In his column, David Hollanders elaborates on the future of the university. He states that a university that no longer reflects on its own aims does not deserve to be called a university On February 25th students occupied the Maagdenhuis, the seat of the board -aka College van Bestuur (CvB)- of the University of Amsterdam. Out of this occupation (or re-appropriation) has grown a movement that calls itself De Nieuwe Universiteit (DNU), which by now has co-movements in other university cities, including Tilburg. For an assessment of this movement, it is necessary to look beyond side-issues. One could disapprove of occupying, but at the same time endorse the goal it is meant to further (or vice versa). One could feel that the life-style of the occupiers –who could be described as engaged intellectuals or spoiled hippies, depending on your perspective- but nonetheless embrace the program (or vice versa). And one could object against the CvB letting loose the police against its own students, while rejecting the program all the same (or vice versa). These are all sideshows in the final analysis. The heart of the matter is the program, which I endorse in my role as lecturer and which is –I feel- worth considering by students –even if one rejects it, which one could. The last decades students have been hit hard on all fronts. Students do not receive much –if any- public financial support anymore, leading to a situation where one has to work (and de facto study part-time), load up with debt or be blessed with rich parents. Adding insult to injury, students are increasingly monitored on how fast they finish courses. This is justified on three grounds: First, taking on debt is framed as an investment in human capital, with a high return in working-life. This is problematic if not false. The job-market has been dire for years now and a master-degree is no longer a sufficient condition for a (well-paying) job. It is a necessary condition however, so one cannot refrain from it. Furthermore, education should –or so DNU argues- be more than trying to get in pole position for the labour market. It is also about Bildung, social cohesion and political participation. A second motivation for increasing the financial burden for students is that education has increased in quality –justifying higher prices. This is again problematic –if not false. The number of students per lecturer has increased dramatically. This has not only increased the work-load of staff –already pressured by job insecurity- but has inevitably taken its toll on quality: larger classes, standard multiple-choice exams, teacher-rotations and light-touch thesis supervision. A third motivation is that austerity is inevitable, and therefore students and universities cannot be spared. Even if one accepts the austerity argument –which many economists, including Krugman, Stiglitz, Jacobs and de Grauwe do not-, there is still the question whether one cannot do better with the money available. Do we want a government that spends scarce resources on research that caters to business interests? Do want universities to spend money on advertisement and public relations instead of research and education? Furthermore, do we want students that have learnt to conform as quickly as possible to whatever the educational system asks of them? Or do we want students who contemplate whether the expectations and demands of university and indeed of society more general make sense? If one feels these are important questions, one should embrace DNU, even if their answers are not always clear. For the DNU is pretty much the only movement that is at least asking the right questions. And a university that no longer reflects on its own aims does not deserve to be called a university.
Tax dodging by corporations
In this column David Hollanders discusses how excusable tax avoidance or fiscal planning is. He explains that tax dodging can be legal, but why it will never be moral. Tax dodging by corporations: if not illegal, it is certainly immoral Nobody likes paying taxes and companies are no exception. So one part of running a company is minimizing tax payments. The finance-textbook of Berk and DeMarzo shows how leverage reduces tax payments. Interest-payments are tax-deductible and the resulting tax-reduction is thus called the interest tax shield (ITS). Of course the larger the ITS, the lower government tax revenues are. This in turn leads to higher taxes elsewhere, higher government deficits or lower public expenditure. One can however not blame companies for taking advantage of tax deductibility of interest-payments, just like one cannot blame citizens for deducting mortgage-interest payments. Some corporations however go much further than maximizing the ITS. They exploit tax loopholes, breaking the spirit if not the letter of the law. An example is Starbucks. The BBC reported that in 2013 “Starbucks, for example, had sales of £400m in the UK last year, but paid no corporation tax. It transferred some money to a Dutch sister company in royalty payment ”. So how can Starbucks make profits but not pay taxes? It has a small office in the Netherlands (in Dutch:”brievenbusmaatschappij”), set up for no other purpose than to avoid taxes. The mother company of Starbucks in the UK pays “costs” (the royalty payments) to their Dutch office; these costs are fabricated and only exist on paper. This artificially reduces profits in the UK to approximately zero (and increases profits in the Netherlands). The Netherlands has a special (low) tariff for royalty payments. The profits are channelled back to the UK, and are not taxed there, for they have been taxed already in the Netherlands, albeit at a (very) low rate. Et voila: zero taxation. Starbucks is not the only company to avoid taxation in their mother county in this way: Google and Amazon are other examples. The other way round, the Netherlands was named a tax haven by Obama in 2009 (other tax havens included Bermuda and Ireland). So is such tax avoidance –or fiscal planning as Starbucks and the likes call it- excusable? One can argue that such tax-dodging is legal and that the social responsibility of businesses –as Milton Friedman (in)famously remarked- is to increase profits. But this conveniently ignores the real issue. There are several activities that may be profitable but that many people nonetheless feel companies should not engage in, such as child labour, weapon-sales to dictators and polluting. While child labour is not the same as tax-dodging, it shows that businesses do have responsibilities. And one of these is to pay taxes, like everybody else in society. These taxes are used to finance –among other things- educating the future workforce and building dykes and roads –all benefitting companies. But, some would counter, isn’t tax-dodging legal and therefore excusable? In fact, it can be argued that tax avoidance is illegal as it entails implicit government support for large businesses –that can afford the high up-front legal costs-, which is illegal in the EU. But even if legal, it is noteworthy that large businesses are lobbying for special tax arrangements –they are not just taking advantage of existing rules, they are influencing the rule-making process. But even if corporations would refrain from lobbying, it is close to impossible to formulate tax-rules that cannot be bent by corporate lawyers, who make a living out of, well, bending the rules. And this brings us back to the real issue. Small companies and households cannot afford an army of lawyers and lobbyists to eliminate their taxes. But taxes need be paid by someone. Whatever large companies are not paying, the rest of us is paying extra. If not illegal, that is certainly immoral.
