Who Shall Guard the Guardians?
Thabo Mbeki
July 26, 2002
DURING 1997, Justice H.C. Nel handed to President Nelson Mandela the four-volume “The First Report of the Commission of Inquiry into the affairs of the Masterbond Group and investor protection in South Africa.”
The Commission stated that its task was to deal with “the circumstances which gave rise to the financial problems of the Masterbond Group and its associated companies and the losses suffered by the public as well as the other questions posed in regard thereto”.
It said, “upon the collapse of the Group, enormous losses were suffered by thousands of investors.”
We refer to this failed business organisation to draw attention to some of the extremely disturbing conclusions of the Nel Commission, in the light of current developments.
The Commission said that its investigation “revealed an astonishing degree of dishonesty, inefficiency, lack of professional integrity and lack of independence on the part of some of the auditors involved with these (Masterbond) companies.”
It said it “found it difficult to believe that some of the auditors concerned with the Masterbond companies could have been so inefficient or blatantly dishonest as was being gradually revealed by the forensic investigation”.
“The saga of dishonest or inefficient auditors which further emerged during the course of the investigations conducted by the Commission, belied the generally perceived honesty, integrity, efficiency and independence of auditors.
“It became apparent that with a few notable exceptions, the auditors involved seemed to believe that in addition to auditing the books of a company, their function was to assist and protect the management of such company as far as possible. They also seemed to believe that the end justifies the means.”
The instances of malpractice cited by the Commission included: “Signing of unqualified reports relating to blatantly false financial statements; changing accounting policies to convert loss situations into profit situations without proper disclosure; backdating auditors’ reports, financial statements and letters of representation; failure to scrutinise minutes of relevant directors’ meetings; and, assisting in misleading the Receiver of Revenue.”
The Commission said “the standards set by the Reserve Bank by its philosophy that the end justifies the means and the apparent acceptance thereof by the auditors concerned, could only have had a negative influence on the auditing profession in South Africa.”
“The auditors were some of the most prestigious internationally affiliated auditing firms whose members are amongst the leaders in their profession – leaders who are also perceived to be responsible for the setting and maintaining of ethical standards and generally accepted accounting practice.”
Many among us will have treated the current headline-catching fate of US companies affected by the kind of mal-practices spoken of by Justice Nel, such as Enron and Arthur Andersen, as curious scandals that will soon disappear from public focus. In any event, they have no material impact on our lives.
The reality, however, is that these conclusions are radically wrong. These practices led to the collapse of the companies concerned, as happened with the Masterbond Group. It is now being confidently stated that apart from the immediate consequences of these corporate failures in the US, the US economy itself has been negatively affected. The drop in investor confidence is resulting in the further slow-down of the US, and therefore, the world economy.
More broadly, as a relatively small group of companies gains ever more dominant positions in the global markets, born out of mergers and acquisitions, the issue of the global social accountability of these corporations will assume increasing prominence, going beyond management responsibilities to shareholder and employee interests.
The Nel Commission sought to identify the underlying problem to the Masterbond failure. It had to make recommendations about how we should avoid the recurrence of such a disaster. It identified the problem as “fragmented and inadequate regulation and supervision of financial institutions and other commercial undertakings.”
It reported that: “Divided responsibilities, restricted powers of inspection, restricted access to information and the resultant ‘grey’ areas where no supervision by the Registrar of Banks or the Financial Services Board and its predecessor had taken place, led to inadequate supervision of the Masterbond, Owen Higgins and Supreme groups of companies with resultant losses to investors.”
The state custodians had failed to discharge their responsibility to protect investors from being swindled by unscrupulous people who were determined to enrich themselves at all costs. The conclusion is – the guardians must organise themselves to do their work properly!
Put thus, the matter is simple. But is it in fact simple? The reality is that, taken as a whole, it is not. To understand this, we have to understand the nature of the beast. The animal is contemporary capitalism.
