In a timely follow up to my post yesterday on whether companies need a foreign policy, Google has effectively delivered an ultimatum to China.

The ultimatum essentially says "let us provide uncensored Google in China or we will shut Google.cn". Naturally, no one expects China to accede to Google's wishes.

The background an a good analysis are provided by Imagethief here.

Imagethief does not mention the meeting between Internet business leaders and Hillary Clinton last week, and I cannot help but feel that the timing of this announcement is linked to that meeting even if there are broader events leading up to this. Eric Schmidt is simply too close to the Obama administration to do this on the fly. Certainly to China it will look like it is, and if there is one thing that was acknowledged in that meeting it is that any stand US companies take in relation to human rights in China will be viewed by China as a proxy move by the US.

While Imagethief notes and the Wall Street Journal implies that Google's eventual withdrawal from China on human rights grounds makes it really difficult for Microsoft to remain, I would be very surprised if Microsoft, the State Department and others did not already know of the move before Google dropped today's bombshell.

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US Secretary of State Hillary Clinton held a dinner last week for the tech industry's key leaders. It looks to me like the consolidation of a trend.

I attended a talk a few years back and I am struggling to recall where it was. It was either in Boston or in Washington. Anyway the talk was given by a recently retired general counsel of a mahor corporation - perhaps IBM, perhaps GM. The main argument of the talk was that corporations need a foreign policy. I thought the idea was instantly exciting and terrifying.

Exciting because back then I had recently written a paper on "Legitimacy risks and peacebuilding opportunities for businesses in post-conflict Iraq". The fact is that businesses have presence, relationships and power and they will have an impact on communities and even nations whether they have a policy or not.
 

Terrifying because, as that paper had tried to make clear, legitimacy was key, and in the Iraq situation the absence of inclusiveness and accountability pretty much assured that the reconstruction effort would lack local goodwill. Think about how the reconstruction contracts were allocated, the absence of community involvement in allocation, the lack contract winners of Iraqi origin, then the failure of firms that undertook the work to do so from the outset with a solid local outreach and inclusion approach.

There are plenty of extractive industry firms with a substantial involvement in foreign affairs, too often with dubious and opaque relationships supporting regimes run by corrupt elites.

It is the global technology firm - particularly though not exclusively the internet-based firms - that is new to the art of running aground on foreign policy issues in most recent years. So I was very interested to hear about a small private dinner hosted by Hilary Clinton last week with Google CEO Eric Schmidt, Twitter Co-Founder Jack Dorsey, Microsoft Chief Research and Strategy Officer Craig Mundie. The subject under discussion: how technology can be used to meet the nation’s foreign diplomacy goals.

It is a topic I touched on here during the first major upheavals in Iran when twitter played such a role: Iran, business models and the right to tweet speech. The basic argument of that post - that access to twitter is crucial to freedom of speech - has been echoed in a State Departent blog post which said the agency wanted to use twitter in a contest as a:

"worldwide platform in which people can discuss the meaning of democracy and exchange ideas from diverse perspectives."

My thoughts/questions are these:

1/ Is corporate foreign policy simply an alternate name for existing corporate responsibility issues with a global hue, like climate change or, in the internet company case privacy issues? Or is it - and I believe it is - something more, where corproations are taking on a responsibility to consider their impact on human rights within their sphere of activity in a more accountable, thus perhaps quasi-public way?

2/ how do we assure legitimacy? How can we bring the right kind of transparency and inclusivity to corporate statecraft to ensure that it is just?

3/ global corporations are based in dozens of countries. Is there a question of to which foreign policy it needs to align its own?

Do you have any views?

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The US Federal Deposit Insurance Corporation that insures US bank deposits is considering billing banks more if they incentivize higher risks.

The FDIC maintains a fund to pay out in the event that depositors lose money frrom the failure of a bank. All insured banks pay into the fund. Banks that according to regulatory assessments incentivize staff to take higher risks are more likely to have such risks materialize. So, the FDIC argues, why not get them to pay higher contributions into the insurance fund. Sounds logical to me.

