Tuesday, July 17, 2012

The corporate corruption glass - half empty or half full?

Reminiscent of the robber baron days, crony capitalism and corporate corruption is front page news across the world. This naturally raises the question of what is responsible for this trend. Is the surge in  corporate corruption a result of the the extensive market deregulation of the last two decades or a reflection of the increased vigilance and enforcement by governments?

Eduardo Porter writes that corporate wrongdoing has today come to be seen as a routine occurrence,
The misconduct of the financial industry no longer surprises most Americans. Only about one in five has much trust in banks, according to Gallup polls, about half the level in 2007. And it’s not just banks that are frowned upon. Trust in big business overall is declining. Sixty-two percent of Americans believe corruption is widespread across corporate America. According to Transparency International, an anti corruption watchdog, nearly three in four Americans believe that corruption has increased over the last three years.
James Surowiecki takes the latter position,
Walmart allegedly covers up millions of dollars in bribes paid to local government officials in Mexico. A former Morgan Stanley executive is convicted of funnelling money to a Chinese official in connection with real-estate investments. The S.E.C. sends “letters of inquiry” to several Hollywood studios, looking into the possibility that they used bribes to crack the Chinese movie market. When you read the business pages these days, you can be forgiven for thinking that international commerce is a cesspool of graft. Yet, by historical standards, things have never been cleaner. What’s changed is how strenuously governments are cracking down on corruption.
The answer lies somewhere in between. While the intensity of regulatory crackdowns has risen, it cannot be denied that there has been a proliferation of corporate misdemeanours in recent years. Deregulation, especially in the financial markets, has distorted incentives and exposed egregious conflicts of interest among market participants.

Further, in the relentless pursuit to maximize short-term shareholder returns and profits, to the near total exclusion of all else, corporate environments are increasingly getting divorced from values and morals. Trust, one of the cornerstones of capitalism, is a casualty in this pursuit. In the context of recent scandals involving Goldman Sachs, Glaxo SmithKline, BP, and Barclays, John Kay recently wrote,
We need to be able to trust pharmaceutical companies. We expect banks to be run and populated by honest people, to keep our money safe, and to give us our money back when we need it. We want oil companies to have a strong culture of engineering professionalism and commitment to health and safety.
It is almost self-evident that capitalism has to be rescued from capitalists themselves!

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