Business/Finance

You chose it, your politicians arranged it and businesses delivered it. Who's responsible again?

On 31 May 2005, the US Supreme Court overturned accounting firm Arthur Andersen’s conviction for obstruction of justice.  It would be a pyrrhic victory as, by then, a company which once employed 85,000 people around the world had been reduced to penury.

The rush for victim’s justice in the aftermath of the Enron fraud scandal led to the deliberate instruction of the Texas District Court that the jury find Arthur Andersen, Enron’s auditors, guilty “even if petitioner honestly and sincerely believed its conduct was lawful.”

Then Chief Justice William Rehnquist stated in his opinion for the Supreme Court:  “The jury instructions at issue simply failed to convey the requisite consciousness of wrongdoing. … Indeed, it is striking how little culpability the instructions required. … Only persons conscious of wrongdoing can be said to ‘knowingly corruptly persuade’.”

This is a mere ripple of good sense in the usual process of kangaroo-court justice that afflicts international affairs whenever something catastrophic happens.

The general public response – whether it be Lehman Brothers and the credit crisis of 2008, Toyota and the recall crisis of 2010, Union Carbide and the Bhopal gas disaster in 1984, Sanlu and the melamine in milk tragedy of 2008, or Parmalat’s very Italian financial fraud in 2003 – is to act as if one bad apple has behaved badly.  Punish them and all will be well.

This is part of the usual delusional belief that “business be bad” or “naked capitalist greed” is isolated to some inhuman entity.

I hate to break this to you, but there is no dividing wall between you, the people around you, the politicians who represent you and the companies who deliver the goods and services you buy.

Your choice, your consequences

If you are standing in a supermarket and you deliberately purchase the cheaper product – the one with an ambiguous history – over the one next to it you are sending a message to all the companies in this market. The message you’re sending is clear: “I want more like this one.”

“I want more low-cost mortgages and who cares who ends up picking up the tab when we discover you can’t give money away for less than it costs to borrow.” Or how about: “I don’t care how much it costs to purify and pipe water to me at home. It falls out of the sky so it should be free, who cares if you find it too expensive to get it to me. I’ll use as much as I want.” Or, “There’s no way I’m paying more for energy. I demand to fill up my car with petroleum-based products, who cares how deep you have to drill or who you have to do business with to get it.”

You asked for it. You got it.

But remember, everything you ask for comes with a risk attached. Even when you sit at home with the doors closed and the windows shut, there is a risk that the house could fall down.

A lot of the time we just ignore those risks. We cross roads during traffic. We order fish in a restaurant on a Monday evening. We ignore that weird knocking sound in the engine in the hopes it’ll get better on its own. We eat that extra helping of fries, every day, for 30 years.

BP drills a lot of holes in the ground. That’s what they do. Drill holes and, if there’s sufficient oil in that hole to justify operations, stick a pipe in it and despatch the oil to a refinery.

It gets so it becomes routine. Drill a hole, stick a rig on it, investigate, terminate the hole and move on. I’m sure that every engineer on every exploratory rig in the world takes moderate short-cuts. After all, we’re only here a few months and we’re closing the hole up anyway. Why bother spending an extra two months securing a site we’ll spend no time on?

Other industries have people doing exactly the same thing. I’m issuing my 100th home-loan this week and the dude says he’s good for it. I’ve checked the cable on that lift shaft and it looks fine to me, it’s due a change but I know that they’re good for longer. I know I have to check every inch of this pipeline, but my kids are hungry and I’m only taking one tiny short-cut so I can get home on time…

Many years ago I was running a small community development project in Cape Town. One of my employees decided to defraud an important client. I found out about it only when the client got hold of me. By then it was too late and the money was gone.

I fired the employee and repaid the client. It hurt but it was dealt with. Imagine I was a major consulting company in the US. I could have been hauled before Congress and had politicians hurling abuse at me and demanding to know why I didn’t know about it in advance. I could have had to set up a contingency fund in case other problems came to light.

Moral hazard applies if there is unlimited liability as much as if there is no liability

Moral hazard is generally held to apply if a person is not held responsible for the consequences of their actions. So a person who will never be fired irrespective of how useless they may be has no real incentive to improve themselves. Same goes for companies which cause harm through their products.

That’s where you get the fear that we “privatise profits and socialise costs.” That’s sort of what happened when the US bailed out the motor industry. Because they’re considered strategically important employers the industry can produce cars that no-one buys and still receive big cash bailouts from the taxpayer. Not much incentive to improve things.

But the converse is true too. If you will be held infinitely liable for any infraction, no matter how small, you may as well make sure you make big mistakes.

This is something that is often noted in countries with exceptionally harsh immigration laws. Immigrants, who would be arrested and jailed for working illegally even if it was simply as a farm worker, often get involved in very serious crimes, like drug dealing, because the consequences of being caught are identical as far as they’re concerned.

Now we have BP. A company that is on record as having promised to pay all costs related to their disaster is being regularly attacked and hazed in the US press. Nothing they can do short of “killing themselves” will do for the American people.

