Monthly Archives: December 2004

"We Have Hearts of Steel"

This is a moving portrait of women workers on strike in China at a Japanese owned plant that supplies cell phones for WalMart. The women labor 11 hours a day to earn less than $60 a week and because they are forced to live in government controlled “company” towns they save very little of that money for even poorer relatives back home in China’s rural areas. This story vividly demonstrates what I am calling the “two souls of global capitalism”: a high tech wonder in the advanced countries underpinned by desperate living conditions in the developing world – a picture tragically enhanced by this week’s tsunami disaster in southeast Asia.

In China, yearnings for unions stir

The PetroChina Syndrome

China is engaged in a vast socio-economic experiment – the transformation of an authoitarian state owned economy into something resembling western capitalism. The restructuring and privatization of state-owned enterprises, or SOE’s, is a central feature of this process. This paper examines the creation of PetroChina, one of China’s largest oil companies. When PetroChina conducted its IPO in the spring of 2000 it sparked significant controversy and institutional investors in the U.S. boycotted the listing. Now the SEC requires special attention by issuers of securities when human rights concerns are raised. The paper was published in the Journal of Corporation Law earlier this year.

Here is the URL: PetroChina Syndrome

And here is my abstract of the article:

This article argues that the process of globalization has generated a legitimation deficit that can be the source of wasteful, even destructive, social and political conflict. I stylize this outcome as “the PetroChina Syndrome,” after a leading example of the kind of activity generated in response to globalization, the PetroChina Campaign, where a coalition of labor, human rights, environmental, anti-slavery and religious groups worked together to oppose the initial public offering of a major Chinese oil company led by Goldman Sachs. The article begins with a discussion of this important but largely unexplored dimension of the anti-globalization era triggered by the 1999 demonstrations in Seattle against the World Trade Organization. The Campaign and its impact are discussed in detail. I then examine three possible arguments that shed some light on this development, including traditional securities law approaches, the broader political context and, finally, structural changes in corporate finance. These three arguments, I argue, are helpful but not sufficient. Recent work by the economist Massimo De Angelis on John Maynard Keynes and Milton Friedman helps us shape an alternative explanation rooted in understanding changes in the institutional mechanisms of the global labor and capital markets. The displacement of the trade union and collective bargaining by globalization has pushed organized labor and other groups to look to political intervention in the capital markets as an alternative means to establish legitimacy. This intervention should be encouraged to develop new institutions to respond to the growing legitimation crisis of global capitalism.

Corporate Reform Battle Heats Up

At the heart of modern capitalism is a fundamental structural divide: between senior inside managers responsible for the day to day operations of the corporation, on the one hand, and outside investors who own shares in a large number of corporations. According to standard corporate law theory this creates an inevitable conflict between shareholders, the principal, and managers, the agent.

Seen this way, managers should serve at the behest of shareholders – if, indeed, shareholders are principals. But to watch the counter-attack on post-Enron corporate reform now taking place in Washington, D.C., it appears as if the managers have overthrown the principals.

Of course, in reality this principal-agent model radically misstates the structure of modern capitalism. Managers are capitalists – they earn their income from the profits of the corporation; and shareholders are capitalists – they also earn their income from corporate profits. So managers, in the form of their representatives at the U.S. Chamber of Commerce and Business Roundtable, ought to be able to understand the value of reforms such as expensing of stock options and allowing shareholders opportunities to place their nominees for corporate boards on corporate proxy statements. These reforms should improve the ability of the market as a whole to function more efficiently.

A conference next month in Delaware could help turn the corner in this debate. The International Corporate Governance Network is bringing together representatives from various corporate constituencies, including managers and institutional investors, to discuss potential reforms in Delaware law with members of the Delaware judiciary that might make it easier for shareholder nominees to get elected to corporate boards. Here is a link to a recent story in the Financial Times on the conference and on the new agenda of the ICGN.

Doing the Right Thing: Expensing Stock Options

The Financial Acccounting Standards Board has finally stepped up to the plate and issued a new rule requiring public companies to expense stock options. FASB faced an intense lobbying campaign on Capitol Hill to block the proposed change. One Wall Street figure told me the campaign against expensing stock options was more intense than the campaign in favor of the North American Free Trade Agreement! Nonetheless, FASB has done the right thing.

Here is a link to a story on the change, a link to the FASB site where the full text of the new rule can be found, and a link to the testimony I delivered to a U.S. Senate Committee last spring supporting the FASB proposal.

FASB Issues New Rule on Stock Options


Diamond testimony: There is no free lunch


This blog aims to be an information hub for people interested in new developments in corporate law, securities law, and corporate finance with an emphasis on the impact of globalization on business.

China and U.S. in the new Great Game

In my work on the PetroChina IPO (scroll down the page for a link) I found out an interesting bit of information: China is now a net oil importer and thus dependent on foreign supplies for its rapidly growing industrial economy. To date, western oil companies have had a limited role in the Chinese oil industry. China has preferred to retain tight state control of oil – only allowing foreign investors and oil companies minority stakes in the newly privatized parts of the industry. Instead of letting foreign companies provide the oil they need, China is sending its own China National Petroleum Corporation, parent of PetroChina, around the world on an oil buying spree. A key target is Africa where CNPC has a deal with the Sudanese which has led many to accuse China and the Sudan of human rights violations in areas where oil is being drilled. This article in Newsweek is a useful summary of the larger geopolitical picture – it turns out the United States sees Africa as crucial to ITS effort to move away from heavy dependence on mideast oil. This suggests the possibility of renewed tension with the United States.