But lets round this out. We could use a basket of indicators to determine contribution levels, including not just pay plan riskiness but also lobbying spend which is highly correlated with risky lending behaviour.

And rather than just use this for assessing contributions to the FDIC - which are not enormous in the great scheme of things - why not tie bank capital requirements to these factors too?

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In 9 days time the US Financial Crisis Inquiry Commission begins hearing what senior bankers have to say about the causes of the crisis.

I will be keeping a close eye on the Commission’s work and posting background and analysis here on the APEsphere blog. Let me explain why.

The FCIC in a nutshell

Phil Angelides (pictured above), the man appointed to chair the commission, last September defined the FCIC’s mission as being “to conduct a full and fair investigation in the best interests of the nation—pursuing the truth, uncovering the facts, and providing an unbiased, historical accounting of what brought our financial system and our economy to its knees.”

The Commission’s 10 members — six chosen by Democrats, 4 by Republicans – have until December to report back to Congress. They have the power to subpoena witnesses, and to refer individuals for criminal investigation and prosecution.

Who cares?

The Commission is investigating the worst financial crisis since the Great Depression. The Global Financial Crisis (GFC) has produced a longer term Global Economic Crisis that has impacted the everyday lives of real people around the world to an extraordinarily severe degree:

• it has increased the number of people around the world in chronic hunger and poverty by over 100 million, to 1.02 billion;
• widespread conflict and state fragility is being anticipated and has already begun to be realised;
• between 200,000 and 400,000 more babies could die each year between now and 2015 if the crisis persists;
• the crisis has undermined the will to make progress on combating climate change, thus contributing to the ecological, social and political risks associated with that phenomenon. Earlier predictions that the recession would reduce emissions have proved ill-founded;
• an increase in global unemployment by between 29 million and 59 million people;
• one in eight US mortgage borrowers is behind on mortgage payments or facing foreclosure at the end of the second quarter 2009;
• pensioners relying on developed country stock market returns for their retirement incomes have seen their savings fall by 45%. The links between the crisis and retirement incomes are explained here.

No wonder countries are marking an upward trend in stress-related mental illness and crime.

What could this Commission achieve?

We want to ensure that this crisis cannot be repeated. A thorough public investigation of the causes can help channel anger into the political will to undertake effective regulatory reform, including the dismantling of powerful institutions known to be “too big to fail”. While regulatory reform is already underway in Washington and elsewhere, further and more profound reform is a potential outcome of this Commission’s work.

The committee set up in 1934 to investigate the causes of the 1929 crash and the Great Depression that followed it signals what is possible. Once Ferdinand Pecora became the committee’s lead investigator and began cross-examining Wall Street’s leaders the ground was laid for reforms that included the establishment of the Securities and Exchange Commission and the Glass-Steagall Act that separated staid commercial banking from risk-fuelled investment banking – reforms that kept Wall Street out of systemic trouble for forty years.

But the FCIC could achieve much more than this, and needs to do so.

When South Africa emerged from apartheid, a Truth and Reconciliation Commission was established to consign to history the egregious, state-supported human rights violations that were committed against a large section of its people.

In 1995, after decades of the systematic abuse of economic, social and political rights known as apartheid, the South African government set up a Truth and Reconciliation Commission to give ordinary people an opportunity to air their grievances against a system that institutionalized racial segregation and discrimination in all aspects of life.

According to the then Minister of Justice Dullah Omar, "... a commission is a necessary exercise to enable South Africans to come to terms with their past on a morally accepted basis and to advance the cause of reconciliation."

The TRC was a forum in which anyone who felt that he or she was a victim of the system could be heard. Those on both sides who had done wrong could also give testimony and request amnesty.
Now, political establishments around the world have been shown to have placed the interests of a powerful financial minority above those of the majority.

