Friday, August 24, 2007

The Regulatory Dimensions of States as Corporate Actors

The last quarter century or so has witnessed a growing obsession with the regulatory dimensions of corporations as state actors at least among global political elites (the transnational political, media and intellectual classes). Much ink has been spilled on identifying the essence of the problem, spotting the weaknesses of the current structure of political governance with respect to the problem, and advocating any one of a growing number of changes to solve it. At its vanguard, this movement in the culture of political characterization (and thus of the crafting of a certain reality) has substantially outlined its conclusions with respect to each. Vanguard elements of the global political elites tend to hold that the essence of the problem centers on the failure to recognize the great social and political dimensions of economic activity. Corporations act like or on states in a manner with respect to which the political and social dimension cannot be ignored. The separation between public and private, state and corporation is unrealistic and unsustainable. It works to the detriment of the underrepresented elements of both sorts of entities—the people. The weaknesses of the current system of governance thus are identified as centering on this failure of recognition. Specifically, there is a capacity problem—states are too small or too weak or too constrained in the exercise of their regulatory power vis-à-vis entities which are themselves unconstrained by any territorial principle. And the solutions? There are many competing even among vanguard groups. These involve crafting a regulatory system through institutions or mechanisms as broadly constructed as the entities to be regulated. Thus, calls for international regulation though autonomous global institutions, or the development of a set of binding global regulatory norms enforceable in the courts of any states, or by other mechanisms.

Clearly the vanguard elements of elite society has not yet won the day. And this global vanguard faces challenges both from the left and the right. Old style Marxist Leninist states tend to be wary of programs that suggest a further deterioration of the power and autonomy of the state. This is especially the case in developing states like China, that have recently come into their own. States that have emerged from colonial domination are sometimes wary and sometimes embrace internationalization. They are wary to the extent internationalization is perceived as a cloak for re-colonization (by other means—the usual charge levied against modern economic globalization). They are more likely to embrace international institutionalization to the extent that it is organized along state representation lines (since there is power in numbers and their political voice will be more loudly, and authoritatively, heard). Ironically, old style free market states are also wary of internationalization, and especial international institutionalization. These states tend to be wary of a further deterioration of the power and autonomy of the state for slightly different reasons. Many in this group remain unconvinced of the democratic legitimacy of supra national and international institutions. And others fear that international democratization will have the opposite effect—permitting those states with little history of respect for rule of law concepts as they have been developed in the West to disproportionately control the levers of global institutional authorities. The political elites in the United States tend to take this position more often than not, and so find themselves at times. And international institutionalization tends to run counter to the philosophy of modern economic globalization, founded on the separation of politics form economics, of public from private institutions, and on a free movement of private capital, some services, but not labor, based on contract principles.

And so, while the vanguard builds a case for global institutionalism, the bulk of public and private elites, and especially those with power and money, have opted for less dramatic approaches. They are willing to acknowledge a problem, but suggest that its essence is bad behavior by the characterless, rather than on a flaw in the theories of governance that posit distinctions between the economic and the political organisms. They are willing to acknowledge weaknesses in the current structure of political governance, but tend to place emphasis on a failure to enforce existing rules rather than on the systemic flaws or incapacities of current governance models. And they are willing to produce models for correct behavior and proper conduct based on an encouragement to states to enforce their laws and an exhortation to economic actors to behave appropriately. The great models for this model are the U.N.’s Global Compact and the Organization for Economic Development and Cooperation’s model rules.

While substantial attention has been lavished on the regulatory dimensions of corporations as state actors, comparatively little has been paid to the regulatory dimensions of states as corporate actors. But this is an issue every bit as important to the problem of the regulation of economic activity, and indeed, may become the most important determinant of the way in which the character of the state ultimately evolves in the legal ordering of this century. The issue was given a bit of a boost recently in a story carried by the New York Times and meant to scare the American population in the usual nativist manner (a pattern well worn outside the United States). Steven R. Weisman, A Fear of Foreign Investments, New York Times, Business Day, Aug. 21, 2007 at C1. It seems that foreign states are becoming great economic actors. They are becoming great economic actors in the ordinary manner—by buying interests in corporations and other private economic actors, and using those investments to maximize their own welfare. The story reports on the way in which governments are funneling their dollar holdings into investment funds that then acquire “companies, real estate, banks, and other assets in the United States and elsewhere.” Id.