It doesn’t matter that American demand for oil drives companies into ever-more dangerous situations in the pursuit of that oil. It doesn’t matter that consumer demand creates risk and that the public is culpable too. It doesn’t matter that politicians are just as responsible for failures of oversight as are BP.

It doesn’t matter as long as they are punished so that we can all offload our collective guilt on Tony Hayward.

The consequences of infinite liability

Liberia, which is ranked as one of the most appalling countries in the world on any international rankings you wish to read, is the world’s largest register of shipping. A country with a GDP per capita of $239, a life-expectancy of 44.7, and infant mortality rate of 15.7% and health expenditure per year of something like $10 per person.

That country. 1,904 international shipping companies list Liberia as their home port. About 17% of all world shipping.

Why?

Simple. To avoid fishing, pollution, employment, taxation, safety and other regulations.

And you paid for it. All those cheap goods from China? They came on Liberian registered ships. If they were American-registered then they would have to pay 50% duty on repairs performed in foreign ports. Too much. Too much for you at the till. Liberia calls.

Infinite liability will make things worse, not better.

It’ll become like Nick Leeson at Barings Bank. He lost big on unauthorised speculative trading at the investment bank. He was in trouble no matter what he did. So he tried to win back his losses by making even bigger speculative bids. He lost more. He kept going.

By the time he was finished he’d destroyed Barings, founded in 1762 and employing thousands. Leeson’s original loss was back in around 1991, for $30,000. By the time he finished, in 1995, he’d lost $1.3 billion.

Imagine a world in which the US consumer continues to demand things that have risks attached to them – petroleum, toys, processed foods, bank loans, pharmaceuticals – but where there is no acceptance of these risks.

Imagine a world where companies do not register under US law, do not have local subsidiaries you can sue for very much, have a registration of convenience in countries where you can’t touch them, and where they deliver the goods you want without any process or safety considerations.

You think the illicit drug industry causing a war in Mexico is bad? Drugs are already illegal.

But the oil industry in Nigeria, where armed militia butcher each other off for control of mineral rights, where illegal taps into pipelines result in thousands of spills, and where sabotage of well-heads has caused millions of tons of oil spills, already hurts more people than will be hurt in the Gulf of Mexico.

And the US relies on Nigeria for 10% of its oil imports.

So let’s stop all this holier-than-though rubbish. You’re in it up to the eyeballs.

The pragmatists guide

Regulations should ensure that the real costs of any risk are passed on to consumers. These real costs must be legitimate and must be transparent. Companies are prepared to do business in the US, despite higher regulatory costs, because they are not being shaken down by corrupt politicians, which is itself a business cost.

Laws and courts must be allowed to get on with things. If the laws are proven inadequate, then they can be changed. But a country that permits its politicians to ignore the rules and impose rough justice at the front of a baying mob is no better than a bunch of vigilantes. You have courts for a reason.

If companies get shaken down irrespective of prevailing laws then they may as well go somewhere cheaper.

You’ll still get what you want and you’ve chosen the consequences.

7 replies »

  1. And poor Joe Barton stuck in the middle. 🙂

    I actually thought, unlike SOME cynics around here, that he might have originally been standing up for his convictions, saying that BP deserved due process and a fair trial like any other company caught breaking the rules or taking advantage of slack enforcement, instead of being held up as a completely unheard-of monstrosity.

    Oh well.

  2. Gavin, I agree with you in principle, but I think you’re straw-manning a bit. Nobody is calling for Congressional investigations into small-scale mistakes resulting from good-faith business attempts. That is most certainly not what BP is. On the contrary, there is plenty of evidence suggesting that they cut lots of corners in an attempt to save cash, and that kind of thing is going to happen when the legislature and regulators and presidents are in the pockets of the corp. This is a natural, foreseeable consequence of 30 years of rage to deregulate.

    I’m all for due process, in the BP case and in all others. But your argument seems to lack a certain symmetry in that you’re using one case of widespread rage (well deserved, by the way) to suggest that the whole system is an unfair witch hunt.

  3. Sam, why is it that every major corporate incident results in a “shaming” exercise before the legislators? What’s its purpose? It turns due process into reality TV.

    It doesn’t matter whether it is prior to a major bailout (the motor industry), a massed recall (Toyota), or prior to numerous court cases (BP).

    It trivialises and pre-empts the courts. And it has also resulted in knee-jerk legislative reviews with – and that’s the point of my article – numerous “unintended” and “unforeseen” consequences.

    • Well, Gavin, that’s a good issue. We do love good theater here in the land of unfettered media, and it’s not unfair to wonder what impact these dog/pony shows have on the eventual course of the judicial process.

      Congress? Well, the natural habitat of the American Congress Weasel is, of course, the grandstand….

  4. Thanks, Gavin. Well argued with great detail.

    I will now go flail my backside with the body of a dead pelican as acceptance of my penance.

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