Civil Society, the Corporation and Regulation: Speech by BCA President Hugh Morgan to CEDA

23 March 2004

Speech by BCA President Hugh Morgan, President, Business Council of Australia, to the Committee for Economic Development of Australia titled ‘Civil Society, the Corporation and Regulation’.

The main thrust of my remarks today is that the economic system which has provided Australians and other citizens of the West with unprecedented levels of prosperity is under a very real threat from regulators. That system is usually called capitalism, or the free market system, and it is something that became recognisable, with hindsight, in the British Isles and in Holland in the 17th century.

The word ‘capitalism’ was coined by Marx and his disciples as a pejorative term, and the word ‘capitalist’ was almost invariably preceded by the adjective ‘bloated’. Today, the word ‘capitalism’ is sometimes used approvingly as in ‘capitalism triumphed over communism’, but not many people will, when describing themselves at a dinner party, tell the guests around the table, ‘Oh, what do I do? – I’m a capitalist.’

Given that most Australian workers today are statutorily required to contribute to superannuation funds, it is correct, at least in one sense, to observe that today, we are all capitalists. At the same time we have to note that the distance between the forced contributor to a superannuation fund, and the corporate decision-makers who decide to make this investment rather than that, is a very great distance indeed.

The capitalists which Marx had in mind were the British mill-owners and the other entrepreneurs of the early 19th century. Today, the word ‘capitalism’ conjures up – for most people – the large corporations of the contemporary scene; the banks, the large mining companies, the oil companies, the big retailers, and so on, in which they probably have shares, albeit unknowingly. They are the companies which form the membership of the Business Council of Australia, and which have done so much to transform Australia over the last two decades.

The capitalism which Marx observed was the outcome of a rule of law which had developed in England and which we know as the common law. The common law has three legs: the law of property, the law of contract and the law of tort. In 1855, the British Parliament passed legislation which gave statutory recognition to limited liability and separate legal personality, the essential elements of the corporation. Since then the corporation has become the dominant legal form for economic activity in the anglophone world. But this statute, which generalised more than a century of particular statutes granting corporate status one at a time to canal companies and railway companies, amongst others, was only possible in the context of the common law as it had evolved at that time.

In their book The Company, John Micklethwait and Adrian Wooldridge make the point that the 1855 Companies Act required strong and sustained political support in order to make its way through the Imperial Parliament. In an even more recent book, Saving Capitalism from the Capitalists, Raghuram Rajan and Luigi Zingales make this point much more strongly, as the following quotations demonstrate.

‘Because free markets depend on political goodwill for their existence and because they have powerful enemies among the establishment, their continued survival cannot be taken for granted, even in developed countries ...’

Recent corporate scandals, the booms and busts engendered by financial markets, and economic hardship have led to growing distrust of markets.

For free markets to become more politically viable, we have to repeat to ourselves and to others, often and loudly, why they are so beneficial. We have to recognise and address their deficiencies. And we have to act to shore up their defences.

Arguably, the most important characteristic of the political tradition which we have inherited from Britain, and which we share with the other common law countries, is that the authority and power of the state is derived from the active and continuing consent of the citizens. In our tradition the free citizen is the primary element of the body politic, and it his or her self-motivated activity in commercial, cultural, religious, philanthropic and political life which makes up the vitality of civil society. And the nation-state, which is the political expression of civil society, depends on that civil society for its legitimacy, for its direction, and for the way it conducts its affairs.

The corporation is a major part, arguably the major part, of civil society in its working clothes. The corporation is not a government instrumentality, although many in government seem to think otherwise. The corporation must obey the law, as indeed so must the government. But it does not exist to do the bidding of the government. The corporation is an association of free people who have come together, through the law of contract, to achieve common objectives. And today, the corporation, along with other business entities, is in danger of being regulated to death.

One of the most distinguished Roman Catholic lay publicists within the contemporary US, Michael Novak, sees the corporation as a voluntary association which allows individuals to work together in ways that make them more powerful and effective than they could ever be on their own. In The Fire of Invention, he argues that corporations serve important social ends. They create jobs. They provide valuable goods and services. Contrary to what zero-sum models like Marxism assert, corporations create wealth which did not exist beforehand. Finally, on a more fundamental level, corporations function as private social instruments, independent of the state, furnishing the material and moral support of other activities of a free civil community.

