Migrants at work

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Should we worry that foreign companies are taking over British ones?

On the day that India's Tata won a bidding war for Corus, the Anglo-Dutch steelmaker that was once British Steel, I debated whether such foreign takeovers of British companies are a good thing with Will Hutton of the Work Foundation on BBC Radio 4's Today programme. Listen here

CSR is irresponsible

Corporate social responsibility - it seems impossible to be against it: who wants companies to be irresponsible towards society? But words are deceptive. The premise behind CSR - that the profit motive is tainted, global capitalism is leading the world to rack and ruin, and business has a duty to give something back to society - is fundamentally flawed. And so too is the practice of it.

I spoke about this theme at a very stimulating seminar last week, which underscored how far the pernicious logic of CSR has won over businesspeople, politicians and anti-corporate campaigners alike.

Anyone in Europe or North America who doubts whether global capitalism can benefit the public good should look around at the material plenty that surrounds us. We are not just wealthier than ever before, we are healthier and better educated too.

Of course, profits and social welfare are not always synonymous. For profit-seeking to maximise social welfare, markets must be competitive and prices need to reflect true social costs and benefits. It is easy to think of cases where this is not so: for instance, a factory that spews out pollution without regard for its neighbours. But then the issue is: what is the best way to curb that pollution? I believe that legislation enacted by elected parliaments is infinitely superior to CSR. 

What, though, are we to make of companies' individual CSR projects? Are they good, bad or indifferent? The two key tests are: do they improve a company's long-term profitability? And do they advance the broader public good?

Consider corporate giving. Many businesspeople see charitable donations as a kind of feel-good advertising, or a way of improving a poor public image. Fair enough, but unless those benefits exceed the cost of the donation, it is damaging to profits. So what? - you may say - it is all in a good cause. Not so fast. Managers do not own companies, shareholders do. While managers may wish to earn kudos, or feel good about themselves, by making corporate donations to charity, generosity with other people’s money is not philanthropy, it is theft.   

CSR may also impose costs on companies that are partly hidden and hard to measure, so that even though a company thinks its CSR policy is profit-enhancing, it may in fact be a drag on profits. For instance, CSR can divert managers' energy and attention from the company's core business, discourage potentially profitable risk-taking behaviour, and allow managers to disguise poor performance at achieving the single bottom line through emphasis on the inherently subjective and incommensurate "triple bottom line".

Unsurprisingly, businessmen tend to see all CSR as win-win; while anti-corporate campaigners often believe that win-win activities are mere window-dressing and that CSR is only effective if companies sacrifice profits in the pursuit of greater social welfare. They both neglect, of course, the possibility that CSR could actually harm social welfare. 

Even window-dressing and tokenism have a financial cost – and if they produce no benefit at all, they reduce social welfare. Worse, CSR is often used as a pretext to restrict competition, and in an international context as a form of backdoor protectionism: expensive CSR commitments act as a barrier to entry for smaller firms, or those from developing countries. 

While it may be rational for companies to enact CSR policies if they are the lesser of two evils - if the cost of not doing so is greater than the cost of doing so - this does not mean that CSR is socially desirable. It may make business sense for a shopkeeper to pay off the Mafia if they threaten otherwise to burn down his store, but this does not make a protection racket socially beneficial. Likewise, it may make business sense for Tesco to give in to the demands of pressure groups who want it to do business in a more environmentally friendly way, because of the costs to its reputation if it doesn’t, but that doesn’t imply that the NGOs’ criticisms are correct, or that society is better off thanks to NGOs’ successful blackmail of Tesco.   

The most pernicious kind of CSR is the more ambitious kind: the efforts to impose higher global labour and environmental standards around the world. Although it is probably a win-win for rich-country multinationals operating in poor countries to offer higher-than-average wages and working conditions – as indeed they do – because they want to attract the best workers, trying to enforce too high a standard, or pulling out of developing countries altogether, costs poor people their jobs and thus an opportunity to improve their lives.

