Category Archives: Economics

Tax: can we find someone to blame?

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If you’re a regular reader, you may know that I work in Luxembourg, and in tax. To many, those key words are enough to see dollar signs rolling in front of your eyes. So when the ‘LuxLeaks’ scandal broke out, it provided justification to many around the world: “those quasi-tax haven countries are unjust”; “they cheat”; “they’re becoming more and more powerful”; “they’re being utilised more and more by an increasingly wealthy elite to evade tax”. Do you think that’s true? Then did you also think the same about Panama?

A journalist organisation recently unleashed nearly 40 years of a Panamanian law firm’s records, which exemplifies how many prominent political figures and wealthy people have used offshore bank accounts to conceal assets. The Prime Minister of Iceland lost his job over the scandal. But it’s also tarnished the reputation of more than 140 other politicians and public officials from around the world – Ukraine, Argentina, Russia, China, Britain, and many others.

Some people ask so what? They quote Judge Learned Hand:

“Over and over again courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.”

It’s a great quote, since it unveils the hypocrisy of many critics. Yes, people do make voluntary donations to the state. But they’re the minority. Most people use every available legal tool to lessen their tax burden, and if they had the wealth to invest somewhere with less tax, would do so in a heartbeat. What’s more, capitalism encourages people to do whatever is legally permissible in order to maximise their capital assets. Thus within the rules of the game, it is not only perfectly reasonable, but more than that positive, to see people increasing their wealth with tax. Is there someone to blame?

Let’s take the example of British Prime Minister David Cameron’s late father. As a multi-millionaire stockbroker, he registered his own investment fund in Panama, and personally managed it until his death. Through this fund, the elder Cameron was a client of Mossack Fonseca – the Panamanian law firm in question. And even the fund’s prospectus explicitly stated that the fund intended to remain resident outside of the UK for tax purposes. So did the elder Cameron do wrong by using taxes to maximise his capital within a system called capitalism? Or is that system at fault?

Richard Hay, a specialist legal counsel to various British offshore centres, summarises the question well:

“There’s no surprise that criminals carry on activities in financial centres, because that’s where the money is. The real question is whether it is systemic.”

One of the main reasons why this story in Panama has attracted such attention is the widespread assumption that such criminal, or at least borderline criminal, activity is widespread. Although Mossack Fonseca itself claims that it applied all KYC (Know Your Customer) and AML (Anti-Money Laundering) due diligence procedures, the ICIJ (International Consortium of Investigative Journalists) reported that many banks, law firms and third parties involved in the transactions referred to failed to adhere to legal requirements. In other words, they did not carry out sufficient due diligence to ensure that their clients weren’t involved in criminal enterprises, tax evasion (illegal), or political corruption. Some of the documents even show that intermediaries deliberately acted to conceal certain transactions.

As a FATCA and CRS specialist, it’s my job to put due diligence procedures in place, and ensure they’re 2016-04-28 (2)implemented. So I have sufficient insight into this world to understand that it is not only possible, but indeed highly probable that sufficient due diligence was not carried out. Yet please don’t read any sort of conspiracy into what I say. It’s great that more focus is being given to the issues at hand in the press, and by politicians. But international cooperation on this matter is already getting better at a break-neck pace, and has has been for many years – especially following the 07/08 financial crisis. Indeed you need only take a random snippet from the FATF recommendations (international standards on combatting money laundering and the financing of terrorism and proliferation) to have a guess at how many institutions around the world will/will not be able to accord with such requirements in the next couple of years:

“Financial institutions should be required to maintain, for at least five years, all necessary records on transactions, both domestic and international, to enable them to comply swiftly with information requests from the competent authorities.”

Given the number and complexity of new laws and regulations that companies need to comply with, and the fact that none of the due diligence work is funded by governments, it’s no wonder that application varies from one institution to the next. And can individual countries even monitor all the data that’s currently being requested? Of course they can’t!!

Therefore, although responsible individuals always have to take blame, I have to say that the ultimate fault, or problem, lies with the system itself. Yes, the days when secrecy was one of the main selling points for ‘tax havens’ is fast becoming history. But nonetheless the lack of a truly global tax organisation – similar to the WTO, but for tax purposes – is a significant hindrance to any truly synchronised efforts at tackling tax evasion. Such a tax organisation (and no the OECD does not, and cannot fill this requirement) would bring FATCA, CRS, UK CDOT, BEPS, and perhaps even model tax conventions, and bilateral tax agreements under its umbrella. With such oversight it could easily replace many of the complicated requirements with a simpler, and at the same time more rigorous, set of compliance requirements. But more than that, it could work towards rebalancing the existing inequities of the international tax system, which presently give huge bias to certain countries (and not just tax havens).

Are Corporate Networks Growing or Shrinking in Power?

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A corporate network (of people, not computers) is in form similar to any other type of network. It’s a series of connections, linking various corporate interests together. As such, history, composition, and influence, vary significantly from network to network. But treated as a whole, there is a popular assumption that of course corporate networks are increasing in power. This view is challenged by: ‘The Power of Corporate Networks: A Comparative and Historical Perspective’ edited by Thomas David and Gerarda Westerhuis.

David and Westerhuis describe how certain global trends can be identified:

  • Late nineteenth century – End of 1920s

The second industrial revolution (railroads, factories, steel and oil industries, electricity etc) triggered the rise of large businesses, and directors of these firms in many instances sat on the board of several different firms. Despite the fact that “during this period the emergence and rise of corporate networks can be observed for almost all countries” (p13), David and Westerhuis explain that the nature and extent of those networks were hugely influenced by politics, and also the strength of facilitative intermediaries such as banks, third party business groups, and colonial firms. In other words they were nationally based, not globalised. Therefore the form of these networks varied from one place to another.

Germany legalised cartel organisations (formal organizations of sellers or buyers, who agree to fix selling prices/purchase prices, or reduce production). Yet the United States (in the Sherman Act of 1890 and the Clayton Act of 1914) passed competition laws that prohibited cartels and monopolies, and outlawed direct interlocks with competitors (the most prominent example of interlock is where directors serve on the board of each firm). As a result of these laws, the “density and centralisation of the network increased [in Germany] in parallel with the growing degree of cartelisation, whereas in the US, mergers were preferred to cartels, and the density of the network declined” (p14).

