Governments Vs. Businesses

If a corporation was a country…

Many have speculated that the world’s biggest businesses are more powerful than some countries.

With Apple and Amazon breaking through the $1 trillion ($1,000,000,000) market capitalization barrier, we might ask ourselves just how big and powerful have they become how might we measure it?

Looking at Gross Domestic Product (GDP) figures for 2017 compiled by the International Monetary Fund (IMF), the stock market value of Apple and Amazon would put both companies ahead of Malaysia and just behind Pakistan. Of the 190 nations listed, this would make them approximately the 26th and 27th biggest economies on the IMF list.

Some might argue that equating GDP (the total earnings from all economic activity each year) to market capitalization is misleading, because it is like putting apples alongside oranges to come up with something that’s bananas!

To escape this criticism and get a more like-for-like view, we can also compare the annual measure of national GDP with the annual turnover of these internet and technology giants. In the 2018 financial year (October 2017 to September 2018), Apple's revenue amounted to a total of $265.6 billion.

If we use this measure to see how it compares to the countries of the world, in 2018 Apple grossed more money than the earnings of Finland but less than Sri Lanka, positioning it at 62nd on the IMF’s list.

For 2018 Amazon reported turnover across its plethora of business lines at just shy of $178 billion. On the IMF list this positions Amazon just behind the Slovak Republic and ahead of the Dominican Republic in 71st position.

To continue the comparison with countries, some of the biggest companies in the world now employ more people than some nations have people. Essentially, there is more than one way to look at it, but it’s clear just how powerful and influential the biggest companies are.

Here we look at some of the related issues and how governments have reacted in the past how they might react to the increasing power and influence of today’s leading global businesses.

Stateless businesses that hoover up cash and avoid liabilities

In 2016, Washington-based political journalism and commentary website foreignpolicy.com listed the world’s top 25 ‘corporate nations’. It is now a given that we live in a world of multinational corporations - effectively stateless companies that fly a flag of convenience, choosing to be domiciled where there are easy tax laws, minimal red tape and they encounter the least friction to carrying on day-to-day business.

We tend to think of these companies as the internet giants. However, one pioneer of this type of sharp business practice was Accenture, formerly Andersen Consulting. Some of their playbook includes tactics such as international expansion to profit from lower taxes, cheaper labor and reduced regulation; and leveraging low tax incentives by being domiciled in Bermuda and since 2009, the Republic of Ireland.

The company is dispersed across around 200 cities in 120 countries. The HR function practices geographical agility for some of the 459,000 employees, avoiding them being ensnared by residency rules that might create tax or other liabilities.

Companies that follow this stateless business model are called metanationals. Such companies threaten the power of nations. It isn’t just about making vast amounts of money and exploiting gaps in compliance frameworks and loopholes in the law to avoid tax. It ties into the philosophy behind the brands of such companies.

These brands have the ability to sway and influence billions of ordinary people around the globe through slick advertising and must-have products and services. A brand like Apple commands loyalty that may even challenge the emotional bonds people might have to their country, especially in these times when nations are divided. In short, the world’s biggest companies are challenging the ideas and conventions of what it means to be a global superpower.

Standard Oil monopoly

The threat from big companies is nothing new. The nation state has acted decisively when corporate power has been believed to be too great in the past.

Rapid industrialization at the end of the 19th Century created the phenomenon of large, fast growing manufacturing conglomerates. In the US, this created the drive to regulate large companies at a federal (national government) rather than a state (local government) level, through the creation of a series of legal instruments, most notably the Sherman Antitrust Act, that forms the basis for today’s US anti-trust laws.

The story of growth in the US at that time was the rapid development of transport. Railroads and the motor car are two of the cornerstones of American cultural identity. Through the 1870s and 1880s John D. Rockefeller had used economic threats against competitors and cut secret deals with railroads to build a monopoly for his Standard Oil Company. Although some minor competitors remained in business, Standard Oil effectively controlled the market.

In 1911 the Supreme Court found that for the years 1900–1904 Standard Oil had violated the Sherman Act. Gasoline, which was now a necessity of life, was far too important to be potentially profiteered by one company. It had to be left to market forces to determine what was a fair price.

This saw the breakup of the Standard Oil monopoly into dozens of separate companies which were in competition with each other. The break up led to the creation of familiar names including Exxon, Mobil (now ExxonMobil), Amoco and Chevron.

Microsoft anti-trust and the browser wars

Should that all sound a bit like a history lesson, here’s another example that is right in tune with today’s big tech businesses. 1999 saw 19 states and the US Justice Department sue Microsoft. At trial, it was found that Microsoft had used anti-competitive practices to reduce the ability of the Netscape browser to challenge Microsoft’s Internet Explorer.

In 2000 the court ordered Microsoft split in two to punish it and to prevent future misbehavior. This would severely impact the development of the business with CEO Bill Gates arguing that splitting the company would diminish efficiency and slow the pace of software development.

Fortunately for Microsoft, this decision was reversed by the Court of Appeals after it removed the judge for acting improperly by discussing the ongoing case with the media. This was a bit of a let off because a new judge came in and a deal was struck. The government would drop the case if Microsoft agreed to stop many of its anti-trust practices.

Although these two examples feature actions by the US Government against US companies, anti-competition laws and watchdogs in other countries and continents have real teeth to reign in corporates operating monopolies and cartels.

In the UK, the Competition and Markets Authority enforces competition law on behalf of the public. For the European Union, the Competition Commissioner is one of the most powerful positions in the European Commission and has frustrated the ambitions of global companies, most notably preventing the attempted 2001 merger of General Electric and Honeywell.

Acting against today’s metanationals

The trigger for starting anti-trust has tended to be whether a monopoly is being built and reinforced by preventing fair competition, and if that affects consumers and lets the monopoly set the price. Acting against today’s internet giants may be difficult, if it is based on such a conventional premise to defining anti-trust.

However, there may be something of a shift coming. The ‘New Brandeis’ movement, named after US Supreme Court justice Louis Brandeis, an outspoken opponent of monopolies, is looking to recalibrate our thinking around anti-trust by placing an emphasis on preserving competition.

This could see the situation where companies with multiple business units are prevented from snaring customers and passing them between the separate divisions of its operations. This might see an ecommerce giant restricted in what it could sell, and a search engine wouldn’t be able to point people to the sites it also owns.

Beyond anti-trust… Anti-society

Anti-trust is concerned with competition and the regulatory influence of the free market. However, it offers no way to respond to the agile way that metanationals are able to identify and exploit the gaps in compliance and tax through statelessness.

The amount of tax which companies are avoiding is impacting the wealth of nations. As a result of this it is likely to be damaging the welfare systems of countries. This could be looked on as behavior that equates to being anti-society.

For instance, in the world’s 5th biggest economy, Amazon hoovered up more than £11 billion in sales for 2017. However, through some creative and entirely legal use of the tax laws, the UK corporation tax bill fell to just £4.6 million.

Given the demand on important welfare services such as the UK’s NHS socialized healthcare system, the low amounts of tax paid by big companies continues to be a significant talking point in the UK and it resonates around the world.

Another factor that also works against the best interests of society is that data and social media platforms might be manipulated to influence voters and interfere in the democratic process.

The challenge for national governments is in two parts; firstly, to internationalize and harmonize tax and regulatory frameworks. The aim should be to close the loopholes which metanational companies are exploiting, so that they cannot escape their tax liabilities. And secondly, to hold companies to account so that they safeguard data and prevent misuse of their social platforms.