Anti-Social and In-Secure: The Chilean experience with pension reform

With the recent indictment of aging former Chilean dictator, Augusto Pinochet, the Chilean people are finally getting a chance for justice to prevail years after the military, with the backing of the CIA, Henry Kissinger and Richard Nixon, overthrew the democratically elected socialist Salvador Allende.

In light of efforts here in the United States to reform Social Security one can only hope that the truth about the reform of Chile’s national pension system put in place by the notorious “Chicago boys” during the Pinochet dictatorship also comes to light (this group lobbied Pinochet, successfully, to install an early version of free market reforms that are now known as “shock therapy”). This article by independent journalist Greg Palast is a good place to start:

It turns out that Jose Pinera, Pinochet’s labor and social security secretary and thus one of the architects of the Chilean shock therapy, is now a Cato Institute fellow in Washington D.C. (a city where Pinera’s Chilean boss General Pinochet allegedly directed assassins to murder Orlando Letelier, Allende’s ambassador to the United States, who was killed along with his colleague American Ronni Moffit, by a car bomb in 1976).

(For the record it should be noted that although many of the economic advisors to the Chilean dictatorship studied at the University of Chicago, Pinera got his training in the wonders of the free market at Harvard.)

Pinera and Cato are leaving no stone unturned in an effort to pay back his former boss’s American backers with support for the Bush Administration’s proposal to privatize the U.S. social security system.

While free marketeers brag about the alleged success of the Chilean program, two recent reports note significant problems. A World Bank report notes that poorer citizens pay a disproportionate share of contributions as commissions to financial players who manage the funds. And a report by the New York Federal Reserve Bank notes that many retirees in Chile must still work to make ends meet. The link below is to the excellent site sponsored by the Social Security Network where Greg Anrig of the Century Foundation summarizes these two studies.

Unocal to Settle Rights Claims

In a major victory for international human rights, Unocal, the California oil company, agreed today to settle claims against it by villagers from Burma where a Unocal natural gas project is located. The exact terms of the settlement have not yet been disclosed. The agreement was apparently reached on the eve of a long-scheduled argument in front of a federal appellate court.

Unocal joined with the French oil company Total to pump natural gas off the coast of Burma and pipe it across Burma to a power plant in Thailand. The project is worth hundreds of millions of dollars to Unocal and its shareholders. But to construct the project Unocal worked hand in glove with the military dictatorship that controls Burma. The military provided “security” on the project which according to testimony presented by the Burmese litigants included forced labor and other human rights abuses by the military with the knowledge of Unocal.

Because Unocal benefitted by the actions of the military they were potentially liable under the Alien Tort Claims Act which allows non-U.S. citizens to sue in U.S. courts for violations of the law of nations. The Act has been used by a wide variety of litigants, most successfully against perpetrators of acts like torture under military dictatorships. Its use against multinational accomplices is relatively new. The victory against Unocal will represent a major step forward in the effort to establish an enforceable global code of responsible behavior by multinational corporations.

Here is the link to a story announcing the settlement:

Unocal to Settle Rights Claims

China to International Labor: You’re not welcome here

Bloomberg is reporting that China has revoked the visas it granted AFL-CIO President John Sweeney and other international labor officials who had intended to travel to Beijing next week at the invitation of OECD’s Labor/Management program. The OECD was hosting a meeting in China on the social responsibilities of multinational corporations. President Sweeney had stated that it was particularly important to highlight this issue in China in light of the huge investments underway there by multinational corporations. If there were any doubts before today about China’s views of genuine unions, as opposed to the state controlled unions it allows, this move should eliminate them. While the global labor movement has been unstinting in its support for labor rights in countries like Burma – which, by the way, is heavily backed by China – there have been some indications that some in the labor movement thought it made sense to work out a rapproachement with China’s state labor organization, the ACFTU. Clearly this is impossible without a genuine right to freedom of association in China. A renewed campaign for this right should now very much be on the agenda of global labor.

The link to the Bloomberg piece is posted here and I am also posting a link to a column in today’s Financial Times by Joe Studwell on the Chinese economy. Studwell is the author of the excellent book, China Dreams, which I reviewed for Dissent when it was published. That review is linked near the bottom of this page. Studwell, editor of the highly respected China Economic Quarterly, is one of the most astute commentators on the Chinese economy and he calls attention to what he sees as the inherent fragility of the Chinese economy.



In defense of CalPERS

In a backroom maneuver California’s Republican governor has sent a signal that he will side with corporate and Wall Street insiders who are fighting efforts to reform corporate governance. California’s large pension plans are managed by boards of trustees that include employee and employer representatives. Sean Harrigan an official of the United Food and Commerical Workers union, sat on the CalPERS board as a representative of California’s State Personnel Board. Two republicans and one democrat (someone known to be close to former SF mayor Willie Brown who lost to Harrigan in a race two years ago for the presidency of CalPERS) voted Harrigan off of CalPERS and hence he could no longer serve as CalPERS president.

While Harrigan was its president CalPERS became a highly visible and leading player in a variety of efforts to improve corporate governance. CalPERS is now known around the world as an advocate of greater social responsibility by corporations. The Governor appears committed to silencing this important voice.

Below is a link to an op-ed by Sean Harrigan explaining his side of the story. Beyond the Harrigan ouster is a larger battle – an attempt by some Republicans to shift the risk of providing for retirement on to the backs of individual workers. That story is described in the second link below.