Banks also played an important role in the rise of corporate networks; providing loans, becoming shareholders, underwriting securities issues, and giving advice. “The density of the Italian network peaked in 1927, when the influence of the larger banks […] reached its apex.” However it wasn’t always banks that played the crucial role. Business groups and colonial firms often acted to facilitate various economic activities. But it was noted that in each example a facilitative organisation was present to support growth.

    • 1930s – WW2

During this period some countries (the UK, Switzerland, France, Finland, Bulgaria and Argentina) continued to experience a densification of corporate networks, whereas others (the US, Italy, the Netherlands, Germany and Portugal) experienced the reverse. For the latter countries, the authors note that this was to a great degree the result of the Great Depression, and the falling number of interlocks between banks and firms resulting from banks’ weaknesses. Legal and political context also played a role. For example Portugal (1935), Italy (1936) and the US (the now famed ‘Glass-Steagall’ Act of 1933) passed legislation designed to weaken the interlocks between banks and firms. And in addition to Germany’s legislation, its expulsion of Jews from the country also expelled many directors with pivotal positions in the corporate network.

    • 1945-1980

The authors speak of an implied consolidation of corporate networks during this period. For Germany and Japan, occupation brought with it a series of US style laws, which resulted in decartelisation and de-concentration. For single party countries such as the USSR, satellite states, and China; firms were interlocked through the party, and the economic plans. Banks also experienced a great deal of growth during this period, particularly in Japan and the UK. Banks therefore contributed to the consolidation of the corporate network, financed a great deal of the post-war recovery, and in various countries contributed to the strengthening of the corporate network.

  • 1980 – Today

The authors speak today of a declining corporate network in many respects. Globalisation has led to less integration within national business networks. Neoliberalism, privatisation and increased focus on shareholder value has led to the shrinking of boards e.g. in Argentina the corporate network collapsed in the last decade of the twentieth century due to privatisation. The fall of the USSR destroyed the party through which many corporate networks were facilitated in the eastern bloc. Moreover, since the financial crisis of 2007/08 there has been a shift in values. David and Westerhuis explain:

“Legal concerns due to new regulations regarding directors’ liability seem to have undermined the social status and prestige conferred to big linkers, which explains the decreasing number of interlocking directorates during this decade.” (p21)

During the Great Recession the roles, power, and prestige, of banks has changed significantly. New regulations such as the Basel accords (and their national equivalents) require banks to hold more tier 1 capital, and bigger capital buffers. This means banks can leverage their assets less, have less available liquidity, are lending less, and can function less ably as global network intermediaries. But beyond this, after the scandals surrounding banks in the crisis, many elites are less than keen to be so closely associated with them. There are other explanations offered by the authors too, such as the use of alternative social networks, or the possibility that corporate elites are acting to hide their networks. But the conclusion is essentially that national corporate networks are now in decline.

Conclusion

The book’s proposition, that national corporate networks are, particularly in countries such as the US, becoming more disperse and less interlocked, is well evidenced. However there is much less attention given to multinational networks. Indeed “global network” comes up nowhere in the whole book, and “multinational” comes up only 7 times. Yet examples of multi-national corporate networks abound:

  • Alumni networks come from every university (and many schools and colleges) around the world. A quick google search for business networks brings up Oxford Business Alumni Network, which has ten thousand members, and of whom a significant number are likely to hold powerful jobs. The Texas Alumni Network (the Aggie Network) has hundreds of thousands of alumni. The University of Pennsylvania’s network currently includes Donald Trump, Warren Buffett, Noam Chomsky, and nine Nobel Prize winners, along with more than 130 clubs around the world. Regional clubs within this network can often boast their own successes. The co-founder of Venmo, CEO of Givology, Executive Director of Apex for Youth, and a Professor Emeritus at the university, are all cited on Pennsylvania’s Asian Alumni website.
  • News based networks are strong within the upper echelons of management. As big media companies deliver news to many of the world’s most successful people, it’s not a big step to use those contact details in order to build a business network. The Economist’s Network is one such large example with a global reach, and a heavily elitist weighting. 88% of its members are senior management level or higher.
  • Industry specific networks are also a significant piece of the pie, and many are quite new. G-Med for example, only founded in 2014, for doctors worldwide. It has over 15,000 members already, and a strong business slant. Type “GMED” into google and the first thing you’ll see is how well the company’s stock is performing. Moreover, many of these industry specific networks are often formed within multi-nationals as opposed to between them. I work in a multinational bank, and even they have recently built an internal social networking site (banks aren’t often high on Forbes’ list of innovative companies).
  • Online networks might not immediately spring to mind as networking tools for the elite. The news stories focus on facebook, twitter, Qzone, Google+, Instagram, Tumblr, Sina Weibo, Vkontakte and Snapchat. But with more than 300 million members, Linked In also high up this list, and it is there not because of the ability to share silly videos, but rather as a professional network. It facilitates introductions, headhunting, and the maintaining of business relationships over time and distance. There are other less well known business networking sites too. But the one thing that all of these sites has in common is that a decade ago, no one even imagined they would be so prominent today.
  • There are also many generic business networks. Business Network International is the biggest among these, with over 170,000 members worldwide. It claims to be able to generate billions in revenue for its customers.
  • Moreover, although not exclusively business related, it would be remiss of me not to mention sites such as Angel’s Club, Affluence.org, Netropolitan and ‘A Small World’. All of these sites ask huge membership fees, and are based upon exclusivity for the rich and famous. Indeed, ‘A Small World’ recently cut its membership from 850,000 to 250,000, in order to maintain the perception of exclusivity.

Therefore the book does not conclusively answer the question as to whether corporate networks are growing or shrinking in power. What the book is successful in doing is showing that national corporate to corporate networks have not, according to this analysis, proved to be the source of that influence since the 1980s. Indeed Cadernas (2012 p315-16) grouped countries based on cohesiveness. In countries such as Italy, France, Germany and Spain, the combination of a bank-based financial structure, interventionist state, firms with blockholders (owners of a large proportion of the firm’s equity and/or bonds), and low economic internationalisation, all lead to a power structure based on unity, concentration and control. Whereas in countries like Canada, Australia, Switzerland, the US and the UK,  a non-interventionist state, market based financial structure and widely held corporations result in a dispersed power structure, in which the corporate network is fragmented. Between 2010-2014 the average GDP growth rate of the former group with a dense corporate network has been (-1.9+0.3+0.1+-1.2)/4) = –0.675%, whereas in those countries with the dispersed power structure the average rate has been (2+2.5+1.9+2.2+1.7)/5) = 2.06%. Given the other factors in play, causality cannot be attributed in this case. However the comparison is indicative of a common consensus among academics: a sparser intra-corporate network does not seem to impede growth. Therefore the shift from dense national networks, to sparse international ones, may not signify the decline of corporate networks, but rather a simple transition from the age of national corporate aristocracy, to the age of global corporate empires.

