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Corporations rule not OK

All stakeholders should have a say in the running of the major corporations that, often corruptly, control our lives argues Prem Sikka.

Most of our lives are spent in working for corporations, but there is little democracy at work. In fact, corporations affect our lives more than any other entity but people have little say in their operations. Corporations are now the Masters of the Universe. Their power affects quality of life, food, water, gas, electricity, seas, rivers, environment, schools, hospitals, medicine, news, entertainment, transport, communications and even the lives of unborn babies. They control our savings, pensions and investments. In pursuit of private profits, they manufacture new diseases (Thalidomide, BSE/CJD, smoking and diet related diseases) and influence our destinies in jobs, credit ratings, pay and product prices. They can boost, or destroy, whole communities by closing mines, mills, offices, factories, and call centres, or opening the superstores and fast food outlets of the low-wage, shelf-stacking economy.

Fifty-one of the hundred largest economies in the world are corporations, not countries. The turnover of companies, such as Ford, General Motors or Wal-Mart, is bigger than the Gross Domestic Product (GDP) of Greece, Poland, or South Africa. Some 60% of world trade consists of internal transfers in just 200 multinational corporations. This concentration of economic power has given them enormous scope for challenging elected governments, controlling markets, operating cartels, shedding jobs, laundering money, moving capital, tax avoidance, and generally acting irresponsibly, or as they choose, in pursuit of profit and their own interests. Making money, massaging earnings and enhancing executive salaries takes priority over service to the public

Major scandals, such as Enron, WorldCom, Maxwell, Hollinger, Bank of Credit and Commerce International (BCCI), Independent Insurance, Parmalat, Mayflower, MG Rover, and others draw flickering media attention to corporate irresponsibility. Glossy corporate mission statements and press releases make great play on social responsibility and good citizenship.

The available evidence challenges such claims. Banks and credit card companies change conditions without prior consultation. Despite claims of competition, they offer remarkably similar costs and interest rates, all indicative of a complex monopoly. Big Five banks (Barclays, HSBC, Lloyds TSB, Royal Bank of Scotland and HBoS) declared profits of £30 billion in 2004. Since 1990 around 10,000 branches of banks and building societies have closed, often in rural and less well off areas as banks switch to profiteering by internet banking and shifting jobs to offshore call centres.

Four chains (Tesco, Asda, Sainsbury's and Morrisons) control more than 75% of the supermarket trade. The UK supermarkets have the highest profit margins in Europe. Their operating profits have increased from £884 million in 1988 to £3,355 million in 2003. Most of their employees hover around the minimum wage. Major supermarkets squeeze suppliers to maximise profits. Fifty years ago, farmers received between 45-60% per cent of the money that consumers spent on food. Today, that figure has dropped to just 7%. Coffee producers receive 5% of the price charged by supermarkets and farmers 3.4 pence a pound for potatoes sold at 28 pence a pound. Of the 50p per litre price of milk, farmers get less than 20p.

The Food Standards Agency found that butchers and supermarkets sell chicken containing as much as 37% water while poorer families are priced out of a healthy diet. There is a 51% difference between the price of healthy, low fat supermarket food and the high fat, low fibre food the poor eat.

UK consumers are being ripped-off on car prices and garage charges. Water, gas, electricity and phone companies routinely rip people off. Since privatisation, railway companies have received more than £10 billion in public subsidies, enabling them to pay record dividends and deliver shoddy services. Argos and Littlewoods have been fined for fixing the price of toys and games. Major pharmaceutical companies, such as BASF and Hoffman La Roche colluded to fix the price of vitamins. Christie's and Sotheby's operated a cartel to fix commission rates. Italian authorities fined Pricewater-houseCoopers, Ernst & Young, Deloitte Touche, Tomatsu and KPMG for operating a cartel. In virtually every sector, there is some scheme to fleece people.

Corporate policies are directly responsible for growing income inequalities. British companies executives are the highest paid in Europe.

During the last five years, directors of FTSE 1000 companies have awarded themselves an average increase of 130%. Ordinary workers had to be content with annual increases of 3%-4% per annum. Government statistics show that the median gross salary of a British employee is just £25,100. With that people are expected to survive, find shelter and even save for their pensions. The result is social squalor, exclusion and growing inequalities. The share of wealth enjoyed by the poorest 50% of the population has shrunk from 10 per cent in 1986 to 5 per cent in 2002.