Of course, there are many examples of abuse and exploitation, but it is not true that developing countries' lower labour and environmental standards are by definition a bad thing. They are a consequence, not a cause, of poverty and it is only through companies making products in developing countries and selling them on the global market - thereby raising living standards - that those standards are going to rise. Capitulating to NGOs' wrong-headed demands may be rational, profit-seeking behaviour for multinationals - but it harms the poor people it purports to help.

The bigger problem with CSR is that it is undemocratic. The UN's Global Compact, for instance, talks about spreading "good practices" based on "universal principles". But who decides what those good practices and universal principles are? Ask people what the world’s problems are and you will get a variety of opinions. Ask them what the solutions are, and how we might achieve them, and you get an even wider range of answers. If everyone agreed on the solution to the world’s problems, there would be no need for politics. We could just appoint administrators and let them get on with the job. But in fact, people disagree on just about everything. That is why we have elections, governments and political debate. It is a messy, rough-and-ready way of deciding society’s priorities, but it is less bad than all the alternatives - not least CSR.   

Companies’ social responsibility is to make profits, not decide how, or how much, the environment should be protected. It is a duty that they have to their shareholders who have entrusted their savings to them. Workers’ jobs depend on it. So does a country’s prosperity: scarce resources should only be tied up in a company if it is adding value. Profit is not a dirty word. Profits help pay for schools, hospitals and pensions. 

Certainly, people have aims besides getting richer. They care about how the pie is shared out, as well as its size. They also care about how the pie is produced: whether corporate activity damages the environment or compromises workers’ safety and dignity. These plural aims do not always conflict: companies with happy workers are often profitable, and vice-versa. But sometimes they do. That is where there is a role for governments: to draft and enforce laws that express society’s collective view about how, say, the balance between economic growth and environmental protection should be struck.   

This traditional model of governance has many advantages. The lines of responsibility are clear: governments set the rules of the game, companies then aim to make profits subject to those constraints. This is not only democratic. It is also fair: laws are transparent, apply equally to all companies, and are impartially enforced by the courts. And it is flexible: laws can vary according to local conditions and preferences. The best way to help workers and the environment is generally through national laws drafted on the basis of democratic participation and consultation.

Governments are more than capable, either individually or collectively, of achieving social aims through legislation. And if there is an appropriate framework of laws that ensures effective competition and corrects market failures, maximising profits is not just good for a company’s shareholders, it is in society’s best interests too. So companies are not irresponsible if they maximise profits within the framework of the law; it is society that is irresponsible if it seeks to pursue (often misguided) social and environmental aims through CSR.

Inefficient markets

Peas in a Pod™
Fears that Apple aims to become the Microsoft of the music download business by using proprietary technology to lock in the dominance of iTunes have already attracted the scrutiny of Nordic competition watchdogs. So it is a worrying indication of Apple's monopolistic intentions that it is laying legal claim to the word "Pod," threatening to sue companies that use the word as part of their product names for infringing its iPod trademark. It is already taking action against the small start-up that makes the Profit Pod, an infrared scanner used to record activity on video-arcade machines.

But lest Steve Jobs forget, Apple did not invent the word "pod." By trying to appropriate it, he risks alienating millions of people who were once attracted to Apple's apparently upstart brand, as well as fanning the fears of European trustbusters. After all, even Microsoft has not dared to lay claim to the word "Word."

Sony stumbles
The company that became famous for its iconic Walkman continues to stumble in the era of the iPod. It was bad enough that Sony failed to anticipate the appeal of MP3 players and was usurped by Apple in the music-player market; now it may fall behind in games consoles too.

Howard Stringer, the Welsh-American who took charge of the Japanese consumer electronics and entertainment giant last year, has so far ducked the challenge of shaking up Sony's sprawling empire, opting instead to muddle along in the hope that its PlayStation 3 (PS3) games console and its Blu-ray standard for next-generation DVD players will restore its fortunes. But now Sony has had to delay the launch of the PS3 for the second time—until next March in Europe, leaving Microsoft's Xbox 360 and Nintendo's Wii a free run at the important Christmas market. Since the PS3 doubles up as a Blu-ray player—indeed, the delay is the result of problems in producing the blue lasers at the core of the Blu-ray technology—the setback is also a blow in Sony's DVD-standard war with Toshiba's HD-DVD.