What’s your opinion? If you have a personal story to share about the strengthening or decline of corporate networks, it would be great to hear from you.

Tax: Missing The Point in Luxembourg

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Over the last few days an international investigation has hit the news following the leak of 28,000 tax documents from Luxembourg, mostly from PWC. It’s triggered a worldwide frenzy of journalistic and political criticism of Luxembourg’s political elite (and to some extent PWC). This is significant for the EU, because Jean-Claude Junker jean-claude-juncker-2-540x304is the current President of the EU Commission (the executive branch), and yet when many of the above documents were written he was Prime Minister of Luxembourg. Worse than that in fact; after 18 years as PM Junker came out with a speech saying that as EU Commission President he would:

“Try to put some morality, some ethics, into the European tax landscape.”

So the story is now that we have a villain and a liar at the head of the EU, as well as a proven tax haven at the very heart of Europe (Luxembourg was one of the EU’s six founding countries). Indeed the news is now peppered with talk about pressure on Junker to step down. BUT, this story is both naive, and also the story that tax avoiders actually want you to buy into. It is a story which harms international cooperation, and prevents focus from being where it actually should be if we want to resolve the problem of lost tax money.

As argued in the tax debate, focus on individual countries, and especially on the political elites, is part of a false and misleading narrative. I work as a Luxembourg Tax Analyst full time (more to assist compliance with government legislation than advice provided to companies, but I know several tax advisors – some of whom work in PWC). In this capacity I have helped to re-organise one of the tax payments systems used. Do companies always pay the cited national level of Corporate Income Tax? No, annoyingly far from it. I remember coming home from work numerous times and complaining to my wife that even in nominal terms we pay many times the amount of tax paid by big corporations. But let me ask you this: do you think companies in the US pay the national rate? How about the rest of Europe outside of Luxembourg? Or indeed anywhere else?

Moreover, I also work as a Political advisor in my spare time. In that capacity I have analysed, and spoken to, a lot of different politicians. My experience is limited, and perhaps it would be different were I to circle with the true elites. But nonetheless, I have never encountered anyone who’s actually clued up about the way that the international tax system works. They all know it’s a problem. But in reality it’s just too complicated for most elected politicians to fully understand. So the problems get shunted off into the administrative elements of the tax system. These administrations are left to understand vague and ambiguous political directions, to which private institutions spend huge sums pandering towards. But, and this is why today’s story misses the point, Tax Administrations around the world all play by the same rules!

This story on the news right now pertains largely to ATAs (Advance Tax Agreements). Within the parameter of these agreements Tax Advisors recommend new structures to clients that will save them tax. Sometimes these structures are complicated. Other times they’re relatively simple. But every time one of these agreements is taken to the Tax Authority, the tax advisors can:

  1. Make an argument of comparison to cases in other countries (appealing to the country’s sense of competition within the rules of the international ‘game’)
  2. Use asymmetrical information to make their argument (local tax authorities have information about their state, and not others – it’s the tax advisors who come to the table having already analysed the big picture)
  3. Make a sales pitch based on whatever ambiguous political values come down from the political elite

Shire is a good example. It’s a multinational drug firm, specialising in treatments for ADHD, Crohn’s disease and rare genetic disorders. Its structure, set up upon advice from tax advisors, sees offices in Ireland, Jersey, the UK and the US. By paying internal loans between these offices (sub-businesses), Shire is able to avoid paying tax on interest payments from countries where tax is high, on the understanding that tax is paid where the interest income is received. But, based on a chart showing money flowing from the company’s headquarters in Ireland, through two Luxembourg sub-units, and ultimately to to other Shire companies around the world; the Luxembourg sub-units could be presented to the Luxembourg Tax Authorities as simply an intermediary between other, larger businesses elsewhere. As part of this presentation, tax advisors can draw up an Advance Tax Agreement (sometimes called a ‘comfort letter’). There, they argue that the onus of taxation falls not on Luxembourg, but really on the final recipients of the interest income, because the loans are really only flowing through Luxembourg.

To the Luxembourg Tax Authorities this idea of tax transparency seems quite normal. Most countries recognise tax transparent companies, where the onus of taxation is not on the company, but rather on the final beneficiaries from the company’s income. In other words the company exists for administrative purposes, and tax just flows through. Moreover, Luxembourg is of course a very small country. It seems easy to believe that it is indeed being treated as no more than a flow-through entity. Therefore, Luxembourg’s tax collectors agreed that they did not need to perform a rigorous tax assessment of Shire’s operations, because the assessments should really be performed elsewhere. Of course this is a very positive light in which to paint these activities. But what I wish to press is that these arguments are easily made, information is often incomplete, and similar things happen all the way around the world. Moreover, every single act now perceived to be immoral was perfectly legal, and not only that, but encouraged under the existing corporate and capitalist systems in place.

The American system of Corporate Governance is the one which dominates almost all global corporations (Germany is a sometimes cited exception because of the power it gives to employees, but even there the pattern of change is towards the global consensus, and not away from it), and it says that the corporation’s primary goal should always be maximising shareholder value. Given that this defines the goals of almost the entire global network of competing businesses, is it really any wonder that Shire was able to justify its actions as below?

“Shire Holdings Europe No.2 Sarl [the Luxembourg sub-unit], is part of our overall treasury operations. We have a responsibility to all our stakeholders to manage our business responsibly; this includes managing our tax affairs in the interest of all stakeholders.”

If someone beats you in Monopoly, do you cry out that they were cruel and unfair to leave you bankrupt? Of course not! They were supposed to do that, because that’s what the game asks. Besides, if you target one player in the game and continually criticise them as being unfair, then you will probably find that while you’re distracted, someone else is even more busily trying to bankrupt the both of you. This is why, when political leaders such as US President Barrack Obama and UK Prime Minister David Cameron come out in speeches labelling multi-national tax-avoiding corporations as “unpatriotic”, they sound to many in the corporate world like the Monopoly player whining about their losses, and in a world where they have as much power as anyone else to affect real change in the rules of the game. This is why it is crucial that we focus on tax reform where it matters most: in the arena of international taxation.

