Institutionalized Greed: Shareholders and Large Investment Funds

CAPITALISM, 29 Mar 2021

Roberto Sansón Mizrahi | Opinion Sur - TRANSCEND Media Service

18 Mar 2021 – Behind large corporations, other actors appear that help sustain the concentrating dynamic. They are shareholders and investment funds that, with diverse complicities, seek maximum profits without considering that their decisions affect the entire humanity and the planet. Greed eagerness goes hand in hand with the permanent attempt to cover up the damages it produces.

A diversity of actors exists in the economic system, a few very powerful, some with medium power, and most of them under the others’ submission. It is a severe hierarchy where the strongest abuse their power to retain good part of the wealth produced by the whole society.

Actors that are more visible are large globalized corporations, such as the technological, oil companies, weapons producers, chemical and pharmaceutical industry, producers of agricultural supplies (which includes agro toxics), cereal traders. With aggressive behaviors, they impose their interests without considering eventual social and environmental impacts. They have substantial resources and privileged information regarding opportunities that they take advantage of for growing rapidly. They dominate markets by buying out or eliminating competitors, impose prices and commercial conditions, evade or elude taxes, flight capitals they transfer to their headquarters or subsidiaries in jurisdictions that assure opacity and minimum tax burden, such as the tenebrous tax havens. Their power affects politics, the media, the judiciary, shaping the prevailing common sense. They control governments and impose deregulations and public policies by obtaining extraordinary profits while harming large majorities.

The resulting dynamic affects humanity and the planet. It destroys essential environmental processes, produces despicable inequalities with opulence and squandering next to poverty and indigence, generates crisis and systemic instability, exalts financial speculation, fragments societies, privileges greed and selfishness, alienates crowds with escapisms looking to daze freewill.

Aware and unaware shareholders

However, it is worth pointing out that behind large corporations other actors appear that contribute to sustaining the concentrating dynamic and imposing basic criteria that guide corporate behavior. They are organizations and persons with surplus liquidity that they invest in diverse activities with the objective of obtaining maximum returns, a purpose that is confused with obtaining extraordinary profits.

Some belong to wealthy families that invest in counselling from advisors affiliated with the hegemonic criteria of maximizing profit, but investors that weight the most are entities that administer third parties’ resources.

The most powerful are investment funds that channel trillions of dollars. Their capacity to influence the course of countries is huge. They have different sizes but, obviously, those that prevail are the ones that manage large sums. The biggest is BlackRock that administers over 7 trillion dollars (double France’s GDP) while its affiliated enterprise, BlackRock Solutions, offers services to clients whose portfolios add up to even more resources than those managed by BlackRock.

Those funds manage resources from a diversity of actors: enterprises’ pension funds, labor unions, industries, governments, insurance companies, universities, foundations, charitable organizations, sovereign funds and banks among others. The pool of fund investors and those who receive their investments make up a huge economic web that, without the risk of exaggerating, operates as the helmspersons of a significant part of the world’s economies.

Another type of funds that do not have bulky own resources but are capable of generating very disruptive situations are the so-called hedge funds (high-risk funds). How do they operate? They enlarge their resources leveraging them with debts and derivatives, and apply them with highly speculative strategies. If they fail, they drag with them many investors, thus, generating panic and capital outflows.

Countries that accumulate surpluses establish Sovereign Funds as Abu Dhabi, Norway, Saudi Arabia, China, Kuwait and Singapore among others. Their investment criteria combine good returns (not extraordinary) with geopolitical interests.

Managers of large private funds do know the “collateral” consequences that their investment decisions produce (allegedly unintended but foreseeable) and, nevertheless, the harm they produce does not limit their desire for obtaining extraordinary returns. It is worth asking if people that, one way or the other, channel their savings in those investment circuits are aware of the humanitarian and planetary disaster they are contributing. Greediness goes hand in hand with the permanent attempt to cover up the harm it produces.

