Banks: Corporate Bundles of Dismal Joy

Banks: Corporate Bundles of Dismal Joy - and Mislaid Rage

Written by Aetius Romulous

Banks: Corporate Bundles of Dismal Joy -

and Mislaid Rage

Banks are not monolithic structures. They are not simply, "the banks". Some banks lend to people, some banks lend to business. Some banks lend to other banks, and themselves. Some banks don't lend at all, but help other banks lend to each other. Some banks will do some, all, or none of the above. There are all kinds of banks.

ar_logo1 Regardless of their complexity and size, who they are or what they do, all banks share several fundamental features. The DNA of the genus. The biological essence of what makes a bank, a bank.

All banks are nothing more than a bundle of lawful contracts called limited liability joint stock corporations. All banks have corporate charters that define their purpose and give them life. Humans - who are constrained by law and fiduciary duty from any other pursuit but the maximum return on investment to shareholders -operate all banks. All banks reward human performance with material gain, peer acceptance, and cultural power.

By considering fairly these common characteristics of banks, it turns out that banks are operating exactly as designed, without malice or evil intent. They are just carrying on carrying on. Our anger and mistrust of banks is dangerously misdirected when we endeavour to repair a system by tinkering around the edges of the symptoms. If it is the inequity and the unbridled risk to us all we are most concerned about, screaming at bankers will accomplish nothing. And accomplishing nothing is the status quo. And the status quo is toxic.

As embarrassing as it may be for some, going beyond the banks and into the system that gives them life is the only alternative. Perhaps it may turn out - after all these good old years - that unfettered corporatism and human beings just don't mix well. Maybe. An idea that at one time appeared to have wonderful merit may well have outlived its benefit to society, no longer the impeachable law of human progress we once imagined it was. Questioning that structure is an entirely rational pursuit now, given the turmoil in which we all find ourselves suddenly. Rational...and necessary.

"There is one and only one social responsibility of business - to use its resources and engage in activities designed to increase its profits..."

Milton Friedman, 1970

The original premise was sound enough for the time, a time two hundred years and a magnitude of lifetimes ago. Trade amongst disparate groups of peoples, cultures and nations appeared to offer a fast track to the future. Building stuff from earth and human imagination, then trading that stuff for the stuff of others improved the lot of all involved. It improved the lot of a few more than others of course, the freedom of markets rewarding the goodies of progress with an invisible, uncaring hand. The rich did get richer, and the poor tagged along for the ride.

With wealth came power, and with power came law. Commercial law principally. Commercial law set the rules for trade and commerce, trade and commerce represented by lawmakers who made the laws. From this wonder of symbiotic back scratching there was born the "conglomerate", a legal agreement amongst investors to pool their considerable resources in order to invest in moneymaking ventures of a scale that each alone could not. It was the questionable birth of legal bundles of dismal joy.

Great feats of capital strength were launched. Great catastrophes of risky business resulted. The subjugation of the Indian sub continent. The Enron of the 18th century in Louisiana. The rise and fall of the simple Tulip. Investing in conglomerates was nothing more than betting on the outcome of a future event you did not control. If the ship came back on time and profitably laden, you landed heads and became a prescient stanchion of the law making classes. If the ship sank, was overrun by pirates, the natives fought back, or any number of unprofitable turns, you and all your corporate confederates came up tails and were ruined. We call that "risk" now.

The fix was to change the law to prevent investors from losing more than their original investment, reducing the nasty bits of commercial gambling considerably. The "limited" joint stock corporation was born into law. A legal commercial entity that existed only by corporate contract, designed expressly for maximising the return on each shareholders investment. And no other thing. Despite two hundred years of fiddling about the edges to further hone and sharpen the spear point of capitalism, the corporation remains unchanged to this day.

Corporations are thus primitive and simple. By filing the appropriate papers and paying a nominal fee, anyone can create a corporation in most western industrial countries. They exist still for the single purpose of making money, the best run among them making smashing sums repeatedly. Corporations that don't make money unwind and go away, sometimes with dramatic departures of international scope.

