In today's corporations the buck never stops. Welcome to the age of irresponsibility

Our largest companies have become so complex that no one's expected to fully know what's going on. Yet the rewards are bigger than ever

• 
• • Ha-Joon Chang
  • The Guardian, Tuesday 9 July 2013 21.30 BST

Hon Ha's Foxconn plant in Shenzhen, China, in 2010. That year there were 12 suicides in the 300,000-strong workforce. 'The top managers of Apple escaped blame because these deaths happened in ­factories in another country (China) owned by a company from yet another country (Hon Hai, the Taiwanese ­multinational).' Photograph: Qilai Shen

George Osborne confirmed on Monday that he would accept the recommendation of Britain's parliamentary commission on banking standards and add to his banking reform bill a new offence of "reckless misconduct in the management of a bank".

That is a bit of a setback for the managerial class, but it still does not sufficiently change the overall picture that it is a great time to be a top manager in the corporate world, especially in the US and Britain.

Not only do they give you a good salary and handsome bonus, but they are really understanding when you fail to live up to expectations. If they want to show you the door in the middle of your term, they will give you millions of dollars, even tens of millions, in "termination payment". Even if you have totally screwed up, the worst that can happen is that they take away your knighthood or make you give up, say, a third of your multimillion-pound pension pot.

Even better, the buck never stops at your desk. It usually stops at the lowest guy in the food chain – a rogue trader or some owner of a two-bit factory in Bangladesh. Occasionally you may have to blame your main supplier, but rarely your own company, and never yourself.

Welcome to the age of irresponsibility.

The largest companies today are so complex that top managers are not even expected to know fully what is really going on in them. These companies have also increasingly outsourced activities to multiple layers of subcontractors in supply chains crisscrossing the globe.

Increasing complexity not only lowers the quality of decisions, as it creates an information overload, but makes it more difficult to pin down responsibilities. A number of recent scandals have brought home this reality.

The multiple suicides of workers in Foxconn factories in China have revealed Victorian labour conditions down the supply chains for the most futuristic Apple products. But the top managers of Apple escaped blame because these deaths happened in factories in another country (China) owned by a company from yet another country (Hon Hai, the Taiwanese multinational).

No one at the top of the big supermarkets took serious responsibility in the horsemeat scandal because, it was accepted, they could not be expected to police supply chains running from Romania through the Netherlands, Cyprus and Luxembourg to France (and that is only one of several chains involved).

The problem is even more serious in the financial sector, which these days deals in assets that involve households (in the case of mortgages), companies and governments all over the world. On top of that these financial assets are combined, sliced and diced many times over, to produce highly complicated "derivative" products. The result is an exponential increase in complexity.

Andy Haldane, executive director of financial stability at the Bank of England, once pointed out that in order to fully understand a CDO2 – one of the more complicated financial derivatives (but not the most complicated) – a prospective investor needs to absorb more than a billion pages of information. I have come across bankers who confessed that they had derivative contracts running to a few hundred pages, which they naturally didn't have time to read.

Given this level of complexity, financial companies have come to rely heavily on countless others – stock analysts, financial journalists, credit-rating agencies, you name it – for information and, more importantly, making judgments. This means that when something goes wrong, they can always blame others: poor people in Florida who bought houses they cannot afford; "irresponsible" foreign governments; misleading foreign stock analysts; and, yes, incompetent credit-rating agencies.

The result is an economic system in which no one in "responsible" positions takes any serious responsibility. Unless radical action is taken, we will see many more financial crises and corporate scandals in the years to come.

The first thing we need is to modernise our sense of crime and punishment. Most of us still instinctively subscribe to the primeval notion of crime as a direct physical act – killing someone, stealing silver. But in the modern economy, with a complex division of labour, indirect non-physical acts can also seriously harm people. If misbehaving financiers and incompetent regulators cause an economic crisis, they can indirectly kill people by subjecting them to unemployment-related stress and by reducing public health expenditure, as shown by books like The Body Politic. We need to accept the seriousness of these "long-distance crimes" and strengthen punishments for them.