The OECD’s Base Erosion and Profit Shifting Initiative (BEPS) is trying to resolve problems such as these (and many others) right now. The latest update relating to BEPS came just a few days ago, with the OECD releasing a discussion draft pursuant to action 7 of BEPS, in which they call for changes to the definition of ‘Permanent Establishment’ (one of the legal requirements necessary to set up residence in a country). So let’s focus on initiatives such as this. Let’s bring them into the limelight. Let’s raise their profile. And let’s challenge their fundamental assumptions too. The OECD is effectively a rich country’s club, as you can see from the map below.

OECD_member_states_map.svg

Talk about tax fairness is commonly about compliance with the OECD Convention, and the OECD’s rules on tax transparency (which countries like the UK and US are not compliant with). But what is not normally recognised is the fact that the OECD Model Convention stands contrary to several principles initially laid out in the 1928 League of Nations Treaty, and later promoted by Keynes when the Bretton Woods Institutions were being set up. These principles gave substantial taxing rights to source countries (where the income comes from). The OECD model benefits developed countries in which investors choose to reside their companies e.g. Luxembourg, the US, the UK, Switzerland, the Cayman Islands, Hong Kong and others. In fact the UN had to create an alternative model in 1980 to more fairly deal with the source countries.

If we’re going to be realistic about what we can do, and we do actually want to support tax fairness globally, and not just for ‘us’, whoever that us happens to be, then we’re going to have to:

  1. Bring the UN in on the BEPS initiative.
  2. Raise the profile of international tax
  3. Work towards a much broader state of cooperation, such that we can found an International Tax Organisation, with similar institutional capacities to the World Trade Organisation

The campaign for tax fairness is not a battle that can be fought and won. There will always be vested interests spending countless hours trying to find loopholes and exploit tricks of the system. An International Tax Organisation would ultimately be able to monitor these efforts, and provide assistance to all states seeking to protect their legitimate taxable incomes. But as that organisation is a long way off, then let us cooperate more on what is on the table today. And let us not turn to childish bickering and the age old classroom ‘blame game’. If we do go down that route i.e. the blame game; our problems will be worsened, not solved. The players don’t need to be changed. The rules do!

Alternatives to Neoliberalism

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The Financial Crisis of 07/08, followed by the ensuing ‘Great Recession’, has hugely undermined faith in Neoliberalism. As Colin Crouch argued in his 2011 book “The Strange Non-Death of Neo-liberalism”, it seems that in many ways neoliberalism is actually stronger than before the crisis. Indeed, the main groups attracting protest votes are very much neoliberal, and heavily influenced by the neoconservative (the two ideologies often go hand in hand) scepticism about the stability of multi-cultural and multi-religious societies. Yet 2011 was also “the year of the protestor” thanks in large part to people’s frustration with its dominance. Moreover, if you listen to the left then No Alternative to Neoliberalismneoliberalism might be in for a fall. Even mainstream (left wing) opposition groups (e.g. Labour in the UK and Die Linke in Germany) now voice their opposition.

But what are the alternatives? After all, when the UK Labour Party was in power between 1997-2010 it governed from within the neoliberal consensus, and its elite became more as opposed to less convinced in the truth behind that consensus as time went on.

To answer this question first let us define neoliberalism. Essentially, it is a political and economic ideology very close in thought to classical liberalism. Andrew Heywood’s “Key Concepts in Politics” defines it as an ideology of the “new right”. It uses models based on the rationality of markets and individuals, places faith in the capitalist economic structure, and espouses a limited role for the state given the capitalist market’s natural tendencies towards long term growth, and the balance of supply and demand. In terms of policy it emerges as a preference for privatisation, de-regulation, low taxes, and anti-welfarism (e.g. austerity cuts to public spending and benefits).

The espoused alternatives are commonly thought to be some sort of mix or variety of Mercantilism (whereby the state makes all economic decisions) and/or Socialism (whereby control is collectively managed without regard to socio-economic differences). However applications of these alternatives don’t take the big picture into account. And in this sense it is right that they are heavily critiqued. Neo-liberalism is the antithesis of the collectivisation and nationalisation seen in the USSR, and perhaps also an echo of the corporatist third way first employed in fascist Italy. To oppose it by lurching back towards the USSR’s tactics is ultimate folly, since the same reasons why we rejected that path in the first place still stand today.

Instead of choosing between letting the state dominate the economy, and letting private capital holding elites dominate the economy; we should be looking for a third choice – and a novel one! There are plenty of new ideas out there without us constantly looking back to the twentieth century. Moreover, it’s no wonder neo-liberals have found it simple to convince people of the economic strengths of their model. Capital holding elites, and especially since the so-called “managerial revolution” and the rising strength of managers and corporations, give high priority to increasing the amount of capital. Indeed the dominant model of corporate governance around the world is that which has one prime goal: maximising shareholder value. States don’t seek the same thing, and so it’s no wonder why people have become convinced that neoliberalism is a necessary evil to keep our economies strong. But answers are out there. The German model of Corporate Governance for example, also empowers the workers, and gives them say over corporate governance. So should we all seek to copy Germany? No.

Solutions must always be adopted, and tailored, relative to local demand. But the German model of corporate governance does carry the seeds of an interesting idea. It recognises that there are other stakeholders besides state and economic elites, and it also recognises that empowering other stakeholders can potentially regulate the excessive short-termism and risk-taking that especially ambitious managers, are often willing to take.

capitalism-is-not-democracySo what would the optimal solution be for Europe? Simple. The neoliberal consensus, which has been growing since the time of Reagan and Thatcher, has reversed our prior agreement that capitalism must conform to democracy as opposed to it being the other way around. To reassert democratic control, we must seek to empower all stakeholders in the economic system (e.g. consumers, suppliers, employees, shareholders, neighbours, and the broader public). Rather than socialism or capitalism, this would be an economic democracy; a model and an ideology that has thus far been unrealised in practice, and should reflect the new counter-argument to the modern neo-liberal consensus.

How do principal-agent relationships evolve within a context of structural contradictions?

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The principal-agent relationship is a very simple one. It simply means any relationship in which one party (the agent) is contracted by another (the principal) to do something on their behalf. So when you take your car to the garage for example, you, as owner of the car and the person hiring, are the principal. The car mechanic, as the person being hired to do work on your behalf, is the agent.

As society has grown more complex and specialised, principal-agent relationships have become increasingly important to modern day life. The reason for this is that they exist when one party does not have the time, resources and/or expertise necessary to carry out a certain task, and must seek an agent to do it on their behalf. Therefore, Dilbert - principal-agentbecause such relationships are so widespread, and because they create problems such as moral hazard, asymmetrical information, adverse selection, and agency rent (see notes at the bottom if you wish to know what these are), they are always evolving.

