Ethical Capitalism: A Fragile Principle
By Michel Rocard
Tuesday 09 January 2007
Henry Ford, builder of the American automobile (1863-1947), was not only the world's biggest industrialist for fifteen years. He was also one of the saviors of the capitalism that had been severely struck by the 1929 crisis: He invented the policy of high salaries that assured consumption's comeback. That indicates the importance of his intuitions.
On various occasions, he asserted that capitalism could not live and develop without respecting a rigorous ethic. In his opinion, it was bad - morally - for the head of a company to pay himself more than 40 times his employees' average salary. He followed this rule himself. The key to this conclusion maintains that capitalism is assuredly the form of social organization that guarantees the greatest margin of freedom to all actors in the system. That observation obviously does not hold in the absence of a high degree of self-limitation and self-control.
Now it is clear, as this twenty-first century begins, that something has cracked somewhere in the system. Even Steve Jobs, legendary creator of Apple, has just been caught with his fingers in the jam over an obscure matter of manipulation of the value dates of his stock options. The previous week, it was German heavy industry, notably in the automobile sector, that emitted an odor of massive corruption. For the last ten years, the list of big global corporations prosecuted under the law for irregularities or massive corruption has lengthened in an impressive manner: Enron, Parmalat, Arthur Andersen, etc. That's without mentioning legally distinct matters that are nonetheless of the same nature, such as the bankruptcy of the English Barings Bank or the affair of the Taiwanese frigates. Japan has also experienced its share of questionable affairs.
The most serious, the most large-scale, and undoubtedly the most immoral of these scandals does not, however, fall into these categories, because it is legal. Salaries, plus stock options, plus various benefits - the compensation of presidents and the two or three highest officers of today's big multinational companies - have gone from roughly forty to fifty times their employees' average salary (Henry Ford's ratio of decency) thirty years ago to some three hundred fifty or four hundred times that average salary today.
Whether or not it's true that the extent of these companies' business has grown in the same proportion - the essential argument of their bosses - that's not an adequate reason to accept the principle of a capitalism predatory to this degree.
However, I fear that justice and popular indignation can't do much about it. A legal conviction, and even a bankruptcy from time to time, won't correct the logic of the system. That's because the system itself is in question.
We were given a good example of this in December, when the French press informed us of the amounts and modes of calculating the bonuses of bank traders. And the new fact was the news that the banks that employed them were forced to take that route in order to keep these traders who know how to find new employers who will accept their conditions anywhere in the world. Consequently, there is a system that affects banking, but even more the industrial world, within which fabulous salaries and indecent stock options are spreading. At such a level of immorality, the system is no longer defensible. That cannot be but worrying in our societies, which are fragile because they are complex. But the most serious issue is perhaps not of an ethical order: It could well be of an economic order.
In truth, this passage of the share of executive compensation from a small three percent of total salaries to a fat ten percent pressurizes the rest of the pyramid. That pressure, combined with that of shareholders who are now massively organized - pension funds, investment funds, arbitrage and hedge funds - to demand the highest return, in fact forces companies to let go all but an indispensable workforce; to outsource all tasks not directly related to its brand knowledge and identity, and, of course, to limit wage increases to a strict minimum. Thus, the real average salary in the United States has been stagnant for twenty years, as it has been in France for the last five or six years. The development of temporary employment is a direct product of this change, attested to in all of our countries by the downward trend in salaries' share of the Gross Domestic Product. In France, it has decreased eleven percent from 1981 to 2005.
The brutal drive for spoils of this new layer of predators - shareholders and executives - pushes companies to fraud today, for both personal and corporate gain. I don't see the legal system being able to triumph over such massive forces. Moreover, George W. Bush, who several years ago after the Enron scandal had named a very dynamic Securities and Exchange Commission (SEC) president, got rid of him a year and a half later to appoint someone more accommodating. The system withstands everything.
The result of that is that between the mass of workers who are affected by unemployment, temporary work, or quite simply poverty; those who are no longer in those situations, but have experienced them; and the even greater group of those who are eaten alive by worry at the idea of falling into those situations, a great despair has taken hold - not only of the working classes, but also, to a wide extent, of the middle class. The distress of the middle class is at the heart of American public debate today. It's also what explains the negative responses from the French and the Dutch to the recent referendum on the European Constitution. Had Germany also required ratification by referendum, it also would have voted no.
It's the prevailing insecurity of employment that worries all of our fellow citizens. It is a direct result of the outrageous change for the worse in this capitalist pressure on employment. Our beliefs can no longer support such a system. And if you add in moral disqualification, social tensions risk worsening a great deal.
The rectification of this situation must naturally occur through a correction in favor of salaries' share of the Gross Domestic Product. But it's useless to only push the bottom of the ladder higher - to increase the minimum wage and support wage negotiations - when market pressure is so strong in the opposite direction. Then the premium for any job will take on Himalayan characteristics. There's no appropriate means other than to reduce the top of the pyramid. Otherwise, any punctual increase in lower-level salaries will aggravate the pressure on employment security and on salaries for the intermediate layer: I.E. the middle class.
It is going to become necessary to put a fiscal ceiling on the highest levels of compensation, to limit public offerings to the extreme, and to put an end to the racket of firms specialized in stockholder powers. All this must be done at a European level to be effective. It's a matter of public morality as much as of social cohesion, as well as being the only way to save free enterprise by returning it to respectability.
Michel Rocard, French prime minister from 1988 to 1991, is a member of the European Parliament.