7 May 2015

Capitalists need to wake up


Irwin Stelzer has a superb essay in the latest Weekly Standard. The American system of market-based capitalism is in trouble, he says. The reason? It is not so much that there was a financial crisis followed by a deep recession, or even that there is public resentment at the rise of a new super-rich elite that spends a lot of money. Western capitalism has survived previous threats, or bursts of populist anger, and prospered.

It is more that, as Stelzer says:

“We have lost what Adam Smith called interest in the happiness of others, though we derive “nothing from it except the pleasure of seeing it.” Yes, we remain a generous, philanthropic society, with the very rich funding efforts to combat many of the nation’s and the world’s problems. Yes, we have woven a safety net to prevent those who cannot trade their labor for a decent wage from going hungry and homeless—a net that many consider too porous, but a net nevertheless. Yes, we have developed a progressive system of taxation that in effect takes from the rich to give to the poor. And yet, and yet. We cannot dismiss the charge that in some sense our economic system is stacked against the less powerful.”

The whole essay by Irwin Stelzer is a treat and I urge you to read it. But that reference to Smith and part one of the Theory of Moral Sentiments – Of the Propriety of Action – is spot on. It gets to the heart of the problem confronting those today who believe in markets and the widespread benefits of competition, but who are worried that a minority of capitalists – somehow blind to the reputational damage caused by their actions – are capitalism’s worst enemies.

Ultimately, this comes down to motivations and a deficit of trust. Capitalists need to wake up to the reality that many of their fellow citizens do not believe they have good motives, and then they need to think about sensible ways to restore trust.

A row in the UK this week illustrated the problem perfectly. The details of the story are quite remarkable, and I say that as a convinced pro-market believer in economic freedom and in tight limits on government action.

The Daily Mail reported:

“BG Group faced a rebellion against boss Helge Lund’s massive pay deal after nearly one in five shareholders at the oil and gas giant’s annual meeting refused to back its remuneration report. Chief executive Lund, who joined the company on February 9 from Norway’s oil giant Statoil, could be in line for a pay and perks package of £25-£31million if he meets every condition of his bonuses and long term share awards. The group’s AGM, held at Reading’s Hilton Hotel yesterday, also revealed more than 15 per cent did not back the re-election of Sir John Hood as chairman of its remuneration committee.”

That is an unusually high number of rebellious shareholders on such a vote, which is very encouraging because it suggests that some owners of companies have finally had enough of being taken for granted. One representative of investors in BG demanded an apology from the board for the size of the package offered.

But it is worse than that. Lund is not even staying for very long. Shortly after he arrived, a deal was done for BG to be taken over by Royal Dutch Shell. He is now surplus to requirements and in the corporate departure lounge. What was everyone involved thinking, beyond “oh goody, how much?”

Try telling this story to friends. Of the £31million chief executive who is holding the fort before leaving soon. Try explaining this to a friend in the pub, or at dinner not in Mayfair, and see what kind of reaction you get. Perhaps a few will say “Lucky old Lund” and good for BG, but not many I’ll wager. Beyond that, most normal people shake their heads in recognition and anger when they hear such tales, because it confirms their deeply negative view of business.

And then, the next time someone mentions capitalism, enterprise or profit, your friend may think, oh yes, that’s the thing that gives managers such as that man Lund up to £31million for doing his job.

At that point, good ‎luck trying to explain to your friend in the pub that much of the excess that attracts criticism is really crony corporatism and big business giganticism and even greed. Sure, they’ll say, you’re just trying to give the unpopular bit of capitalism a different name to distract me. At that point you go to the bar, because it is your round and you need to think of an answer to a difficult question.

How exactly did custodians of companies – shareholders – allow corporate managers to pay themselves such vast sums, as though these bureaucrats are running their own private companies and paying themselves their own money? It was not, contrary to what critics of Thatcher say, what she intended when she introduced her reforms. Far from it. Wouldn’t Thatcher today be robustly for consumers and shareholders holding management to account? Of course she would.

Capitalists who do not think this stuff is much of a problem – who say the proper response should involve shouting more loudly that the 1% pay a lot of tax (as they now earn so much) – are kidding themselves. They’re forgetting we live, mercifully, in a democracy, where the consent of their fellow citizens has to be won and trust maintained, and where politicians with a very left-wing worldview can, in Britain and beyond, turn this stuff to their advantage if they get half a chance.

If opponents of markets can present capitalism as a racket, because some who call themselves capitalists operate it as a racket, then there will not be many votes in saying otherwise and anti-capitalists will win elections. When capitalists are blasé about poor behaviour by elites, don’t expect many people to listen when it is explained that capitalism is the route to wider prosperity.

The Institute of Directors in the UK, under Simon Walker, is doing great work on this theme, applying pressure on executive pay and trying to remind big business that if it does not act then the risk is that government will instead do it and cause huge damage, driving away genuine talent as well as the miscreants.

In the end, I fear that those on the pro-market side of the argument have driven themselves into a cul-de-sac, which suits the enemies of capitalism, by talking too often as though there is only ever one obligation or consideration. Of course the primary duty of a company is to make a profit, but, as Adam Smith demonstrated, morality and propriety matters too. Just because you can get £31million out of the board of a company doesn’t mean you should. Just because you can do something doesn’t mean you should. Economic freedom comes with responsibility to others.

Iain Martin is Editor of CapX