“Save us from corporate greed,” blares the Mail & Guardian headline, placed on a dramatic black background. “Corruption is not the sole preserve of the Guptas – or government. MultiChoice and Steinhoff prove that South Africans are left poorer when big businesses deceive in pursuit of profit.”
Over on social media, Dali Mpofu, the national chairperson of the Economic Freedom Fighters, echoed the sentiment: “Corporate corruption of Naspers, Steinhoff, etc is far WORSE than govt corruption. We can vote out a corrupt govt but Capitalism=Corruption! (sic)”
A few short lines make powerful political slogans, but they hide a slew of misdirections and misconceptions. From the outset, I should say that I do not mean to defend, in any way, the actions of Steinhoff or MultiChoice. I hold no brief for them.
That said, let’s start from the bottom, with the claim that capitalism equals corruption. This is a patently untrue generalisation. Capitalism abhors corruption and deals swiftly with those who are discovered to be corrupt. Business owners (including investors) do not tolerate directors, managers or staff who steal from the company. Companies do not tolerate fraud from their business partners. People who get caught get fired, get blackballed in the industry, and often become subject to criminal or civil charges. When the corruption is serious, investors simply withdraw their capital from a company, often shockingly quickly.
Witness Steinhoff. We don’t actually know much about the problems at the company, yet. All we know is German authorities are investigating “accounting irregularities”, the CEO resigned, and the company postponed its results presentation. There is no proof, and nobody has been convicted of any wrongdoing, but those are very serious red flags. Without waiting for proof or formal convictions, investors responded rapidly by withdrawing their capital from the company, wiping 90% from the company’s market capitalisation. Christo Wiese, the company’s single biggest shareholder, who was worth $5.7-billion earlier this year, lost 87% of his wealth and is no longer a dollar billionaire. Capitalism does not tolerate corruption, it punishes the corrupt, and it exacts a heavy price from investors who fail to notice or prevent malfeasance.
Mpofu says private sector corruption is worse than government corruption. He doesn’t say on which basis – scale or consequences – he makes this claim, but he does point out that we can vote out a corrupt government. Presumably he means to imply we cannot vote out capitalist enterprises.
Actually, we can, but let’s first examine his claim that we can just vote out corrupt governments. We can only do so once every five years, so there’s nothing we can do in the short term. Even if we vote out the ruling party, which we certainly can – and should – do, that does not affect the government’s millions of permanent employees. Nor does it guarantee that the new rulers will be any less corrupt. They may well have a different set of favoured cronies from whom they’ll accept bribes and to whom they’ll divert juicy government contracts and kickbacks. Corruption is rarely eliminated by a change of government, and all governments – including those of rich, developed countries – are susceptible to corruption.
Government corruption is obviously terrible for citizens, whose taxes get diverted into private pockets, and whose services get curtailed for private gain. But from the perspective of corrupt governments themselves, corruption is a very successful strategy. Corrupt governments have been able to remain in power to enrich themselves by using patronage to buy the votes they need. In this way, they successfully perpetuate themselves: they’re not at all easy to vote out of power.
Mpofu suggests that by contrast with corrupt governments, we cannot escape corruption in the private sector. But that is simply wrong. The M&G’s editorial on the MultiChoice and Steinhoff cases says: “And the message is simple: complexity must fall. If we’re too stupid to understand a corporate structure, then our money should not be invested in it. If we can’t figure out who actually controls a company, then we should not be doing business with it.”
Leaving aside whether M&G’s journalists can judge the complexities of corporate finance, and whether a lack of understanding is sufficient basis for an opinion on the matter, they are correct in saying that we should stay away from companies we do not understand or do not like. That’s investment 101. Nobody forces you to buy particular shares, or do business with a particular company. You have a choice. If you do not trust it, or do not like it, or do not understand it, you’re entirely free not to do business with it. To use the M&G’s dramatic phrasing, that’s how you save yourself from corporate greed.
This ability to protect yourself against mismanagement, fraud or theft by choosing not to deal with a company stands in stark contrast with government corruption. If you don’t approve of fraud and theft committed by government officials, you don’t have the option of not doing business with the government. You are not permitted to withhold your tax on the grounds that it is being abused for criminal purposes. You cannot choose to contract privately for the services over which the government claims a legal monopoly. Unless you’re rich and can afford to emigrate, government corruption will harm you, and there’s very little you can do about it.
