Why Met Gate Matters…
… or Applied Transactional Cost Management Strategy in an Environment of Cronyism.
There are two elements to a successful strategy; creating value and appropriating value. By value I mean, usually, wealth but not always. It’s not always the case that if you bake the pie you get the biggest piece, sometimes you have to pay the guy who owns the oven. That is okay where you know how the pie is going to be allocated and believe that the system is fair. You strike the best deal you can. Where there are good rules and people stick to them, we can all get on with creating value for ourselves and to share as we see fit. When the system is corrupt people will think twice about how much effort they put in to creating value. Met Gate matters because it raises questions about how fairly the people who set the system’s rules are behaving. This ulitimately leads to poor economicy performance. It is an issue of corporate goverance.
In a society with strong Corporate Governance, value is allocated fairly and transparently, according to rules that are known to all and open to challenge by all. Enlightened self-interest will encourage most people to broadly focus on creating and exchanging value whilst appropriating a “fair share”. Where the system is broadly honest the system can cope with a few people who focus on appropriating value they have not created and it can stand a very few who misappropriate value through fraud, theft or graft.
But it can’t stand many. One of the reasons Britain is rich is a deep rooted belief in fair play. People deal honestly with each other and with the state. Everyone one contributes their honesty and takes out a little bit of the efficiency that honest systems create. Corruption is an anchor that creates a huge drag on economic prosperity. In my opinion corruption creates exponential drag; a little graft goes a long way to undermining economic growth.
Once you start down a road of corruption the destination is a kleptocracy where politicians use the power and patronage of their positions to misappropriate the resources of their country. Power you have given them is used to steal your wealth. The best counter to a drift to a kleptocracy is good Corporate Governance. Corporate Governance is like a seat belt, it’s annoying when you wear it but when you need it you will wish you had been wearing one all along.
Corporate Governance requires duties to be segregated, there should be transparency about how decisions are made, who made them and who benefited from the outcome, power should be distributed, with checks and balances available and the system should be open to audit, not just of particular decisions but also how the system is working.
For Corporate Governance to flourish there must be the substance of these things, not just the form. Cronyism destroys this substance while leaving the form intact and the illusion of safety is more dangerous than knowing you are in unsafe territory.
There must also be a good incentive for each separate part of the Corporate Governance structure to do its job. This is the essence of a system of segregation of duty with checks and balances. In this case the police should be incentivised to detect and prosecute crime, the press should be incentivised to expose malfeasance, politicians should be incentivised to deal honestly and hold dishonest members of their tribe to account.
There must also be an effective sanction. The fear that the electorate will discover any malfeasance and vote out a corrupt government. The punishment must be fearsome and the likelihood of punishment high for a deterrent to be effective. If you can not see that the rules are being breached you can not punish that breach. Where the police, the press and politicians are colluding to keep a story out of the public domain the fear of sanction is hugely diminished.
Why does this matter? There is additional value created when you live and work in an honest system. Honesty and the expectation of honesty lower transaction costs. I do not have to check your bone fides. I know that if you bilk me I will be able to get redress. I trust that the fear of going to prison will ensure that you deal as honestly with me as I intend to deal with you. Good Corporate Governance reduces drag from misappropriation. Less insurance, in its widest form, is needed. Assets can be allocated to their most efficient use, not to the use that best serves the wants of a kleptocratic elite.
For an economy to flourish it is not enough that its political, judicial and economic systems are honest. They must be trusted, absolutely. Where I can not trust the system I am better off assuming that it is corrupt. The cost of finding out if you are honest and holding you to account if you are not is too great. I will be better off assuming you will cheat me and better off yet trying to cheat you.
Once you start down a road it can be very difficult to stop everyone following along with you. You begin with a situation where everyone’s short term interest is in avoiding the sanction of being seen to misappropriate value and long term value accrues to all. The strategically stable state of everyone behaving honestly and punishing those who misbehave is replaced with one where it more and more pays to be corrupt. Short term interest becomes about milking the system as effectively as possible. Long term value is destroyed.
Where there is distrust, exchange falls and is limited to only trusted people. The benefits of specialisation begin to unravel. Capital is hidden and not used to avoid it being misappropriated. There is no commonwealth; taxes go unpaid because no one trusts that they will be spent on improving roads or schools to the benefit of all. Before you know it you end up living in the tribal area of Pakistan or feudal Europe.
The value that is created by each and every individual forbearing to take a little dirty short term advantage belongs to us all and should be jealously guarded.
As a nation drifts towards a kleptocracy it more and more becomes the case that you do not bother to pay tax, you bride the tax collector, you stop creating wealth and concentrate on stealing other people’s. Unless you can trust the system to be open and honest you are better off playing dirty. If everyone is playing dirty no one wins and the system itself become corrupt.
Is Metgate going to destroy British probity and with it our long term economic prosperity? Well, no, not on its own but the man involved is a senior advisor to the Prime Minister. The suggestion that police, politicians and the press are colluding to keep a story from the public does call into question the integrity of the system as a whole and speaks volumes about the corporate governance of Britain. Questions should be asked and answers demanded so that in the future we can all continue to enjoy the benefit that flows from being able to assume that we are dealing with a fair system and honest men.