4 décembre 2009

« Saving private enterprise!! »

Yvan Allaire et Mihaela Firsirotu | Financial Post


Capitalism, famously wrote Karl Marx, bears the seeds of its own destruction. Yet Marx was blind to capitalism’s ability to renew itself and soar, Phoenix-like. The last time this happened, after its near-death experience in the 1930s, governments had to salvage a battered, discredited capitalism and give it a new lease on life, albeit a tightly regulated one. The managerial capitalism that resulted was dominant from the 1930’s to the late 1970’s. Then, our industrial system was slowly nudged away from that model and replaced by a financially driven capitalism.

The recurring financial fiascos since the 1980s — including the most recent — share  common underlying factors rooted in warped values and a peculiar model of business ownership  This model, which was gradually, slowly, ushered in over the last 30 years, has infected all parts of the economy and was promoted in all parts of the world:

  • Publicly listed company “owned” by an array of funds, many of them with short-term goals;
  • Pressured by sharp, international competition for its products and services;
  • Fastidiously governed by “independent” directors;
  • Managed by a mobile executive class MOTIVATED by stock options and other compensation schemes to work exclusively for these “shareholders” (with short-term goals);
  • Surrounded by speculative funds free to play all sorts of lucrative games with the company’s shares and debt.

All the key players of the last financial crisis, with the exception of hedge funds and pension funds (including at least one credit rating agency, Moody’s), were publicly traded companies subjected to the kind of pressures described here. Even the investment bankers, the Bear Stearns, Lehman Brothers and others, which historically were organized as partnerships, had become publicly listed corporations during the 1990s.

The financial crisis should be a Eureka moment, an epiphany, an eye-opener. However, this crisis may well fade away without some fundamental assessment of its causes. Influential players will seek to preserve the status quo in slightly modified form, adding a pinch of regulations, a drop of oversight to the mix and, perhaps, to divert public anger away from the politicians and real causes, some criminal trials and jail terms for the visible few.

For the foreseeable future, the open, highly competitive product-and-service markets will continue to exert pressure on the performance and survival of companies. The short-term focus and relentless pressures for EPS (earnings per share) growth exerted by financial markets are highly detrimental. That is the paradox: the more competitive the markets for products and services, the less pressure for short-term profits should come from “company owners.”

Precisely because product-and-service markets are so competitive, financial markets should not pile on companies, bully them for short-term results and black-mail them in the very times when these companies are fighting a tough competitive battle. They need the time and the latitude to adapt, to innovate, and to put in place strategies for the future, without financial speculators breathing down their necks.

Notwithstanding the current agitation, financial markets will not change. There’s too much money to be made with this model of the corporation. Different forms of ownership are required to insulate the economy of a society from these crisis-mongers. Fortunately, the Canadian industrial structure already contains a significant number of large companies and industrial champions, which, by virtue of their ownership, are immune to financial market shenanigans or may, with relative impunity, tell financial operators and short-term speculators to go fly a kite.

For instance, the 100 largest business corporations in Canada in 2008 (on the basis of revenues) exhibit the following ownership structures: Publicly-traded with a controlling shareholder (19); State-owned corporations (13) ; Subsidiaries of foreign companies (13); Privately-owned companies(11); Cooperatives (3); Publicly-traded and widely held corporations(41). Several of these 41 companies are also subject to government-enforced restrictions on their ownership (banks, insurance companies, etc.)

Similarly, The Conference Board of Canada identified (in a 2005 report) 43 Canadian champions that it defines as companies with more than $ 1 billion in revenues and a significant position in their respective international markets. The ownership structure of these “champions” has provoked little curiosity. Three widely held, publicly traded companies have already been taken over. Of the 40 remaining, six are privately owned and fourteen are publicly traded but with a controlling shareholder. We need more of them.

Government policies should be framed in ways that foster the growth of these forms of company ownership with stable, long-term shareholders. Policy prescriptions should also curtail the most damaging form of executive compensation: the stock options. We are convinced that a modicum of social trust, loyalty and reciprocity must be re-built in publicly traded companies. We are also convinced that this will not happen with the compensation models currently in use in most companies.

In the universe of widely held corporations, no single company can, with impunity, flaunt the rules of a distorted game. Governments must act. Societies and their governments have a small, rapidly closing, window of opportunity to make fundamental changes before the shaken, destabilized maestros of finance recover their aplomb. Whether the lessons of this crisis lead the U.S. to adopt truly different economic arrangements remains unanswered, even doubtful. So be it.

Canadian policy-makers should learn the true lessons of our recent brush with worldwide financial catastrophe. Globalization notwithstanding, Canada should build on its very own foundation of regulations and on forms of business ownership impervious to financial legerdemain and the short-term pressures of financial operators ».