The article reports that the resulting concern is multilayered. “One of the American concerns is philosophical. The United States has for years preached the gospel of privatization, calling on other countries to sell their government-owned industries.” Id. Yet this is an odd concern. Governments are not nationalizing economic actors. They are merely seeking to act like other shareholders. This behavior is unremarkable when private entities acquire interests in each other for the purpose of maximizing their interests. But it appears to have a different effect if public entities begin to act like private investors. The usual explanation is simple: states are different. They seek to maximize the political and social interests of their people rather than confine themselves to wealth maximization like private investors. The difficulty, of course, is that this explanation is no longer entirely accurate. Private investors maximize their interests (roughly translated into wealth concepts). And they serve their own masters, including ultimate shareholders and the investment community in ways that may require action that does not suggest immediate monetary maximization. Indeed, the entire corporate social responsibility movement is grounded in the notion that investors are demanding conduct that is not wealth maximizing in the traditional (and now increasingly obsolete) sense of short term profit maximization. States also, to a great extent, are captive to their own “investor base”—their voters. In this respect the political dimension of state activity in the market is similar to that of private holding companies in the market.

Ah, it is said. But that points to the second concern—state corporate investment will affect the markets adversely. Thus, related to the “states are different argument” is one that is raises “the prospect of government interference in free markets, only this time, in other countries’ markets.” Id. Control of the markets, it is said, derives from the size of the investment funds controlled by state actors.

Another concern is the sheer size and potential growth of these funds. Their estimated $2.5 trillion in assets exceeds the sum invested by the world’s hedge funds. . . . Though sovereign wealth funds do not appear to have played a role in the recent turmoil in global markets, experts say they could in the future, in favorable or unfavorable ways — by selling assets abruptly and precipitating a crisis, or by bailing out funds or companies that are in trouble.

But this argument is difficult to square with the nature of the investment. States power to control the markets are based on the same power as that in private hands—the ability to deploy vast amounts of wealth in the market, in strategic ways for the benefit of their ultimate shareholders. To the extent that private holders of vast wealth are currently regulated—and we are told by our political elites, regulated well enough—those regulations apply to state investors as well. And surely to the extent that the world’s great hedge funds, already enormous by the all accounts, can be acceptably regulated, so too sovereign funds. Indeed, even those who worry most suggest that the conflation of state and corporation that appears to be so vociferously denied when the issue is the public responsibilities of private concerns grudging admit that this is a worry in search of a problem. “‘They could become either the source of the problem or part of the solution,’ said Edwin M. Truman, senior fellow of the Peterson Institute for International Economics.” Id.

Thus the problem points to the fundamental issue mirrors that of multinational corporate regulation—how does one square the realities of private conduct by public actors in the market under a theoretical and regulatory construct that posits the separation and unbridgeable separate character of public and private entities. It is no surprise, then that “The worry is that beyond the possibility of foreign funds pushing up prices on bonds, stocks and real estate, they might exercise inappropriate control politically or in the private sphere.” Id. And the answer, for some, is one heard increasingly in national legal orders—when states act in the market, they will be treated as any other corporation. ““A government is a different type of animal in the investing world,” he said. “We call them sovereign wealth funds, but once you’re operating outside your own borders, you’re not sovereign in the same sense.’” Id., (quoting Edwin Truman). Yet, the implications of that position, for the construction of a regulatory framework, is still lost on its proponents. For if it is so self evident that states lose their political character to an extent at least when they act outside their borders, then it seems equally plausible for other entities to do the same in similar circumstances. And it is not necessarily that the sovereign character of the state is lost when it projects its power outside its borders, but that te nature of that power, and its relation to the regulatory power of others, changes in the context in which it is asserted. This, of course, is precisely the point raised by those who argue that corporations actions can acquire a political and social dimension.

So, for the moment, those who identify the problem appear to propose a regulatory framework substantially similar to that imposed on private entities exercising social responsibilities. Thus “many experts [are] urging the United States, the International Monetary Fund and the World Bank to draw up codes of conduct that would keep politics out of investment decisions and require the funds to share information about the composition of their portfolios and their investment strategies.” Id. Other suggest requiring sovereign funds to have “non political managers.” Id. And quite rightly, the United States has sought a measure of reciprocity in these forms of investment—inbound as well as outbound. Id.

All of this, ironically enough, seems to add a measure of strength to the arguments of the vanguard that the distinctions between public and private entities are falling away. That insight should produce a necessary reevaluation of the nature of regulatory deficiencies and ought to reinvigorate the debate about the character of appropriate responses. All of that has been difficult to do when the focus has been on the regulatory dimensions of corporations as state actors. Perhaps it will be more likely coming when the focus is on the same problem in reverse—the regulatory dimensions of states as corporate actors.

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