Business Page – July 25, 2004

Greed is good?

Introduction

'Something is rotten in the state of Denmark' was the quotation used in Dr. Ian McDonald's piece last week on the wealth and income distribution in the United States of America. The statistics used by Dr. McDonald to show how the disparity has tilted in favour of the rich, mainly whites like Warren Buffett and Bill Gates and a few blacks like P. Diddy, Oprah Winfrey and Tiger Woods are indeed staggering but even these do not tell the whole story. And it is not as though things are getting better with President Bush's irresponsible tax cuts and immoral war on Iraq which have plunged the USA into a sea of red ink to be financed by taxation and/or further debts imposed on future generations.

For all of President Bush's boast of No Child Left Behind and being President of all the People, a recent study has found unemployment rates among male black Americans at levels which no Third World country would tolerate, with 10% of the black male population under 40 incarcerated; with those who did not finish high school experiencing 44% unemployment; those with a diploma 26% and even those with a first degree 13%. With no education comes no jobs, no income, no marriage prospects, crime and jails. And this is taking place in the richest country in the world numbering among its citizens some of the world's richest individuals including Mr. Gates. So it is of interest.'

Power and Influence

The rich are getting richer ....' is indeed true of America which had seen income disparities narrow under the New Deal following the Depression in the thirties when social policies sought to make health, education, food and housing available to all Americans. But things have changed again, and blinded by propaganda and the American Dream, the public now see absolutely nothing immoral in the juxtaposition of the obscenely rich and the miserable poor. That no one seems offended that 50% of the Bush tax cuts which will cost trillions of dollars will end up among the top 1% of American families is an indication that the wealthy have managed not only to shape public policy but public opinion as well towards measures that favour the rich. After all, wealth gives access not only to more goods and services and the other comforts of life, but also helps to buy access, influence and power. Indeed, it can also purchase professional expertise and intellectual influence and if that is not enough, it can buy its own press and television. In this way, the rich with their purchasing power shape the debate on economic policies, taxation and the laws and regulations.

Legislation

From time to time such as following the bubble of the nineties, these excesses become obvious and harmful to the point where the public says enough is enough and the legislators take enough action to appease the public until the next time. That was so clear when the scandals of Enron, Andersen, Tyco, Waste Management etc. became so unbearable that the Bush Administration hastily cut its ties with Ken Lay and passed what is regarded as the toughest piece of legislation (Sarbanes-Oxley Act), setting out the ground rules for public companies, even over the objections of those rich and powerful who thought it was going too far too fast.

Not that that was either the beginning or the end of corporate greed or misdeeds as the recent prosecution of homemaking diva Martha Stewart showed. Here was an American icon and one-time billionaire being sent to jail arising from a transaction from which she would have received a gain of no more than US$100,000. Nor was Ken Lay of Enron who has now been indicted or Dennis Kozlowski of Tyco the first to face the music after some of the most egregious examples of greed seen anywhere outside of the thieves posing as rulers of Third World countries. Remember Ivan Boesky of the Insider Trading scandals of the eighties and who gave the world the expression Greed is Good for which the 1987 movie Wall Street is best remembered? Or Michael Milken, former Vice- President of Drexel Burnham (no relation) Lambert, who made hundreds of millions for his company and himself from the introduction of junk bonds, corporate debt with promised high returns but little underlying intrinsic or secured value.

Rock Star CEOs

One facet of the corporate scandals was of course the exorbitant amounts paid to the rock- star status CEO's including Jack Welsh of GE who prior to the release of the information on his post-retirement benefits was widely regarded as the best CEO of the 20th century, and to others like Michael Eisner of Disney, remuneration that simply widened the disparity between the wages earned by the workers and those which in many cases the CEO's paid themselves as a result of their control of the Boards of Directors of their companies.

Without in any way seeking to justify or even explain the excesses of the USA, that country has tried to enact and implement checks and balances which do work, even if not efficaciously. We must also not ignore the action taken by the authorities. Boesky was barred for life from the securities business and served jail time which was mercifully shortened because of cancer. Drexel Burnham was fined US$650Mn while Milken was fined $600Mn in addition to jail time despite a spirited public relations campaign that promoted Milken as a national treasure. Or forget that the owner of the world-famous Empire State Building spent four years in jail for tax evasion. Or that Kozlowski of Tyco which paid US$6,000 for a shower curtain was also convicted for evasion of New York sales tax and even before his conviction was fired by his Board which had also demanded repayment of some $20Mn improperly paid to another director.

Not only did Jack Welsh lose much of the aura of greatness and magic but he was forced to return some of the retirement perks while Michael Eisner suffered the indignity of being removed as Chairman of the Disney Board. But there were also institutional measures taken to address the abuses including, as was alluded to earlier, the passage of legislation and more stringent disclosure requirements. And former Chairman of the New York Stock Exchange Richard Grasso is locked in a legal battle with that State's Attorney General Elliot Spitzer over payment which Spitzer considered excessive even though it was approved by the board-compensation committee. The advocates of greed and their apologists do not like this and Spitzer was accused of having political ambitions for fining Merrill Lynch US$100Mn. for promoting securities to clients of that firm even when its own analysts were saying otherwise about the same securities.