Corporations have been one of recent histories most successful inventions, judged solely by their astonishing proliferation over that last several generations. Corporations are everywhere, and affect every aspect of an increasingly global corporate planet. Layers of corporations stand between most humans now and virtually every necessity of life, as well as all manner of corporately induced non-necessities. Corporations have earned for themselves a rather tainted reputation in most cultures, cultures that embrace them and their "progress" while railing at the people who do so well inside them. Corporations thrive because they are grossly misunderstood, and any attempt at dealing with them always fails to tackle the Meta of their existence. We always prefer to beat up the people and not the institution and as a result, the people come and go but the institution remains and lives on.

Any corporation and its actions are readily understood by what it is not rather than what it is. What a corporation is of course is a machine for harvesting profit from the investment seed of its shareholders. What it is not is moral, ethical, or social in any sense. In fact, where conflicts exist between any human issue and the making of money, corporations are bound by law and fiduciary duty to choose the money, and to do so with extreme prejudice. They are barred by basic economics from participation in any activity that does not promise "profitable enterprise", regardless of the need or circumstance of the society around them. Nothing but bundles of arcane commercial contracts, corporations were just not built to be social institutions.

Corporations are artefacts of the past. Maybe there was a time where it happened that the great benefits of conglomerated capital - gambled at great risk to all - worked for the world. Perhaps in times past, our developing western societies braved the ills of corporations in exchange for the commercial bounty they spun off. Corporations themselves were pubescent as well, and had yet to gain the commanding heights of the economy, restrained by men of different culture and morality.

But that was then, and this is now.

Taxation is the usual weapon of choice by lawmakers too timid to tackle the voraciousness of the corporate form. Varying degrees and schemes of corporate tax are employed by governments of all political stripe around the world. Far from clipping the wings of corporations, the highest corporate tax rates in the world exist in the most dynamic and wealthy nations. Japan, Germany, France, Canada, Australia, and the US all occupy the top ten, with corporate tax rates hovering above 30% each. Of course, these are also the bastions of the world's greatest accountants, and so actual cheques cut to citizen governments are another matter. But that too is the province of the well run corporation, automatically programmed to chisel the tax department wherever it can...and in some cases where it should not. Regardless, taxation skirts the issue of the fundamental DNA of the corporation if its purpose is to regulate.

Actually changing the mandate and social responsibility of modern corporations - bringing them into line with the contemporary standards of a vastly different world - at first blush seems simple enough. By law, change the charter, and by accounting practices, change the definition and recognition of costs and expenses. Simply put, legally ensure the returns of commercial activity are allocated to all stakeholders equitably, including the indirect investments made by communities that today we call "externalized costs".

An incorporation of investors wishing to build a mine in Ecuador today need only operate within the limits of complex, contradictory, and ultimately flimsy local law in its commercial endeavour to extract as much gain at the lowest possible cost. Costs are entirely calculated in the value of inanimate raw materials from the earth, and successful attempts at minimizing the contributions of human energy and time. In this way, the current form of return is partially a theft from others and perhaps, the future. The risk has been misrepresented. Happens all the time.

By widening those costs to include the mitigation of disruption to the local community, environmental impacts, and universally recognized standards of the value of labour, a newly considered corporate regime would reallocate the gains made from the enterprise, as well as account for the totality of the risks involved to all members of the human community. With all risk fully considered, investors are then in a place to be as greedy and daring as they no doubt were born to be.

Of course, the returns will appear to evaporate relative to those we all read about today. But that is what we - the collective community - really want in the end. We want a society where vision and ingenuity fairly and equitably constructs its victories, where winners are celebrated without the need for losers. If after considering all costs and risks involved, it is not profitable to mine in Ecuador...it simply means the planet is not ready for that mine. Which is very cool. If it turns out later that the planet demands Ecuadorian minerals with prices willing to offset the costs, and provide a return to investors, Ecuador will get an environmentally neutral mine that benefits the local community equitably.

