On the Constitution of Corporate Power: What Is to Be Done?

February 25, 2016

This is a polished version of my talk at the Plan B conference in Madrid on Saturday 20 February 2016 (theme section “Alternatives to the regime of trade and inversion”; workshop 1: “How to regulate transnational corporations, put an end to fraud, tax havens, and the power of lobbies?”). The workshop can be seen at Youtube; while my talk is in English, the workshop is mostly in Spanish.

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Corporate power has evolved through the historical development of layers of fictions, which have been turned into reality through laws and institutions. As human creations they can be re-imagined and changed. Yet many of them are deeply entrenched in our contemporary society, not least through the control and command of resources, especially via the media of money.

A company is defined by and registered in law. The actions of particular individuals may count as that company’s collective actions if they are so recognised in terms of rules and procedures of the company and relevant law.

Corporate power emerges not only from private property rights but also from its important contemporary counterpart, the idea of limited liability. These conceptions are constitutive of relations of power and dependency in a world built on such legal concepts – for instance between employers and employees, between productive companies and banks, and between corporations and states.

Moreover, an employment contract, or a taxable sale, can only occur in a society co-constituted by the imaginative social construction of money.

Another central legal fiction relevant in this context is that of state sovereignty. It divides political humanity into separate spheres. State sovereignty can be mobilised, for example, for the creation of offshore financial centres, within which transnational corporations may establish new entities to sidestep the requirements of their homeland.

This possibility builds on the assumption that corporations (rather than just natural persons) can create and own other corporations. This makes it possible to build large conglomerates called ‘business concerns’. They could also be called business empires; the implicated social relations are forms of power relations.

Profit-making is defined in terms of the balance sheet. Law defines the categories and rules of book-keeping and accounting too. These legal rules and principles are not only conventional and inexact but also open to manipulation.

From all this follows that the intrinsic structures of the company or corporation are not so much physically confined to an office or anything else concrete. Rather they are constituted in, and effected by, a much wider sphere or envelope, namely the legal systems of states and international law, without which the capitalist world economy could not exist.

All laws can be changed, including those defined directly or indirectly in international law, but often they are made exceedingly difficult to alter. Many free trade agreements are a case in point. They “constitutionalize”, on a global scale, the legal underpinnings of corporate power.

The matter is further complicated by interstate relations. If one state creates, by legislative acts, an offshore centre for banks and firms based in other countries, it empowers those banks and firms by providing them with new opportunities. Simultaneously, it constrains other states by making them lose some of their controls – in the form of regulation and taxation – over those firms.

In other words, at the abstract, generalized level, the institution of state sovereignty protects corporate power in the liberal-capitalist world economy, which is divided into separate political realms. It is this protection that facilitates tax avoidance via transfer pricing and fictional or hidden payments and investments.

What is to be done? As far as tax evasion is concerned, a typical and often-heard reformist proposal is to change the legal rules and principles of book-keeping. Country-to-country book-keeping is argued to prevent illegitimate transfers of funds from one part of company to another part and thus to hinder tax avoidance. While I agree that this would to a degree improve the situation, the proposal does not go very far, not even if implemented globally.

We should go deeper to reimagine possibilities. Consider for instance the implications of limited liability in a situation where the consequences of a failure of a corporation would be unacceptable from the point of view of society as a whole, from the viewpoint of economic growth, levels of unemployment etc. The prevalence of these kinds of situations gives rise to an asymmetric principle: risks are in effect to a large part socialized, while profits remain private and ownership and control exclusive. This principle is not fair or just.

This point can be reframed also as a generic question: if liabilities are limited, why are then benefits and ownership not limited and shared as well? If an entity is too big to fail, it should be at least in part be placed in public democratic control. There is a variety of ways in which we can re-allocate the rights (entitlements) and duties (liabilities) of corporate entities (see for example Roberto Mangabeira Unger’s False Necessity). Arguably, this could best be done under democratic cosmopolitan law, given that we live in a single world economy.

Rushing on, there are other possible institutional transformations. For instance, the way state sovereignty has been established is analogical to private property rights. State sovereignty means, at least in principle, absolute and exclusive control over everything that is happening within a given territory. Taxation has been a key aspect and exclusive right of state sovereignty. Only states have the right to tax property, incomes, activities and the like. Not even the EU can set or collect taxes. Its meagre funds are coming from member state fees.

Breaking the connection between sovereignty and taxation would open up many new possibilities. To take an example: a grouping of countries establishes a global currency transaction tax and, with it, a new democratically controlled global organization, in accordance with the Denys-Patomäki Draft Treaty. This organization then sets a tax of 25% on any capital outflows or inflows to and from non-co-operative tax havens, which threaten, in any possible way, the prospects of success of the currency transaction tax.

If applied globally, such a tax on inflows and outflows would, in effect, put an end to tax havens. Even if limited in scope and coverage, a high-rate transfer tax of this sort would make a big difference. It could be used to secure adequate transparency and regulation of all financial centres.

Or consider the more generic possibility of a worldwide tax organization, which may even involve a global corporate tax, and at any rate some common rules and regulations concerning book-keeping and accounting and adequate levels of taxation. Perhaps this kind of global tax organization could be used to share a part of revenues? Perhaps a part of these shared revenues could go towards purposes of global common good, such as tackling climate change and its consequences?

Last but not least, we should also reconsider the ways in which the socially constructed institution of money is being created and controlled. Here a chief question is: what are the rights (entitlements) and duties (liabilities) related to money creation? At the moment most of the money is being created privately through the lending of banks, themselves profit-seeking corporations.

This does not have to be so. Central banks could take a much bigger responsibility in creating money, and they could do so under public democratic control. We could also have a world central bank and central bank currency, as in the Keynes-Davidson-Stiglitz plan of an international or global clearing union. Such a union would make global money creation possible – while it would also necessitate the idea of global democracy.

I could go on but the main point is this: we need to reimagine the institutional basis of our society. We need modest and concrete plans. To be truly transformative, however, any plan of action must be grounded on an in-depth analysis of the constitution of our current predicament.

Heikki Patomäki