29 February 2004

Once one gets past the lurid title and slightly condescending rhetoric born of "innate British superiority," the column in today's Guardian by Will Hutton on the Hollinger International controversy—which, given who that company controls in this country, should be of more than passing interest to serious nonfiction authors—provides some interesting perspective.

Companies were originally invented as a group of companions sharing risks in order to discharge a vital economic and social function from which they maximised profits. They would petition the crown for a licence to trade, promise that their intent and vocation was to do X and accept reciprocal obligations in return. The company thus accepted that society imposed obligations along with the right to trade and placed that above the quest for profits. For example, the East India Company in 1600 was granted a licence to trade with the proviso that it carried its cargoes in English vessels and paid duties to the crown. It then set out to maximise profits for its shareholders. It built a great business around a central vocation, accepted reciprocal obligations, and additionally made a lot of money.

This classic conception of the company, at the heart of Anglo Saxon capitalism at its best, has been wrecked by the pernicious notion, incubated by the American Right, that a company is no more than a network of contracts that maximises returns for its shareholders. The idea that it should have an organisational purpose, earn a licence to trade or accept obligations to the society of which it is part is "socialist." Yet a capitalism run along these allegedly purist principles soon loses its bearings and its companies degenerate. At their worst, like Black's Hollinger or Enron and WorldCom, they collapse under the weight of individual greed.

A company that owns newspapers thus has a choice. It can treat its assets as just another commodity to be bought, sold and sweated to enrich the shareholders. Or it can accept that it has a vocation to build and sustain the very precious thing that is a newspaper with all the obligations that implies — to readers, to journalists and to what the newspaper stands for — from which it will then aim to maximise profits. In this conception profitability results from being a great newspaper company, and it is that to which the company should be consecrated.

"Black Day for Capitalists" (29 Feb 04) (emphasis added).

Hutton's article never quite comes to grips with the underlying problem. Hutton's rhetoric is aimed squarely at what he calls "shareholder maximisation" as a target, but he left out a critical qualifier: "short-term." The real difficulty with the rules as they stand now is that they actually do recognize the difficulty of predicting the future! They have gone too far the other direction, by relying upon current and immediately past stock prices in a positive-feedback loop. Perhaps the most obvious example of this is the business-school method of using the beta statistic, which measures relative variability of return, as a proxy for "risk" when it is nothing of the kind. But the disjunctures between reality and theory are far deeper even than that. The tyranny of the quarterly report is only a symptom of other problems, most particularly the assumption that immediate gratification is the only thing that is in investors' best interests.