In thinking about how relationships evolve, the common approach is to think in terms of utility, attachment, and the basic emotions which drive us to maintain those relationships. In other words we tend to conduct relational analyses in an individualistic light, looking predominantly at the agents (when described in agency-structure terms both principal and agent are agents) who take part in the relationship, more than the structure within which that relationship evolves. Yet structures are built by individuals, and they are built to achieve certain things. Therefore, structures have intentions just as much as do individuals.

So what does it mean when principal-agent relationships evolve within a context of several overlapping structures? Does it cause a synthesis of those structural intentions? Or was the Bible (Matthew 6:24) right when it said that “no man can serve two masters”; implying that, if structures can be considered as Masters, then either one or both will have to be chosen over the other at various times.

Let’s take the structural contradictions between liberalism, capitalism and democracy as examples. Can a principal-agent relationship evolve within each of these structures, and at the same time better achieve each structure’s goals? What’s the aim of each? I have to be very clear here; what I’ve written below is purely my interpretation of these concepts, and some people would disagree.

Liberalism aims to maximise freedom of the individual, insofar as said freedom does not impinge upon the freedom of others; and thus it treats all individuals as being equal under the law. An utopian liberal principal-agent relationship would therefore be the most anarchic of all structural relationships. Its theoretical ideal would be that principal and agent collaborate together on an equal footing, towards a Pareto-optimal outcome in terms of marginal utility gains (an outcome in which no stakeholder’s level of satisfaction deteriorates). However its intentions as a structural framework would not be to create a Pareto-optimal outcome, but rather to allow it. This is why many people think that liberalism and capitalism go hand in hand, because liberalism is more concerned with equality of input i.e. legal rights, than output i.e. wellbeing, power etc.

Capitalism aims to maximise productivity, by ceding power over the means of production, distribution and exchange of wealth to private individuals who express competencies through their existing capital holdings. An utopian capitalist principal-agent relationship would perhaps behave in a Darwinist fashion, as a great deal of Darwinist thought was absorbed into the then youthful notion of capitalism.The ideal capitalist principal-agent relationship would at face value seem very conservative, as it would seek to maintain, and further, the power held by the ultimate capitalist principals i.e. the capital holders. And yet it would be ruthless about letting those who squander their power fall.

Democracy is slightly more collectivist in its thinking than those other two structures above. Where liberalism is slightly anarchic about its definition of principals i.e. everyone should have equal rights; and where capitalism selects individual capital holders as the ultimate principals; democracy finds the majority electorate to be the ultimate principal. An utopian democratic principal-agent relationship would therefore seek to empower the electorate.

Although many well-renowned figures have argued that democracy and capitalism go hand in hand e.g. Schumpeter and Friedman, the aims of democracy and capitalism are immediately and visibly contradictory if the above definitions are used. So what does this mean for the evolution of principal-agent relationships? If you were writing a contract governing a principal-agent relationship today, what would you do? Would you instinctively employ one structural understanding over another? Would you seek to serve the interests of multiple structures at the same time?

My expectation is that as principal-agent relationships evolve, they’re led by social, state and international structures towards one or other particular ideological structures. So for example in the period after the Cold War ended I might expect to see that principal-agent relationships evolved towards being more capitalist, as this period of history saw many people believing that capitalism was the best system that we would ever find. Whereas when a left wing government takes power, and proves to be successful with the economy, I would expect to see that principal-agent relationships become more socialist.

I’m now thinking about starting a PHD in exploration of this question, in which I would explore recent theoretical developments, and the thoughts of those elites working in the field, to test whether or not these structures do seek to pull the evolution of principal-agent relationships in different directions. Given that this is a huge question, my initial thoughts are to limit the parameters of this study as described below:

Geographical restrictions Comparison of Luxembourg with an individual UK constituency of a similar sized population
Restrictions in terms of people Economic fiscal relationships between decision makers on the one hand, and the principals of both capitalism and democracy on the other (I added liberalism above as a further example of the many competing structures that affect our thought, but it would be too broad to encompass more than 2 within a PHD)
Restrictions on the types of relationships Specific fiscal decisions made by key individuals, and how the decision makers interacted with their agents and principals in making the decisions. It doesn’t matter whether those decisions were made into law or not. It could simply be a decision to vote in a certain way. The focus will be on what influenced that decision and how e.g. were measures taken to mitigate the principal-agent problems, and if so did they better help capitalism or democracy?
Temporal restrictions The longer the timeframe the better the data will be in terms of building a trend in the evolving direction of said principal-agent relationship. However this will of course depend on what data is already available.
Restrictions on the type of research Secondary theoretical analysis will be required in order to test what I see as the study’s main weakness i.e. the subjective theoretical interpretations against which data is analysed. And if feasible it would be great to verify any hypotheses which emerge as a result of this research en masse via crowd-surfing. However most data gathered will be in the form of individual interviews with the key stakeholders involved.

Such a study would not only provide invaluable data on the evolving trend of principal-agent relationships among political and economic elites, but would also prompt further research questions into the impact of competing ideological structures on decision making among elites. However, the idea behind this research is at present only that: an idea. No research proposal of any shape or form has yet been drawn up. Therefore, I would be immensely grateful to you if you could share your thoughts with me. It doesn’t matter how educated those thoughts are. What do you expect that I’d find? Is it a worthwhile idea? Is it feasible? Whatever your thoughts are, I would truly love to hear them!

 

P.S. If you’re interested then please see the below definitions of the major problems in a principal-agent relationship:

Moral hazard is a situation in which the contract arranged between principal and agent makes one party more likely to take risks, which might adversely affect the other party. An interesting example today is bank deposit insurance. If a bank shows signs of trouble, and individuals’ deposits in that bank are not guaranteed by the government, then depositors/investors are likely to run on the bank (withdraw more than the bank holds in reserves, and prompt bankruptcy) out of fear. Yet if the government says it will insure deposits in the event of a crisis, then banks feel more able to take risks, because should the worst occur then they would not bare the costs. In the principal-agent relationship, the agent may have incentive to act inappropriately if the agent’s and principal’s interests are not aligned, and depending on the nature of the contract. For example collective cabinet responsibility creates moral hazard, for it means that the results of high levels of risk created by one Minister (agent) will be shared by all other Ministers, and the Prime Minister (principal)

Adverse Selection refers to the process through which undesirable selections could be made, usually as a result of when principal and agent have asymmetrical information. In agency terms, adverse selection often occurs because those least qualified for a post are often the keenest to be hired. For the same reason, the most ambitious are likely to try harder, and so to obtain posts more quickly than those who are perhaps more able. Yet they could also be more likely to policy shift if they think it will get them a better job in the near future. In political situations adverse selection may often be more likely, as it could occur without asymmetrical information. For example election results could require a coalition, or party factions could necessitate certain, otherwise undesirable appointments.