Novak’s defence is not just an a priori idealisation of the corporation but is derived from an acute observation of economic history. The business corporation is the voluntary association through which economic revolutions have been wrought – revolutions that have changed the world;s horizons, and transformed the lives of hundreds of millions of people, arguably billions. The Industrial Revolution, usually dated from 1750 to 1850, was driven in large part by the railway and canal companies. The great changes that have taken place in our lives since the invention of the computer and most recently the internet, have not been the work of governments but the work of people who worked in corporations. The corporation has turned the mechanical industrial age into the electronic age, and the benefits have permeated the whole of society, even – perhaps especially – the poor. For only in periods of dynamism and creativity do ever greater numbers of the poor rise out of poverty and discover their own talents for accomplishment. As catalysts of that dynamism, public corporations are one of the best aids to the poor in finding a route out of poverty. That is the main reason why healthy business corporations are the sine qua non for the success of a modern free society. Novak hails these two signal achievements – raising up the poor, and energizing our civil society – as powerful claims for the inherent morality of the business corporation.

But at the end of the day the corporation is not justified by its good works. The corporation is a legal instrument, based on the law of contract, devised by free people, to assist them in creating new things, new enterprises, new industries, new technologies, new cities, new knowledge, that could only be achieved through this voluntary association. The corporation is freedom at work in the economic life of the nation. When all is said and done, the attack on the corporation is an attack on freedom.

Having just said that the corporation is not justified by its good works, I am, for political reasons, going to enumerate some of them. Member companies of the Business Council of Australia collectively account for 20 per cent of output of the Australian economy. They employ about one million Australians, including a quarter of a million in regional and rural Australia. Currently they generate about $18 billion in dividends for shareholders and plough back the bulk of the remainder into skills development, product innovation and investment in long-term projects. Drawing on economies of scale, large corporations provide a wider range of goods and services to consumers, suppliers, employers and shareholders than would otherwise be possible. In this era of the global economy, they are an important conduit linking Australia with the rest of the world. Together, BCA members account for about one third of Australia’s exports. In particular, the past two decades have witnessed a significant growth of the corporate sector.

It is often said these days that during the last twenty years or so, Australia has undergone an economic transformation. That, for example, the year-on-year GDP growth record since 1994 is unprecedented in Australian history, at least since the gold rushes of the 1850s and 1860s. These statements are, I believe, true indeed, but what is rarely said is that the prime mover in this transformation has been the corporation, and that the people who did the heavy lifting during this transformation were the members of the corporations: the directors, the management, the workers, and the many thousands of people who supplied the corporations with goods and services.

Nonetheless, it is obvious that political leaders are responding, in their current bout of re-regulation frenzy, to what they perceive to be public perceptions about corporations. I discussed CLERP 9 in a speech some weeks ago and I will not revisit that today. The Enron and WorldCom scandals in the US resulted in the Sarbanes–Oxley Act which was passed initially and with little reflection by the US Senate 97– 0, and then with greater hesitation, passed soon after by the House. Robert Bartley, who was the intellectual giant at the Wall Street Journal for more than twenty years, and who died of cancer, at the height of his powers, just three months ago, said of Sarbanes-Oxley, that it has taken policy in exactly the wrong direction1.

The re-regulation frenzy which we see at home and abroad, is a matter of very great concern to the BCA membership. But I would be the first to admit today that the arguments that we employ to shake the resolve of governments to rethink their re-regulatory ambitions are difficult to achieve traction. When we suggest, in the most deferential language, that we do not like what is being done, and that we will campaign against it, the amused response is: ‘Make my day!’

So the corporation has to rediscover the sources of its legitimacy, and refurbish that legitimacy in contemporary language.

At this point of my remarks it would be appropriate for me to cite some examples of regulation which give weight to the arguments I have outlined. I have just one specific example. Prior to the most recent additions to the regulatory burden, which fall upon financial services advisers, it could require up to 200 hours for an adviser to fill in all the paper work, which maintaining his licence required. Among the questions they had to answer, were – ‘Have you ever had an altercation with a regulator?’

