Corporate Freedom and Social Responsibility from a German Perspective
Speech at the 12bet Workshop “Corporate Freedom and Responsibility in Germany and China”, Beijing, September 24,2004.
Ladies and gentlemen,
Let me first of all thank the Cathay Institute of Public Affairs and 12bet for inviting me today to deliver a presentation on “Corporate Freedom and Social Responsibility from a German Perspective”. I will do so by looking at economic ethics and their interdependence with the freedom of unrestrained competition. After that, I will turn to the burden of social responsibility that companies currently face in Germany and to the rather ambivalent response of the German government. I do have to apologise that due to time restraints I will have to omit a more detailed review of the discussion on an ISO Corporate Social Responsibility standard, 12BetOnline the Social Accountability 8000 standard and other corporate responsibility schemes.
It is certainly an honour to speak at this renowned institution and I appreciate the opportunity to share my thoughts with the experts who participate in today’s workshop. I do have to clarify, though, that I am not an entrepreneur, who would be better suited to give you first-hand experiences with this subject. Rather, I am an economist, who looks at the issue from a macroeconomic perspective and assesses corporate freedom and social responsibility in the overall economic order and their potential implications for society and economic growth in particular.
The entrepreneur in the market economy
Let us take some time to talk about those entrepreneurs. Who are they? Well, I define them as anybody who takes initiative to invest into a business undertaking and lives of its profit, instead of some employment wages. Entrepreneurs do so by investing their capital, their efforts and own labour. Looking at the difference sectors of the economy, entrepreneurs in the industrial sector include all household entrepreneurs, small- medium sized companies, and large companies under individual ownership. In trade and services, entrepreneurs are street vendors, household entrepreneurs, small- medium sized companies and, of course, also large scale corporations. In agriculture, the group of entrepreneurs includes all farmers, agribusiness companies and household enterprises.
Looking at this list it becomes obvious that in China, for example, the vast majority of people are entrepreneurs. Hundreds of millions of Chinese are entrepreneurs. This is less so in a developed industrial country like Germany. There, entrepreneurs are a minority of brave people who decide to seek their luck without the safety of an employment contract.
After all, entrepreneurs fulfil their social responsibility by contributing to the supply of goods, by creating employment and by taking the risk for their investment with their own capital and by guaranteeing bank loans with their own savings or real estate. They are also taking full liability for business contracts. Assume for instance that a farmer, who by all means must be regarded as an entrepreneur, sells rotten eggs! He will be held liable for the damage that he does to his customers. Only a developed insurance market can help to reduce this risk, which is usually shared by the entire family. Supply of goods and employment as well as taxes and other monetary contributions to the social security system are the main corporate social responsibility.12BetOnline This is the main subject of my presentation.
For the entrepreneurs’ contribution to society, the society owes the entrepreneur full ownership of his profits. While considering any additional corporate responsibility scheme, you must keep this in mind!
The situation changes, of course, when large modern corporations are not run by individual entrepreneurs, but by paid management staff with little personal risk and much less personal liability. However, these “corporate machines” are still contributing to national and local fiscal revenues as well as to employment and thus domestic consumption. They do contribute to society!
In the light of all discussions about corporate responsibility schemes it is indeed necessary to emphasise that their absence must not be understood as the absence of any corporate contribution to society. The recent debates about new ISO standards or a Social Accountability standard merely discuss possibilities to ENLARGE the corporate contribution to German society, not to CREATE it.
The assumed misperception is aggravated by the public media. They severely impact public opinion with frequent reports on enormous salaries of corporate managers, extraordinary severance payments, management mistakes, rigged balance sheets, corporate fraud and corporate breach of contracts. While these reports refer to actual cases, they almost entirely portray corporations in a negative light and do not point to their beneficial contribution to society. Individual greed, it appears from these reports, undermines the market order. This market order, however, seems to function only on the moral basis of individual restraint and collective compassion. In this presentation I contradict this statement by emphasising that the market economy makes individual interest compatible with the moral well-being of society.
Hence, my first statement today is that there is no inherent contradiction between individual morality and the pursuit of personal interests. I expect this statement will lead to a lively debate after my presentation.