Remember as well that return on investment is a relative concept. Five per cent looks crappy when twelve is available. A relative contraction of margins through a universal reworking and standardization of the accounting standards will mean little to investors whose marketplace will change to reflect the new era. Pools of investment capital will still exist, and they will still hunt down the best return. A single set of rules for every player will ensure both efficiency and confidence. But with all costs properly accounted for, that capital will be invested building profitable, socially acceptable commercial enterprises. Instead of just profitable enterprises.

Corporate charters, setting out the scope and mechanics of each corporation should also include boundaries to operations that reflect the social concerns of the corporation's particular commercial sector. Military corporations could be restricted from building land mines, right on their birth certificates. Corporations that buy, merge, or amalgamate with other corporations would inherit the obligations of the target. Charters could restrict risk-systemic sector corporations from buying, merging, or amalgamating.

Corporate charters could define appropriate guidelines for executive compensation. It requires simply drafting the laws and setting up the administrative apparatus.

"Corporations...must develop into a purely neutral technocracy, balancing a variety of claims by various groups in the community and assigning to each a portion of the income stream on the basis of public policy and not private cupidity."

Adolph Berle Jr, "The Modern Corporation and Private Property", 1932

Or a motivated society with the guts to take it on could do anything else it wanted. In the end, a society does belong to its people. Commerce is good and amongst humans, it's inevitable. But the principle form of business commerce in the world today is the current form of Limited Liability Joint Stock Corporation. A format that has been unchanged in its essential form for hundreds of years. Hundreds of years as in another age, on another type of planet. If the time has not yet come to update this modern anomaly, this dusty legal artefact of antiquity, is the time perhaps here to talk about it? If not now, when?

The problem it appears is people. People who cling doggedly to superstition and dogma, investing their own futures in the status quo, terrified of the mysteries and uncertainties of change. These are not the corporate leaders of our world, who are simply servants at the mast of corporate capitalism. They can do no other. And while it is true that given the opportunity, each and every one would keep on keeping on, the decision is not theirs to make, nor has it ever been. The decision lies with the lawmaker who makes the laws that define commercial enterprise.

It is understandable that in another age when representative governments were not what they are today, the "vested interests" of commerce could influence - and literally make - the laws that sanctified corporations. Sadly, it is all too undeniable that in a modern democracy, little has changed. Corporations have become Frankenstein monsters with astonishing power in our modern social world. They use that power to influence lawmakers still, their proliferation, international scope, and perpetual life dwarfing the development of a democracy - itself unchanged and welded to outdated charter. They now routinely gamble on future events with the risk shouldered by all of society, and perpetuate that bonanza by reinforcing the glory of free market dogmas that give them continued life - and pay off lawmakers too ignorant of the world to turn down the cash.

It's a trap of sorts. Of course, lawmakers in Washington set the limits and nature of those free markets for the world. They do so in a balance between what their consumer constituents will vote for every so often, and what their corporate sponsors demand through campaign contributions - among other stuff. Its complex work and democratically electable people are not up to the task of acting in their voter's best long term interest, by reason of conflicting personal opportunity, short terms of office, and simple dumb ignorance of the concepts...which are flawed in the first place. The contemporary elected official is clearly out of his league.

Humans run the corporations as well. Irrational, unpredictable beings that can and often do take personal advantage of the unregulated free market. Investor humans who seem to be willing to take on any amount of risk, with the money of others especially. Management humans who swear fealty to the investors, the markets, God, country, and the flag - but repeatedly act in their own, small self-interest. Whaddya gonna do? What can you do other than simply accept that humans need direct supervision at times. Corporate humans cannot be trusted with limitless profit; lawmaking humans cannot be trusted with corporate humans with limitless profit. It just seems so hammer in the face obvious that rules are necessary to protect the common good of the community at large.

"Competition between businesses (won't) guarantee an optimal result, because the people running businesses (have) their own motives."

