Capitalism going wrong, really wrong

There is clearly something wrong with our capitalist system. The scale of unethical and illegal behaviour by corporate executives appears to be growing while rich executive compensation means business leaders are leaping ahead of the rest of society in economic gains.

There is clearly something wrong with our capitalist system. The scale of unethical and illegal behaviour by corporate executives appears to be growing while rich executive compensation means business leaders are leaping ahead of the rest of society in economic gains.

Much of the focus is on the behaviour of bankers in the big financial centres of London and New York. Scrutiny of the financial world is certainly needed.

But the bankers are not alone in abusing public trust; other industries, from credit cards to pharmaceuticals, are also being exposed for unethical or illegal behaviour.

In the U.S., Visa and MasterCard have agreed to pay more than US$6 billion to scores of retailers, as well as providing temporary fee relief worth another US$1.2 billion, for uncompetitive behaviour. In Canada, the Competition Tribunal last month completed a hearing on charges of anti-competitive behaviour by Visa and MasterCard, with a finding expected in the near future.

The Competition Bureau charged that credit card fees paid by merchants in Canada are “among the highest in the world” and that conditions imposed by the two companies are uncompetitive.

Pharmaceutical companies are also facing huge fines for unethical and illegal behaviour, especially in the U.S. Johnson & Johnson could be facing criminal fines of up to US$2.2 billion for illegal marketing. GlaxoSmithKline was fined US$3 billion earlier this month for illegal marketing, Abbott Laboratories was fined US$1.5 billion for illegal activities in May, and Merck was fined $1 billion last November for similar illegal actions.

In Canada, we have had other actions, though on a smaller scale. Suncor Energy and other oil companies pleaded guilty to price fixing in several Ontario communities.

Bell Canada was fined $10 million, the maximum allowed under the Competition Act, for misleading advertising. Whirlpool Canada was forced to provide rebates to customers for a misleading mail-in rebate promotion, Panasonic Corp. was fined $1.5 million for price-fixing and Solvay Chemicals was also fined $2.5 million for price-fixing.

But the biggest recent scandal has emerged in London, where Barclays, the big British bank, has been fined US$460 million for fraudulently fixing the London Interbank Offered Rate (Libor), which is the benchmark for loans made all over the world. Investigations could lead to 12 big banks publicly linked to the Libor scandal to face fines as high as US$22 billion, according to Morgan Stanley.

Money-laundering is another ethical and legal failure. Last year Wachovia, now part of Wells Fargo, was fined $160 million for helping Mexican drug cartels launder money.

Earlier this year ING was fined US$619 million for helping Iranian and Cuban companies move billions of dollars through the U.S. financial system, contrary to U.S. sanctions. And now HSBC has been found to have helped Mexican drug cartels launder significant sums.

Now, a preliminary report from the International Organization of Securities Commissions for the G-20 has found that the Price Reporting Agencies for benchmark oil prices, which are widely used as references for transactions in various oil markets, could be “susceptible to manipulation or distortion.”

One indication that capitalism is in trouble is the establishment of the Henry Jackson Initiative, a trans-Atlantic group of business leaders, whose goal is to restore integrity to the capitalist system.

The forum, which is co-chaired by Dominic Barton, the Canadian-born global managing director of McKinsey & Co., and Lynn Forrester de Rothschild, chief executive of the investment firm E.L. Rothschild., includes two other Canadians — Robert Greenhill, managing director of the World Economic Forum, and Jim Leech, president of the Ontario Teachers’ Pension Fund.

The group’s starting point is that while capitalism is the best system to advance human progress, the system has spawned unethical practices and growing inequality and is in urgent need of repair.

In a recent report — Towards a More Inclusive Capitalism — the group argued that “improving the ethics of the business world is fundamental to solving capitalism’s current problems.” The group stressed that the 2008 banking crisis, which triggered an even bigger global economic crisis was “mostly unethical rather than illegal.”

Ultimately, of course, ethics are at the heart of behaviour. But if capitalism is to regain public trust better regulation is needed, the incentive systems that reward executives need revision so they pursue the long-term interests of their companies rather than short-termism for immediate rewards, and capitalism has to show that it can lead to a more equitable society by creating greater opportunity and fairness rather than increasing inequality.

Economist David Crane is a syndicated Toronto Star columnist. He can be reached @crane@interlog.com.

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