Many people in Europe, the United States, but also in many developing countries believe they are fighting for human morality when they criticise the selfishness of the rich, the powerful, the transnational companies and the Western world in general. Even those, who support the principle idea of a market economy, assume a necessary trade off between individual morality and the pursuit of personal interests. From experiences gained in our daily life it seems justified to assume that under fierce competition those who show moral restraints are going to be sidelined and outmanoeuvred by their reckless competitors.
Personal experiences usually prove that honesty and morality don’t pay. While driving to work, you often experience the situation that giving way and being polite to other drivers not only hardly meets with gratitude, but is often abused by reckless drivers taking the space you made for others. Once you get to your company you often experience that you will loose out, if you show some restraint and allow others to stand in the limelight.
Those who are claiming morality and self- restraint, hence, easily call for higher authorities to ensure that this ethical behaviour should not lead to social disadvantage. In their final analysis, the imposition of these ethics of restraint requires the abolishment of competition. Competition, after all, is seen as incompatible with caring societies and will ultimately breaking up local communities.
However, my second statement for the subsequent debate is that individual restraint is not required, if there are adequately enforced rules equalising the chances in a free and fair competition.
In my opinion, the mentioned “ethics of restraint” need to be replaced by “ethics of order”. Not individual motivation matters, but only the individual and collective respect for rules. You may respect them, because you believe this helps you to maximise profit, because your religion asks you to do so, or because you expect social reputation. Never mind, because personal motivation does indeed not matter! The only relevant concern is whether the rules are kept and whether those, who are violating those rules, will be punished.
Of course, in modern societies rules need to be established through a process of consensus-building among all stakeholders. Only this process of consultation allows for the establishment of rules that create equal chances for everybody. Once they have been established, however, it becomes irrelevant why somebody plays by the rules. What matters in ethics of order is the assumption that everybody, who sticks to the rules, acts ethical and hence socially responsible! It is necessary to re-emphasise this while looking at the negative image of corporations and keeping in mind the many accusations against them of greed and pursuit of self-interest!
Well, if playing by the rules is sufficiently ethical, why then do companies sponsor cultural events or even support costly education programmes in developing countries? Rules are applied in contracts, but these contracts cannot anticipate reality in its entirety. Contracts ARE in general incomplete and it can be argued that they also SHOULD not be complete. We would deprive ourselves of the capacity to respond flexibly to new framework conditions and situations, if we were bound by all-encompassing contracts. Especially in the age of globalisation, contracts need to contain a necessary level of flexibility to respond to unforeseen risks and other situations in all parts of the world.
The existence of incomplete contracts, however, requires trust between the involved companies and also the attitude of fairness in the fulfilment of incomplete contracts. Here is, where additional business ethics matter!
Globally active, if not all enterprises have to portray themselves as reliable and trustworthy, if they want to gain the confidence of their counterparts. Ethical commitment of companies is economically sound, because it is an investment in the sustainable success of the enterprise.
My third statement for today is that business ethics are individual commitments of companies to social values and norms. They are added to, and thus complement the collective commitment to formal rules, i.e. the ethics of order. Business ethics and the ethics of order are the two components of contemporary economic ethics in a market economy.
The interdependence of economic ethics and economic freedom
Let me now turn to the situation in my own country �C Germany. Just like here in China, economists, sociologists, philosophers, politicians and the media in Germany are also involved in a discussion on economic ethics. In the German democratic system, however, this discussion has a strong political connotation, because people’s perceptions turn ultimately into votes and can oust the political leadership from its position of power.
Discussing the modern German economy, one has to look back at the origins of the German market economy about sixty years ago. Economic policy right after the Second World War was driven by the insight that it is, in fact, not government, but only entrepreneurs and their initiative that create employment. State action must show self-restraint and empower entrepreneurs to develop their business.
A key government regulatory function in this regard is to secure market competition by establishing an effective anti-monopoly law and independent competition enforcement. It was already after the First World War that the German government issued in 1923 the ‘Regulation Against Abuse of Economic Power Positions’. The main purpose of the regulation, however, was NOT to eliminate the 3,000 cartels at the end of the 1920s, but to enforce some social responsibility among them. This was done in response to the world economic crisis in the early 1920s. For reasons I cannot elaborate in this presentation, the system was generally regarded as a failure and often served as negative reference for setting up a different type of cartel legislation after the Second World War.