Michael Jensen, University of Rochester, 1971

The solution appears however, to have been to do nothing, and do it with a vengeance. Under the blanket of the "efficient market theory", corporations would police themselves, punishing executive insincerity with crappy stock prices, forcing the investor's hand or risking losing it all to other corporate raiders. Further "progress" in this regard was made by universally adopting a cash incentive pay structure, abolishing forever the old salaried man, and tying performance to the stock price. In this fashion, humans were hardened to drive corporations forward with no regard to anything but the stock price...and the bonus it represented. It had the desired effect, causing joy in executive suites, and rolling sorrow everywhere else. Markets have become efficient as predicted - efficient at dumping risk far and wide in a whatever-it-takes stampede to support the stock price.

"Some called these restructured companies "hollow corporations" because their goal seemed to be to transcend the corporeal world of things so they could be an utterly unencumbered brand. As corporate guru Tom Peters put it: "You're a damn fool if you own it!" "

Naomi Klein, 2010

If you accept the premise that it is perfectly rational for some humans to earn money, power, and fame at rates that can only be measured on scales of magnitude, you must also accept that humans are going to need craploads of capital to earn such magnitudes. You must accept as well that humans will, by their nature, use any means at their disposal to accumulate said craploads, and the only means in town are corporations. Corporations that by necessity must be colossal in size. So colossal in fact, that actually making anything is fast becoming a hindrance to business.

Which brings us back to "the banks".

Goldman Sachs, Citibank, BofA. What is their business? It turns out, not even the Chief Executive Officers know exactly. The investors, less so. The communities in which they operate and all the "externalized" people they touch - no freaking idea. They manufacture nothing, and except for the denizens of the rarefied air in which they operate, none of those who shouldered the risk of their gambling - every man, woman, and child on the planet - received anything in return but arrogant disdain. They are simply "hollow corporations" churning money from manipulating markets. Markets of other corporations. A bank is nothing more than a stock price.

This of course, is exactly the way the rules are laid out.

So you have a toxic mix of 1) Antiquated and dysfunctional state law, 2) Exponentially growing modern, sophisticated, technologically advanced international corporations and 3) a seething pile of humans on whom both depend in a weird, symbiotic mashup - humans that are fast losing a grip on the other two. Holding it altogether is nothing but a thin blind belief in a series of economic and political dogmas that began to rust years ago - and which give the wheel its creaky perpetual motion. Good times.

Flaying bankers alive accomplishes nothing, and punishes humans who are guilty of little more than playing by the rules exceptionally well. Regulating any commercial enterprise within a wobbly system is like having tea with a hungry lion; Band-Aids for a kid with razor blades. Banks are no different and as corporations, they simply cannot help themselves. Whatever it is they do in those towers of gold and ivory, banks are auto programmed by law and fiduciary duty to do what they were designed to do - and nothing more.

Our mislaid rage against these corporate bundles of dismal joy will prevent us from ever taming the mother of so many of our social problems. Our anger is better spent against our lawmakers who perpetuate the monster. Getting under the hood of the thing will require a focused effort to change the commercial laws that give them life, and by changing the way we make laws if needs be.

In the meantime, corporations continue to grind away at our planet and us. Sometimes through the stealth of dull, complex, soul crushing mystery, and sometimes through ever increasing protection of the law. Corporations in the United States have just elbowed themselves into constitutionally guaranteed free speech - equal in every way to actual humans, - except in the amplitude their money provides.

"Sweeping aside a century-old understanding and overruling two important precedents, a bitterly divided Supreme Court on Thursday ruled that the government may not ban political spending by corporations in candidate elections.

The ruling was a vindication, the majority said, of the First Amendment's most basic free speech principle - that the government has no business regulating political speech. The dissenters said allowing corporate money to flood the political marketplace will corrupt democracy."

New York Times, January 21, 2010

Don't ya just love it when a design comes together like that?

Aetius Romulous

Historian, Economist, Accountant, Writer, and blood sucking CEO.

Born at the wrong end of the Baby Boom Generation - too late to enjoy the ride, too early to have missed it, and stuck in the middle with the mess.

Aetius writes and blogs from his frozen perch atop the earth in Canada, spending the useful capital of a life not finished making sandwiches and fomenting revolution.

It's a living.

http://screambucket.com/

aetiusromulous [at] rogers.com