Shifting power lines: from governments to corporate

To the question of who wields power in the modern times, most people would often answer without a pause that it is the largest states like Russia and China. Even though there is a consensus that corporates are extremely powerful, the attempts to study the extent of the same have been far and few.

Let’s consider the following facts: -

●      The world's largest company, Wal-Mart Stores, has revenues higher than the GDP of all but twenty-five of the world's countries. Its employees outnumber the populations of almost a hundred nations.

●       The world's largest asset manager, Black Rock DSP, controls assets greater than the national reserves of any country on the planet.

●      The Bill and Melinda Gates Foundation, spends as much worldwide on health care as the World Health Organization.

●      The top 30 companies are bigger economic entities than almost 100 countries in the third and fourth quartile-combined.

●      More than 30 financial institutions have consolidated assets greater than $50 billion each—meaning each has more assets than two-thirds of the world’s countries produce in annual GDP.

●      A world economic forum survey of 2013 revealed that more than 73% of the population in the G20 countries value their savings in banks more than their citizenship.

●      Combined, Amazon, Walmart and Apple have sold to more than 2 billion people-meaning that they have more mind share than most countries and governments.

It can be safely stated that there are far more systematically relevant companies than there are countries. Corporations have been exerting their influence in all aspects of human life since the time they came to existence. Here, this study attempts to understand the various manifestations of this power and the extent to which the states are becoming dependent or threatened by this rising force.

HISTORICAL CONTEXT

Corporations have been continuously growing and transforming. At times, they become extremely powerful than initially anticipated. In such scenarios, there have been varying degrees of consequences including but not limited to monopolization of resources and excessive clout inside government machinery. There also have been instances of state intervention by regulation or nationalization to claw back power.

 The oldest and continuously surviving company till date is an organization based out of Sweden called Stora Enso. There are documents from an early share transaction involving Stora that date back to 1288. Today, the company, renamed Stora Enso, is a booming multinational with operations in more than thirty-five countries—an important but not terribly well known enterprise that controls half as much territory as Belgium and has annual sales that are larger than the GDP of almost a hundred countries. The organization moved its business from mining to forest based products like paper. Through its active lobbying, it managed to stay alive and circumvent multiple environmental regulations even to date.

Here at home territory, the modern history of India has been created by trading companies, which set out of their western shores in search of profitable trade avenues. One of the most prominent amongst them has been English East India Company. Starting with striking favorable trade deal with local rulers, they grew rapidly. In a short span of 150 odd years, they managed to bring the Indian subcontinent under their rule by employing soft and hard power tactics- the details of which has been historically well covered. After the armed rebellion, the British crown took over EIC’s Indian operations.

At the heart bed of capitalism, the United States, there are examples galore. Standard Oil cashed in on the great American gold rush by owning the full value chain by horizontally integrating and killing off the competition by vertical integration. By sheer scales, it decimated all obstacles. States and other public institutions were arm-twisted into forming favorable policies. Later down, the government grew wary of its clout and broke down the company into smaller companies. The legacy companies, Exxon-Mobil and Chevron still remain as amongst the world’s wealthiest and influential corporations.

The legacy of power struggles has carried on. The more the corporations grow, the states have tried to reclaim balance by measures like antitrust regulations, fair trade and business laws, anti-monopoly measures, investment regulation acts and even nationalization (like Venezuela, India etc.). In modern times, attempts were made to break up companies like Microsoft, AT&T and General Motors but they have by and large failed.

CORPORATES: ABOVE RULE OF LAND

It has been widely established that people with excessive power are historically unencumbered from performing their duties and are proportionately punished lightly for their widespread contribution to the devastation and victimization of human, physical, and social ecologies. The rich and powerful can get away with rules of the land with relative ease.

As global corporations have grown richer and more powerful than many nations, they increasingly operate without limits on their power or influence. Around the world, global corporations drive governmental policies, unchecked by strong global policies to protect public health, human rights and the environment. One step ahead, they openly flout norms and there is hardly any action taken against them.

