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Patanjali Sokaris

Pondering the universe

Trusting in big business

Governments are placing a lot of trust in businesses being the powerhouse of our economies, but investigations into the operations of big businesses show that that trust may be misplaced.

A lot of people seem to trust that given access to a whole lot of money, businesses will automatically choose to increase their staff numbers. As shown by the royal commission into the banks in Australia, their own profits and executive remunerations were given preference. Furthermore, good governance was generally abandoned, and performance incentives were targeted to reward greed, without consideration of customer welfare.

Such biases in favour of such bad social behaviour indicate that there might be some rotten thinking going on in other enterprises outside banking, which then brings into consideration of whether we can really trust big business to provide gains that are generally useful to society, at least not without some solid direction.

Should we even be surprised at the bad behaviour? The British East India Company, as the first huge enterprise, sold opium to the Chinese to finance its tea operations in India. Old big enterprises like the banks cannot be trusted, and new big enterprises like Facebook and Google cannot be trusted. The pattern here is that when enterprises get too big, they can leverage their power to get governments to basically play their game, or at least not interfere too much.

The reality is that businesses are a construct that is given legitimacy by the good will of the people of a country via their elected representatives making laws that allow them to be created, and specify how they are governed. That means that, given the political will, the whole business working environment is able to radically altered.

Transparency ^

Transparency is about ensuring that the processes by which a businesses runs are explicit and verifiable.

Businesses are now being subject to more requirements to be transparent in socially desirable ways. While some may think this restricts them too much, the push has only come about because there have been too many cases where business owners and managers have been grossly unfair and tried to cover it up, so now everyone pays the price.

However, given businesses are personally benefitting their owners because of the priviledge afforded them by a democratic process, they should expect that that priviledge has a price, and that that price is about being fair to the citizens that give their consent to that priviledge.

The price is that people and their governments expect businesses to be behaving somewhat ethically, and don't wantenly damage people and public property.

Wages growth needed ^

With a lot of government expenditure provided by personal income tax receipts, to keep providing services, with their increasing cost base, the average wages per person must keep increasing.

Even the Reserve Bank of Australia is saying that low wages are a probem, but why are they?

In general people spend upon necessities, and some desirables, first, before savings or investment. If they have any disposable income after those, then they can use that for discretionary spending, like mainly upon the goods and services that small businesses provide. Spending is also where governments gather more money through taxes and duties. When small business is bouyant, their owners and staff will hopefully be paying more income tax.

Tax cuts for large businesses are being touted as the saviour for our wages problems, via what's known as trickle-down economics, yet with the revelations of the royal commission into the banks in Australia showing a horrific lack of social responsibility, is big business generally capable of being relied upon for wages outcomes?

The two ways that people can have more discretionary income is either by:

  1. a.Lower personal income taxes.
  2. b.Increased wages.

This is where the ideology by which a government frames its thinking decides which is more desirable, with so-called conservative ones favering the former, because they will generally be trying to reduce government costs.

But most democracies expect governments to provide some level of:

  1. a.Social services.
  2. b.Management of the mechanics of government, including elections and essential services.
  3. c.Governance of businesses.

No matter what political persuasion a governments has, providing these is still expensive, so there will always be a considerable level of government expenditure. In this way, all democratic governments are to some extent, socialist.

Social contract ^

We expect that when government provides assistance to people, they enter into a contract to earn that assistance, and showing that they are actually undertaking steps to do so.

While businesses have to comply with some regulations, they are not subject to the often invasive scrutiny those getting government assitance are subjected to.

Some might argue that the difference is that businesses have the potential to add money to the government coffers, in addition to enabling their workers to do so. But does that have to be taken as a given, without further governance that their activity will add to the economy in ways beneficial to the general population?

Big business, like others, is increasingly being given more of an explicit social contract to fall in line with. We now know that they generally cannot be trusted to do the right thing by society in general, though they are greatly accepted, and run, by those already at the top eschelons of society, who benefit from the bad societal behaviour.

Executive remuneration ^

We have seen huge growth in senior executive payments, despite often poor business performance.

Executives seemed to be hired on the assupmption that they will heroically bring good furtune to businesses, but are they really worth those huge payouts?

An executive is reliant upon the whole workforce pulling in the same direction. In large enterprises, these employees are hired by human resources processes, and a lot of their job descriptions are well defined. Most executives inherit a lot of these processes, tweaking where required to ensure the business is generally staying on track.

That begs the question of whether an executive is really adding so much value that they are worth hundreds or a thousand times what most of their workers individually earn.

The real question is whether they perform so much better than someone paid only 5 to 10 times what most workers earn. Many companies have CEOs and boards that are showing dubious management expertise, with some showing despicable behaviour and leadership.

Perhaps it is time for us to have some more realistic expectations of executive performance, and define some concrete company performance indicators that show how they are actually fulfilling the social contract that allows them to operate.

Economies are stagnating because companies are sabotaging workers salaries to appease greedy senior executives and shareholders. This is unsustainable. It may be time to peg CEO salaries as a low multiple of the median (middle) salary in their businesses, so that everybody has to get raises to justify higher executive salaries.

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