Owning profit

Whose profits were they?….They arose from the sale of energy products, particularly gasoline, that the American Public had no practical choice but to purchase”, extracts from the book, Private Empire – by Steve Coll. All credit to Mr Coll for writing a well-researched and thoroughly gripping account of Exxon Mobil, a successor of Standard Oil.

Reading through the book reaffirms a belief repeatedly asserted in this series of profit; history will label this era as the return of monopoly power with this proverbial rebirth of Standard Oil as the most incriminating and overwhelming evidence. But then if all countries blessed with precious resource already practice state monopoly and were amongst the last few standing after the twin global financial crises, perhaps the dictum that monopoly is bad needs to be finally scrapped.

While one is tempted, the intention is not to gloat. However those in capitalism’s corner and forever critical of the public sector need to educate themselves about recent happenings. Globally, private ownership of big business has become at best, hazy, be it due to the “too big to fail” excuse or the employment alibi.

The reader needs to magnanimously ignore the tendency to digress in this complicated discussion which is simply because every tangent needs to be explored and ticked off. Nonetheless, the intent behind the quote at the beginning was to re emphasis the point advanced in the last article titled”Comparing Profits”; necessary commodities and national assets need to be managed efficiently, irrespective of the structure, public or private. When consumers have no practical choice but to purchase, the related business is vested with inordinate price fixing ability which in the absence of government interference can tax the populace without any social obligation.

As aptly articulated by Lee Raymond, “We don’t run this company on emotions. We run it on science and principles, the relentless pursuit of efficiency”. Efficiency in the business world is a code word for profit!

At this stage, there is a need to differentiate between State Owned Enterprises and public ownership of shares ina private enterprise, they are not the same. The blueprint of privatising by enticing a strategic equity partner coupled with a public offering needs to be fully explored. Fundamentally, the brainchild behind government financing the termination of excess personnel in a privatisation process and thereby becoming directly responsible for their very welfare, verges on ignorance, to say the least, especially considering that the profits earned by this cost reductions hardly revert to the state. Au contraire, in most instances the state ends up guaranteeing profits for a business it was unable to manage profitably.

How you get there is only important, if “there” is where you should be going in the first place.If private enterprise is nirvana, the path can always be improvised. In order to conclude that “there” is the appropriate destination in this particular debate, the characteristic of the private enterprise needs to be analyzed. The domestic corporate edifice which arguably is in the infancy stage in the evolutionary cycle, by a quirk of fate may mirror the recent developments in the mature economies where family corporations and state capitalism appear to be the buzz words, but is unsuitable as a basis for a conclusion on public ownership.

The focus is on the corporation spawned by the utopian free markets and spurred by free flow of capital and unrestricted trade. The bastion of capitalism, the multinational corporation, is characterized by a global presence, sheer size of operations and assets, ability to disrupt economies by its presence or absenceand the capacity to influence politicians in regions they operate in for monopoly rent by any means possible.The power of the multinational corporation can hardly be over emphasised. One is reminded of the days of the East India Company; the only thing lacking is a corporate military to conquer resources, which may even be envisioned by some consultant very shortly. Oops!

“There’s one political party in this country, and that’s the corporate party”, John Hall.

Question is who actually owns this corporation? Definitely not the shareholder, with thousands and in some cases millions of equity holders,ownership is compromised by the principle, when everybody owns something then nobody actually owns it. This lack of effective ownership is incontrovertibly evidenced by the inability of the shareholders to even curtail CEO remuneration, a highly publicised bone of contention. If the shareholders have no direct sway in hiring, firing and emoluments of the top management, they definitely have nothing to do with the more complex and critical investment and policy decisions.

Is the corporation than owned by the CEO/professional management? Reading through biographies of iconic business leaders, one amazing revelation is that the CEO has the ability and the authority to select the Board of his corporation which in turn approves his package and ratifies his decisions. Apparently, all that is needed for a CEO to survive is the ability to announce improved quarterly results to avoid a market back lash orchestrated by pseudo owners, the shareholders. In businesses characterised by monopoly rent, this is easier said than done, in other cases, the most likely worst case scenario is termination with benefits.

Deliciously for the CEO, someone, somewhere a while ago dreamt up this quaint notion that professional management are shareholders agents and therefore their interests should be aligned, the birth of stock options. Whether interests ever got aligned is questionable, what did happen was that the all-powerful CEO also got richer and even more astonishingly disastrous performance simply meant going home to enjoy the moolah!

The problem however, with concluding that the ownership vests with the professional management is continuity. Contrary to politics, corporate world is devoid of dynastic rule. This dilemma raises doubts subject to conspiracy theories on who actually is King. If public ownership in essence is limited to uncontrollable return on investment, and professional management has a limited window to operate wherein the focus is self-actualisation, who or what controls the destiny of the corporation?

Pertinently, with profit the only motive for shareholders and professional management, the likelihood of scrupulous action is remote. In this scenario the belief that corporations are best suited to manage all national assets is difficult to digest. Quality of life and consumer choice are at the opposite end of the spectrum compared with simple survival and basic necessities.

The critics will quickly point out that the public sector is fraught with corruption and hardly a solution. But does a robust private sector ensure the demise of corruption, as modern history documents, hardly. The solution, if it exists, perhaps lies elsewhere. The singular pursuit of profit has it benefits; the puzzle is the ownership of such profits. Lack of allocated space entails carrying forward of this particular debate to the next edition, for the moment, suffice it to say that, after all, it is all about profit!