This risks becoming a rerun of the VHS-Betamax battle, where Sony's technologically more sophisticated format ended up losing out. Stringer's gamble—that thanks to its superior technology, Sony's PS3 would beat its much cheaper rivals, and that this would propel its pricier Blu-ray format to victory in the DVD war—was always risky, but now it looks foolhardy. Sony's once-vaunted technological prowess looks increasingly dodgy: witness the embarrassing recall by Dell and Apple of over 5m faulty Sony laptop batteries, after videos of them bursting into flames circulated widely on the internet.

As concerns grow that the Blu-ray technology is also not quite up to scratch, Sony cannot afford to pin its recovery hopes on products that are late, expensive and potentially flawed. Unless Stringer embraces root-and-branch reform soon, Sony risks becoming an also-ran.

Can Europe keep growing?
When the US economy sneezes, the rest of the world catches a cold. Or so it used to be said. But not this time, we are told. With Germany, France and Britain all growing faster than America in the second quarter of 2006, Europeans are feeling in fine fettle.

Jean-Claude Trichet, the head of the European Central Bank, seems unperturbed by the mounting evidence of a US slowdown and the increasing risk of a recession next year. He is worried instead that Europe's resurgent growth will spark inflation, and has signalled that he plans to press on with interest rate rises. Officially, Gordon Brown also remains bullish that Britain's economy is hardy enough to shake off a foreign incubus.

But the chances that Europe's economies can escape unscathed from an American recession are slim. For a start, many of the factors that are dragging the US down also weigh on European countries, such as high oil prices driving up inflation and interest rates, thereby threatening to prick many countries' house-price bubbles.

What's more, a US recession would soon knock Asia's export-led economies and thus deal a double blow to Germany and other European countries that remain dependent on export growth. Although Britain may initially appear more robust, it would surely suffer from a simultaneous slowdown in the US, Asia and the eurozone.

Worse, the ECB's complacency about the risk of contagion from America suggests that it will continue to raise interest rates—thereby also heightening the risk of a dollar collapse, and hence a growth-choking surge of the euro—until it is too late to prevent a eurozone recession.

And with deficits in Germany, France and Britain already around 3 per cent of GDP, there would appear to be little scope for fiscal stimulus either.

Despite this gloomy outlook, the Dow is back near its record high, while European and Asian markets have also rebounded strongly. Optimistic investors appear to be betting that if US interest rates have peaked, this is positive for corporate profits and doubly so for share prices.

But this is only part of the picture. If the reason interest rates are now expected to be lower than was previously thought is that the economy is slowing, the prospect of recession will hit companies' earnings far more than lower interest rates will boost them. That can hardly be positive for share prices.

Inefficient markets

Doha derailed — who to blame?
So much for the lofty rhetoric about freeing trade and aiding development; when it came to the crunch, governments instead bowed to corporate protectionism. Thus the Doha round — launched after 9/11 as WTO members rallied around America in a show of unity — has collapsed in acrimony, with most blaming the US for its demise. This is not fair. America was guilty mainly of being too ambitious: it offered to prune its agricultural subsidies if others sheared their farm tariffs, but India and the EU refused.

Officially the round is indefinitely suspended, but there are already hopes of reviving it early next year. Besides, optimists point out that while 12 years have elapsed since the previous round was completed, globalisation continues apace and the world economy is booming. Such complacency is misplaced. If a deal can’t be done when the going is good, perhaps it can’t be done at all. After all, the only break in the WTO’s run of failure — Seattle, Cancún, Hong Kong and now Geneva — was the Doha launch, when circumstances were truly exceptional.

Next year hardly looks promising: President Bush is set to lose his power to push through trade deals without congress unpicking them, precluding US negotiators from striking a credible bargain with other WTO members; a new farm bill that could entrench America’s contentious subsidies is in the offing; and an economic downturn could sharpen fears about trade-related job losses.

But if the round remains on ice for too long, the WTO risks being sidelined, with the benefits of global competition, multilateral rules and impartial adjudication giving way to tit-for-tat protectionism and a web of bilateral arrangements that privilege rich-country companies at the expense of the poor.

