Tuesday, June 1, 2010

CSR ... and where to funds come from to balance government budgets!

Dear Colleagues

In the last two years it has becoming increasingly clear that there is a global structural financial imbalance in almost all government entities whether it is the US government, multiple US State Governments, and many US cities ... or whether it is the Government of the UK, or Greece or Portugal or Spain ... or any of hundreds of the poor developing countries.

The capital markets and the corporate world is, it would seem, looking to the IMF to bail out the sovereign entities that are in trouble ... but, I would ask, with what?

The IMF is famous for its "austerity programs" which it has used with more or less bad results for the best part of 60 years. This is, from my perspective, something like economic lobectomy ... or perhaps "the medicine is awful, it has to be doing some good!"

Most free market corporate enthusiasts argue that the corporate sector is the economic driver of progress ... and I would agree. But serious Corporate Social Responsibility (CSR) requires as much as anything that corporate activities that produce profit for stockholders should also be contributing a fair share to government finance. I would argue that it is high time that the #1 element of CSR is to have the corporation pay a fair amount of tax in all jurisdictions where it generates its profits. For the record ... my sort of analysis does not accept that multi-billion dollar corporate entities generate any of their profit in tax havens like the Cayman Islands! Profits are generated in countries where resources are exploited, raw materials are processed and finished goods are sold to distributors and consumers!

The corporate world and others have good reason to grumble about the high cost and the low efficiency of government ... but it is in their power to help to get this changed. Sadly, most corporate leaders do not consider this to be in their best interest ... and most corporate leaders only make decisions in their own best interest and rarely in the interest of the broader society. Frankly ... most of the business media and stock market analysts would be on their case if there was any hint of social good being on a par with corporate profit!

And a lot of poor country governments have something to grumble about as well. It is amazing how many calls there are on government resources ... health, education, infrastructure, tax holidays for foreign investors, etc ... with hardly any focus on analysis of what financial resources are available to these government. Everyone knows the stories about corruption in developing countries ... but in most cases where there is a high level of corruption there is also an even bigger "rip-off" of the local government and the local society by foreign investors and commercial interests.

In summary ... it seems to me that CSR should include thorough analysis of where a multinational company makes its profit and how much and where it pays its taxes (including user fees, royalties, etc.).

I am painfully aware that the capital markets are adept at arbitrage ... and of course this means that if a country like Canada or the USA were to embrace a better reporting of these matters within the CSR framework ... and another country chose not to ... then the capital markets would punish Canada and the USA and divert capital to these other places. In due course, I am optimistic that ordinary people in China are probably as interested as ordinary people in Canada or the USA in "correct" behavior of the corporate juggernauts.

But back to the matter at hand ... where are funds to balance government budgets going to come from. In the end it is going to come from people being more productive ... including some able retired people doing some work that needs doing ... and this value adding flowing through corporate structures so that all the work that government and society needs to do gets done. The idea that there are perhaps as many as 15% of Americans who are out of work ... and there is work that needs to be done ... is ludicrous. Same for Spain with 20% unemployment.

Capital markets ought to be sorting this out and allocating capital to what needs to be funded ... but capital markets have proved totally inept at this ... worse even than Government! Capital markets may have enabled a lot of big bets that have made financial gamblers very rich ... but this has done little to get the structural problems of modern society sorted out. In my view there will be little or no progress on this front until the metrics of the markets embrace value as much as profit. It can be done ... but it is a big paradigm change ... with no big champion yet!

Peter Burgess

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