Agency Rent describes the opportunity for agents to extract ‘rent’ (in material or policy terms) that the principal would rather not pay. This rent can be extracted within the agent’s ‘bargaining range’. For example even if there are other perfectly suitable candidates for the job, so long as there are costs involved with replacing the agent, there is always bargaining power to be had. Rent can be extracted in material terms where the agent has the power to request more resources/pay than he/she actually needs, in the form of leisure i.e. agent shirking, or in the form of policy i.e. policy shifting.

Agent shirking is a situation when the agent is not putting in the required effort to get the job done, which is possible in the Principal-Agent relationship because the agent can observe what he/she is doing much more closely than can the principal. Dilbert - principal-agent 2

Policy shifting occurs with the presence of asymmetrical policy goals between principal and agent. As the agent does not share the same preferences as the principal, they may not lead in the direction that the principal would wish. For example ministers may have different policy ideas to their principal: the Prime Minister.

320px-Principal_agentAsymmetrical information means no more than to say that both parties do not have the same information. But the most commonly described problem here is what Gary Miller describes as Weber’s asymmetry i.e. the agent, as the specialist, holds an informational advantage over the principal, who thusly feels a need to make use of his/her authority to incentivise the agency to act according to his/her interests. For example when you take your car to the garage, you know that the mechanic knows more about the car than you do. You don’t know that when they say they’ve fixed the problem, they haven’t created another dozen, which will require you having to go back to the garage within a few months. So you, as principal, might want to ask for some sort of insurance e.g. that if there is a problem in the same area of the car within the next six months, that they will fix it.

Does the State Have Real Power to Intervene in the Economy Today?

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The latest Journal of Labour Economics (Uni of Chicago Press) features an essay entitled “The Detaxation of Overtime Hours: Lessons from the French Experiment.” The data does show an increase in the number of overtime hours claimed, which was the intention of the law. However data gathered about the number of hours worked (the particular focus is on trans-border workers, who should theoretically come to work less overtime than French workers after October 2007) shows that:

“The detaxation of overtime hours has had no significant effect on length of time worked.”

The law did nothing to change earlier laws or regulations concerning the working week (which was capped prior to 2007). It simply changed the cost of working overtime. And as such, according to the authors (Pierre Cahuc and Stephane Carcillo), despite the popularity of this same policy in other European countries (e.g. Austria, Belgium, Italy and Luxembourg), its result is simply to aid tax optimisation.

French 35 Hr Working WeekWithin the context of the French socio-economy this article and argument may strike you as being one among many overtly, and obviously political manoeuvres in what is today a highly divided society between the left and right wings of politics. However, there is a wider point at play, and a more international one. In an increasingly globalised world (and by globalised I actually refer to devolution as well as internationalisation), how much power do state politicians truly have over the economy (it’s a big enough topic already so please stick to economics if you comment)? And if such powers are different in extent to how they were in the past, then what is the shape of that trend? Are we on a plateau today? Or will the future see politicians at the state level become completely redundant?

According to a growing consensus, the result of modern globalisation has been a dominance of the markets and capitalists over the power of democracy and state governance. But in many ways this consensus is a shame, because it means that few people discuss the extent of government power anymore; they only discuss whether it is good or bad that it has declined, and will continue to do so. Furthermore, there is evidence to suggest that globalisation is not always the prime culprit behind such reduced power.

In the above example Cahuc and Carcillo do not argue that exempting overtime income from tax is ineffective because the global markets have a more powerful impact on the amount of overtime demanded or supplied. They argue that it is ineffective because it ignores some of the most fundamental principles of fiscal planning. If taxation is to be efficient then it must define a tax base that the authorities can easily verify, and checking the amount of overtime actually worked, as opposed to how much is declared, is almost impossible for the Tax Authorities and/or withholding agent, to accurately verify. Indeed, although they do not mention it in the article, one could go to the very roots of the subject. In ‘Wealth of Nations’ Adam Smith proposed four canons (principles) by which tax can be assessed: efficiency, fairness, certainty and convenience. It could be argued that exempting overtime income fails all four of these.

  1. Efficiency has been discussed already. It requires an easily identifiable tax base.
  2. On the matter of fairness, some have less verifiable hours than others, and often these people tend to be richer to start off with.
  3. The criteria of certainty is all about simplicity. The more complex the tax system becomes, and the less that the general public know about which parts of their income are taxed in which way, the less certain everything becomes.
  4. Convenience is about how easy it is to find out what’s owed, and how easy it is to collect the money. As already discussed, overtime hours hours not recorded but actually worked, is incredibly difficult to actually check.

Failures in these four areas suggest that rather than globalisation, it may often be sheer incompetence on the government’s side which causes an ineffectiveness of economic intervention. Clearly this is a subjective view, and it’s not necessarily one that I am advancing. However remember that the term ‘globalisation’ was barely even discussed before the late eighties. And yet the ability of governments to manage, plan and/or regulate their economies has been limited since well before.

Policy Area How did it Affect Economic Governance?
The Rise of Monetarism & Fall of Keynesianism Since the late seventies Keynesian macro-management has been largely discredited, Monetary Policy has taken precedence over Fiscal Policy, and Monetary Policy decision making has been outsourced to independent Central Banks.
Tax Resistance The ‘race to the bottom’, in which governments compete to attract rich residents with low rates of tax, is not the only reason for tax resistance. Think about the Boston Tea Party – what started the American Revolution was essentially tax resistance. And what about Hoover’s tax cuts in 1929? He cut marginal tax rates to the lowest point in modern history, a long time before modern globalisation.
Privatisation Speaking historically, privatisation was less about increased efficiency, and more about simple costs. Looking at examples like British Steel, privatisation occurred prior to globalisation, and was implemented as a way of getting rid of subsidies from the Exchequer.
Moves to Restrict Social Provisions and Benefits These also started prior to the modern period of globalisation. Extensive taxation, designed to redistribute wealth from poor to rich, was rejected by electorates around the world, particularly, and probably firstly, in the US.