Dead babies will never learn to speak, and how do you give voice to the 100 million starving? But what the FCIC can do is provide public, open and free discussion of the causes of the crisis, confront those responsible with those they have impacted, raise the question of prosecution and possible amnesty rather than assume as now a cosy settlement between corporations and regulators.

How else do governments and financial institutions expect the results of egregious risk taking at great cost to communities and individuals to be put behind us? How else will they lay to rest the cynicism, mistrust of institutions and raw anger that that behaviour has garnered?
 

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Often when someone fights against accountability, they make their opponent's case for them.

Take three recent instances:

Attempts by British oil trading firm Trafigura to gag the Guardian newspaper from reporting on a question posed by a MP in Parliament about the company's existing secret gagging order preventing the newspaper from reporting on Trafigura's dumping of toxic waste in the Ivory Coast. Had Trafigura succeeded in preventing reporting on the parliamentary question, it would have represented a stunning override of parliamentary privilege. The attempt was undermined effectively by people on twitter who took it upon themselves to make the question public.

Then there is the reaction of UK-listed and based Vedanta Resources to being told by the UK National Contact Point for the OECD Guidelines for Multinational Enterprises that the company had failed to consult on or look out for the interests of local people regarding its plans to construct a bauxite mine in Orissa, India. According to India's Business Standard, Mukesh Kumar, chief operating officer of VAL's Lanjigarh project responded:

“We condemn the findings of the UK-based agency. Our bauxite mining project at Niyamgiri hills has been cleared by the Supreme Court, the highest judicial authority in India. It is inappropriate for the agency of any other country to comment on a project being developed in India”

Even where that company is rooted in and takes advantage of capital markets in that other country?

Then there are the mounting attempts by corporations to shift their tax residence elsewhere from their actual base of operations in order to avoid tax (prompting this response from the UK tax authority) .

As corporations take ever greater liberties with the reach of democratic accountability, they make the case for global or at least extra-territorial regulation.

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So after a week-long brouhaha Apple Inc has decided to permit the release of a new iPhone application called iSinglePayer.

The application enables users to see which US legislators have received political contributions from which limb of the anti-healthcare-reform lobby, and then to phone up the representative at the touch of a button. The application's data is supplied by the Center for Responsive Politics.

The link between industry money and political process has never been more transparent.

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Rachel Maddow looks at the unconstitutional nature of the Defund ACORN Act and speculates which other corporations risk being defunded on the same basis as ACORN.

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A Newsweek article argues the new Financial Crisis Inquiry Commission should play the role I was advocating for a truth and reconciliation commission to bring daylight and justice to the events leading to the financial crisis.

Michael Hirsh argues:

we don't necessarily need a parade of Wall Streeters headed to the Big House. What we do need, however, is a parade of witnesses who will provide what's been missing so far in this crisis—a prominent outlet for public outrage. In the last nine months, the Obama administration and the grandees in Congress have been designing solutions without much input from the outside, often using experts from Wall Street (especially "Government Sachs"). It's pretty much been a closed system.

Like I said, we need some public, inclusive, truth and reconciliation.

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Mixed news on the battle brewing over bankers' bonuses.

European finance ministers (with the UK taking a back seat) are coming out strong on curbing banking bonuses.

This I get. Dealing with the excessive (arguably unbounded) risk taking that super-high bonuses encourages, and the crises such excessive risk-taking produce, finding a way of reining in the expectation of high bonuses for excessive risk-taking seems like the only way to ensure the recurrence of such a damaging crisis is avoided.

On the other hand there is something very disturbing about the recently announced French approach: curtailing the bonus upside but also punishing traders for any substantial hit suffered by the bank.

This seems to me merely to raise the stakes - a contributor to the adrenalin fueled environment that leads to excessive risk-taking in the first place.