When Germany emerged from the smoking war ruins in 1945, it had undergone terrifying experiences during the autocratic rule of the National Socialists. While it soon engaged in its famous economic miracle development, the guiding principle after the Nazis’ authoritarianism was “Justice For All”. The new German competition law and policy responded to claims for ‘economic justice’, i.e. the protection of consumers and small business. The creation of rules for free competition in the German marketplace and the establishment of a truly independent enforcement agency can be seen as the birth date of the ethics of order as a paradigm in German economic policy.
The general intellectual framework for this policy was provided by the so-called ‘Freiburg school’ of academic thought with members, like Walter Eucken and Franz Boehm. The school basically promoted the liberal belief that open markets are a necessary component of a prosperous, free and equitable society. They assumed, however, that markets need a regulatory arrangement, which protects the process of competition from distortion and minimises governmental interference in the economy. This legal arrangement to assure market competition in the economic sphere was the essence of the so-called ‘ordoliberalism’ of the Freiburg school in the late 1940s and early 1950s.
The spirit of ‘ordoliberalism’, i.e. the belief in legal regulations assuring unrestrained market competition, remains the intellectual framework for economic policy in Germany. The ethical paradigm of this ordoliberal spirit is the ethics of order.
However, the mentioned call for “justice for all” also included several programmes to raise lower incomes and to equalise individual living standards all over Germany. The German concept of a social market economy assumes that market failures infringe upon the legitimate rights and interest of disadvantaged people and that the government is obliged to rectify this. Here the German economic system bears an inherent conflict between the ethics of order for unrestrained competition in the economic sphere on the one hand, and the creation of a social security system on the other hand. The social safety net has developed over the years into some kind of a competition-free safe haven, regarded by many as some kind of an “anti-market”.
Throughout the wealthy decades after the Second World War, the German economy was built on the consensus that decision-making power in large enterprises is to be shared with the employees and that a large share of all companies’ profits needs to be redistributed for the benefit of the society at large. This system produced massive redistribution agencies, which worked largely undisputed until Germany was struck by the financial burden of German reunification in 1990. After that, the government came under increasing pressure to cut down the social security system. This, however, has met harsh domestic criticism for pushing alleged victims of society back into the hardship of the market, where corporate sharks are just waiting to exploit their vulnerable victims. In Germany, employers who offer low-paid jobs are indeed portrayed as unethical and so is the government which forces unemployed to take these jobs.
However, low-paid wage income is certainly preferable to long-term unemployment, which has remained on a very high level for many years. The re-employment of these people gets prevented by enormous labour costs created by an extraordinary burden of taxes and fees on employers. Germany belongs to the world champions in corporate taxes and fees. Looking at the subject of today’s workshop from this perspective, the German companies are also world champions in corporate social responsibility.
Meanwhile the same burden on employees’ salaries has reached a level that prevents national consumption. Growth of domestic demand has slowed down every year to a low of -1.6% in 2002 and 0.3% in 2003. Moreover, households are reluctant to spend, because they fear cuts in the social security system. The savings quota has hence been growing over the last couple of years to 10.8% of GDP in 2003.
The burden of taxes and fees on employers has reached a level that prevents job creation. In addition, detailed German labour regulations are supposed to support the interests of wage recipients. However, they also strongly discourage employers to employ permanent staff in Germany.
Let me briefly touch upon the German labour market. It is highly overregulated in the sense that the government has codified the rights and interests of everybody, including for example women and men, physically able and disabled persons. If a company employs men and women, they must provide two sets of toilets and the law also prescribes �C if necessary – separate showers and washing facilities. Every company beyond a certain size is supposed to employ physically handicapped people and to ensure an adequate worksite for these people. If not, they will be fined. In early 2004, the German government introduced additional plans to make all companies beyond a certain size accept and train young apprentices. Again, if they fail to provide these mandatory apprenticeships, the company will be fined.
