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Society, Politics & Law

Starbucks in the Star Chamber

Updated Wednesday, 5th December 2012

Starbucks and others were able to rebuff attempts to pillory them over their tax payments. This suggests that regulators still lack the power to keep private enterprise aligned with public interests, writes Alan Shipman.

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Faceless corporations loom over a regulator in this cartoon Creative commons image Icon Catherine Pain under Creative-Commons license State-backed regulators now appear to be in the ascendancy, unearthing new commercial transgressions on an almost daily basis. A succession of multinational bosses are forced to explain how their tax bills come to be scarcely larger than the price of their coffees and comic-books (as explained in Business week). 

Banks are accused of (among many crisis-driving crimes) rigging a key interest rate to rescue their profitability. The Big Six energy suppliers face charges of rigging the wholesale gas market. 

Drug companies stand accused of hiding negative test results from regulators, selectively publishing the positive ones to create rich markets for medicines that don’t work. Never known for ducking a good story, rule-bending press barons (or their senior editors) take the ritual quiz twice over, before parliament’s Culture, Media and Sport committee and at the Leveson Enquiry.

But these showpiece tribunals have a long history, going back at least to Henry VIII’s ‘Star Chamber’ grillings of overmighty nobles. Their frequent recurrence confirms their ineffectiveness. 

After an economic crisis in which national governments (on both sides of the Atlantic) had to bail-out big banks and throw a lifeline to many businesses, the paying public might have been expected to get a bit more say over the private-sector tune. Instead, wobbling profitmakers have turned their weakness into strength, demanding lower tax and lighter regulation to underpin their recovery.

Regulatory capture

When American and European leaders decided – after the painful economic slump of the 1970s – that they needed a powerful dose of privatisation and de-regulation, they expected to unleash market forces that were wholly benign. Agencies were set up to monitor the new private firms that took over electricity, gas, telecoms, water, railways and other former public monopolies in rapid succession. But these regulators were always intended to take a back seat as competition took over as the main protector of customer interests. In the notoriously footloose financial sector, the UK had added incentives for weak regulation: it could draw to London the banking, insurance and financial markets that might otherwise gravitate to continental Europe or New York.

Private companies’ top executives owe their fast-escalating pay to many skills – not least their ability to sideline or co-opt their political masters. Far from giving a tax confession, those of Amazon, Google and Starbucks were able to explain how they minimise their tax bills via entirely legal loopholes – kept big enough for even the most bloated corporate treasury to jump through, by successive governments. The creation of ‘super-regulators’, like the Financial Services Authority, visibly failed to solve the problem.

Public spending cuts triggered by the cost of publicly rescuing private financial institutions are now forcing a trimming of regulatory budgets, already small, compared to those of the firms they try to discipline, and dangerously dependent on subscriptions from those firms. On reason the Chemicals Regulation Directorate has been slow to act on evidence linking potentially devastating bee death to pesticides is, critics fear, the agency’s financial reliance on companies that make them. 

Counter-culture needed

Private enterprise chiefs have long argued that, if not permitted to police themselves, they should be regulated by people drawn from their ranks. They firmly believe that career public servants:

  • don’t have the knowledge to regulate an industry, unless they’ve worked extensively within it first
  • don’t have the ability to regulate an industry, because private firms pay more for top talent, so will always outwit them

The first assertion assumes that regulators must be steeped in an industry’s culture before they can set successful rules for it. That’s a bit like telling parents they must know exactly what goes on in the adolescent mind before they can discipline their teenagers. Neurologists now helpfully inform us that this is impossible, because the teenage brain is differently ‘wired’ from the adult version it will eventually become (see here). It’s also undesirable. An outsider’s perspective is often more effective, because a culture’s fatal flaws are rarely glimpsed by those within it. As one particularly costly example, a simple bureaucratic rule that banned commercial banks from taking speculative risks with depositors’ money proved far more effective than sophisticated efforts to measure and micro-manage those risks. And if experts can switch freely between regulators and regulated industries, there’s always a risk that anticipated rewards in the second role will dull vigilance in the first. Suspicion that public servants with industry links are more Trojan horses than poachers-turned-gamekeepers was already exercising parliamentary concern half a century ago (as in this Hansard record for 1962) in relation to defence.

The second claim assumes that the highest talent always attracts the highest pay, and this is people’s sole objective – so that the best minds forgo public service for bigger private bonuses. Fortunately, this is belied by the quality of staff the public regulators can now draw on. They differ from private-sector counterparts not in talent but in motivation, having grasped that profit is neither justifiable nor sustainable unless made in ways that don’t destabilise their industry and the society around it.  The new Archbishop of Canterbury, who traded in oil before anointing with it, and who has been among those catechising the errant bankers – is fortunately not alone in confronting former crude-loving colleagues with a Solomonic message. Governmental wisdom is not an alternative, but a precondition, for entrepreneurial longevity and wealth.

This blog post is part of Society Matters. The blog seeks to inform, stimulate and challenge our understanding of this changing world and of our humbling role within it. Find out more about the blog and the team.
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