What future for democracy when the private sector’s advance shows no sign of abating asks Prem Sikka

What is the future for liberal democracy? This should be a pressing question. All around us, corporations rule the roost. They fund political parties and reward former and potential ministers with consultancies. They finance think-tanks, control newspapers and television and radio stations to mobilise particular kinds of opinion. This is in addition to their control of food, water, gas, transport, electricity, medicine and virtually everything else. The interests of corporations are deeply embedded within the domestic and foreign policymaking imperatives of the state.

There was the hope that under the weight of public expectations, governments would adjudicate on demands by corporations. However, that aspect of public policymaking has also been made corporate. Corporate elites have been installed in senior state-sponsored public policymaking structures, enabling them to shape public policies, keep radical reform off the political agenda and mobilise support for their preferred alternatives.

All this is illustrated by two recent reports relating to the current financial crisis. They shield the systemic nature of problems from scrutiny by individualising failures and – even worse – by treating them as aberrations which can somehow be solved by using the right techniques.

The first report is The Turner Review: A regulatory response to the global banking crisis, a report published in March 2009 by Adair Turner, chairman of the Financial Services Authority – a post he was given in September 2008. Previously, he was a non-executive director at Standard Chartered Bank. From 2000-2006, he was vice-chairman of Merrill Lynch Europe (now part of Bank of America). And from 1995-99, he was director general of the Confederation of British Industry. In 2005, he was elevated to the House of Lords and became a legislator for life.

The second report relates to UK international financial services – the future. This was published in May 2009 by Winfried Bischoff, a former chairman of Citigroup Europe. The Bischoff report is personally endorsed by Chancellor Alistair Darling

Both Lord Turner and Sir Win are highly experienced individuals and should have a good idea of the failures of the financial sector. Their former organisations have been bailed out and have made headlines. Here are some examples.

In 2008, a United States Senate Committee report concluded that: “Merrill Lynch developed, marketed, and implemented a variety of abusive dividend tax transactions to enable its non-US clients to dodge payment of US taxes on US stock dividends”. In August 2008, New York State’s attorney general threatened to sue the company for misrepresenting certain debt investments as safer than they actually were. The threat came even though Merrill Lynch had offered to buy back $12 billion of auction-rate debt.

In 2005, Merrill Lynch was fined $14 million by the US Financial Industry Regulatory Authority for violations relating to sales of shares. In 2003, the US Securities and Exchange Commission charged Merrill Lynch and four of its executives with aiding and abetting Enron’s frauds. The allegations were eventually settled with a payment of $80 million.

In 2002, the company paid $100 million to settle charges that its analysts had misled investors by touting shares in companies so that the firm would win highly profitable investment banking business from those same companies. In 1999, Merrill Lynch was fined £6.5 million by the London Metal Exchange over its involvement in the Sumitomo copper market scandal and the allegations that it assisted clients to manipulate the copper market. In September 2008, with support from the US government, Merrill Lynch was bailed out by Bank of America, which itself subsequently needed state support.

In 2008, a US Senate Committee report concluded that Citigroup knowingly crafted transactions “to enable its offshore clients to dodge US taxes on their stock dividends”. In 2008, Citigroup faced US regulatory charges that it “misled investors regarding the liquidity risks associated with auction rate securities”. The bank agreed to buy back $7 billion of securities. In 2005, Citigroup Global Markets Limited, the European investment banking arm of Citigroup, was fined £13.9 million by the FSA for failing to conduct its business with due skill, care and diligence. In 2003, Citigroup paid $120 million to settle SEC allegations that it helped Enron and Dynegy commit fraud. In November 2008, Citigroup was bailed out by US government. In fact, it has been bailed out three times altogether.

Arguably, Lord Turner and Sir Win are in a position to understand and check the corrosive culture of the financial sector, but their reports are disappointing. Lord Turner made 28 recommendations, although none are developed in any detail. These include bolstering capital adequacy, reducing financial leverage, better supervision, deposit insurance, good governance of credit rating agencies and possible controls on executive remuneration.

The report harps on about depositor protection, but does not offer a single right to depositors – for example, the right to appoint directors to influence bank operations. It notes that banks made mistakes, but does not consider alternatives, such as co-operatives or mutuals. It notes conflicts of interests by credit rating agencies, but does not suggest that the functions could be better performed by a not-for-profit organisation. Lord Turner acknowledges that much of the innovation in financial services had little social value, but is silent on the corrosive culture that encouraged it and its role in tax avoidance and development of exotic financial instruments which have brought untold misery to millions of people.

The Bischoff Report did not like the mild criticism of the City in the Turner review and argued that the development of toxic financial products is desirable because they generate profits. Such product development could be checked by tougher regulation, but Bischoff isn’t keen on that and says: “Existing principles, rules and practices should only be replaced with proper justification”.

Bischoff calls for high standards in the City, but does not explain why they remain elusive. Despite the financial failures, the report recommends that the “Government and the industry should collaborate in order to maintain and expand the UK’s central role as a finance portal for the rest of Europe and the world”.

There is a good case for separating the retail side of banking from the toxic investment side, but Bischoff rejects such ideas. Governments may be keen to fight organised tax avoidance and adopt progressive taxation policies which place higher burdens on the rich, but Bischoff recommends that British “taxation policy should be mindful of the wider aim of maintaining and expanding the UK’s central role as a financial centre”. The report is silent on what the social consequences of this might be.

Sir Win Bischoff is being touted to head UK Financial Investments, the Government body for overseeing investments in the banking system.

Ministers have been telling us that the financial crisis is global and that international regulation is needed. However, Treasury minister Lord Myners followed the Bischoff line: “We oppose a European single supervisor”.

Lord Myners was criticised by the Treasury Select Committee in its report on the debacle of Sir Fred Goodwin’s pension at the Royal Bank of Scotland. The report said: “We suspect that Lord Myners’ City background and naiveté as to the public perception of these matters may have led him to place too much trust in an RBS board”.

In March 2009, the Sunday Times alleged that before his ministerial appointment Lord Myners was chairman of a Bermuda-based company that avoided £100 million in British taxes.

Corporate discourses dominate the financial world and other sectors, too, as corporate grandees are parachuted in. Increasingly, corporate preferences masquerade as policies of the state.

No doubt, Lord Turner and Sir Win mean well and are keen to serve broader social interests. But the truth is that people’s conception of social interests is framed through the prism of their class, wealth, business interests and circles of friends. The Bischoff report was prepared by a panel of accountants, lawyers, bankers and financial elites. There was no room for anyone suffering from credit crunch, endowment mortgage, pensions mis-selling and payment protection insurance scandals or excessive overdraft and credit card charges.

In recent weeks newspapers have been full of stories about MPs who have enriched themselves by abusing the expenses system. In comparison, little attention is paid to the takeover of the state by corporations. Abraham Lincoln once said: “I see in the near future a crisis approaching that unnerves me and causes me to tremble for the safety of my country… corporations have been enthroned and an era of corruption in high places will follow, and the money power of the country will endeavour to prolong its reign by working upon the prejudices of the people until all wealth is aggregated in a few hands and the republic is destroyed. I feel at this moment more anxiety for the safety of my country than ever before.”

The choice is clear. We can have either democracy and public accountability or rampant corporate power with enormous wealth and influence concentrated in the hands of a few business executives. But we cannot have both.

Prem Sikka is professor of accounting at Essex University