The Influence of Corporate Power on Society and Economy - Research Paper Example

YISHENG LI Number:211220225 Kean Birch SOSC 1340 Corporations around the world are established to maximize the revenues to their shareholders and to preserve the interest of the various stakeholders. Thus, profit maximization is the main and core aim of the corporations functioning all around the world. In fulfilling their main aims, they actively engaged in the destruction of the atmosphere, involved in trafficking of child laborers, abusing the child laborers from the third-world countries, lobbying with the governments and politicians to evade and twist the laws and regulations in their favor. Further, the corporations are also responsible for environmental damages, which have resulted in global warming. This research essay will analyze how corporations around the world are exerting their sway on the respective governments and societies, and the ways and means to prevent it and how to make them more socially accountable for their actions. The influence of corporate power on society and economy Introduction Corporate authority and influence naturally are fostered along with commoditization. Corporate authority is employed to nourish policies that kindle commoditized economic development. As these governmental policies are prone to be tilting toward commoditization, corporations wield more or more power, thereby influencing corporate power at all levels towards supporting commoditization. Multinational companies are employing their power to persuade nations to minimize their tariffs, to remove the barriers to investments, to annul or eliminate the rules on repatriating profits out of countries in which they have invested and to lower the corporate tax rates and to offer incentives to foreign investors. The corporate laws around the world are being drafted in such a way that it facilitates to create an atmosphere which is favorable to amass capital and to incorporate and run companies (Costanza, 1999, p.224). With the extraordinary powers which corporations are possessing with through regulations, nowadays they have started to wield their sway on not only governments but also on societies in which they operate. This research essay will analyze the manner and style with which the corporations are exerting their power on the governments and societies, how to prevent them and to make them more socially responsible to the various stakeholders to whom they have to be accountable. Objectives of the Research Proposal The main aim of this research essay is to demonstrate how regulatory capture, i.e. how the interest of the public is sacrificed to the advantage of a corporation and how corporations around the world are exerting influence on the government or regulators. Further, this research essay will discuss how corporations are employing lobbying as a mechanism to bend the regulations in their favor by disregarding the welfare of the society. The Problem Statement Corporations around the world now acting as a mechanism through which their representatives could cause irremediable loss to the society in the manner in which the corporations are incorporated and safeguarded by the laws. Now, the modern corporations are indulged in lobbying for twisting the regulations in their favor and to cause irreparable losses to the society through oil spills, causing damages to environments, and they are also responsible for global warming. Hence, time has come to decide whether we should eliminate the corporate form of business and whether the governments should increase or decrease its control over corporations. It is essential to refurbish the corporation’s original objective which is to serve the interest of the public and there is an urgent need for the reinstatement of governmental democratic authority over the corporation form of business. Thus, it is highly recommended that there should be realistic, concrete and practical reform which is the need of the hour to cleanse the contemporary corporate forms of business. Literature Review Corporation wields its authority over the government and the society, and it is said that there exists collusion between corporations and the governments as corporations around the world are able to twist the laws in their favour and when the public interest is forfeited for favoring a company due to influence wielded by such company, which is known as “regulatory capture.” Thus, in regulatory capture, the advantages that corporations enjoy surpass the costs to the regulator. According to Albino, Hu and Bar-Yam (2013), the global financial crisis started in 2007 blossomed the notion that failures by regulators can destabilize the fundamental market function and the economy. As per the Financial Crisis Information Report of 2011, the global financial crisis of 2007 was mainly due to large-scale