Small businesses are traditionally started by a person or a few people in partnership. Very often there is a family connection between those involved. As businesses get bigger, however, there is a need for people with skills that family members don’t have and often for outside money to enable expansion to take place. To raise the money, you need to be able either to borrow or to have a structure such that people can actually invest in the business. The model which has emerged is that of ‘joint-stock companies’. There are records of them being formed in Europe as early as the 13th century.

However, beginning in the 16th century, they multiplied significantly when adventurous investors began speculating about fortunes to be made in the New World. Indeed, European exploration of the Americas was largely financed by joint-stock companies. Although governments were eager for new territory they were reluctant to take on the enormous costs and risks associated with these ventures. The tax system was in its early stages and, with a very limited tax base, the whole idea of taxes was probably even less popular then than now.

That led instead to entrepreneurs raising money by the sale of shares in their ventures to the very many investors (the shareholders) willing to fund voyages to the New World. This was to find the gold, spices and other resources from which they would all make lots of money. But there was a downside. Not only could you lose your investment, but you would be personally liable for the company’s losses The ability to limit the liability of investors who buy shares in a company, legislated for by the UK parliament in 1855, was perhaps the most important change ever to  company law. Unsurprisingly, it subsequently spread throughout the world.

But underlying the idea of a company which has shareholders is that it is there simply to make money for those shareholders. And it is this which can cause social problems, because companies don’t have to have a conscience. In times past we had the East India Company, to which Britain in effect sub-contracted much of its colonisation, and today we have Amazon. If Amazon were a country it would be the world’s 51st richest nation, ahead of Qatar and just behind Peru, New Zealand and Greece. And just as the East India Company used its size for its own advantage, so present-day international companies do the same with their ability to buy influence over our politicians.

We see, as one of the results of this influence, the failure by politicians to deal with the gaming of the taxation system by international companies in order to build up their wealth in an almost exponential way. They ‘recognise’ profits in tax-havens which maximises the profits available for distribution to its shareholders in the country where it is really based. This problem is at last to be addressed, this week, by the G7. It will mean that the lowest permitted rate of tax anywhere in the world will be effectively 15%. Although still not very high, the agreement will allow the non tax-havens to levy the difference between the actual tax rate paid in the tax-haven and the global minimum rate. This has been triggered by the need, even for countries like the USA, to increase their tax revenues in order to pay for the economic damage caused by Covid.

We all know that, for the sake of good publicity, large companies portray themselves as wanting to support the environment. This is known by the more sceptical amongst us as ‘greenwash’. As an illustration of their hypocrisy, we have ‘Dieselgate’, the car emissions scandal. Most of the main manufacturers had built electronic systems into their cars which detected when they were being put through the emissions test. When this was detected, the electronics automatically adjusted the way the engine ran in order to reduce its NOx emissions and so make it comply. When the test finished, the system would switch itself back to its normal polluting mode.

When this was discovered, Volkswagen incurred $33 billion in regulatory fines, compensation and buyback schemes in the USA alone.  But now claims companies are advertising for clients to join their proposed group action in the UK against numerous manufacturers. And all of this was so that the companies could reduce their manufacturing costs to maximise the benefit for the shareholders, the holy grail for company directors. Of course, in practice, the paying of hefty bonuses to directors is assumed to be for the benefit of the shareholders by motivating the directors to make the company work in the most profitable way possible. Yes, of course...

Another, this time legal, anti-environmental ploy used by multinational corporations, however, comes through international law. It’s an example of the ‘Law of Unintended Consequences’. Fifty years ago, there was pressure by a group of German businessmen to find a way to protect their overseas investments as a wave of developing countries gained independence from European colonial powers. They called their proposal an “international Magna Carta” for private investors. An international arbitration system was duly created to which companies, not based in a country, could complain if they believed the government of that country had acted so as to adversely affect their commercial interests there.

Most international investment treaties and free-trade deals grant foreign investors the right to use what is known as Investor-State Dispute Settlement (ISDS), if they want to challenge government decisions affecting their investments. Now, it is true that many newly liberated countries, often dictatorships in their early ‘liberated’ years, wanted to have investment. However, they also wanted to be able to change the rules whenever it suited them and expropriate the assets not only of their own people, but also of foreign companies. Under the ISDS system, if the foreign company obtained a judgement against a state, it could be enforced through the courts not only of that country, but also those of any other country which was a signatory to the treaty and which had any assets of the offending country. So then, all very reasonable.

But recently, companies doing business, not only in dictatorships, but also in democratically run countries, have found that ISDS is a good way of putting pressure on them in order not to suffer the economic consequences of government measures mandated by the electorate. Whereas companies in the country making those laws would have to put up with them, multinational companies can claim compensation. Although largely used in the past to sue for compensation for expropriation of assets, recently, claims have been based on a huge range of government measures, including environmental and social regulations, which they say affect their ability to make profit. And the amounts involved range from hundreds of millions to many billions of dollars. The number of suits filed against countries at the ISDS is now around 500 – a figure growing at the rate of one case a week. Increasingly, companies are using the threat of a lawsuit at the ISDS to exert pressure on governments of relatively poor countries not to challenge their practices or actions, because the countries can’t afford to lose.

Many countries which, under dictatorships, granted such things as mining concessions, not subject to much by way of environmental conditions, have found themselves sued when, under democratic governments, they tried to introduce what would now be regarded as perfectly normal conditions on such activities. And this, even though the company would have been completely aware of what was going on.

As a result, many countries have decided to leave the treaty altogether as soon as they can. Unfortunately for them, even after having given notice, they can still be liable under its provisions for between ten and twenty years. But then, as we know, the directors’ duty is to maximise profits for the shareholders, not to indulge moral scruples. And so maybe that is what needs changing. And at last there is some movement in that direction.

From last year, there is now a statutory requirement in the UK that companies should be required to take into account the social good which they produce as well as the cash. Directors, whilst still required to “promote the success of the company for the benefit of its members as a whole”, must now do so having regard “(amongst other matters) to – the interests of the company’s employees and the impact of the company’s operations on the community and the environment. Well it’s a start, but there’s still a long and winding road ahead, even though it’s already taken seven centuries just to get this far.

Paul Buckingham

2 June 2021