18.07.2007

Corruption and irrationality

Jim Moody comments on the trial of Conrad Black, which highlights the enigma of 'capital without capitalists'

On July 13, after a 16-week trial, a jury in Chicago's federal court found former Hollinger International CEO and chairman Conrad Black guilty on four out of 13 charges: three of fraud and one of obstruction of justice. His three co-accused - Jack Boultbee, Peter Atkinson and Mark Kipnis - were each found guilty on three counts of fraud. Unless Black's proposed appeal is successful, he faces a 15 to 20-year jail sentence and a fine of up to $1 million.

Chicago-based newspaper firm Hollinger, which was once the world's third-largest English language newspaper chain and used to own The Daily Telegraph, Toronto's National Post and the Jerusalem Post, was the location for Black's and his accomplices' $60 million (£30 million) swindle - stealing investors' money via the device of non-competition payments in contracts for the sale of newspaper titles. The mainly female jury accepted prosecutors' allegations that Lord Black of Crossharbour PC, OC, KCSG and the three other former Hollinger executives trousered the $60 million.

Subsequently, legal authorities in the USA have been moving to seize Black's illicitly gained goods, including his $35 million Florida mansion and millions more held in jewellery. He gave up his Canadian citizenship in order to take up his peerage, but has recently tried to regain it in order to mitigate the effects of the punishment he is likely to receive (so he can transfer to a Canadian prison to reduce his wait for parole).

US commentators have crowed that this is "the latest in a series of triumphs by government prosecutors in an Enron-inspired crackdown on corporate crime that began five years ago this month" (Chicago Tribune July 15). It is true that if the Enron scandal had not broken then such executive milking of the corporate cow as Black and his cronies engaged in would in all likelihood not have been exposed for punishment under the criminal law. Black's hubris resulted from overweening arrogance; his nemesis was found in bourgeois law's sine qua non: defence of the right to profit and who is entitled to gain from it.

Non-compete payments have been relatively common in the newspaper industry. They are used to 'compensate' executives against their promise not to start up publications rivalling those they have just sold. Black saw payments under these agreements, which are anyway little more than bribes, as a tax-free fringe benefit. In one such scheme, Hollinger sold a local paper to another of its companies and Black and the trio paid themselves $5.5 million not to compete. In the final stage of another deal, they went back and added a $600,000 non-compete agreement after forgetting to do so initially. If only we could all remedy our forgetfulness so advantageously.

It was not as if Black's shareholding in Hollinger was measly: he held a 17.5% stake. This was substantial, but not necessarily a controlling interest. However, as is illustrated by, for example, the Ford Motor Company's ownership of a 33.4% stake in Mazda, when a ­thirds majority is required for crucial decisions, then a stockholding in a company of only a third becomes a controlling interest. And if not all shareholders care to or can vote, an even smaller holding has to be taken seriously by company decision-makers.

Where Black went wrong was in assuming that he could plunder what he saw, thanks to such a large shareholding, as solely his company's profits. While capitalism's reason for existence is the continual maximisation of profits, who gets those profits is regulated by the state. Company law has developed in each territory, over centuries in some cases, precisely to protect investments and limit the liabilities of investors and capitalists, not to leave profit distribution willy-nilly to those running the company.

Lord Black's case is a real turn-up for the book, given that he was once one of the UK's wealthiest and most influential media figures. Black and his wife, Watford-born rightwing journalist Barbara Amiel, were not ashamed to flaunt their wealth. Despite only being an old media magnate, he expected a dot-com billionaire's lifestyle and overreached himself by exceeding what was his due as chief executive officer and chairman.

In point of fact, the Black case is indicative of the period we are living in. While Enron saw large numbers of people defrauded, losing pensions and other entitlements, and the Black case involves lesser amounts, the tendency is the same.

No longer, as in capitalism's early days, do we see anything resembling the capitalist himself overseeing his (it is still usually 'his') factory workforce, ensuring they arrive on time, checking their output throughout the day and yet still there when the workers clock off in the evening. This kind of capitalist had to adopt a frugal, not to say protestant, ethic himself, ploughing back profits into his enterprise merely in order to survive. His direct and hands-on approach was a necessity. That was the situation, to some degree, that Marx discussed in Capital volume 1, where he posed and developed the abstractions of use-value, exchange-value and surplus value.