More importantly, we need to simplify our economic system so that responsibilities are easier to determine. This is not to say we have to go back to the days of small workshops owned by a single capitalist: increased complexity is inevitable if we are to increase productivity. However, much of the recent rise in complexity has been designed to make money for certain people, at the cost of social productivity. Such socially unproductive complexity needs to be reduced.

Financial derivatives are the most obvious examples. Given their potential to exponentially increase the complexity of the financial system – and thus the degree of irresponsibility within it – we should only allow such products when their creators can prove their productivity and safety, similar to how the drug approval process works.

The negative potential of outsourcing in non-financial industries may not be as great as that of financial derivatives, but the buying companies should be made far more accountable for making their subcontractors comply with rules regarding product safety, working conditions and environmental standards.

Without measures to simplify the system and recalibrate our sense of crime and punishment, the age of irresponsibility will destroy us all.

Globalisation isn't just about profits. It's about taxes too

Big corporates are gaming one nation's taxpayers against another's: we need a global deal to make them pay their way

• 
• • Joseph Stiglitz
  • The Guardian, Monday 27 May 2013 21.00 BST

Why should German taxpayers help bail out a country whose business model is based on avoidance and a race to the bottom? Illustration by Daniel Pudles

The world looked on agog as Tim Cook, the head of Apple, said his company had paid all the taxes owed – seeming to say that it paid all the taxes it should have paid. There is, of course, a big difference between the two. It's no surprise that a company with the resources and ingenuity of Apple would do what it could to avoid paying as much tax as it could within the law. While the supreme court, in its Citizens United case seems to have said that corporations are people, with all the rights attendant thereto, this legal fiction didn't endow corporations with a sense of moral responsibility; and they have the Plastic Man capacity to be everywhere and nowhere at the same time – to be everywhere when it comes to selling their products, and nowhere when it comes to reporting the profits derived from those sales.

Apple, like Google, has benefited enormously from what the US and other western governments provide: highly educated workers trained in universities that are supported both directly by government and indirectly (through generous charitable deductions). The basic research on which their products rest was paid for by taxpayer-supported developments – the internet, without which they couldn't exist. Their prosperity depends in part on our legal system – including strong enforcement of intellectual property rights; they asked (and got) government to force countries around the world to adopt our standards, in some cases, at great costs to the lives and development of those in emerging markets and developing countries. Yes, they brought genius and organisational skills, for which they justly receive kudos. But while Newton was at least modest enough to note that he stood on the shoulders of giants, these titans of industry have no compunction about being free riders, taking generously from the benefits afforded by our system, but not willing to contribute commensurately. Without public support, the wellspring from which future innovation and growth will come will dry up – not to say what will happen to our increasingly divided society.

It is not even true that higher corporate tax rates would necessarily significantly decrease investment. As Apple has shown, it can finance anything it wants to with debt – including paying dividends, another ploy to avoid paying their fair share of taxes. But interest payments are tax deductible – which means that to the extent that investment is debt-financed, the cost of capital and returns are both changed commensurately, with no adverse effect on investment. And with the low rate of taxation on capital gains, returns on equity are treated even more favorably. Still more benefits accrue from other details of the tax code, such as accelerated depreciation and the tax treatment of research and development expenditures.

It is time the international community faced the reality: we have an unmanageable, unfair, distortionary global tax regime. It is a tax system that is pivotal in creating the increasing inequality that marks most advanced countries today – with America standing out in the forefront and the UK not far behind. It is the starving of the public sector which has been pivotal in America no longer being the land of opportunity – with a child's life prospects more dependent on the income and education of its parents than in other advanced countries.

Globalisation has made us increasingly interdependent. These international corporations are the big beneficiaries of globalisation – it is not, for instance, the average American worker and those in many other countries, who, partly under the pressure from globalisation, has seen his income fully adjusted for inflation, including the lowering of prices that globalisation has brought about, fall year after year, to the point where a fulltime male worker in the US has an income lower than four decades ago. Our multinationals have learned how to exploit globalisation in every sense of the term – including exploiting the tax loopholes that allow them to evade their global social responsibilities.

