Mon, November 29, 2021

perspective

2018: The year of competing dangerously


This was not a year of living dangerously, since most of us want more than ever to live a quiet life. The past 12 months have also not been easy for leaders, as Theresa May knows too well.

Since the great recession of 2008, competition has been a race to the bottom in almost every sphere, but more so in politics. As Harvard professor Michael Porter wrote last year, “competition in the politics industry is failing America”. US polarisation stems from the two-party arrangement where each party tries to outdo the other by distorting the rules of the game in their favour, through gerrymandering, political funding and placing partisan interests above the public interest.
The capture of party politics by vested interests has corrupted democratic governance across the world, with growing discontent from rising social inequality. When the politicians refused to deal with the global financial crisis of 2008 by letting off bad bankers and solving it instead by printing more money, the result was rising asset prices and even greater social polarisation. Once technology and migration threatened jobs, the populist vote for change moved further to both the right and left.
The biggest casualties from the crises were not financial, but political, with loss in public trust in the system as a whole. When “fake news” is being thrown around, no one knows who to believe anymore.

Crisis of public trust
The Edelman Trust Barometer, an online survey in 28 markets with 33,000 respondents, indicated that in 2017 trust was in crisis while in 2018, there was a battle for truth.
Interesting enough, public trust in institutions (NGOs, business, government and media) was highest in China, Indonesia and India, whereas trust in US institutions has fallen from 52 per cent to 43 per cent. Scarier still, trust in US institutions among the informed public has fallen from 68 to 45 per cent. Public trust in the US government fell 30 per cent. Americans’ faith in journalism reflected party allegiances, with only 27 per cent of Republicans trusting the media.
This capture of the state by the market was simultaneously accompanied by corruption of the market by politics. Funding democratic politics is expensive, with the last US presidential elections costing $16 billion. And since government spending comprises 38 per cent of gross domestic product, it is no surprise that businesses seek to influence policies through lobbying and political funding. Consequently, competition in business also became corrupted by competition in politics, with growing concentration in market power. This trend can be seen in many countries.
A stark illustration of why even professional institutions are now failing the public interest through lack of competition comes with the audit profession. The auditing of corporate information is a public good because fair, reliable and timely information is the lifeblood of markets. Many recent corporate failures, which will only increase as the world enters a recessionary period, were due to false and misleading information disclosure. If we cannot even trust basic accounting information, how can investors trust markets?

Failure of market competition
Amid all the noise of Brexit, the British Competition and Markets Authority has published a paper on how to reform the British audit profession. Earlier in the year, the UK government commissioned the Kingman report on the Financial Reporting Council (FRC)’s role in setting the governance standards for UK companies, including the quality of audit work on corporate financial accounts.
The Kingman report suggested that the old Financial Reporting Council is failing to do its job properly, since it is funded by the audit profession, and not “feared by those whom it regulates”. 
The Competition and Markets Authority has finally tackled the unsustainable position in which only four audit firms audit 97 per cent of FTSE 350 companies, compared to eight firms in 1987. These audit giants were widely criticised for corporate failures in the wake of the 2007 global financial crisis, but regulators were concerned that sanctioning them would make the concentration problem even worse. In its 2018 Audit Quality Review, the FRC found a decline in quality of audit work by all the Big Four, and an “unacceptable deterioration” at one of them. Indeed, the Big Four earned 79 per cent of their revenue from non-audit services, which means that there is an underlying tension between profits from providing high-quality audit services versus profits from non-audit services.
The proposed reform involves splitting the audit and non-audit business at the Big Four, and an innovative “joint audit regime” for FTSE 350 companies. One of the joint auditors will be from the smaller audit firms outside the Big Four.
These reforms suggest that the public agenda is finally shifting towards competition failure as one of the major causes of our present dilemma. If you think about it, in almost every field, competition is now between a handful of giants, be it 5G telecoms, finance, healthcare, technology, news media, geopolitics and even national parties. Such “managed competition” often comes at the expense of the less privileged. Some may call these behaviours predatory for the uninformed consumer. Even in climate change policies, there is greater awareness that failure to tackle climate warming is hurting poor and rural regions more than anyone else. The old rules of competition are clearly broken, but there is no clear way to change these rules and enforce them fairly.
The market is not working for all, but is the state the right institution to fix these problems, especially if it can be controlled by the few? That is why the new year brings new dangers, and for the optimistic, new hope for change.

Andrew Sheng writes on global issues from an Asian perspective.

Published : December 26, 2018

By : Andrew sheng special to The Nation