Wednesday, February 14, 2024

Some thoughts on Colin Mayer's last book

Colin Mayer is one of the world's most recognized experts in Business Economics and corporate finance. As founder of Oxford University’s Business School, he has launched numerous research and advisory projects with some of the UK's and the world's leading companies. 

He has dedicated his professional life to pointing out both the weaknesses and the transformative potential of the capitalist firm as a key institution of our society. In this book "Capitalism and Crises" (which completes a trilogy that began with “Firm Commitment” and continued with “Prosperity”), he proposes a new firm model, one that moves away from creating problems for society, and that, on the contrary, focuses on finding solutions to these problems and at the same time generating profits for shareholders. 

The author is forceful in pointing out the responsibility of the capitalist company in the generation and aggravation of some of the great problems of humanity: climate change, social inequalities, or political instability. The reason for this responsibility lies in the fact that, in the current model, it is possible to obtain business profits as a result of creating problems for society, either by polluting, making available to consumers products that are harmful to their health, or making decisions to the detriment of the prosperity of local communities. 

Competition in the market does not solve the issue, since one company can displace another by earning more profits, creating more, and not fewer, problems for society (even for consumers themselves when they are free to choose, as Akerlof and Shiller pointed out in their book “Phishing for Phools”). The State's corrective action does not resolve the issue through regulation either, due to its limitations as it is carried out. In some way, regulation usually arrives too late, and the possibility of it being “captured” by regulated companies is one more of the problems that they contribute to generating, thereby obtaining a profit (a problem that, according to Mayer, Artificial Intelligence aggravates). 

In reality, the capitalist corporation shares responsibility with the State and with the public-sector firm in its inability to stop the great problems of our time. The company as an institution has a great responsibility in creating problems and at the same time in the possible search for solutions to society's problems for two fundamental reasons: for its unique capacity to direct enormous resources generating social impacts, and for its potential to innovate by leading technological change. 

The proposal made in the book to focus the business task on solving problems generating profits has a philosophical background: it would be about replacing a Golden Rule (“do to others as you want them to do to you”) with a Moral Rule (“do to others as they would like”). Based on this principle, business legislation should be changed to one that forces companies to generate profits without generating problems, that is, avoiding the generation of harmful effects for the rest of society. Each company should choose to focus its activity on the “purpose” of solving a problem generating profits, and articulate all its work, its structure, its corporate governance and its control and measurement systems, in solving this problem. The company's accounts, for example, should not only reflect the value of the cost of production inputs and income through the sale of outputs, but also reflect the impact (positive or negative) on society and any type of measurable outcome that arises from their actions. This would be different from the ESG movement (the acronym for environment, society and governance), which also aims to measure the impact on social problems, because in Mayer's model this impact would become something nuclear, necessarily integrated into the core objective of the company, unlike what happens in the ESG model, which according to the author has been used fundamentally for propaganda purposes. 

According to Mayer, the change in model is feasible among other reasons because it is compatible with the power of shareholders and the objective of maximizing profits, as long as these business profits are accounted for net of the cost of the activities that the company generates for third parties. The difference with the current system is that it would not be the State that would be in charge of correcting the "negative externalities", but rather the company itself, forced to do so by legislation. 

The separation between business and the public sector would be naïve according to Mayer, leading to a train wreck between institutions that have an impact on the same society, but do so with opposite objectives (profit without taking into account the problems that the company generates, and public interest without sufficient instruments to satisfy it) in the current situation, in many cases. On the contrary, the company should be involved in social objectives as a core task and not a secondary one, and the state should work side by side with companies on the same objectives. In this sense, Colin Mayer's criticism of the British regulatory and privatization model in network industries (which he helped design, together with other economists, in the 1990s), which today is in crisis, is devastating. The criticism of privatized energy, water and railway companies, and their regulation by independent regulatory agencies, is reminiscent of that made by historian Tony Judt in the book he wrote in the last stage of his life, “Ill Fares the Land.” The notion that a benevolent regulator separated from the day-to-day work of companies ("arms-length regulation") that are solely accountable to their shareholders and their objective of maximizing profits, will succeed in imposing the public interest, would be enormously naive. 

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