breakdown in financial rules and supervision, which explained about the demoralization of the respective country’s financial markets (Albino, Hu & Bar-Yam, 2013). In his book, Dan Skidmore-Hess details under the chapter “Obama’s corporate centrism”, how Citigroup and Goldman Sachs donated liberally for the Barack Obama’s 2008 election campaign. Both Citigroup and Goldman Sachs made a political war to overthrow any initiatives to disintegrate banking institutions in USA during Obama’s term (Cox, 2012, p.2). Further,US based big corporations like Apple Inc,Google Inc,Microsoft Corporation ,EMC Corporation are keeping too much cash in their foreign subsidiaries instead of repatriating the same back into USA as they have to a corporate tax of 35% on it thereby hampering the creaation of nw employment and expanding their activities in USA. Further, these powerful corporations are being engaged in strong lobbying to reduce the corporate tax rates so that they repatriate those balances back into USA. It is claimed that Apple Inc is having around $ 100 billion cash reserves parked in their overseas jurisdictions, and they have to pay $ 35billion as taxes to US government if they repatriate these cash reserves back into USA. (Linebaugh, 2013). Other than American companies, many foreign companies hire lobbyists to manipulate American government’s policy and spending patterns in the USA. For instance, in 2005, about 700 foreign companies engaged the US based lobbying firms to safeguard their interest. It is alleged that foreign-based companies spend hundreds of millions of dollars per annum on lobbying mainly to establish a conducive business and trade atmosphere. Major UK based pharmaceutical company, GlaxoSmithKline is spending huge amounts on lobbying in the USA, mainly to manipulate Medicare laws. It is to be noted that the Coalition of Pharmaceutical interest, which is known as PhRMA, expended $65 million between 1998 and 2004 on lobbying in USA. (Schmidt et al, p.266). Many corporations would favour that the general public should be unaware of their initiatives to influence laws that enhance worker safety or that minimizes pollution. Thus, companies engage their trade associations to assume some public stand on these issues, facilitating the lobbyist engaged by the corporation to establish personal rapport with the decision-makers and such contacts are not always easily visible to the media and general public. (Godwin, Ainsworth & Godwin 2012). Joel Bakan in his book “The Corporation “critically argues that how cost-benefit analysis being used in the automobile industry in USA where safety of the car owners is flouted to keep the cost of a car to the lowest and how corporations maximize their margins by employing sweatshop labour force from under developed nations like Bangladesh, Sub-Saharan African regions and Pakistan. Further, the influential oil majors such as Exxon, BP have the track record for flouting environmental and safety regulations through their infamous oil spills and spending millions of dollars on lobbying. Bakan also discusses about how corporations around the world involved in continuous lobbying to amend the regulations that limit their activities. When the President Roosevelt introduced the New Deal program in 1934, the majority of the corporations in USA did not like it. It was exposed by a Congressional Committee that there was enough proof of a conspiracy to overthrow President Roosevelt by major corporations of USA. It was suspected that the plot to overthrow Roosevelt included envoys of USA’s giant corporations like JPMorgan, Goodyear Tyre, and DuPont. Bakan discusses in his book about how big corporations are engaged in the lobbying with the government and getting success in introducing deregulations in their favor. (Burk, 1990, p.x). If corporations act recklessly, the real perpetrator for the same is the relevant governments and their so-called pro-corporate laws. (Sklar, 1988, p.93). Regulatory Capture As per Boehm (2007), if there is a sacrifice of public interest to make a company to reap benefits due to that company’s influence on its regulators which is known as regulatory capture. As per Duso (2005) , the negative impacts of regulatory capture have traditionally been recognized by economists and policy majkers , but the recent global economic crisis started in 2007 enlightend that regulatory failure can destabilize fundamental market economy and market as a whole. As per Financial Crisis Inquiry Commission (2011) , the 2007 economic crisis would have been avoided but for the large-scale failures in financial supervision and regulation demonstrated to demoralizing to the stability of the U.SA.’s financial markets. Given the primary role played by regulation , it is necessary to comprehend how capture creates a regulatory breakdown , how large-scale and magnitude of the