The French, of course, are feeling somewhat bruised by the whole Kerviel affair in January 2008 when national financial champion Societe Generale was hit with  a 4.9 billion euros ($7 billion) loss due to what the bank maintains was unauthorised trading by Mr Kerviel. The preferred narrative in France is that the bank's systems and controls (including remuneration culture and policies) were not at fault; this was a simple case of a rogue trader. So punishing the trader when the bet goes the wrong way helps reinforce that narrative.

But surely it is better to address the up front incentive for unbridled risk-taking rather than pull your punches in favor of creating stiff personal consequences for the failure of the bet? Rogue traders already know that if the bet goes wrong they stand to lose their jobs and their lifestyles, but "rogue" traders (ie those produced by the prevalent bonus culture) show again and again that they never imagine they will fail, that the bet will go against them.

It is the size of the potential upside that motivates their actions and that is where serious politicians and regulators should focus their attention.

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Does the ongoing anger over bank bonuses suggest the need for something akin to a Truth and Reconciliation Commission on the causes of the crisis?

You might think I have been spending just a little bit too much time outdoors over the summer; “Truth and Reconciliation” is the way nations like South Africa consign to history the egregious, state-supported human rights violations that have been committed against a large section of their people.

But bear with me for a moment and reflect on the breadth and degree of damage that the culture of greed managed to inflict by causing the worst financial crisis since the Great Depression: an increase in the number of people around the world in chronic hunger and poverty by over 100 million, to 1.02 billion; between 200,000 and 400,000 more babies could die each year between now and 2015 if the crisis persists; an increase in global unemployment by between 29 million and 59 million people; one in eight US mortgage borrowers is behind on mortgage payments or facing foreclosure at the end of the second quarter 2009; pensioners relying on developed country stock market returns for their retirement incomes have seen their savings fall by 45%.

Let’s not forget the stories behind the numbers. My friend Mike’s mother has been working for General Motors her whole life and was due to retire this year. Now she has no pension and will likely be working for the rest of her life. For more stories, take a stroll through the New York Times’ Living With Less – The Human Side of the Global Recession.

No wonder people remain angry.

The political will to rein in Wall Street and the City of London’s high stakes culture is lacking, and the financial sector is doing everything within its power to undermine what will remains.

A report by Essential Information and the Consumer Education Foundation found that $5 billion in political contributions over the past decade gained Wall Street freedom from regulation. According to OpenSecrets.org: “Despite the mortgage and banking crises of 2008, the financial sector still managed to donate $468.8 million to federal campaigns and candidates during the 2008 election cycle, an 80 percent increase during the two previous years.”

The Center for Responsive Politics notes that the finance, insurance and real estate sector spent $109.4 million on lobbying in the US during this year's second quarter alone, during which time the industry has been lobbying against the movement for tighter regulation provoked by the financial crisis.

How can we move forward?

We have a precedent for resolving situations where the will of government has been put at the service of powerful minority interests, to the detriment of the majority.

In 1995, after decades of the systematic abuse of economic, social and political rights known as apartheid, the South African government set up a Truth and Reconciliation Commission to give ordinary people an opportunity to air their grievances against a system that institutionalized racial segregation and discrimination in all aspects of life.

According to the then Minister of Justice Dullah Omar, "... a commission is a necessary exercise to enable South Africans to come to terms with their past on a morally accepted basis and to advance the cause of reconciliation."

The TRC was a forum in which anyone who felt that he or she was a victim of the system could be heard. Those on both sides who had done wrong could also give testimony and request amnesty.
Dead babies will never learn to speak, and how do you give voice to the 100 million starving? But that does not negate the need for public, open and free discussion of the causes of the crisis, to confront those responsible with those they have impacted, to raise the question of prosecution and possible amnesty rather than assume as now a cosy settlement between corporations and regulators.

How else do governments and financial institutions expect the results of egregious risk taking at great cost to communities and individuals to be put behind us?

How else can we say that we are serious in our desire to stop this happening again?

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