Vulture Venture Capitalism

Investment logic whose consequences are nor explicit

Why do all the investors, as a herd, expect extraordinary profits? The answer is because they are allowed. With the deregulation of markets and capital movements imposed at the end of last century, the dams that in some way contained the unbridled concentration of wealth were raised. When those restrictions were eliminated, the field was open for a pack of speculators to chase after every type of opportunities, some legitimate and many related with weaknesses or misfortunes of other actors. The watchword was to prevail at any cost, accelerated, and in every latitude, a tsunami of abuses, arrogance, and injustices few times seen before in the long history of humanity.

The deregulated context gave way to high rates of return that, once installed as “normal,” established the expectancy among investors of always obtaining such ambitious returns, and thus no more modest profits but rather large and growing. This was and still is the mandate given by shareholders and lenders to directors and managers of almost every fund that channel their own resources and those of third parties. To preserve their jobs and compensations, they are required to obtain bulky returns; if they succeed then they receive generous rewards, if not they are fired. What is serious about this mandate is that it induces them to push the limits of what is illegitimate and even of what is illegal. Few researches trace the concentrating route and those that show the infinite power abuses and transgressions used for obtaining extraordinary returns, end up silenced or far from reaching large public.

Thus, economic concentration is reproduced and increases. Large corporations maximize returns buying promissory enterprises as they startup or by eliminating competitors. A perverse dynamic reinforces the oligopolistic nature of main markets. Those who dominate can impose prices and commercial conditions to suppliers and consumers, to obtain unreachable profits in less imperfect markets. In turn, medium enterprises are forced to apply similar strategies with their small suppliers and clients, and in similar ways descending up to the vulnerable spaces where weak ventures of the popular economy barely survive. A cascade of appropriations is established throughout the economic system, without limits, merciless. This way of functioning, narrows internal market and reduces growing opportunities for the real economy. Instead, spaces for speculative financial operations grow, a world filled with instability, unscrupulous organizations insensible to the social and environmental destruction they produce.

Mechanisms used for extracting extraordinary returns

Mechanisms used by dominators are multiple and diverse; some persist over time but most of them adapt or renew. Although in other texts we have tried, in these lines we cannot mention many of them. As examples, we choose some of the most significant ones to describe.

One of the most scandalous mechanisms practiced with the complicity of neoliberal governments are highly speculative financial operations; one of them is carry trade (commonly known as “financial bicycle”). In this case, a financial group familiarized with a country’s vulnerable situation that suffers from foreign currency shortage, brings in dollars or euros, exchange them into local currency, and allocated them in bonds or time deposits that pay high annual interest rates (30, 50, or even higher). During such period, currency exchange rate remains stable, in part due to the inflow of those same speculative resources that feed the offer of short-term currencies. If there were to appear signs of a possible devaluation (or if they obtain privileged information), speculators rapidly rebuy their original currencies, obtaining much more than what they brought, thus, obtaining returns impossible to access in their countries of origin. The issue that is concealed is who assumes the payment of tremendous amount of resources sucked out of the country. No doubt, the local society who, in part bamboozled by those who colonize their minds, does not understand that what has been extracted is nothing less than a significant part of the domestic savings generated with their effort and work.

Another example refers to how they elude or evade tax payments (and thus increase even more their exorbitant rates of return). For that, they use triangulations between different enterprises of the same group. If they export, they under invoice to avoid registering profits in the country that produces the exported goods; if they import, they over invoice what they acquire from another enterprise of their group to inflate costs and thus concealing profits. In addition, they frequently use the mechanism of billing their headquarters or affiliated enterprises for services that were not provided or whose cost is inflated to, once again, “eliminate” profits. This punishes emergent economies and also generated confrontations and lawsuits between the European Union and large technological companies that register negligible local profits, despite their successful market performance in France, Germany, and the rest.

A third example is buyback, which means allocating an enterprise’s liquidity to buying their own stocks, something that seems naïve but has very serious consequences. Buyback or stock-ownership concentration (the opposite of shareholders dilution) is done to generate larger returns for the shareholders, who, as they are less than before the buyback, receive a larger part of the enterprise profits. This is a highly speculative scheme; it has been disseminated abusively throughout central economies, representing trillions of dollars. Without the generation of wealth by the enterprise, shareholders increase their profits and managers are rewarded for such increase. Of course, the consequences are dreadful, because the functionality of the enterprise becomes distorted. Instead of allocating corporate resources for investment, research and development, generation of new jobs, improvement of wages or any other purpose that promotes development, such potential is completely sterilized by taking away vast resources from the productive circuit with the sole objective of satisfying the greed of shareholders and managers.