One-in-three children, 3.8 million children, live in poverty. According to the Royal National Institute for the Blind, between 17 and 22 per cent of school-age children have poor eyesight, but have not had an eye test. Some16% of the population lives below the poverty line. Some 12.8 million Britons are unable to make adequate provision for retirement. Almost two million pensioners live in poverty. Over 22,000 pensioners die each year from cold and related illnesses.

People may look to governments to help them through progressive taxation policies but companies are shrinking the tax base and social investment with it. Companies accept subsidies, export credit guarantees and all the benefits of the social infrastructure but are unwilling to pay their share of democratically agreed taxes. British corporate tax rates are lower than those in Belgium, France, Germany, Italy, Japan, Netherlands, Portugal, Spain, Sweden or the US. The 30% UK corporation tax rate is the lowest ever. Major companies, such as NewsCorp, the owner of The Sun, News of the World, Times and Sky TV, pay little or no corporate tax in Britain. Neither do the owners of Daily and Sunday Express.

Virgin Atlantic, Prudential, BAT and others continue to avoid paying UK corporate taxes. Phones4U, Debenhams and various retailers have been hauled to the courts for operating aggressive VAT, income tax and national insurance avoidance schemes. Major tobacco companies have been running a very elaborate smuggling ring to avoid paying UK excise duties and VAT.

A recent government report admitted that some £13 billion of VAT goes missing each year. Probably more than £100 billion of taxes are avoided each year by companies and their controllers. Successive governments have quietly shifted the tax burdens to individuals. Income tax collected from individuals has increased from £48.8 billion in 1989-90 to £123 billion in 2004-2005, while corporation tax over the same period increased only from £21.5 billion to £33.6 billion, barely 2.5% of the GDP despite the fact that from 1990-2005 UK companies have been recording an average rate of profitability of 11.5% against an inflation rate of around 3-4%.

Taming the corporations is one of the biggest issues for the twenty-first century. Companies and their patrons resist calls for democracy and accountability. Corporate governance codes, such as those advocated by Hampel, Cadbury, Greenbury and Higgs cannot curb corporate abuses or bring companies under democratic control. Democracy and public accountability should not stop at the factory gate or office door but must apply to all major corporations.

Major companies can only be effectively challenged by powerful regulators with powers to force them to reflect on their abuses. The Financial Services Authority (FSA) has been in awe of financial conglomerates and needs to be restructured. The UK non-financial sector does not even have an independent regulator.

Railway accidents, BSE/CJD, the plundering of pension schemes and other scandals show that a wider variety of stakeholders are affected by corporate conduct. Therefore, directors of major companies should be elected by stakeholders, rather than just shareholders. Company directors can thwart resolutions about their conduct by casting hundreds of proxy votes. This should be ended and one-person-one-vote should apply to all companies.

Directors should owe a 'duty of care' to all stakeholders and be made personally liable for frauds knowingly perpetrated by them. Their financial rewards should be the subject of a vote by all the parties electing them. To prevent fat cats, no director should be able to earn more than ten-times the average wage in the same company. No company should have perpetual life, since that encourages abusive conduct. At regular intervals, their social conduct should be evaluated and those with a track record of abusive conduct should be closed down. There should be a new offence of 'corporate killing', so that companies and named directors can be prosecuted where mismanagement causes death or injury. By using their enormous resources, companies can stop individuals from raising serious social concerns about employment, human rights, pollution, product safety and health hazards. To check corporate power, the libel laws need to be changed to favour the citizen rather than powerful corporations.

Companies should not be able to conceal any information that could prevent injury, disease and harm to people. The public's 'right to know' should take priority over any concerns about corporate secrecy and confidentiality. The protection and advancement of human rights should form an integral part of the constitution of every company.

This is only a brief sketch of the reforms that we should discuss and develop. Previous advances in social obligations, such as the minimum wage, workers' rights, equal pay, health and safety legislation, environmental protection standards, product/food safety, and the minimal provisions for openness and accountability had to be imposed in the teeth of opposition from big business.

The same will probably be necessary again. However, no effective reform is likely until we also clean up the institutions of politics so that corporations cannot hire political parties, individual politicians or give soft jobs to ex and potential ministers.

Prem Sikka is Professor of Accounting at University of Essex and Director of the Association for Accountancy & Business Affairs.