BP’s biggest blunders
If petrol costs over £1 a litre next time you fill up, blame BP. Oil prices spiked to nearly $80 a barrel when it announced it was shutting down America’s biggest oil field — possibly until 2007 — to repair leaky pipes. The lost production from Alaska’s Prudhoe Bay is only a tiny fraction of global output, but oil supplies are so tight — and speculators so frenzied — that the slightest disruption sends prices rocketing. (The terrorist threat to air travel and the fragile ceasefire in Lebanon have since pushed prices down somewhat — at least for now.)

But in any case, the damage to BP could be great. The issue is not so much the financial cost of lower output and higher repair bills; it’s the stain on the company’s carefully polished eco-friendly reputation and, above all, the growing doubts about its competence. Last year, an explosion at its largest refinery, Texas City, killed 15 workers and injured over 100. In March, a corroded BP pipeline caused the biggest ever oil spill on Alaskan soil. In June, regulators charged it with rigging the US propane market.

And the timing of the latest mishap could hardly be worse. The US Congress, which is desperate to deflect some of the fire from voters fuming at soaring petrol prices, is planning a probe into BP’s Prudhoe Bay operations, and angry shareholders are suing BP for compensation. And with Venezuela, Russia and other oil-rich countries feeling flush and questioning why they need foreign help to extract their oil, BP’s bungling is hardly a persuasive sales pitch.

The World Bank and corruption
The World Bank’s controversial new boss, Paul Wolfowitz, has stirred up a huge fuss by making battling graft his top priority. His anti-corruption drivewill be the most hotly debated topic at September’s IMF/World Bank annual meetings in Singapore. He has frozen loans to India, Kenya, Bangladesh and Chad because of concerns about fraud, tightened the strings attached to debt relief for the notoriously kleptocratic Republic of Congo, beefed up the Bank’s anti-graft department, and pledged to spend more on promoting good governance. Wolfowitz is adamant: the Bank will not tolerate corruption.

A crackdown is certainly desirable: it is scandalous if bank funds destined to help the poor are siphoned off by crooked contractors or funnelled into politicians’ Swiss bank accounts. It also erodes rich-country voters’ support for debt relief and aid. More  broadly, corruption impedes development: it stifles business, cuts into spending on public goods such as health and education, and hampers poor people’s efforts to improve their lot. So the Bank should try to ensure its money is well spent, monitor countries’ corruption levels and help them root it out.

But there is only so much the Bank can do, and Wolfowitz appears to be going about it in the wrong way. His actions so far — a cancelled loan here and there—appear arbitrary, when they ought to be transparent and systematic. Nor is the Bank meant to meddle in politics, and although the line is fuzzy, his bolder ambitions — such as fostering freedom of speech — overstep that fuzzy line. The Bank’s mandate is to promote development, not democracy. And while waging war on graft may sound good in Washington, in practice the bank must tolerate some, or stop lending altogether, since no country is whiter than white. Indeed, the bank itself is hardly above reproach. Its boss is appointed not through an open and fair selection process but by the US president — and Wolfowitz, who happens to be one of Bush’s close chums, has since recruited a coterie of neocon cronies with few development credentials.

Inefficient markets

Stagflation lite
US interest rates are already 5.25 per cent, euro rates are set to rise again on 3rd August, the next move in British rates looks likely to be up, and as deflation recedes, even Japan has finally raised rates. After years of borrowing cheap to take ever more exotic speculative gambles, investors are rediscovering risk and retrenching. This is not yet a bear market. The Dow, the FTSE and Morgan Stanley's international stock market index remain up so far this year—just. But markets may tumble once people realise that even in a more flexible and globalised economy, higher energy prices eventually feed through into higher inflation and lower growth. To keep a lid on rising prices, interest rates may have to rise much further than previously expected, pricking bubbly house prices and hurting heavily indebted consumers. Though the prospect of higher inflation and slower growth sounds like a rerun of the 1970s, it is unlikely to be that bad—rather what US economist Nouriel Roubini calls "stagflation lite."

