The unacceptable face of capitalism

In 1973 the British Prime Minister Edward Heath, in a statement in the House of Commons on the Lonrho affair, said: “It is the unpleasant and unacceptable face of capitalism, but one should not suggest that the whole of British industry consists of practices of this kind.” The phrase ‘the unacceptable face of capitalism’ stuck to Lonrho’s reputation and that of its chief executive, ‘Tiny’ Rowland, but the facts are probably not so well remembered.

Rowland was recruited to the London and Rhodesian Mining and Land Company, later Lonrho, as chief executive in 1962. Under his leader- ship, the firm expanded out of its origins in mining and became a conglomerate, dealing in newspapers, hotels, distribution, textiles and many other lines of business. During 1973, Rowland’s position was the subject of a High Court case in which eight Lonrho directors sought Rowland’s dismissal, due to both his temperament and to claims he had concealed financial information from the board. Rowland failed in his legal attempt to block the move but was subsequently backed by shareholders and retained his position. Edward Heath criticised the company and made his famous statement about these events.

What high standards we must have had back then, four decades ago, if a relatively minor dispute over governance could make such headlines. By contrast, recent headlines have been full of a corporate scandal of huge dimensions touching the lives of millions. I refer to the Volkswagen (VW) case.

While BP may have been negligent in the Deepwater accident, VW has deliberately deceived regulators, the media and the public by installing illegal software in millions of vehicles with the sole purpose of bypassing emissions tests. This in turn has enabled its cars to emit up to 40 times more pol- lution than is allowed under US law. Consequently, more people are likely to have been vulnerable to serious respiratory diseases. VW has abused the trust consumers put in Western free enterprise.

Under the Clean Air Act, the Environmental Protection Agency can take civil or criminal enforce- ment actions against violators of environmental laws. To my eyes these actions by VW, which it has admitted, are indeed criminal. It has deliberately set out to evade the rules and so illegally offered for sale its vehicles in the US going back to at least 2012. This also affects vehicles sold in Europe and already VW has admitted that 11 million vehicles, equivalent to a year’s production, will need to be recalled. It has provided €6bn for this but in time the costs may be considerably higher.

The US Justice Department has indicated it will take action, while the German authorities are investigating the actions of VW’s CEO. It is reported that VW could face up to $18bn in fines by the administration in the US and perhaps other countries. There will be the costs of fighting and perhaps settling class actions by consumers who feel that the second-hand value of their cars has been compromised by the damage to VW’s brand reputation. And then there is the untold cost of that damage to its reputation. Its share price has plummeted and it remains to be seen how sales will be affected. Switzerland has already banned the sale of specific VW diesel models.

For too long some of the leading companies in the world have behaved as if the law did not apply to them. There was the Enron scandal: a massive fraud on the public including its own employees. At least the perpetrators went to jail. Then there was the banking crisis of 2007–8 with Northern Rock, HBOS and RBS on this side of the Atlantic and Bear Stearns and Lehman Brothers on the other side. Almost no one went to jail.

Scandals like these give succour to the arguments of those who call for the overthrow of capitalism and will strike chords with the young and impres- sionable. Worse, as Edward Heath in his maladroit way tried to suggest, the whole of industry is tarred with this brush, though the rotten apples are the rare ones. When the rotten apples are so famous and so large, one is tempted to think that the problem is one of size. The chief executive of VW, Martin Winterkorn, made a round of apologies saying he was ‘endlessly sorry’ for the ‘manipulation’, but he was forced to resign. He may not have known anything of this fraud but it was so sophisticated that it had to have been signed off by senior management. Clearly there is something very wrong with the culture of a company that can behave in such a way, and so I conclude that VW is too big and should be broken up.

VW is the second largest vehicle manufacturer in the world. The largest is Toyota, which has also had a series of problems in recent years. Both companies seemed to be bent on volume growth for its own sake when that is never a sensible objective on its own. It is one thing to aspire to be the best. It is quite another to target to be the biggest.

David Pearson is Master Elect, The Worshipful Company of Marketors [email protected].

This article, was taken from the January 2016 issue of Market Leader. Browse the archive here.