The US could not have a functioning corporate income tax system if we had elected to have a transfer price system (where firms "make up" the prices of goods and services that one part buys from another, allowing profits to be booked to one state or another). As it is, Apple is evidently able to move profits around to avoid Californian state taxes. The US has developed a formulaic system, where global profits are allocated on the basis of employment, sales and capital goods. But there is plenty of room to further fine-tune the system in response to the easier ability to shift profits around when a major source of the real "value-added" is intellectual property.

Some have suggested that while the sources of production (value added) are difficult to identify, the destination is less so (though with reshipping, this may not be so clear); they suggest a destination-based system. But such a system would not necessarily be fair – providing no revenues to the countries that have borne the costs of production. But a destination system would clearly be better than the current one.

Even if the US were not rewarded for its global publicly supported scientific contributions and the intellectual property built on them, at least the country would be rewarded for its unbridled consumerism, which provides incentives for such innovation. It would be good if there could be an international agreement on the taxation of corporate profits. In the absence of such an agreement, any country that threatened to impose fair corporate taxes would be punished – production (and jobs) would be taken elsewhere. In some cases, countries can call their bluff. Others may feel the risk is too high. But what cannot be escaped are customers.

The US by itself could go a long way to moving reform along: any firm selling goods there could be obliged to pay a tax on its global profits, at say a rate of 30%, based on a consolidated balance sheet, but with a deduction for corporate profits taxes paid in other jurisdictions (up to some limit). In other words, the US would set itself up as enforcing a global minimum tax regime. Some might opt out of selling in the US, but I doubt that many would.

The problem of multinational corporate tax avoidance is deeper, and requires more profound reform, including dealing with tax havens that shelter money for tax-evaders and facilitate money-laundering. Google and Apple hire the most talented lawyers, who know how to avoid taxes staying within the law. But there should be no room in our system for countries that are complicitous in tax avoidance. Why should taxpayers in Germany help bail out citizens in a country whose business model was based on tax avoidance and a race to the bottom – and why should citizens in any country allow their companies to take advantage of these predatory countries?

To say that Apple or Google simply took advantage of the current system is to let them off the hook too easily: the system didn't just come into being on its own. It was shaped from the start by lobbyists from large multinationals. Companies like General Electric lobbied for, and got, provisions that enabled them to avoid even more taxes. They lobbied for, and got, amnesty provisions that allowed them to bring their money back to the US at a special low rate, on the promise that the money would be invested in the country; and then they figured out how to comply with the letter of the law, while avoiding the spirit and intention. If Apple and Google stand for the opportunities afforded by globalisation, their attitudes towards tax avoidance have made them emblematic of what can, and is, going wrong with that system.

Apple and the art of business

By Sreeram Chaulia

Since the ailing Steve Jobs announced his retirement from the chief executive position at Apple Inc last week, tributes have poured in to a giant of a business leader whose personality rivaled few others in corporate history.

Hailed as a genius who steered Apple from a down-in-the-dumps crisis in 1996 to the world's most valuable company (this year briefly surpassing ExxonMobil), Jobs' life imparts a message that individuals can make all the difference even in a complex and diversified global economy.

Of all the stunning insights Jobs has bequeathed, the basic one is that entrepreneurship is an art, rather than a science to be learnt through formal education or training. A college dropout like Microsoft's founder Bill Gates and Facebook's founder Mark Zuckerberg, Jobs read the pulse of consumers like no other business titan of our times, and did so in an uncanny and instinctive fashion without meticulous market surveys, focus group discussions, or commissioned research reports.

One quote that epitomizes Jobs is his response to a journalist when asked how thoroughly he had analyzed market moods and tastes before introducing the iPad tablet computer: "None. It's not the consumers' job to know what they want."

This arrogant statement upends the mythology of capitalism, wherein the "consumer is the king" and corporations compete to serve this master by peddling choices. Jobs' scintillating career demonstrates that the marketplace is essentially a creation and a construction of wants and desires, not an invention to satisfy consumers' own preferences.

Apple, now valued at over US$300 billion, is at the apex of designing new gadgets whose need is not necessarily felt by people ex ante, but which nevertheless become indispensable for millions of buyers after getting launched.

"Coolness" - an ineffable quality - separated Apple from its direct competitors as well as peers in other industries. From the day the Macintosh arrived in 1984 until the latest iterations of the iPhones, iPods and iPads, Jobs imbued in his production stable a magical touch that made their outputs objects of mass desire.