20:20:20 vision to save Doha
The leaders of the world's most powerful economies—the US, the EU, Canada, China, India, Brazil and Mexico—have tried to break the deadlock in the Doha round of world trade talks by setting a mid-August deadline for reaching an ambitious and balanced framework agreement. Trade negotiators have been instructed to stop stonewalling and seek compromises instead, while Pascal Lamy, the WTO's boss, has received a mandate to bang heads together in the marathon negotiating sessions that doubtless lie ahead.

The main bones of contention remain the EU's high farm tariffs, the US's hefty agricultural subsidies and the steep industrial import duties of Brazil, India and other developing countries. In June, Lamy floated a 20:20:20 formula for a possible agreement, whereby the US would cap its farm subsidies at $20bn a year, developing countries would limit their industrial goods tariffs to 20 per cent and the EU would accept a proposal by the Group of 20 poor countries to cut its agricultural tariffs by an average of 54 per cent. But now that he has the public backing of all the big players, Lamy should aim higher.

An ambitious deal would not only bring bigger benefits, especially for developing countries; it may also be easier to sell politically. A modest deal would still be tough, since EU and US farmers will fight tooth and nail against any cut in agricultural support, but it would offer little for exporters to get excited about. They might prefer to spend their political capital on more rewarding bilateral trade deals instead. But a more ambitious deal would not only make cuts in US farm subsidies easier to swallow, by giving US farmers new export opportunities in Europe and elsewhere. It would also give US and EU exporters of manufactures and services eyeing up new markets in India and China something to fight for.

EU populism 1: mobile operators
Seldom does the Daily Mail say something positive about Europe, let alone an EU commissioner from Luxembourg who proposes to impose on British business new regulations described by one executive as "close to socialism." Yet the Mail has been singing the praises of Viviane Reding, the EU's telecoms commissioner, for her plans to slash the cost of using mobile phones abroad. It's a pity that Reding's proposals are half-baked. Mobile operators certainly make a packet from the "roaming" fees levied on phone calls made and received abroad, but Britain's mobile telecoms market is generally highly competitive. Prices continue to fall, and new operators, such as Tesco and easymobile, keep established players such as Orange and T-Mobile on their toes. Since most of their customers primarily use their phones within Britain, it is normal, and perfectly legitimate, that operators have until now focused their price-cutting on domestic charges. Besides, even before Reding first announced her plans, Vodafone had started to target customers who use their phone abroad a lot with cheaper prices through its Passport scheme. But despite the evidence that competition is working well, Reding felt compelled to intervene—in a potentially very damaging way. She proposes to set arbitrary caps on both wholesale and retail roaming prices, in effect gumming up the rapidly evolving mobile market by making it a regulated utility. Her plans, which still need the approval of the European parliament and the EU's 25 countries, should be roundly rejected. Where's the Mail when you need it to attack barmy Brussels initiatives?

EU populism 2: Microsoft
Reding is not the only EU commissioner who has succumbed to misguided populism. Neelie Kroes, the formidable competition commissioner, has made a mockery of due process by fining Microsoft €280.5m (£193m) for failing to comply with an antitrust judgement against it, the first such financial penalty the EU has imposed. She is promising even stiffer fines in the future. Kroes may be right that Microsoft has exploited the quasi-monopoly of its Windows operating system to crush competitors in related markets, but she is jumping the gun by fining it. The European court of justice, which has already struck down several high-profile EU antitrust decisions, is still considering Microsoft's appeal. Besides, Microsoft has stuck to the timetable agreed with the commission for handing over the technical information about Windows that rival firms need to write software that works well with it.

Keep out Gazprom II

My argument that Britain should prevent Gazprom, the Russian gas company that is in effect an arm of a potentially hostile Kremlin, from getting a hold on its gas market was widely criticised. But if you don't believe me, listen to Andrei Illarionov, a former Kremlin adviser who fell out with President Putin's team.

He says Europe must stand up to Russia's new energy tsars by insisting on open and transparent business rules in Russia's energy sector. Otherwise, he says, the Europeans will find themselves at the mercy of the Russian state, and so face "a cold, dark future".