Let's consider the case of Apple. In 2015 Apple Inc. reported a quarterly profit of $18 billion, the largest in history. Its market-capital valuation of $800+ billion reached the highest ever for any U.S. corporation. Based on total revenues of $248 billion for a private, public, or state-owned company, Apple ranked twelfth in the world.

The Apple brand is also the most admired brand in the world. Several factors have contributed to Apple’s success, including the vision of the late Steve Jobs, the work executed by Apple engineers and their constant pursuit of excellence and a knack for marketing. It is equally important to note that the failure or refusal of Apple to pay a fraction of its fair share in taxes, and the super-exploitation of the workers who manufacture Apple products have also contributed to its record-breaking profits.

A U.S. Senate investigation discovered that by creating mail-slot entities all over the world and attributing its profits to them, Apple managed to pay just 2 percent in taxes on $74 billion of income overseas. Another investigation in 2016 revealed that that Ireland must recover from the local Apple subsidiary up to as much as 19 billion euros including interest for unpaid taxes dating back more than a decade. Apple had taken tax benefits provided to its subsidiaries in Ireland through two tax rulings amounted to state aid that was illegal under the European rules of business competition. They had achieved this by threatening to pull out of Ireland operations and hence influencing legislature.

This is an illustration of tax avoidance accounting schemes enjoyed by such mega multinational companies as Facebook, Google, and General Electric. They achieve it by creating complex legal subsidiaries which helped them negotiate much lower taxes than permitted by the state.

Flouting rules has not been limited to tax saving. It has also extended to sidestepping regulations to own and operate businesses as corporates please. A case in point is the e-commerce companies in India.

Till 2013, India didn’t allow foreign investment in large retail stores, nor in online retail, as political parties didn’t want to antagonize small traders and retailers. After 2013, India opened its doors for foreign investment in retail. This was hailed as one of the greatest reforms the country had seen. But according to the regulations, the doors were being opened only for physical retail via stores.

By then, foreign investors, including most large venture capital firms had already invested hundreds of millions of dollars in Indian e-commerce startups, betting on the future trillion-dollar valuation. They started off on the workaround by finding loopholes. The government hadn’t defined what an online marketplace was. So both companies set up a network of subsidiaries and holding company structures, some in India, some outside, to circumvent the foreign investment regulations.

India’s largest e-commerce company Flipkart (now majority owned by Walmart) started as one company, but had by 2017, multiplied into 14 companies owned through holding companies based out of Singapore. There’s also Singapore’s 17% corporate tax rate, compared to 30-50% in India. Amazon India, meanwhile, has 12 direct subsidiaries through which it conducts its business also exist for similar reasons.

FLOUTING LABOR RIGHTS

The consistent mission of corporates is to maximize profits. This often comes in the way of upholding the values of labor and justice.

Apple has subcontracted facilities in China where employees of Pegatron and Foxconn assemble their iPhones. This is done to cut production and labor costs. Moreover, the labor law enforcement in China is not very strict, even though they claim to uphold the human and labor rights in the annual reports. Several footages of the facilities recorded the regular breaching of the standards established for workers’ hours, ID cards, dormitories, work meetings, and juvenile employees. They also documented that in Indonesia, children were working in dangerous open cast mines and that the tin from these illegal digs was being used in iPhones. Workers were found to be working 100 hour weeks, without sleep, while living in buses in sub-zero environments.

Apple’s annual report for 2014 acknowledges that the compliance rate regarding its own standards was only 70 percent, down from 77 percent a year earlier. The enforcement of workers’ hours was also down from the previous year. In a nutshell, these subcontracted workers are exploited in various ways despite the reality that labor costs amount to a tiny fraction of its profits, especially in the context of the generous compensation packages enjoyed by top executives. In 2016, the top nine members of Apple’s executive team received compensation packages equal to that of fully 90,000 Chinese factory workers.