According to Robert Skidelsky, an academic often referred to as today’s most prominent biographer of John Maynard Keynes:

“Globalisation is as much a consequence, as a cause of declining government power.”

Such a statement starts one thinking about the Japanese fiscal stimulation of the 90s, and those employed by many Economic Intervention Antisince the 08-09 financial crisis. It brings to mind the rise of China. And it also brings to mind left wing leaders from Latin America like Hugo Chavez and Evo Morales. In 2005 the BBC reported that out of 350 million people in Economic Intervention ProLatin America, 3 out of 4 lived in countries with left leaning Presidents. It’s become so significant a trend in Latin America that it has been given a name – “the pink tide”. And despite what many have said about their success, there have been successes.

So, does the state have real power to intervene in the economy in the modern, globalised world of today?

Are Humans Labour?

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Have you ever heard of an unemployed tiger? Probably not. An unemployed whale? No?

Unemployed animalWhy are the concepts of labour and employment so universal, and so evidently a part of human life, when they are completely unheard of to all of our Earthling kin? Either labour is a natural concept exclusively for humanity, or it’s a temporary attribute of the dominant economic system today. I assumed that the second was an obvious truth, and set out thinking about how we would be able to move towards a state when unemployment could be eliminated. But labour, employment and unemployment are huge parts of our modern socio-economies. And trying to solve the problem of unemployment based on conventional economic reasoning would, I knew, lead me to either incremental solutions designed to lower certain types of unemployment i.e. structural and cyclical; or it would lead me towards Milton Friedman’s conclusion that unemployment can’t be lowered beyond the ‘Non Accelerating Inflation Rate of Unemployment’ without price and/or wage controls. Furthermore, the concept of unemployment is a very modern problem.

Prior to England’s Poor Law of 1601, and to some extent prior to the Industrial Revolution, the concept of unemployment simply wasn’t recognized. In 16th century England the jobless were called “sturdy beggars”; a term that included both those with non-socially accepted employment, and also those who didn’t want to work. The Poor Law of 1531 simply assumed that there were enough jobs for everyone, and perhaps understandably so, since the first Vagrancy Law was passed in 1349, when the death toll caused by Bubonic Plague spreading across England was at its peak. Yet throughout the globe, humanity’s population boom only commenced after the Industrial Revolution was under way, and most strongly in the latter part of the twentieth century. Furthermore, the technological advances which have been utilized since the eighteenth century have meant that production today is less labour intensive than ever before. All of this leads economists to conclude that unemployment is a very much a modern concern, and problem to be addressed within our present economic system. However, I wanted to explore the concept’s roots a little further; not as a sociological investigation into when it was first used, but more as an investigation into where and when the idea of humans as labour came from.

I was immediately surprised to find reference to the word labour in theories dating as far back as Confucius (about a hundred years pre-Socrates and Plato). But I thought, surely this is a poor translation, right? So next I looked at the etymology of the word labour. I found that it comes from the Latin word ‘laborem’/’laborate’, which seems to mean a great many things, just like our modern word: work, trouble, toil, exertion, hardship, pain, fatigue, and even labour in a fairly modern sense. Etymology of Labour Going back further proved difficult, with the best guesses that I found saying the word comes either from one which means “tottering under a burden”, or from one of the Ancient Greek words of lamvano/lavo (to undertake; Gr: λαμβάνω), or laepsiros (one who runs very fast, agile, speedy; la+aepsiros; Gr: λαιψηρός, λα+αιψηρός).

In other words as far back as we can go, the verb labour i.e. to labour at a task, seems to exist. However treating humans as labour in the sense of a noun i.e. labour meaning worker, does indeed seem to be quite modern. For example when Confucius used the word, as in the quote below, he was meaning work, and not worker: “Learning without thought is labor lost; thought without learning is perilous.”

My question therefore, is this: why did we start seeing humans as labour/workers? Is it natural among humans to treat ourselves as such? And if the modern adoption of concepts such as unemployment, and labour as a noun, are indicative of the modern socio-economic system, and temporary, then might it be possible to see a point in time when we see ourselves not as labour, but rather as thinkers, players, or even something else entirely?

The Tax Debate

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Taxes are one of the hottest topics in politics today. But where is the debate today, and is it in the right place? To those on the right, inefficiencies are costing us money, and we should adopt a more regressive system of taxes i.e. flat rates. To those on the left, states seem to be in a ‘race to the bottom’ in lowering their Corporate Income Tax rates as a means to attract investment, while at the same time benefits to the poor are being slashed; in other words the rich are getting richer while the poor are getting poorer. Indeed, if you google the phrase ‘tax debate’ you will find:

  1. A debate in the US over whether they should lower their official Corporate Tax Income rate of just under 40%
  2. A debate in the UK about whether it is fair to increase taxes based on the number of bedrooms in your house
  3. A debate in France about the effectiveness/efficiency of the 75% upper limit of tax on income over EUR 1m, combined with govt spending of 56% of GDP

Each of these debates is a pretty traditional debate, based on the values laden division between right and left, and what they teach you in a university about tax policy making. For instance in the UK the left say that the ‘bedroom tax’ is unfair because it targets the poor, and of the 660,000 people affected only a minority are able to move to smaller accomodation. Whereas the right say that this is efficient, because in de facto terms this removes a ‘spare room subsidy’, which ultimately saves the tax payer around GBP 500m.

Tax JusticeBut to what extent are these debates really in touch with public concerns? They attract interest of course. Yet to the vast majority of people reading newspapers, it is neither fair, nor efficient that firms with greater market power have a lot more room for manouver in negotiating their rates. To think that one of the largest, most widespread protests in human history was the international Occupy Movement, and that this movement is still going on today, it seems odd that the debates today are national. Indeed where the debates are international it is simply in comparitive terms. Right wing tax reformers in the US for instance, like to highlight the fact that the average Corporate Tax Income Rate in the OECD is only 25%, compared to their 40%. But is this the debate that moves public interest? In practice, the 40% rarely applies. And it is not just in tax journals and legal documents that this is realised. The public is well aware.