Inefficient markets

A high-stake reform

A decade ago, a fresh-faced Tony Blair briefly touted “stakeholder capitalism” as New Labour’s big economic idea. But he soon recoiled: the notion, made fashionable by Will Hutton’s The State We’re In, that companies should be accountable not just to the short-term demands of their shareholders but also to the long-term interests of their wider stakeholders, such as their employees, was dismissed as dangerously radical. Yet in the dying days of the Blair era, the government is quietly pushing through parliament a bill to reform company law that could have dramatic consequences for British businesses. The bill will for the first time put company directors’ duties into statute. They will be required to ensure that the business is run in the financial interests of its shareholders, but also to “have regard to” its impact on employees, customers, suppliers, communities and the environment. The bill will also make it easier for shareholders to sue directors for failing in their statutory duties.

Predictably, the coalition of unions and NGOs campaigning for greater corporate social responsibility complain that the reforms do not go far enough — they would rather directors had a “duty of care” to communities and the environment. But even in its current form, the bill is a big victory for them. It would, for instance, allow NGOs to sue directors for failing to give due regard to their company’s environmental impact. Friends of the Earth (FoE) could buy a few Tesco shares and then sue the directors of the supermarket chain for, say, failing to do enough to encourage recycling, squeezing its suppliers too hard or sourcing fruit from developing countries where environmental rules do not live up to FoE’s expectations. The mere threat of legal action would have directors scrambling to cover themselves.

That is bad for business—and a shoddy way of advancing green goals. Soundly based, transparent and predictable environmental regulation is surely preferable to expecting company directors to second-guess what courts might deem appropriate.

A flawed charter

NGOs have long demanded that governments, businesses and international organisations be open and accountable for their actions—and rightly so—but what about NGOs themselves? The self-appointed guardians of global rectitude ask us to rely on their word that they are beyond reproach. But in a belated response to closer scrutiny, this is finally starting to change: 11 leading international NGOs have just signed up to a new “accountability charter”.

The new charter’s signatories make much of their commitment to accountability and transparency, as well as to principles such as good governance, independence and ethical fundraising. But they still ask us to take too much on trust. For instance, saying “we are accountable to our stakeholders”—including future generations and ecosystems—sounds great, but how? Declaring that: “We will listen to stakeholders’ suggestions on how we can improve our work and will encourage inputs by people whose interests may be directly affected” is scarcely robust accountability.

Nor does the charter do enough to guarantee NGOs’ independence. It does not, for instance, force directors to reveal their political and business links. Its ethical-fundraising pledge commits NGOs to reveal their donors’ names only “in cases where the size of their donation is such that it might be relevant to our independence,” which is worryingly vague.

Above all, there are no guarantees that this voluntary charter will actually be enforced. Pledging to apply it “progressively” and promising to produce an annual report are not enough; NGOs must also agree to independent monitoring. In short, the charter falls far short of what is needed.

A plague of populism

To show off their intellectual superiority, certain very clever people love arguing outrageously contrarian things. No matter how misguided the anti-globalisation brigade’s positions may be, the former chief economist of the World Bank makes a habit of defending them. In the latest edition of New Perspectives Quarterly, he goes out of his way to deflect criticism of the new breed of Latin American populists such as Venezuela’s Hugo Chávez: “Now, if by populism one means worrying about how the bottom two-thirds of the population fares, then populism is not a bad thing,” the Nobel laureate argues—even though the distinguishing feature of Chávez’s populism is clearly not his apparent concern for the poor, which is more than matched by Brazil’s Lula, but his penchant for quick-fix remedies and anti-American grandstanding.

“Obviously, it is of concern if these new leaders of the left in Latin America pretend there are no laws of economics,” Stiglitz astutely adds. “But the question is whether the IMF strictures are the only ones consistent with good economics,” he continues, changing the subject and setting up a straw man—“The answer to that is a resounding no.” But the real issue—whether Chávez’s profligacy is bringing a lasting improvement to poor people’s lives or whether Venezuela’s oil windfall is being squandered—has been dodged. Stiglitz is no stranger to populism himself.