These measures force companies against their will to invest their resources for imposed ethical purposes. Corporate growth is sacrificed and investment is restrained for a public good. Ethics of order are given up for ethics of restraint, which neglects that corporate investment as such is already a public good. Instead, companies who do not show the government-induced self-restraint will be fined.
Current situation in Germany
As a result of this, the German economy appears inflexible and not fit for international competition. The regulatory system of protection and redistribution appears to be the chief impediment to employment and economic growth.
The Economic Freedom Report of the Canadian Fraser Institute measures and compares every year the level of economic freedom in 123 countries of the world. Their latest report came out in July 2004 and shows that Germany’s ranking has fallen from position 20 in the year 2001 to 22 in 2002. The main reason for the low ranking of Germany is the size of its government, where Germany ranks on position 107 out of 123 countries! Next in line are the labour market regulations, where Germany ranks on position 94.
In a response to severe budgetary pressures, the German government presented on March 14, 2003 its so-called “Agenda 2010”. The agenda aims to reduce non-wage labour costs, to boost domestic demand and capital spending, to help the unemployed find a job more quickly, and to make the labour market more flexible. Let me briefly summarise those components of the reforms concerning the labour market: A Commission under chairman Peter Hartz, who is the personnel director at Volkswagen, has suggested in August 2002 the following legislation:
– Easing of employment protection regulations through liberalising temporary and agency work in companies up to ten employees (Hartz I, 2003)
– Legalising so-called “mini-jobs” (tax- and deduction-free under 400 �1�7/month, employers pay a lump-sum tax of 25%) and “Me plcs.” (tax-free and non-repayable business start-up grants to promote self-employment); reducing master craftsman’s diploma in 53 of the 94 skilled trades (Hartz II, 2003)
– Reorganising the Federal Employment Agency and cooperation with privately-run Personnel Service Agencies (Hartz III, 2003)
– Unemployment subsidies after 12 months of unemployment will be merged with a social welfare scheme into a so-called “unemployment benefit 2”, which will be a means-tested flat-rate payment, plus rent, heating and other allowances. (Hartz IV, 2005)
While laws on Hartz I �C III are already in place, the German public has now engaged in a discussion on Hartz IV, which is to be enacted in January 2005. In August 2004 mainly people in eastern Germany have taken to the streets every Monday to strongly protest against Hartz IV. The reason is that about two third of the future recipients of this “unemployment benefit 2” live in the formerly socialist part in eastern Germany. They fear loss of income and increased pressure to take up lower-paid jobs. In addition, the protests also show their frustration with large disparities in economic and social development 14 years after German reunification.
After a total of 800 billion Euros in net transfers to East Germany since reunification, East Germans still own fewer cars, less computers and have less internet access than West Germans. Their economic performance measures not even two third of the performance of their compatriots in the western parts of the republic. The unemployment rate remains at an alarming 18% in the East and thus about 10% higher than in the West. Therefore, while 75 billion Euros of public funds, or 4% of the GDP, are transferred to East Germany every year, many East Germans still feel and see themselves as victims of the market economy in general and of the reunification process in particular.
The task of the German government is immense and the question remains whether it has the regulatory capacities to manage the much needed but strongly resisted reforms. Obviously, the affected people accuse the German government of mishandling the conflicting objectives of freedom and justice as well as employment and development. They feel that their newly gained freedom leaves them at a disadvantage and unfairly treated. While they clearly see massive developments in infrastructure and technology all around them since 1990, they lament being unemployed. They desire more subsidies and care by the government. Companies are blamed for merely seeking their corporate interests. Budget cuts are regarded as unjust and favouring the rich. But what option does the German government have, given the fiscal restraints as well as the increasing international integration of, and competition on the world markets?
Ambivalent response of the German government
The main problem of the current German government lies in its ambivalent policies. It has to reduce the budget deficit and also the corporate social responsibility by cutting back certain social services, in order to raise the attractiveness of Germany as a destination for direct investment. However, the government does not intend to follow the ordoliberal paradigm of ethics of order anymore. Instead, it believes, for example, that it can engineer advantages for the national economy by allowing mergers that were previously prohibited by the independent German anti-monopoly agency. The current German government generally does not believe anymore in the sanctity of rules, but has the confidence to interfere by means of industrial policy to create wealth and employment.