caputre is and how capature can be mitigated or prevented. Some of the scenarios that would likely to minimise the capture are : separation of the regulatory functions from the companies,particularly at the juncture of the regulatory supervision , enhanced visibility of outcomes of regulations , enhanced visibiity of interfaces between corporations and regulators, and broadly distributed regulatory control. (Derber 2000). As per Greenwald & Stiglitz (1986), economic transactions in a market can result in unwanted results like fruad , monopoly and pollution. Due to this , consumers’ witness variety of issues like shoddy building construction , price-gouging and the harmful health impacts due to pollution. As per Stiglitz (2012), economists’ brand these outcomes due to the results of market failures- such issues do not present in ideal theoritical markets,but real markets do not behave in the idealized fashion commonly known in economic theory. . Political Salience As per Culpepper (2011) , political salience or prominence can be defined as the importance of an issue to the average voter in comparison to other political issues.Thus, where an issue is of high political salience or of high significance to voters, then strong influence over the direction of policy is being exerted by the politicians, and the best example for this is issue relating to income-tax. However , in case of issues of low political salience , then , politicians will exert their influnece over the direction of policy, and the best illustration for this is corporate governance. Due to restricted public interest in such subjects , corporate lobbying groups and companies are likely to exert more influence over issues on corporate governance and coporate structuring. Further , in the majority of the naitons ,representatives from corporations were over represented on political committees dealt with corporate regulation. Surprisingly, there are many hostile takeovers attempted and finalised in liberal free-market nations like U.S.A and UK whereas nations like The Netherlands and Germany exhibit strong markets of patient capital as the companies in these nations are predominantly depicted by concentrated ownership and there were very few hostile takeovers (Culpepper,2011,p.37). The notion “ political salience” helps to demonstrate why in some sectors, coporate managers failed to obtain their intended results – if corporate policy was being enacted mainly through lobbying and the perception that “ money makes things happen” , then it would be apparent logically reliable that companies would accomplish their objectives no matter the saliency of the issue at hand whereas the Japanese company managers would have been successful to drown or water down the law relating to triangular mergers. Thus , in the provinces of high political salience , even where large quantums of money are employed in lobbying , corporate players are not assured with success. Though , corporate managers may still exert their influence,voter preference and ideology will become more significant for legislators(Ferrand,2011,p.267). Triangular Mergers As per Culpepper(2011), “ quiet politics” were less helpful to company managers of Japan, mainly due to the high salience of issues of corporate control as in Japan, there are fewer governmental decisions influenced by the vested interests of the Japanese corporations. Japanese company managers were more influential in the designing and framing of takeover laws before 2004 whereas in 2005 , corporate control turned into a high salience issue. The issue encircled the notion of “ triangular mergers” where a company could form a subsidiary company so as to merge with a third company , but through the combined shareholding of parent and subsidiary company. There had been strong opposition to the “ triangular mergers” by the Japanese companies as espousal of such legislation would legalise such mergers as it would result in hostile takeovers bids of Japaneses companies by foreign investors .Inspite of hue and cry and vehement lobbying from Japanese companies , the legislation for triangular mergers was passed by the Japanese legislators. Thus , as per Clupepper (2011) , the refusal to accept the wishes of corporate managers is mainly due to the political saliency of the issue. Thus , the issue of hostile takeover was propagated in Japan medias in Japan in post 2005 mainly due to high profile takeover . Thus , prior to 2005, there was very few articles per month appeared in Japanese media pertaining to hostile takeovers. However , between 2005 and 2006, there were an average twenty-five supporting articles per month . Due to the strong media attentiotn and obvious public interest in the issue , legislation is decided across party political lines, mainly through formalised institutions instead of through corporate lobbying and