Whether it is Saudi Aramco’s balance sheet, customer frauds at Wells Fargo, financial institutions’ manipulation and rigging of market prices, Infosys Ltd shareholders’ anger on acquisitions gone sour, the shenanigans at ICICI Bank or bad debts in India’s public sector banks, they all point to one thing, as far as I am concerned. They raise questions on the continued relevance and usefulness of the model of arms-length capitalism.
Market economy and private sector capitalism were believed to be different from top-down government-led economy. There were supposed to be automatic checks and balances in the former. But, in practice, both have begun to converge towards non-accountability. The stakeholders in both the versions are powerless. Let us face it—whether it is the money of the taxpayers or many hundreds of faceless savers, they are too removed from action and hence have very little or no influence over decisions taken in their name.
Far from encouraging long-term thinking, arms-length capitalism removed the incentive for it and encouraged short-term thinking in both managers and owners. Shareholders do not have a long-term horizon and hence, are not interested in corporate actions that pay off in the long term. Further, when share prices rise because margins expand—thanks to generous liquidity spawned by low interest rates and monetary policy “Put" options and not because of far-sighted management decisions—shareholders have even less incentive to pay attention to the quality of the management and its decisions.
As governments and regulators recognize these inherent limitations of shareholder capitalism, they seek to offset them through greater oversight and regulation, thus compounding the problem. In the process, we have injected a great deal of complexity into everything. That is what came to my mind when I read the story (“The Drop", Financial Times Special Report) of how a funds transfer mechanism created by the Commonwealth Bank of Australia was exploited by money launderers, drug dealers, gamblers, etc. The bank has to pay a big fine now.
Proposals being mooted for auditors to audit and certify not just financial statements but also qualitative statements and disclosures that are part of corporate financial statements (“Accounting Watchdog Eyes ‘Front-to-back’ Audit Of Annual Reports", FT ,4 April), was another reminder of the complexity of modern economic activity. On the one hand, auditors are found guilty of negligence, connivance and rampant conflict of interest. But, in the same breath, they are expected to do more.
These two phenomena—the increasing fragility of shareholder capitalism and the complexity that humans have managed to weave into the way that modern commercial enterprises function, public or private—create a justification in the minds of managers to enrich themselves disproportionately at the expense of shareholders and workers.
But those who don’t want to walk down that path are increasingly finding that their jobs and responsibilities are a poisoned chalice. For example, how is it possible for executives to make corporate acquisition decisions if, with the benefit of hindsight, it can be questioned or challenged and mala fide alleged? Or, for that matter, for honest individual directors and auditors, the trade-off between rewards and responsibilities may be simply not worth it anymore.
A survey by executive recruiter Egon Zehnder of 402 sitting chief executive officers in 11 countries showed that about half of them felt that they had no time for reflection and for driving culture change. New chief executives—especially those promoted from within the organization—felt overwhelmed and underprepared especially since they were being called upon to speak out on social issues. A sizeable fraction of them found it harder to maintain physical health, find time for personal and family lives and for reflection (The CEO—A Personal Reflection: Adapting To A Complex World, April)
Can we roll it back and make things simpler? The evidence that we possess the skills or the attitude to do so is scant. Once we unleash “something", we lose control; and that “something" then dictates our subsequent responses. Take, for instance, scientists warning a university in South Korea not to develop weapons systems that would be fired and used by robots—Artificial Intelligence (AI) driven warfare. But, does anybody believe that they will succeed in putting this genie, or the genie of AI, back in the bottle? On the contrary, many think that it is only a matter of time before the weaponization of AI becomes de rigueur. In short, our societies will be overwhelmed by the sheer complexity and myopia of modern capitalism that we have created. We are no longer in control because we have reached the limits of our comprehension, as Martin Rees said in a different context.
Do I have a better answer? No, I don’t. All I can do is to recall what Yuval Noah Harari wrote in Sapiens. Ever since we—sapiens—learnt to domesticate plants and animals, we have destroyed everything that we have come in contact with. Humans cannot hope to be exempt from their own destructive power. To write that the solution lies in going back to our roots sounds too facile even to me to be believable. So, I go back to the header of my column published in these pages—“In Short, We Are Doomed", Mint, 4 May 2009.
V. Anantha Nageswaran is an independent consultant based in Singapore. He blogs regularly at Thegoldstandardsite.wordpress.com. Read Anantha’s Mint columns at www.livemint.com/baretalk
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