Institutionalization of greed

This way of obtaining extraordinary returns (that we have barely sketch out) just represents the institutionalization of greed and its disastrous effects. It is incredible that the unbridled desire for profit of shareholders, investment funds, and managers could impose such disastrous course and way of functioning to the entire humanity. If we were to ask ourselves whether this is unavoidable, we would answer that it is not. As well as powerful minorities organize to make their greed and irresponsibility for humanity and the planet prevail, large majorities would have to find ways of dismantling the suicidal course. Which options exist?

A decisive factor is replacing financial helmspersons by governments that build another type of economy; an economy that instead of concentrating wealth and decisional power, operates servicing humanity and the planet. In previous texts, we have described that concentration is sustained by a series of engines that allow for its reproduction and subdue democracies to their interests. There is no lack of measures to dismantle them and liberate captured democracies. As there are no unique recipes, each country will have to combine changes and times according to circumstances they face. However, some common denominator criteria can be identified such as the need for permanent popular clarification, having strong social organizations, and politics strengthened with the conviction that more of the same does not work, that changes in the course and way of functioning are essential; that is, choosing leadership and support activists that serve the peoples.

How do we value efforts that try to mitigate popular suffering?

Though they do not transform prevailing economic dynamic, actions orientated towards mitigating popular suffering are highly valuable; they go out to meet compelling needs here and now. We should support those efforts, recognizing their value and the courage of those who carry them. They are bearers of profound humanity and do not give in to tremendous circumstances regarding all types of shortages and inequities in which assistance to defenseless victims is developed.

These initiatives also act as conveyor belts that inform what vulnerable majorities are suffering, something that dominators always try to conceal.

What can we say about those who dominate today and abuse their power?

Dominators conscious or unconsciously subjugate, lie, cheat, conceal, sink into senseless opulence, build an uncertain and merciless future. How far do they want to go; what drives them in their march of injustice and destruction?

Would there be left only harsh punishments with penalties in accordance with the evil acts they have done? It is possible, but it is worth reminding others, though partial, valuable initiatives.

Though minority, there are movements that clarified shareholders so they do not invest in weapons industry; others were successful in making shareholders avoid investing in enterprises that destroy the environment. In similar way, trusts were established to invest while promoting social equity and environmental safety, offering their shareholders smaller returns. In the last decades, the so- called enterprise B appeared that work for “an economy where success is measured by the wellbeing of persons, societies, and nature.”

Is this type of efforts enough? No, but they help scan other courses and ways of functioning. They are not enough because the context in which these efforts develop is still dominated and organized by the unbridled wealth-concentrating process that prevails in the world. As it was already mentioned, the outrageous economic concentration facilitates and consolidates decisional power, which is the ability that has the economic power to sustain its preeminence and silence or corner up their opponents. Those who have this power ignore or deny what they cause. Do they really believe that they will enjoy eternal impunity?

There are several paths to revert this world chaos. One option, to which we adhere, is going through democratic venues with politics as helmsperson, with clarification, social organization, honest and not corrupt governments, decentralized media, fair justice, dismantling all the engines that sustain concentration, with universal health, transforming education among other critical changes.

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Opinion Sur is a non-governmental, nonprofit group from Argentina dedicated to promoting sustainable economic and social growth in developing countries. Opinion Sur creates original ideas and strategic action plans to share with policy makers, entrepreneurs, academics, NGOs, and the public through advisory services, and a series of products: two monthly online publications – Opinion Sur and Opinion Sur Joven. Through Opinion Sur Journal, a free and non-partisan online publication, it circulates ideas that contribute to the sustainable development of countries in the Southern Hemisphere. This publication, which is also available in Portuguese and Spanish, focuses on three complimentary areas: Development; Geopolitics; and Transformations. Currently, there are more than 70,000 subscribers spanning across the five continents. More…

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