For this purpose it has, for example, overruled the administrative decision to prohibit the merger of two large energy companies E.ON and Ruhrgas. It has created new media merger regulations which basically allow media market domination by a single company. It has extended the monopoly of the German Post in the area of letters under 100 Grams. In addition, the Chancellor has publicly called for the merger of large German banks. Finally, in the area of network industries, the government has decided to create sector-specific regulatory agencies and grants the Ministry of Economics the authority to issue directives to these agencies. These are only few examples of a new trend in the regulatory practices of the German government.
On the European level, the German along with the British and French government have urged the new President of the European Commission to merge all economic competencies, including competition and industrial policy, under one Commissioner. This would have, in effect, increased political considerations in competition matters and also compromised the independence of the European competition watchdog. Luckily, the attempt was rejected by the European Commission, because it feared the undue interference by the most powerful members of the European Union. The IMF later also criticised the trend in European politics to enhance economic performance by strengthening national champions.
The German anti-monopoly agencies are equally alarmed. The Federal Cartel Office has repeatedly criticised the current government for its interference into competition enforcement. In addition, the German Monopolies Commission published in July 2004 its general bi-annual competition assessment report under the title “Competition Policy Overshadowed by ‘National Champions’”. Inside this report, the Commission harshly criticises the economic policy of the German government. The Monopolies Commission considers the underlying theoretical and political assumptions partly wrong and partly unfeasible. Moreover, it questions the emerging changes in the governance structures of competition policy.
This takes me to the end of my presentation. I wanted to emphasise the compatibility of individual interests and morality through the paradigm of ethics of order, and, based on these assumptions, I wanted to demonstrate the specific situation with regard to corporate freedom and social responsibility in Germany.
German reunification has made government and others in Germany aware that corporate responsibility, i.e. imposed social duties, has been stressed to an extent, where it suffocates corporate competitiveness. Reform measures have been initiated, which might be regarded as only incremental and not fundamentally changing the situation. However, they point in the right direction and might ultimately set the politically sensitive agenda for more radical change. Meanwhile, however, the government has given up the ethics of order in the economic sphere and breaks into the sanctity of rules by interfering government action. The level of interventions in the markets is unprecedented in modern German economic history!
The organisers specifically asked me to also touch upon the question of experience or lessons learned for China, of course, a very difficult task for a foreigner. I can only encourage the Chinese decision-makers and those who advise the decision-making process to follow the ethics of order and to create rules that equalise chances for everybody in the Chinese economy. The creation of general rules for a free and fair exchange of goods, labour and services need to be built by consensus amongst all stakeholders, i.e. they require participatory rule-making. That way, they ensure social responsibility!
According to the ethics of order, corporate responsibility lies mainly in the collective commitment to taxes and fees. The revenues are then used to finance a social security system. Here the Chinese decision-makers still endeavour to find the best solution for China. They might want to look to Germany for the experience of going too far and not being able to deliver all promised public goods in the long run.
Once a system has been established in China that is financed through taxes and fees, it must be understood that any additional corporate social commitment is voluntary. If part of the society requires higher standards, for instance in environmental protection, then it is up to those people to define these standards and the market will leave it to the consumers to decide.
The current German debate about mandatory apprenticeships to be offered by sizable German companies is a negative example. The government portrays itself as the guardian of the young and unemployed, while the heavily burdened German enterprises have to provide mandatory apprenticeships. Rules should be transparent and long-lasting. If government arbitrarily introduces new rules for the sake of its own short-term popularity, then it risks that companies lose their ethics of order and engage in violations of the rules.
Finally, when it comes to the enforcement of rules, it is advisable to have an independent administrative and judicial enforcement system. No market player is allowed to bend and violate the rules. It is of specific importance that the government itself shows self-restraint and does not interfere in market transactions. This message appears to be increasingly difficult to convey to China, when my own government together with the British and the French are all falling for the myth of having the regulatory capacity to govern individual market transactions.