informal management structures (Culpepper,2011,p.129). "Lobbying and Executive Pay” Traditionally , executive pay is regarded as an iusse of low salience and however , now executive pay has become increasingly an issue of privileged political salience. Due to the outbreak of Enron scandal in 2001 , which intertwined extravagant exeuctive pay with perceived executive ineffectiveness , issues pertaining to executive pay became highly salient issues in the USA, with 545 articles per annum from that 184 articles appeared during pre 2001 in the U.S.A media like Wall Street Journal , New York Times and Washington Post. Thus , companies are not able to foot upon quiet politics where political salience is high and must in its place, which failed the attempt to change or counter public opinion(Culpepper,2011,p.173). In the case of extravagant executive pay , public ire over the bankruptcy of Enron meant that in spite of widespread lobbying from companies , a neoliberal centre-right government nonetheless enacted sweeping laws like Sarbanes-Oxley Act, mainly to regulate executive paypackages. In contrast , in France , the issue was less salience, and Nicholas Sarkozy’s government was not interfered in the matter of executive payment as French companies were at liberty to decide the same until 2009. However , in 2009 , a chain of pay scandals and the global economic crisis startted to transform the public perception of executive paypackages and become an issue of high political salience . Due to this , though Sarkozy’s administration which also symbolising neoliberal centre –right economic policy , consented to demands for enacting laws concerning executive pay (Culpepper,2011,p.179). Lobbying for Concealment of Frauds Some corporates also indulge in vigrous lobbying to conceal fraud. For instance , the public utility company namely Webstar Energy in U.S.A was accused for fraud due to continous mismanagements and where its fraud resulted in loss of $794 mn in 2002 . Webster exclusively banked upon intensive lobbying,mainly to prevent its fraud and failure revelation to public. Thus , lobbying can make fruud more arduous to make the public exposure as the corporations through lobbying can influence the concerned watchdogs. Corporations can use lobbying to bend the regulations for their benefit as Enron lobbied vigrously to permit some kinds of debt off the book and to prevent the implementation of regulation of its trading in energy derivatives. Immediately, after its incorporation in 1985, lobbying had been a major part of Enron’s business strategy. Enron employed a substantial number high-profile , in-house lobbyists and also hired the services of leading lobbying firms. Since 1997, it spent in excess of $5 mn on lobbying alone and had registered to lobby in twenty-eight states by the close of year 2002. Just before it announced the largest bankruptcy in the corporate history of U.S.A , Enron had received favourable treatments by lobbying various state governments , federal government and Congress and various regulatory agencies in U.S.A on 49 instances.(Yu & Yu,2011,p.1865). Global Crossing lobbied vehementlty to prevent competitors for erecting a transpacific fiber –optic cable , thereby thwarting its competitors form entering into U.SA. market. Likewise , Enron lobbied vehemently for the de-regulation of the electric utility industry and for the removal of price controls on natural gas.Corporations can use their lobbying influences to gather political intelligence to assist them better react to incoming policy transformation.A recent illustration is the hiring of lobbyists by many hedge fund managers, mainly to gather predictions and tips as regards to market-moving information through their political affiliations. (Yu& Yu 2011,p.1865). Yu&Yu (2011) study analysed the data on lobbying expeneses incurred by corporations between 1998 and 2004, and from the wide sample of large frauds found during the same period which revealed that company’s lobbying actions made an important difference in detection of frauds as contrasted to non-lobbying companies . They found that companies that indulged in lobbying on average have a lower hjazard rate of being exposed for fraud , has evaded detection of fraud for 117 days longer and are less proable to be noticed by the regulators by 38%. Further , they also found that fraudulent firms used to spend on an average 77% in lobbying as contrasted to non-fraudulent companeis. Further , companies involved in frauds spent 29% more on lobbying during their fraud days. Due to lobbying , there occurs delay by the regulators to fix the fraud and by using this time gap , the managers were able to delay the negative market reaction and to dispose off their shareholdings. As per John Dean , an erstwhile counsel to Richard Nixon , past president of U.S.A lamented that lobbying by Enron, and