Should government listen to US Round Table?

The right-wing folk are aghast at the decision of the current Prime Minister who dared to criticise to board of the Finnish Post Office (Posti in Finnish) for allowing the CEO to take home €1 million while planning to cut the wages of ordinary postal employees by some 30%.

Critical comments started to fly from the Confederation of Finnish Industry, that represents the big companies, and from the Conservative Party. They claimed that it is not the government’s job to interfere in the management of a company even if it is owned 100% by the government and even if it has a statutory duty to deliver the post!

These comments are based on the Gospel according to Milton Friedman that “corporations exist principally to serve their shareholders”. 

The CEO of the Posti has claimed that the cuts are necessary to ensure that the company can remain competitive. The numbers of letters and printed media that need home delivery have fallen dramatically and Posti is facing a profitability crisis as well as having strong competition from UPS, DHL, etc… Naturally these companies want to remove Posti from the competition and lobby hard to do so.

But let’s examine these comments in the light of many new studies: 

Milton Friedman’s statement and long-held gospel “corporations exist principally to serve their shareholders” has been examined and studied this last three decades. When he made this statement in the 1970’s many companies were owned and managed by the same people and families.

But times have changed, and over the last 50 years we have seen that ownership is now more spread out and pension funds and investment funds are now the biggest owners. This means that we the investors are no longer the owners of the companies as such who can make decision about how the companies are run. That has been delegated to the CEO and the rest of the senior management. These people have managed to hijack the remuneration system by saying that they can increase shareholder value (the share price) if their interests are aligned to those of the shareholders. They simply want to be rewarded with share options and bonuses if they can increase profits and hence dividends and the share price. This of course is all based on annual targets, in other words the whole system has become a race for short-term gains, while society should bear any costs – the financial crisis and climate change…

There are plenty of nice promises about sustainability, climate change and social responsibility but they are just that… Look at the Finnish government’s majority-owned power company, Fortum, that bought a huge share of Uniper, the German fossil fuel company; look at Vapo another government owned company that digs up and sells peat; look up Posti, as described above…  

Martin Wolf in a recent article in the Financial Times (FT “Why rigged capitalism is damaging liberal democracy” 18.09.2019) consolidates many recent robust studies on this topic as a result of a recent communique issued by the US Business Roundtable:

“While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders.” According to Mr. Wolf it appears that this may be replacing Milton Friedman’s famous statement.

Basically the article points out that rent-seekers, like bankers, financiers and real estate folk have been able to increase their own market shares without actually contributing to the real economies  – he describes “rent”as:

“… “rent” means rewards over and above those required to induce the desired supply of goods, services, land or labour. “Rentier capitalism” means an economy in which market and political power allows privileged individuals and businesses to extract a great deal of such rent from everybody else.

Mr. Wolf also states that falling productivity and income inequality have been caused in part by the blind application of shareholder value. He also note that innovation, another cause, has fallen behind in recent decades. A fact that is not surprising since the big global tech giants have bloomed and strangled competition…

This is topic is not new and has already been covered by an endless stream of studies and books from academia where leading professors and experts call for radical changes in what is taught at the business schools around the world. Some of these writers have actually called for business schools to be closed down, so serious are their worries about the consequences of what is being taught there.

It was interesting that in yesterday’s budget announcement from the Finnish government, Mr. Martti Hetemäki, the most senior civil servant in the Finnish Ministry of Finance, pointed out that productivity in Finland has not seen any significant increase during the last decade. He put this down to the fact that companies have not been investing even though money is cheap… We should not be surprised by this statement. The financial crisis and the dominance of global and national giants, who hate competition, are never the big dynamos for growth and innovation. The statistics for this are clear on this point – big companies pay their senior management higher salaries in return for cost cutting and higher short term profits. Investment in new plant and staff are low or non-existent. Share buy-backs, that have no impact on productivity, are really popular! It is the same with employment – big companies fire staff or employ less staff when compared to SME’s. SME’s are the growth movers and employ more people than big companies.

Posti’s CEO’s million Euro pay packet and the plans to cut worker’s salaries by 30% are indefensible by any stretch of the imagination and outrage is fully justified. Of course, the Posti must endeavour to make a reasonable profit but at the same time it must treat workers fairly. As a company it can receive grants for statutory postal deliveries, but it must be free to deliver parcels and other services like any other delivery company. It is not that hard to keep transparency in such a government owned-company to ensure that government grants do not allow it to subsidise non-statutory business. 

The postal service like coins and cash notes in circulation are fundamental basic services. Those digital geniuses who claim that both such services will die in a few years time are nonsense. Reading paper books, articles and newspapers are more efficient that screen based solutions and a lot more convenient when there is an electricity blackout or when your battery dies! Cash is also a great invention – why should I be forced to use something else for small quick payments. Digital solution with cards and mobile phones are expensive and hard and often impossible to handle for many elderly folk, no matter how digitally equipped when they were younger. The losses from digital fraud for banks and companies is many times greater than from old-fashioned armed robberies – and guess who pays for that too! We all know what happens when the internet blacks out, and bank networks are going down ten times a year in Finland as Russians and other hackers attack this and many other  digital services.

Society, here meaning consumers, workers, and pensioners, are now direct stakeholders in companies. This means that we have the right to demand fair pay for workers meaning we need to stop slave-like conditions that Amazon & Friends are doing. We need to reduce income gaps – Posti! We need the demand and enforce through taxation and regulation climate change polices. We need to ensure that companies invest rather than spend all their effort avoiding tax payments.

Why do we allow CEO’s to retire at 60 years to enjoy huge tax-free pensions in Portugal when the rest of us are stuck here until 67 years and then have small pensions taxed like normal income? Now you can talk about stakeholders being cheated…

The corporate lobbyists are very tenacious but it is about time that they were listed when meeting with decision makers in our various governmental organisations

It is very probable that the new gospel from the US Business Roundtable will be repeated in each Mission Statement:

“While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders.” 

It sounds really nice, but it is a good bet that few, if any of the big companies, will actually implement this any time soon because Milton Friedman’s statement that: “corporations exist principally to serve their shareholders” will just continue to be the “right way to do business”…

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