Tuesday, October 4, 2011

Mental masturbation on the socio-economic Catch-22

I'm writing about something that has bothered me for a long time. I've actually blogged about it intermittently when I started blogging, particularly in 2008 when the U.S. sub-prime crisis unfolded.

It's about the Catch-22 of modern capitalism.

As with all things, there's a Yin and Yang view (how wise the ancient sages were).

From the perspective of the leaders of modern large corporations, the KPI is the mantra of "shareholder value".

Shareholder value

What is shareholder value? It's about generating profits. Not just profits, mind you. The target is profit growth year-on-year.

Just read the financial news. Just watch the financial media. Just read analyst reports. 

If a large corporation made a billion last year and made another billion this year, the watchers and analysts and, yes, shareholders start decrying the zero profit growth year-on-year. This makes the company boring. The only consolation is if the company declares some higher dividend payout than from the year before.

Hell, unlisted companies have serious orgiastic parties if they record good profits every year. But, no, it's just not good enough for the shareholders of modern large corporations.

Flat is bad?

Flat growth is decried...even if it is still a highly profitable enterprise.

And, who are these shareholders?

Well, it's you and me.

Even if you hold up your hands to sanctimoniously cry aloud that you have never bought a single share of a publicly-listed company in your entire life, you would still be wrong.

We've all got money stashed away in pension funds, superannuation, or whatever one call it. So, indirectly, we're all complicit.

We bitch about poor returns, poor yields.

Where does that yield come from? Why, from the modern large corporations, of course.

Whether we like it or, not, we're in a carousel that is spinning out of control.

I have no idea how to stop the carousel. Do you?

Changed social values

All I know is that the correct social values as it existed in a village or kampung has disappeared in the era of modern capitalism.

Countries like our own Malaysia are caught in this awful carousel.

Our government is told that we need to reduce taxes in order to attract FDIs. FDIs are typically in the form of modern large corporations looking for cost-effective venues to produce goods and services at competitive prices. Competitively-priced products are attractive to consumers. Consumption of these products generate revenue and profits to the modern large corporations whose KPI is to generate growing year-on-year profits. And, the cycle is complete and, it repeats itself, year-on-year.

If only there was a better way to harness these great surpluses to plough into public amenities like more parks, community centres, welfare, public health, education, and so on.

We know that public finance comes in the form of tax revenues. But, wait a minute, aren't governments being told that taxes must be reduced in order to ensure competitiveness to attract FDIs?

If we peer across the Pacific Ocean to the U.S., we will see President Obama struggling to convince the American public that a tax regime that attempts to extract greater public revenue from modern large corporations and high net worth individuals is a good thing. Many believe that he is committing political suicide, because the U.S. is the citadel of modern capitalism.

Voluntary tax

Another equally ironic situation is when a bunch of tycoons in Malaysia buys out a lottery company owned by another tycoon in order to distribute welfare to non-Muslim Malaysians.

A lottery is what economists call a "voluntary tax". 

I've blogged about this before. 

The irony is that the Malaysian government was very enlightened up until the 1980s when Islamism and privatisation policies became the rage.

That spelled the death knell for the Social Welfare Lottery (remember that?) and Toto (remember that?).

As I said, it's ironic.

So, where does all this meandering lead to?

It leads to the one key takeaway that is good to mentally masturbate over.

The futile hope

A significant portion of the surplus of modern large corporations should be extracted for the public good.

If there were better social amenities, like public parks, sports complexes, sports programmes, academic instituions, vocational training institutions, better roads and pavements, better maintenance of public facilities all around ... and better public institutions to help farmers grow better fruits, vegetables, grains, dairy, meat (which is an excellent way to control food inflation)... then, we may not need to fret so much about savings and investment returns.

Then, we may leave the leave the modern large corporations to do more R&D on products and services that improves the human condition instead of generating the desire to consume at an irrational rate.


As I declared earlier, it's mental masturbation. But it does have some pleasurable side effects...


hishamh said...

Friend de minimis,

Funny you should be talking about this...I've just finished drafting a speech for someone on more or less the same subject, though approaching it from the point of view of the corporation.

Try this for reference...


...and look at challenge no 1 and 2.

You might also want to read this:


Zaidi said...

Dear DM
The cry for lower taxes has always been the rantings of the corporation in the name of making the nation more competitive. You get what you paid for. Good and reasonable taxes are necessary for the well functioning of the society. The effort must be directed to the definition of "good and reasonable taxes". Alan Greenspan once described the American tax system as "confiscatory level". Personally, 23% is a good level provided the Government spend it wisely.

de minimis said...

Yes, hishamh, I read the HBR piece last night. It's a conundrum. CSR work doesn't cut it either because the shareholders will still be baying for blood come the financial year-end.

And, Zaidi, you're right.

Remember Bhutan and the Happiness Index? Pity it's only Bhutan not the US or EU.

It's a Western capitalist value system that we're caught in.

As I said, the challenge is how to get off this carousel.

walla said...

This comment will meander more than the Amazon river.

When man started to work for reward, things were linear. Work so much, get rewarded so much. Then he started to wonder if he could get more for the same amount of work. He wanted his money earned to work as well. So he leveraged. The industry which made that happen also wondered if it could earn more than just commissions. So it leveraged those leverages until the liabilities multiplied down the line with the whole edifice tenuously held together by just one thing. Don't-rock-the-boat herd sentiment. Who owes what to whom became enmeshed in schemes of schemes. Cause and effect became nonlinear. Perhaps the bubbles that ensued had to burst at certain sizes in much the same way a study by one think-tank had concluded corporations had growth stall points once they reached certain sizes.

Which comes to the question of whether in chasing the drug of shareholder value, investors realize that they may be trying to milk too much when the cow has already reached its own growth stall point. At that tipping edge, something will have to give way. Destructive acquisitions, for one. Questionable operating practices, as another. Institutional collusion, perhaps. Backdoor maneuvers, even.

But then it may also be asked how can progress be made if targets are not set to increase one to the next financial year?

Perhaps it is at the intersection of these two conflicting curves that a maximis (cough) point can be ascertained which satisfies both objectives - the minimisation of risk and the maximisation of reward in order to maintain a progressively taxable entity for inland revenue.

However that will next beg the question whether inland revenue will also be efficiently used for the good of the peoples and the economy on which they depend for their betterment.

By the same argument as for corporations and their discharge of social responsibility, inland revenue entities are to country as investors are to corporations. These entities too are challenged to find their maximis points. Do they minimize tax to catalyze enterprises which exercise real CSR? Do governments also act with the same level of responsibility as regards how they utilize and distribute the tax revenue collected?

In short, people would feel more charitable about paying tax if they can be assured their taxes paid will be used fully and usefully at the right places for the right reasons that will reduce future demands on them to pay more taxes.

If we are today talking about basics like social amenities, education, health, roads, maintenance and so on, it can only suggest in no uncertain terms that what we are having at the mouth of this Amazon river is not a Catch-22 situation.

Not even Catch-11.

hishamh said...

There are successful examples out there if you look hard enough, unfortunately still few and far between, but they are there e.g. Danone.


I don't believe that a more socially responsible approach is something that can be legislated or imposed via the tax code. It has to come from the values of society itself. And if there's one good thing to have come out of the rough and tumble of the last 5 years is a growing recognition that the increasing bent towards shareholder value and free market fundamentalism has gone too far. We are seeing the pendulum swinging the other way, in various little steps.

50 years from now, our descendants will probably be decrying the inefficiency and bleeding heart socialism of their corporations.