Ethical Practices

Twenty-five years ago, Jeff Skilling of Enron had boasted during his MBA studies at Harvard that the role of the business leader is to take advantage of loopholes in regulations and push beyond the laws to make money. In his view it was the job of the regulator to try to catch him - something that seems eerily familiar to us in Guyana. Who would have known how dangerously Skilling would take that boast leading to the fall of a giant?

In assessing the USA one needs to recognise that except for reports of quarterly earnings and annual reports, only the bad makes the news and that in fact there are many good companies under leadership of trust, integrity and honesty. Bill Gates of Microsoft has announced that the entire sum of US$3.3Bn due to him as special dividends from Microsoft will be donated to the Bill and Melinda Gates Foundation which is involved in many projects to improve education and fight disease and improve health care worldwide. Or that the CEO of Costco another public company has refused to take any salary increases that would put his remuneration at more than thirty times that of the worker on the shop floor. No doubt this would be exceptional but more and more leadership of US companies is being defined in terms of ethical practices that have at their core, the principles of openness and honesty.

Tax System and the Have-nots

Can we say that of Guyana? Hardly. While the scale is unrecognisably different, when the policies in Guyana are examined, we see changes even under so-called pro-worker governments that equally favour the haves over the have-nots. Guyana has effectively abolished estate duty which even the USA has not done as yet even though this may very well form part of Bush's agenda if he is re-elected in November. Guyana long ago abolished such pro-poor features in its tax system as dependant allowances, insurance relief, progressive tax rates, mortgage relief while retaining for the higher-paid employees wide possibilities of tax-free allowances which the waged employee can only dream about. Measured in terms of take-home pay surely we have our own excesses but with the top echelons protected behind a wall of secrecy and an all too tolerant society, who knows for sure.

And we have turned tax principles on its head by taxing investment income at no or lower rates than we tax the income earned from waged work. Bank interest without limitation is taxed at 20%, dividends at 0 % and capital gains at 20%. How many poor people have capital gains and despite the boast of tens of thousands of shareholders how many shares does the small person have? To encourage the formation of public companies and to promote economic democracy we have removed the capital gains tax on shares in public companies but do those who control those companies care about economic democracy? As ownership control changed hands in two public companies recently, the first efforts of the new owners were directed at buying out the small shareholders, concentrating ownership in the hands of a few. Tax evasion here is so widespread that it is seen as a victimless crime not unlike perhaps the crimes by corporate crooks. Unlike the USA have we jailed anyone for tax evasion over the past twenty-five years? More seriously, do we have the will or the capacity?

(Mis-)use of the Court System

Dr. McDonald might have noticed that some of the statistics he quoted come from data provided by the Internal Revenue Service (IRS), a useful guide to the macro-taxation data. For years there have been calls for more statistical information to be included in the annual reports of the Revenue Authority, all without success. Any rational discussion on the subject of income distribution must be rooted in facts and perhaps explains why not even our leading economists or those who want to shape public opinion stay clear of such issues.

And what have we done about governance in Guyana? The short answer is little of consequence. Yes, we passed the Companies Act in 1991 and the Securities Industry Act in 1998. But are they being enforced? No. One of the provisions of the Companies Act allows the Minister of Finance to look into shareholdings but yet successive administrations have seen Government's ownership improperly diluted by new owners/managers without any effort to look into the suspected improprieties. Martha Stewart was convicted for making false statements to regulators and for obstructing justice, neither in respect of her own company but acting on a tip from her broker. How many times has this column not brought to public attention inadequate and misleading information by directors that is clearly in conflict with the law? And has anything happened? In fact is there not sufficient evidence that supports the suspicion that some of our directors use the court system to delay if not avoid justice? And how are our regulators treated? There seems to be a notion among the business community that if regulators get in the way, just go to the court and ask for a stay. To a layperson this seems like a sanctioned form of obstructing justice. Can you imagine the SEC being told by the US court that it cannot issue any orders against a company which it is required by law to regulate? And here in Guyana, despite all the empirical evidence of wide-scale money-laundering, a practice of the rich, not a single person has been convicted of this crime against society.

Conclusion

The truth is that while greed is indeed endemic in America, Guyanese did not wait for it to be exported from the USA. Or for Americans to teach Guyanese how to break our own but other countries' laws as well. We found ways to beat the status quo on bans on the importation of goods, exchange controls, export of assets, and - at great cost to the country's reputation - creative and wildly imaginative ways to move narcotics around the world. It would be interesting to compare the Guyana dollar declarations on the tax returns, if any is filed, of many of the top persons in the private sector with their ability to own homes in Miami, New York and Toronto. The study into the business culture and practices of the Guyanese is long overdue but we are likely to find that their genesis lies not from US imports. It does not help that there is an absence of regulation of businesses in Guyana and that while there are calls for transparency in Government, transactions in public companies are shrouded in secrecy. Lifestyle audits by the IRS are common in the United States, perhaps it is one of the worthwhile imports Guyana needs.

"Men at some time are masters of their fates: the fault, dear Brutus, is not in our stars, but in ourselves......" (Hamlet). In other words, let us look into ourselves rather than elsewhere for our shortcomings.

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