In its edition of February 18, 2002, the leading newspaper, the Financial Times (FT), carries an article under the heading: “Greed is good – in small quantities”. The article reports the views of one Marc Lewis, “a 28-year-old millionaire entrepreneur” who believes that greed is good. He expresses this in his book, “Sin to Win”.
The FT says, “the book argues that things traditionally seen as sins, such as avarice, gluttony, anger and self-love, are the ingredients of both business and personal success, while naked self-interest is the only criterion of truth.”
It quotes Mr Lewis as saying, “the attitudes we have inherited from religion are all about constraining people. But vice has a positive side. You cannot aspire to be successful – and it is up to individuals to define what success means to them – unless you believe in yourself, grab every opportunity and have no regrets. We have to use sin, not waste it. Self-interest is eternal – everybody always wants more.”
Mr Lewis says: “What I am saying is that we have got the wrong idea of sin – vice is essential to success and no one should feel guilty about it. Coveting stops you being complacent.”
In his honesty, on which he insists, he says that the reward of sin is that: “You control the world. You choose how to live your life. You have the power to believe in yourself. You are number one. You are a god! You are your god!”
The FT carries the views of various thinkers on the propositions advanced by Mr Lewis. One of these is Philippa Foster Back, director of the Institute of Business Ethics, who “admits the line between greed and self-interest perhaps should not be drawn too rigidly.”
“You need a little bit of both,” she says. “But with greed it is a question of degree. There is not a direct line between greed and crime – but crime may be the outcome of greed.”
The newspaper cites Bernard Mandeville’s “Fable of the Bees” of 1714, in which the beehive is used as a metaphor “to represent a successful trading nation such as the England of his day.”
It goes on to say: “Mandeville singled out dishonesty, selfishness and devotion to vice as the emotions that lay at the root of prosperity; the more permissive the attitude to the vices and selfishness of the bees, the greater the prosperity.”
Mandeville concludes: “Thus every part was full of vice, yet the whole mass an earthly paradise.” The honeycombs were full of honey, whereas “Christian self-restraint and charity would simply lead to impoverishment.”
Though separated by three centuries, Mandeville and Lewis communicate the truth that the immanent, correct, legitimate and moral purpose of capitalist enterprise is to make money. They argue, correctly, that you cannot pursue the accumulation of money unless you are hungry to have money in increasing quantities.
Lewis argues that saints may be poor, but god is rich. With justification, he asserts that ordinary human beings would rather be gods than saints. He proposes that the highest human and social value is the accumulation of wealth, whose purposive acquisition can only be propelled by the acquisitive drive, wrongly condemned by all religions as sinful avarice.
The recognition of these truths about the inherent nature of capitalist accumulation of wealth, and the way in which capitalist economic goals become the dominant social value system, leads directly to the view that society, represented by the state, should police and regulate the expression of avarice. This is the burden of the recommendations of the Nel Commission, as is the global response to the Enron and other failures of what is considered to be good corporate governance.
The position that ‘greed is good – in small quantities’, also recognises that every product needs to be marketed. Thus are markets created, contrary to the claim made that producers merely respond to what the markets want. Tragically, this includes the deliberate creation of public perceptions about many problems, regardless of the truth, including social trends, the performance of the economy, the causes of diseases, as happened with regard to smoking, and so on, intended to build or maintain a profitable demand for particular goods and services.
This requires the cultivation of a herd instinct that follows the advice of ‘experts’ who make money out of convincing society as a whole that their view is correct and sacrosanct. Naturally, these organised and moneyed independent thinkers have and use their means to ensure that the rest of us think as they do.
In the article to which we have referred, the FT says “in the section on avarice, the (Lewis) book features PwC, the accounting and consulting group, admiringly written up because of its ‘insatiable ambition to extend the range of its present professional services into every corner of the business firmament’.”
PwC aggressively pursues the objective to ensure that society, starting with business, accepts its ideas as the gospel truth, which acceptance it will authenticate as the duly approved, tradable and financially profitable truth. It has a product to sell, in its self-interest, legitimately. With regard to competing products, even in the immaterial form of the truth, preferably its product must have 100 percent of market share.
