomi Klein would love to be continually deluded, companies cannot force us to buy their products. Brands exists, not as a symbol of strength but a representation of their real fragility. Remember Nike and sweatshops (Nike by the way, despite the vitirol heaped unto it by Klein ranked a mere 229th in the survey) ? It's amazing what how badly they could be hurt by negative publicity. Hell, Burkina Faso could confiscate all their property, and unless their state of origin decides to interfere, what can these corporations do?

What has happened to the Goldwater Republican? Economically and socially liberal? It is just simply scary how people would swallow what appears to be conventional wisdom without really analysising it for themselves. Hopefully, this little article has been useful.

Personally wondering whether to post this on the Company Law forum...



At 7:35 PM, Anonymous Anonymous said...

Continent? What continent? Oh... you mean India, the _sub_continent.

I'm sure any Indians reading this blog would be quite pleasantly flattered... :)



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