Corporate governance
In this column David Hollanders discusses why corporate governance can be understood with non-quantitative methods. He explains this by using two examples: Wall Street and Margin Call. Economics is mostly practiced with the use of models.Finance in particular has been mathematized, as research in and teaching of for example option valuation, asset-liability management and corporate finance demonstrate. Even within finance there is however an important exception. Corporate governance can also –and sometimes even better- be understood with non-quantitative methods. Corporate governance is -in the words of Berk and DeMarzo in their textbook Corporate Finance– “the system of controls, regulation and incentives designed to prevent fraud”. Fraud by its nature is an informal, irregular and hidden activity, and as such is context-specific. Models however work best in stable environments where just a few parameters change –the parameters which are subsequently modeled. Fraud, misconduct, tax avoidance and cooking the books seldom provide such environments. So to get a grip on the issues involved and subsequently analyze them, non-quantitative means are called for. These include historical case-studies, thick description, investigative journalism and participant observation. They also include documentaries (such as Enron: The Smartest Guys in the Room, Inside job and Shock Doctrine) or even fictional movies. Two excellent movies illustrate the value of movies in understanding and teaching conflicts of interests in corporatations. 1. Wall Street: shareholders versus management Wall Street (directed by Oliver Stone, 1987) is as politically relevant and economically interesting as a movie gets. It depicts the dealings of investor Gordon Gekko –played by Michael Douglas. In a crucial scene, Gekko fulminates against management of a company (‘Teldar Paper’) of which he is himself a shareholder. Any socialist would no doubt subscribe to this speech which at the same time sums up the essence of shareholder-capitalism: every euro going to management is not going to shareholders. Gekko therefore calls fellow-shareholders to arms at the shareholder meeting: “You own the company. That’s right, you, the stockholder. And you are all being royally screwed over by these, these bureaucrats, with their luncheons, their hunting and fishing trips, their corporate jets and golden parachutes. (..) Teldar Paper has 33 different vice presidents each earning over 200 thousand dollars a year. Now, I have spent the last two months analyzing what all these guys do, and I still can’t figure it out. One thing I do know is that our paper company lost 110 million dollars last year, and I’ll bet that half of that was spent in all the paperwork going back and forth between all these vice presidents.” 2. Margin Call: management versus clients Margin Call (2011) is a reminder that interests of a company differ from those of its clients. Every extra euro paid by a client is good for the company. With a clear reference to the credit crisis, Margin Call depicts an over-leveraged Wall Street-investment bank overloaded with toxic financial products. When management finds out that they own shitty products, they try to sell them as soon as possible, before clients find out too. Management tells their bankers: “The firm has decided to liquidate its majority position of fixed income MBS… today. These are your packets, you will see what accounts you’re responsible for, today. I’m sure it hasn’t taken you long to understand the implications of this sale, on your relationships with your counter parties and as a result… on your careers. I have expressed this reality to the Executive Committee, and they understand. As a result, if you achieve a 93% sale of your assets, you will receive a 1.4 million dollar one-off bonus. If the floor as a whole achieves a 93% sale, you will get an additional 1.3 million dollars apiece. For those of you who’ve never been through this before, this is what the beginning of a fire sale looks like. I cannot begin to tell you how important the first hour and half is gonna be. I want you to hit every bite you can find: dealers, brokers, clients, your *mother* if she’s buying.” These two examples underscore the nature and scope of two crucial conflicts of interests in the modern corporation better than any model can. This is not to say that all movies that are instructive in the realm of corporate governance are good movies. Whereas Wall Street is a modern classic, Margin Call is just entertaining. It is also not to say that every good movie about finance is instructive. American Psycho for example is a perfect satire about the habitus of investment bankers, but does not help to understand specifics. It is all to say that movies can help to understand corporate governance in ways mathematics never can.