“Corruption is not the sole preserve of the Guptas – or government,” is hardly front-page news. Of course it isn’t. Bribery, fraud and theft happens wherever money changes hands. But there is a fundamental difference between private sector and government corruption.
Private sector corruption occurs with money that investors knowingly, and voluntarily, put at risk. If you can’t afford to lose money, you should not be investing. And when you do invest, you need to protect yourself against poor performance, bad strategies, mismanagement and financial crimes. One way to do this is to be vigilant: read annual reports, do your due diligence, and hold companies accountable. Another way to protect your investment is simply by diversifying.
If you are overexposed to any one company – even the most reliable, trustworthy business out there – you’re taking too much risk. If you don’t understand financial complexity – as the M&G’s editors appear not to do – there are many instruments that minimise your exposure to the vagaries of individual stocks. And those instruments often outperform professional asset managers, to boot. If you buy an index, you won’t lose 87% of your money on Steinhoff, as Wiese did.
Public corruption, by contrast, involves money that belongs to all citizens. It increases the tax burden, and reduces the services government is able to provide to citizens. It affects all of us, and not only risk-conscious investors. There is no way to hedge against the risk of public corruption. And while private sector corruption largely affects the wealthy, public sector corruption hurts the poor the most.
The Steinhoff case is really simple. Investors got burnt, but that is the risk they took when they bought into the firm. If they had studied the company closely, they might have seen the warning signs. Either way, the market deals promptly and ruthlessly with any malfeasance that is discovered. Criminal and civil action seems likely, as it should be. If only the consequences were as swift and certain for those implicated in government corruption.
From a public policy point of view, the MultiChoice case is a little more nuanced and complex, but those complexities have little to do with the private sector, and everything to do with government policy.
MultiChoice has taken a lobbying position on a public policy question before government. That’s not unusual, many companies do. And it also should not shock us that its position is in its own interest, and not in the interest of competitors, or anyone else, for that matter.
To get other stakeholders to toe its lobbying line, MultiChoice allegedly used some dodgy tactics, including making dubious payments to them. It also allegedly threatened to kick a major TV channel off its platform unless that channel supported its lobbying position.
Now you’d think that as a private company, MultiChoice is free to accept or reject whichever content providers it wants, for whatever reasons or no reasons at all. And not pulling in the same direction on a public policy matter seems like perfectly reasonable grounds not to do business with someone. However, MultiChoice is a monopolist. It owns 98% of the digital television market. Therefore, a threat to kick a channel amounts to extortion; an abuse of monopoly power.
In a just world, MultiChoice customers would defect to a competitor, as would content providers that want to lobby against MultiChoice’s vested interests. But they can’t. And whose fault is that? The government’s fault, of course. With its licensing policies, which restrict the number of available licences and set high barriers to entry, the government created the MultiChoice monopoly.
If MultiChoice’s lobbying succeeded (as it appears it did), whose fault is that? The government’s fault, of course. Nobody forced them to accept MultiChoice’s argument, when it was clear that it was just arguing its pocketbook, and that its position was clearly not in the public interest.
When making policy decisions, government officials ought to evaluate public comment on the basis of whether the arguments have merit, not on their popularity or the financial power of the people who make them. Government’s failure to make a sound decision, therefore, is not a failure of the private sector. Nor is the spectacle of a government-protected monopoly throwing its weight around a failure of the private sector.
These are problems of the entanglement of big business and government. This is the same relationship that feeds government corruption, in fact. So, much like we maintain a formal separation between church and state to prevent the abuse of state power to impose religious ideology, perhaps we ought to advocate a separation between business and state. The kind of corruption that impoverishes all citizens takes place at this interface, when private companies subordinate the powers of government to gain an advantage over their competitors, and when government officials exploit their power to award contracts or make regulations to enrich themselves.
Separation of business and state would have far-reaching consequences, which I’ll leave as an exercise for the reader. But by reducing the government’s power, we reduce the power available to be corrupted. This will make it less plausible to condemn all private enterprise for the crimes of a few, or to defend government corruption on the grounds that the private sector is a counter-party to corruption.
By falsely accusing the whole of capitalism as corrupt, as Mpofu does, or drawing a false equivalence between private sector fraud and public sector corruption, as the M&G does, they’re only giving shelter to those who misappropriate public funds for private gain. As much as we might condemn corporate fraud or monopoly abuse, the private sector deals pretty harshly with its own criminals. It’s up to all of us, however, to deal with the criminals that subvert government power to steal from the public. DM