As South Africans, we know the full meaning of the unregulated expression of avarice, of the unbridled capitalism of the robber barons experienced also by other societies through time. It is on this practice that the accumulation of wealth and property in our country was based. It was possible because there was a black majority to dispossess, subjugate and exploit, as a matter of state policy.
The Masterbond disaster occurred because the ‘way of life’ of the systemic, state sanctioned and enforced defrauding of the black majority was generalised, enabling the defrauding of the population in general, including our white compatriots. Those who sought to make money from elsewhere other than from the black majority, reduced to penniless poverty, had to target the white population, much of which had become ‘bankable’, only as a result of the comprehensive expropriation of the black majority.
It is these ‘bankable’ whites to whom the Nel Commission referred when it spoke of ‘thousands of investors’. It was appointed by the apartheid regime because whites had been robbed by (white) business people, even as its historic task was to protect and advance white minority interests.
All of us are also aware of how the objective of personal enrichment pursued relentlessly by the dominant white minority, regardless of the high human cost, informed the value system of the oppressor and the oppressed. Thus, Cecil Rhodes and other successful business people after him, to date, came to represent the very epitome of human success, which all of us had to emulate.
Today, the best South African is the person, whether black or white, who is dressed in the most expensive clothes. He or she owns the most expensive car and lives in the most luxurious house. He or she consumes the most exotic products and spends holidays at the most expensive locations in South Africa and the rest of the world. He or she will have the most expensive coffin and funeral. Anybody who questions this value system is a moegoe or a mampara.
Within the ranks of our movement, this translates into a struggle for positions. This is about political power, which ensures personal access to material resources. Many in our ranks and society in general, are adherents of the philosophy of legitimate avarice expounded by Mandeville and Lewis. One outcome of this is that, as Philippa Back said, crime might result from this ethic of greed. Wrongly, the view has been projected that corruption is a special preserve of the public sector.
The fact however is that many in this sector have derived their value system from the private sector. Generically, this latter sector believes that every person has his or her purchase price. Some in the public sector are ready to be bought, provided the price is right. They consider their avarice as legitimate sin.
To respond to this immediate and real danger, we called for the “RDP of the soul”. As a country, we are engaged in a national campaign for moral renewal.
Justice Nel provided us with a detailed and comprehensive picture of the incidence of corruption in our society, driven by the natural corporate requirement to show a healthy bottom line. The Nel Commission demanded that the democratic, post-apartheid state should, practically, act as the real guarantor of the interests of all our people, regardless of race, class and gender.
It is significant that, whether rightly or wrongly, issues of ethical corporate conduct were raised in connection with the rapid depreciation of the Rand towards the end of last year.
Justice Nel asked of us that we should ensure that those whom the people freely elected as their representatives should truly represent the people. He asked that we must refuse that Lewis’ ‘self-interest’ entices us into a den of thieves.
The dominant world-view is that without the private sector, there will be no honey. This sector is an important social partner for us as well, many of whose members are firmly opposed to unethical practices. This enables the regulator of avarice to draw on the expertise and efficiency of those whose actions, according to Lewis, are intrinsically driven by greed, even as it acts to contain greed.
Many among us believe that to be poor is to be nobody. We believe that democracy has given us the possibility to prosper. Some believe they are especially entitled to material success because, personally or otherwise, they spent many years in active struggle against apartheid.
Some among us see the Truth and Reconciliation Commission as a vehicle to legitimise our personal demands for financial rewards for having fought for our own liberation. Perhaps Marc Lewis reflects the popular view when he says that naked self-interest is the only criterion of truth.
If this is true, then we must accept that there will be some who will accept the principle and practice – set a sinner to catch a sinner – with us too, serving among the sinners! Thus would we agree that the greedy should be guardians over themselves. Nevertheless, together with the rest of the world, we would still have to answer the question: quis custodiet ipsos custodes – who shall guard the guardians?
**This article first appeared in Volume 2, No. 30 of the ANC online publication ANCToday’s “Letter from the President”: http://www.anc.org.za/docs/anctoday/2002/at30.htm#preslet
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