On the surface, it seems an innocuous question. But the hero of Orwell’s 1984, Winston Smith, would have recognised this as a highly loaded question.

A general example comes from a forthcoming monograph by the distinguished legal scholar Geoffrey Walker, formerly Dean of Law at the University of Queensland. The monograph is entitled ‘The Tax Wilderness, How to Restore the Rule of Law’ (to be published by the Centre for Independent Studies) and in the first paragraph we read:

‘Before the High Court in the First Uniform Tax Case (1942) needlessly gave the Commonwealth a monopoly (at first de jure, later de facto) of income taxation, the relevant federal legislation occupied 81 pages in the statute book. Now it has exploded to 8,500 pages, or 13,500 pages if one includes fringe benefits, capital gains, and superannuation provisions.’

Regulation so permeates our business and personal lives that we have become desensitised to its impact. Everything we undertake brings us into contact with regulations and regulators. The last survey of the BCA membership concerning the factors impinging upon the success of their businesses, yielded the result that taxation was the most serious, and that regulation was the second most important factor inhibiting the growth of their enterprises.

It is noteworthy that over the last two years the BCA has undertaken an exercise in scenario planning, which has involved bringing together some 80 opinion leaders, drawn from a wide spectrum of Australian society. The results of this exercise were released last week. Three story lines were developed, to illustrate various possible situations in which Australia could find itself in by the year 2025.

These story lines were not intended to be either prescriptive or exclusive; they were mind stretching exercises. It is pertinent to observe that throughout the discussion and debate involved in the development of these story lines, in which I was much involved, and given the high ranking importance to the BCA membership of ‘regulation’ as a growth inhibitor, only one of these story lines considered the possibility that by 2025 Australia could be seriously impoverished by regulation.

This suggests to us that we have all become so desensitised to the growth of this phenomenon that we are unable to understand and identify what is going on. It was different when Margaret Thatcher, for example, took on the miners in 1984 and won a decisive victory; everyone knew that things had changed. The same was true of Rupert Murdoch and Wapping. And so it was with Roger Douglas in New Zealand. But here we are dealing with a slow, insidious, piecemeal expansion of regulatory intervention over every aspect of our lives.

There is no point in my giving a long list of particular examples. If we were to just pause to think, every one of us could cite their own list. The first issue is: Why haven’t we tried to do something about it, given that it is almost as important as tax?

The reasons that come to mind are – a sense of complete powerlessness; the necessity of getting over hurdles to maintain the day-by-day momentum of business; the disproportionate effort required to overcome any particular regulation; and the sheer weight of the army of regulators who are out there to help us run our affairs. What is not understood is that each individual, and society at large, can only sensibly respond to a strictly finite regulatory array. And it is no different for the corporation.

In many instances, at least up till now, any one regulation might have seemed innocuous and reasonable. But when we have an ever growing accumulation of regulations and regulators, we are like a person who feels ‘sort of all right’, but not really brimming with energy, but who in fact has an unrecognised and certainly undiagnosed, malignant cancer.

We are in the position of a person who is not feeling 100 per cent, but is very reluctant to go to a doctor, because there is a fear of the diagnosis and the consequences of the surgery that might follow.

This is not an attack on regulators. It is an attempt to grapple with the realisation that we have got a problem; but it is a problem for which the answer is not readily apparent.

What should be the role of the BCA and other business organisations in this situation?

The advice which Rajan and Zingales offer, is this: ‘The public should be made more aware of how much it benefits from the market and what the costs of seemingly innocuous anti-competitive policies are, so that the public is less willing to remain passively on the sidelines’.

CEDA, of course, is just the forum where these issues can be appropriately canvassed. I’m most grateful that I’ve had the opportunity to do so today. At the conclusion of their book, Rajan and Zingales say this: ‘The main point of this book is that free markets, perhaps the most beneficial economic institution known to humankind, rest on fragile political foundations’.

It is our joint responsibility to secure those foundations. 



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