The challenge of the modern world is how to reconcile global free trade with a commitment to democracy and national sovereignty. Of course, the two aren’t really compatible, which is why true free trade has traditionally taken place within national borders or across empires. Since World War II, the West has tried a novel approach, based on “pooled sovereignty”. Nation states agree to abide by rules set by multilateral organisations, such as the United Nations, World Trade Organisation and the EU. This has been remarkably successful. The movement of goods, capital and people is now freer than at any time in history. But the tensions in the system are enormous – and over the last month, many have come to the fore.
There was the breakdown in the WTO trade talks last week, reflecting the difficulty of persuading rich democracies to make sacrifices for the greater good. There’s also the war in Lebanon, which is essentially about how the free trading world defends itself against those who do not share its values (see Israel batters Lebanon while US hesitates) Does it annihilate them (Lebanon), try to convert them (Iraq) or try to negotiate with them (Iran)? There have also been rows between the UK and US over the extradition of the NatWest Three and the arrest of the British boss of UK-listed online gaming firm BetonSports (see profile of David Carruthers). These highlight the massive issue of how national governments protect their tax bases and the fears that a regulatory “race to the bottom” will erode basic consumer protections.
These issues aren’t going to go away. They’re going to get worse. Earlier this week, I heard Sir John Gieve, deputy governor of the Bank of England, warning that the biggest challenge for the UK in trying to cope in a financial crisis will be the need to co-ordinate with other monetary authorities. The days when a financial crisis could be contained to a single country are over. Today, thanks to hedge funds and derivatives, crises can spread around the world like wildfire.
But protecting the world against these risks requires leadership and trust. There’s little doubt that, due to the Iraq war and US Government’s support for Israel’s actions in Lebanon, the US has forfeited some moral authority in the world’s eyes. People look at their actions in the Middle East, then see the US arresting British citizens for activities that don’t count as crimes in the UK, and they see a pattern.
Okay, so this isn’t entirely fair on the US. It argues that it is forced to deal with these problems because no one else will, and that it is the only country willing to bear the cost of protecting the free world. But that’s not wholly true. The rest of the world might not pay US taxes, but it does lend billions of dollars a year to fund US deficits. This supports the dollar and lets America continue to enjoy its privileged lifestyle. If the world lost faith in America and stopped lending money, its power would be harshly clipped. This is why the dollar is the most potent symbol of the US’s authority and the best barometer of the crisis in global leadership.
Has the shareholder revolution gone too far?
The shareholder revolution that has swept the financial world over the past 20 years has generally been a force for good. Firms are better run, corporate egos have been reined in and the economy has benefited from a more efficient allocation of capital. But is the revolution in danger of going too far? Events at two of Britain’s biggest companies in the last week suggest that the answer is yes.
First, leading shareholders at Vodafone tried to oust CEO Arun Sarin by voting against his re-election at the firm’s annual meeting. This was despite Sarin retaining the board’s confidence. At BP, supporters of CEO John Browne tried to do exactly the reverse: appeal to shareholder support to allow Browne to carry on in his job after his official retirement age in defiance of company policy and the wishes of his chairman and board.
This is taking shareholder activism to new and reckless levels. Responsibility for identifying the right leadership and putting in place an appropriate succession plan lies with the board. That’s its primary duty. This is particularly true for well-run firms such as Vodafone and BP, which scrupulously tick every box of Britain’s elaborate corporate governance code. Both firms have strong, independent chairmen and a healthy balance of outside and executive directors. Why should shareholders be in a better position to assess what the firm needs?
Shareholders are not just questioning the talents of individual directors; they are also questioning the board’s judgement. Had shareholders had their way at BP or Vodafone, it’s hard to see how the chairmen could have kept their jobs. That would hardly be good for either firm. Nor would it be much good for British business. It would send a message that it is not enough for an executive to have the confidence of his board. He must also win the approval of individual shareholders. That is a recipe for short-termism, risk aversion and poor decision-making.
Simon Nixon is executive editor of Breakingviews.com