its liberal political campaign contributions might have indirectly assisted it in slowing the exposure of its fraud to public and assisted the company to fly under the radar as long as possible. (Yu&Yu,2011,p.1865). Research Method. This research essay will mainly employ secondary resources to prove the research question. The secondary resources are not only cost effective but also time saving. Thus, references will be sourced from the books written by eminent authors, peer viewed journal articles, past empirical studies and article available from the internet. Secondary sources offer accurate and detailed information on the research topic as it offers what the authors have found on the subject already. “Findings , Conclusion and Recommendations” Corporations can use lobbying to bend the regulations for their benefit as Enron lobbied vigrously to permit some kinds of debt off the book and to prevent the implementation of regulation of its trading in energy derivatives. Global Crossing lobbied vehementlty to prevent competitors for erecting a transpacific fiber –optic cable , thereby thwarting its competitors form entering into U.SA. market. Likewise , Enron lobbied vehemently for the de-regulation of the electric utility industry and for the removal of price controls on natural gas. If there is a sacrifice of public interest to make a company to reap benefits due to that company’s influence on its regulators which is known as regulatory capture. However , in the provinces of high political salience , even where large quantums of money are employed in lobbying , corporate players are not assured with success. (Marcuse 1964:16). Though , corporate managers may still exert their influence,voter preference and ideology will become more significant for legislators. If there is a strong media attentiotn and obvious public interest in an issue , legislation is decided across party political lines, mainly through formalised institutions instead of through corporate lobbying and informal management structures. Centre-left governments like France when it comes to issues of corporate governance has frequently permitted businesses to self-regulate and have enacted laws in their favour. Likewise, centre-right administration have in some occassions has enacted laws as in case of U.S.A against the wishes of the corporations. If we make a comparative evaluation of hostile takeover legislaton in many nations , we can understand how law is formulated but how governmental policy is frequently changed due to enhanced pressure from corporatons and because of the public salience in a subject matter. Thus,to minimise the regulatory capture , the following is strongly recommended ; separation of the regulatory functions from the companies,particularly at the juncture of the regulatory supervision , enhanced visibility of outcomes of regulations , enhanced visibiity of interfaces between corporations and regulators, and broadly distributed regulatory control. READING LIST Albino, D K., Hu, A., & Bar-Yam, Y. (2013).Corporations and Regulators: The Game of Influence in Regulatory Capture. Cambridge: Cambridge University Press. Bakan, J. (2014). The Corporation. London: Constable & Robinson Ltd. Burk,R F. (1990). The Corporate State and the Broker State. The Du Ponts and American National. Harvard: Harvard University Press Costanza, R. (1999). Privileged Goods: Commoditization and its Impact on Environment and Society. New York: CRC Press. Cox, R W. (2012). Corporate Power and Globalization in US Foreign Policy. New York: Routledge Culpepper, P D. (2011). Quiet Politics and Business Power: Corporate Control in Europe and Japan. Cambridge: Cambridge University Press. Derber , C. (2000). How Corporation are taking our lives: What we can do about it. New York : St.Martin’s Press Farrand, B. (2011).Corporate Governance or Corporate Government. Cambridge: Cambridge University Press. Financial Crisis Inquiry Commission. (2011). The Financial Crisis Inquiry Report. Washington: GPO Godwin, R K., Ainsworth, S., & Godwin, E K. (2912). Lobbying and Policy Making. New York: CQ Press. Linebaugh, K. (2013). Firms Keep Stockpiles of “Foreign Cash” in U.S. Retrieved February 6, 2014 from http://online.wsj.com/news/articles/SB10001424127887323301104578255663224471212 Marcuse , H. (1964). The New Forms of Control: One Dimentional Man. London: Abacus. Miller , D & Dinan , W. (2008). A Century of Spin. London: Pluto Press. Schmidt, S., Shelley, M., Bardes, B., Maxwell, W., Crain, E., & Santos, A. (2009). American Government and Politics Today –Texas Edition, 2008-2009. New York: Cengage Learning. Sklar,M J. (1988). The Corporate Reconstruction of American Capitalism. Cambridge: Cambridge University Press. Yu, F., & Yu, X. (2011). Corporate lobbying and fraud detection. Journal of Financial and Quantitative Analysis, 46(6), 1865. Read More