Dan Lynch et al (Product Market Power and Tax Avoidance: Market Leaders, Mimicking Strategies, and Stock Returns, 2013) found that between 1993 and 2010 there was a positive correlation between product market power and tax avoidance. Furthermore, they found that the effects trickle down to smaller companies, and even to the individual shareholder. Less influential companies seek to emulate the practices of the market leaders. And investors gain a greater return from firms that engage in more aggressive cash tax avoidance. The entire system seems set up to encourage more than discourage, tax avoidance. In fact I spoke with an investment adviser earlier this year. He said to me “some people only want ethical investments in their portfolio, and that’s ok; but it really does hold us back”. He was encouraging us to give him complete autonomy over our investment decisions, and quite explicitly admitting that if we did so then he would have been investing in areas that might be deemed less than ethical…

It seems odd therefore, that in the media and in political literature the stress is on the average rates applied at the national level, together with the right-left debate over efficiency versus fairness; whereas in business, law, and popular culture, the stress is instead on the exceptions, and the application of law. Why for instance, don’t we hear more about the fact that OECD recently released a progress report on tax transparency? In this report, not only countries such as Luxembourg, the Seychelles and the British Virgin Islands, but also countries such as the UK and US were found not to be fully compliant with the OECD’s tax transparency rules. Why don’t we hear more about the US Foreign Account Tax Compliance Act (FATCA) or the OECD’s Base Erosion and Profit Shifting (BEPS) initiative? Why don’t we hear more about the growing popularity of the Financial Transaction Taxes? And what about the Double Tax Conventions? Or the conflicts between different tax laws e.g. EU law on the one hand, and Double Tax Conventions on the other? There really are so many issues that are current, and huge in significance. And yet the major political debates still rage over the classical right-left dispute.

What do you think today’s major tax debate(s) should be? And why?

To what extent is innovation collective?

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Let’s not re-create the wheel they say, as if the wheel were one individual innovation, thought by a single great thinker from our ancestry: the genius cave man!

Genius cavemanMost of human history in fact seems to have been analysed this way (with a focus on great individuals) until relatively recently. Take the study of leadership as an example. Its first spot in the limelight as a subject of its own was with the Great Man theories of the 1840s. Subsequently, the subject’s theories have shifted through traits theories, behavioural theories, contingency based theories, charismatic based theories, and now only recently to more collective forms of leadership which, for example, take the followers into account as well.

None of these theories were ‘stupid’, and in fact despite the reduced popularity of the great man theories in the field of leadership, they have permeated a great deal of our culture. Think about the big events that you learnt in school history lessons; there were probably a few significant individuals at the heart of each study. Napoleon, Hitler, Stalin, Alexander the Great, Nelson Mandela, Julius Caesar; the list goes on and on. Indeed we seem obsessed with individuals across all subjects. Think about English, and Shakespeare probably pops into mind. Music; Beethoven and Mozart. Science; Galileo, Newton and Einstein. Maths; Pythagoras. Etc. It makes sense for us to link significant ideas with their proponents. And so you can see how the Great Man theories of the 1840s became popular. However the growing force of pragmatism is forcing these emphases into the history books as well. For what use is it to memorise a list of great names? Just as in leadership, so too in other studies, we are becoming much less interested in who did what years ago, and much more in how we can do those things ourselves.

However, it may also be that this move is more logical and truthful than simply pragmatic. Einstein, for instance, wrote the general and special laws of relativity. But could he have done this without the help of Max Telmud (a student who introduced him to several difficult topics), his teachers at Zurich university, the authors of those books that he read (and he read a lot), and indeed the entire advancement of science up until that point in history?! I could have extended this list, but hopefully you get the point. To give an other example; shortly into this century a broadsheet newspaper concluded that Marx was the most significant political thinker of all times. Whether or not you agree with this, it would be impossible to deny that a significant amount of what he said, was widely known and talked about when he was writing. Neither did Marx even try to deny it. For instance he started his academic career as a Hegelian, and this is where his concept of alienation came from. When he later wrote more about alienation he said not that he was adding to Hegel’s work, but rather that he was taking it, and “turning it on its head”.

When we come to innovation, many ideas seem to be echoed in nature. And so it is easy to infer that prior to the invention of the wheel someone might have seen a log rolling down a hill. Perhaps this log injured or killed several people, and started a lot of gossip. It’s quite possible that events such as this could have been talked about for generations before one creative individual, or perhaps team of individuals, decided to ‘take’ (not make) this idea, and use it for something else. How else can one realistically suppose that the wheel’s invention came about? Inventors/creators don’t just sit around and invent/create out of nothing. They learn from others all the time, amalgamate different ideas heard in different places, and build upon what other people have said.

invention of the wheelAlthough we don’t know exactly who created the wheel or when, we have in fact made numerous educated guesses. For instance the earliest wheels found come from Sumer, (around 3500BC – this empire was formed along the Euphrates and Tigris rivers in the Middle East) the empire which is also credited with the invention of writing. And the process of their invention is believed to have been a six stage progression, from placing rollers beneath heavy objects, to placing sledge like runners beneath them, through various combinations of the two led eventually to what we now call the wheel.

If the Sumerian invention of the wheel is correct, then this invention was indeed a huge one, over a huge period of time. But my contention is that all creativity is collective and social. After all, if you put someone in a room at birth, and kept them alive, but with no form of social interaction; do you really think that that person would ever invent anything new?

To what extent do you agree? Is innovation always collective? Or is it sometimes, or even more than sometimes, individual?

Is there a difference between Management and Leadership?

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The concept of leadership has been analyzed as a concept distinct from management for centuries. Indeed a great deal of the debate dates back to Weber (and even a hundred years before too), who’s well known for distinguishing between transactional (bureaucratic), transformative (charismatic) and feudal (traditional) models of leadership. And the philosophical debate has been continued in today’s era by the likes of Burns and Bass. Bass said
“Leaders manage and managers lead, but the two activities are not synonymous. Management functions can potentially provide leadership; leadership activities can contribute to managing. Nevertheless, some managers do not lead, and some leaders do not manage”.

Far from being distinct, the above quote seems to reflect the consensus view. Leadership is commonly thought of as relating to inspiration, charisma and particularly crisis situations where direction, and “grabbing the bull by the horns” are important. Management however, is often thought of as being more operational, administrative, reactive and sometimes technical. One results in change, the other results in maintenance.

But what’s the truth? And is there any merit in the separation of these two concepts? Professor Tony de Luca of Sacred Heart University believes that not only is the debate without merit, but it also proves very little in the way of a real difference. For example a leader who isn’t a manager would make nice speeches but never deliver on anything. They would be ” all smoke and no sizzle” i.e. no beef. So in reality there’s no point in separating the two concepts because either job needs both skill sets.

What are your thoughts?

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