However, toward the end of his life Marx observed (in Capital volume 3) the system more practically as it then was, with its limited stock companies and listings on the stock exchange, prompting him to coin the phrase, "capital without capitalists". As is obvious, companies listed on the London Stock Exchange are owned by many capitalists, not just one or two. Since Marx's time, ownership and control have become more and more divorced, with prices on stock exchanges moving on the basis of company annual reports, declarations of levels of dividend and reports of takeover or merger.

The stock exchange system operates on the basis that the information its users receive is accurate and provided within legal limits. Trading stocks and shares on the basis of inside knowledge that is yet to be made public is illegal. On the other side of the equation, companies are bound by law to provide information about their trading situation that is true and publicly available. They are responsible to their shareholders and are held to account on this score by the state's regulatory authorities, which can step in and, in extremis, replace boards of directors if they are failing in their statutory duties.

We all know that there is exploitation of workers, but what Enron highlighted was the 'exploitation' of shareholders. Definitely a no-no as far as the smooth running of capitalism is concerned; which was why the state - capitalism's executive committee - came down on the Enron malefactors like a ton of bricks. Clearly, the bogus profitability on display at Enron did no service to the shareholders, since the fictional profit declarations gave the opposite picture to the real situation. Shareholders lost out, at best being paid in shares that, once the truth became known, were not worth the paper they were printed on. Meanwhile, senior Enron managers paid themselves handsome salaries, ran up enormous expense accounts, and ensured that they benefited from the bubble of temporarily increased share prices that their swindle produced.

Senior management in large corporations are in a position of trust vis-à -vis the often disparate group of shareholders. In this situation, as we see, the temptation to overplay her/his hand sometimes proves too much for a senior manager or group of managers. After all, the annual salary and perks (or 'executive compensation' in US corporation-speak) of CEOs and other members of senior management in the largest corporations is nothing more than a distribution of surplus value that does not make it into company profits. They are no less key stakeholders in the carve-up of profits than formal shareholders are. So it is easy to see why it is not a step too far for some CEOs, chairmen, and senior managers to dip into the profits pot for that 'little' extra. It is all too logical, looked at from the exploiters' side of the fence, to see a surplus value pie ready to be carved just a smidgeon more in favour of management.

US business journal Forbes reported a couple of months ago the staggering levels of income of the personifications of US capital: "The chief executives of America's 500 biggest companies got a collective 38% pay raise last year, to $7.5 billion. That's an average $15.2 million apiece. Exercised stock options again account for the main component of pay, 48%. The average stock gain was $7.3 million" (see www.forbes.com). Top of the pile was Apple's chief, Steve Jobs, who received a nominal $1 salary in 2006, but realised a staggering $647 million from vested restricted stock. Such massive sums were still not enough for Enron's senior managers and this pervasive attitude is clearly evident in many others, such as Lord Black.

All those with senior responsibilities at the top of corporations worldwide consider themselves to be 'wealth creators'. We can laugh, but their unfounded arrogance is based on the manner that wealth, derived from the majority's production of surplus value, comes so readily to their companies and to them. Their grip on reality is less than sure as a consequence, so that, as the system continues on its merry way, it becomes more and more prone to managerial exploitation. There is without doubt an increase in this kind of irrationality, as defined within its logic, as capitalism develops. Conrad Black is but the latest manifestation of a more prevalent irrationality.

Corruption is, of course, endemic to capitalism, and greater separation of ownership (shareholdings) and control (management) only exacerbates this characteristic. When those like Black see their way clear to the robbery of wealth from other capitalists, a crisis of a particular kind deepens. Under capitalism, senior managers must have sufficient 'compensation' to lick companies into shape, profit-wise.

But how long is a piece of string? What is 'sufficient'? In the end, who can you trust, if even the trusty managerial 'servant' of capital is on the take?