Tim Worstall is a good man, despite a somewhat Antipodean approach to public debate. He has taken me to task with his usual shyness and charm for an article I wrote last week in the Telegraph about the duties of directors and the idea of stewardship. In his words, “With Jesse Norman as a Tory MP why bother having a Labour Party?”
Tim’s standard operating procedure is (a) read something he doesn’t like, (b) reach for his shotgun, and (c) blow the end of his own foot off. Here’s a previous example, in relation to something I didn’t say last year about the House of Lords. Those of a tender disposition may wish to look elsewhere.
It is one of the deformations of the age that economic libertarians often denounce real conservatism as a socialist doctrine, and this is a good example. Indeed, I could offer a point-by-point refutation of Tim’s piece, and show in detail how my insistence on stewardship and the importance of shareholders exercising proper ownership has its (deeply conservative) roots in the thought of Smith and Burke. (Hint for enthusiasts: look at, for example, Jensen and Meckling on the modern (Coasian) theory of the firm as a nexus of contracts; and e.g. Bob Clarke’s essay in Pratt and Zeckhauser’s Principals and Agents on the limits of agency and fiduciary theory. My book on Burke may be of interest.)
But as I was contemplating this dreary task a small scenario floated into my mind, which may do the job better than I can. Needless to say, it is a work of fiction, an homage to SJ Perelman, and does not represent my view of how multinational businesses actually conduct themselves…
Scene: the offices of MegaWidge, Inc., a global manufacturer of widgets. Tim, Doug and Ed are in the final stages of preparing a major presentation to the board. A couple of dozen lawyers and accountants are in attendance. All is not well.
Tim: OK, so have we got this straight? New Cayman Islands subsidiary?
Tim: Lichtenstein holding company?
Tim: Transfer pricing agreements?
Tim: IP licensing contracts?
Tim: And our effective corporate tax rate is?
Doug: Two per cent.
Tim [rapidly reddening]: TWO PER CENT??? What do you mean, two per cent?
Doug: Well, what would you prefer? Five per cent? 15 per cent? We can make it any number you like.
Tim: Doug, haven’t you understood anything? As Milton Friedman says in his famous article “The Social Responsibility of Business is to Increase its Profits”, we have a responsibility to shareholders to make as much money as possible. Provided we keep a lid on the cost of this lot [looks meaningfully at advisers] that means not paying anything in tax at all. We would be in BREACH of our FIDUCIARY DUTIES if we do. We could be SUED.
Ed: Er, Tim?
[The others ignore him.]
Doug: So sorry, Tim. Yes, of course. I forgot.
Tim: That’s better. Now what about the employees? Minimal contractual rights?
Tim: Minimum wage in all jurisdictions?
Tim: Ancillary benefits? Offshoring?
Doug: Check and check. Though they do get the Christmas turkey.
Tim [panting with anger]: THE CHRISTMAS TURKEY???
Doug: Or goose, or Quorn Alternative Winter Festival Treat. We try to think of everything.
Tim [facepalm]: DOUG!!! THE SHAREHOLDERS!!! FIDUCIARY DUTIES!!!
Ed: Er, Tim?
[The others ignore him.]
Doug: Sorry again … forgot.
Tim: … IF we can now get back to work. Finally, our environmental profile. Minimal clean air compliance?
Doug: [doubtfully]: Well, we do have one or two offices with their own recycling schemes. Those cost a bit.
Tim: [apoplectic with rage]: FRIEDMAN!!! THE SHAREHOLDERS!!!
[Doug hides under a chair.]
Ed: Tim, the shareholders never do anything. That’s the problem – they’re bad owners. If they don’t like a company they just sell the shares. But capitalism relies on effective ownership – that’s Adam Smith’s point about the weakness of joint stock companies. This isn’t real capitalism.
Ed: And isn’t Friedman really objecting to the idea that managements might arrogate to themselves, without shareholder approval, the social responsibilities of the state?
Ed: And doesn’t Friedman himself say in the same sentence of the article you quote, “… while conforming to their basic rules of the society, both those embodied in law and those embodied in ethical custom.”
Tim: Er, yes.
Ed: So even according to Friedman, a company might properly decide, according to “the basic rules of society” that it didn’t merely want to comply with minimal standards in the amount of tax it paid, or the way it treated its employees or the environment?
Ed: And it might properly choose, according to what Friedman calls “ethical custom”, to do more in each of these areas on moral grounds?
Ed: Which is almost exactly what Section 172 allows for?
Ed: So that section of the Companies Act 2006 fits with Friedman’s own conception of corporate responsibility?
Ed: But you’ve described it as “one of the idiocies of the last Labour government”?
Ed: So Friedman’s view is idiotic socialism?
Tim [flustered]: Yes, er, no.
Ed: And you in fact reject it?
Tim [brain explodes]: No… yes, I mean, er…. AAAAAARRRGGGHHH!!!
[Tim starts running around in circles and waving his arms. He is gently led away.]
Ed [to the advisers]: You’re fired. Throw these board papers out. Radical change of approach–we’re going to focus on making and selling products we can be proud of.