BP was found responsible for $28 billion worth in environmental damages owing to the Deepwater Horizon rig explosion. With various measures, they ended up by paying only $120 million in damages.

The weapon manufacturing companies - including Lockheed Martin, Boeing, Apache, Sig have aided and abetted instability, wars and arms races which have crippled economies and pushed entire continents to an endless cycle of strife. The humanitarian atrocities are by and large, unchecked. No action would be taken by any state, as it is these very corporations that arm their national defense forces.

The international organizations, with all their combined might, find it almost impossible to deliver justice to the aggrieved, because the corporate perpetrators exist beyond borders and typical legal constructs.

THE CORPORATE INFLUENCE IN POLITICS

Corporations influence governments through political donations and direct lobbying. Federal lobbying expenses in US was estimated to cross $5 billion, with nearly $4 million being the cost per Congress member.

Large corporations are also avid contributors to political campaigns. Of the top 100 donors to federal political candidates, about half are corporations while many others are organizations that represent business interests. By this, they essentially secure their business interests. For example, NRA backs pro-arms candidates and will outspend candidates with pro-control stances. With campaign kitty deciding the electoral fate, there is little that the candidates can do to prevent this.

In India, the situation is much worse as there is no transparency in political funding. Estimates by Pew Foundation states that over 77% of the electoral war chest of the major Indian national political parties come from large conglomerates with vested interests.

THE RISE OF NETWORK CORPORATES

Today, we see the rise of the global networks: giant companies like Facebook, Google, Amazon, Alibaba, Baidu and TenCent. These new global networks grew even faster than traditional corporations like Nestlé, Exxon, General Electric or Monsanto. They are connected to billions of people and know everything about them, because of their access to data.

With scary levels of knowledge comes mass control. These new platform corporates now control how information and communication is carried out by the entire planet. Facebook and its involvement in the fake news fiasco demonstrates the sheer power they wield in shaping public policy and government formation.

These bring with them a host of new challenges for governments. States and control can’t keep up with the pace of evolution of these corporates and their rapidly changing models. For example, the government hadn’t even envisioned the need of new labor laws for workers in a gig economy. Blockchain and Ethereum technology based companies stand a point where they threaten to take away state control over money and insurance. The governments have responded by measures like GDPR but only time will tell how successful they turn out to be.

FLIP SIDE: CORPORATIONS AS TOOLS OF STATE

State power did not disappear with globalization, but it transformed. It now competes with corporations for influence and political power. On this side of the argument, there is a strong case being made that states have control over corporates, and even more, use them as proxies to exert power in indirect ways domestically and in geopolitics. This is primarily done through state owned companies (fully owned or part ownership).

State owned companies now constitute for nearly 25% of all fortune 500 corporations. They are still a force to reckon with, as they have virtually unlimited war chests. By investing in state-owned enterprises beyond their borders, states gain strategic leverage in comparison with other states or actors – Russia’s gas pipeline holdings via Gazprom in eastern Europe are a good example. China, through its stake in corporations like Tencent have started developing great deal of soft power in overseas markets. Japanese government owns stakes in Softbank- which operates the largest VC fund (Softbank Vision Fund, $70 billion) in human history. Softbank is now the global tech startup kingmaker - a firm that owns Alibaba, Uber, Ola, Oyo, Paytm and other tech unicorns. Japan may have lost out to the US and China post 1980s industrial revolution, but they surely see this as a hedge to get back power. Similar instances can be seen in infrastructure development projects undertaken by state-owned Chinese corporations in the partner countries like Pakistan for the OBOR initiative.

 On a conclusive note, after the in-depth research and faculty discussions, we feel that corporates will continue to create a new world order where they will come to the forefront of global affairs, as it has done to lives of consumers. At the same time, the state structures will find ways and means to bring some semblance of control back to the system. It is too chaotic a scenario for us to pass a conclusive statement.