In assessing which model of an electronic device would "click" and emote with the consuming public, Jobs must have performed mental and psychological role plays wherein he became the market, and the market became him. If business leadership is about divining the market and its future shape beforehand, Jobs was a natural at it.

Apart from design cachets in Apple devices, which were premised on gut feelings about American and global popular culture and psyche, Jobs deployed daring marketing tricks, such as keeping the supply of new products scarce and limited and whetting the appetite of customers until they became ravenously hungry. Such a teasing marketing strategy was risky, as impatient consumers could have jumped ship and plumped for an alternative tablet computer or smart phone that was readily available without the agonizing wait.

But apart from technical know-how about logistics and supply chains, Jobs had the supreme artful confidence of a maestro to execute this approach, knowing that the hungry would salivate and wait for the "real thing" rather than substitutes that lacked the X-factor of Apple.

Apple probably has the lone distinction of counterfeits not only its specific products but of its entire stores and retail outlets, as seen in China this year. Even the recognizable facade of the Apple store was fabricated in numerous locations by conmen in just one area - Kunming - until the government clamped down. It shows that a strategy of setting up far fewer sales points than is actually warranted by the mushrooming consumer demand pays off (provided competitors lack your charisma and pulling power).

The way Apple entered and then cracked the Chinese market - which had hitherto been a wild goose chase for several Western technology firms - is worthy of business school case studies. Where literally every other starry eyed international technological firm had beaten a sullen retreat, Apple went into China with its colossal global reputation and tapped into the rising disposable purses of the world's second largest economy. Jobs, the demystifying business guru, silenced market analysts who used to highlight China's cultural peculiarities and how Western multinationals lacked the local discretionary knowledge to woo the Chinese buyer.

As the ultimate capitalist of our times, one who rivals the industrial-age Henry Ford in ambition and vision, Jobs' reading of the Chinese market revealed that culture and local idiosyncrasies can be overcome through global consciousness and integration into a seamless "world market" that defies nationalism and parochialism. With every buyer, including the upwardly mobile Chinese one, glued into the same materialistic dreams, globalization takes on a new universalizing force with companies like Apple at its nerve center.

Chrystia Freeland of Reuters has written about the "Apple economy" as a distinctive phenomenon that globalizes employment and life chances instead of confining them to workers within countries where corporations are headquartered. With the bulk its buyers, manufacturers, salespersons and assemblers coming from outside the United States, Apple under Jobs was the ultimate symbol of a new era in economic organization of the planet. Local identities remain entrenched in some spheres, but ever less so in the high-technology domain, where the likes of Jobs have rendered the nation-state a defunct unit of analysis.

Steve Jobs was like an orchestra conductor who had the command to sway the audience the way he wanted them. He was not an average soap opera producer who went by "what the people like to see". Similar to the great auteur Alfred Hitchcock, who confessed to "enjoying playing the audience like a piano", Jobs delighted in deciding what form and content daily-use technology should take, and the masses lapped up his confections.

Few business leaders can deny that they nurse inner urges to take the market to a different plane, beyond staying profitable within the existing parameters. The premature departure of Jobs (he is only 57-years-old) from active stewardship of the most admired company for innovation is an opportunity to examine what it takes for one individual to remake her or his profession or field. It is a moment to reflect on how the part can transform the whole through unconventional boldness and inspired imaginativeness.

Reminiscing about a low point in 1985, when he was forced to quit as CEO of Apple, a company he had co-founded in 1976, Jobs talked about "the lightness of being a beginner again". Each of us, regardless of the station of life, has a chance to become a "beginner again", unlearn received wisdom and think fresh. Jobs' take-home legacy is a lesson that creativity is within reach if the mind is attuned.

Sreeram Chaulia is Professor and Vice Dean at the Jindal School of International Affairs in Sonipat, India, and the first ever B Raman Fellow for Geopolitical Analysis at the Takshashila Institution. He is the author of the recent book, International Organizations and Civilian Protection: Power, Ideas and Humanitarian Aid in Conflict Zones (I.B. Tauris, London)