This article first appeared in Forum, The Edge Malaysia Weekly on October 21, 2019 - October 27, 2019

The RM244 billion forecast revenue in Budget 2020, considerably lower than the RM263 billion in 2019, has left the government with little room to manoeuvre to address the ubiquitous problem of inequality in Malaysia. Putting aside the meagre increase of 2% tax on those earning more than RM2 million and the introduction of the digital tax, the absence of other forms of wealth tax — a subject that has dominated much of the economic discourses prior to and after the May 2018 general election — has been disappointing.

Despite many scientific studies to the contrary, the government appears dogmatic in the belief that imposing more taxes to correct the huge imbalances in the share of economic wealth would impede economic growth. Growth as a precondition for distribution seems to be the dominant thought behind the budget.

This article does not intend to argue against this doctrine. There is a multitude of factors, competing interests and demands that prevent the government from introducing more transformative measures to combat inequality. But even if the government had the freedom and willingness to come up with more taxes and distribution, relying on fiscal policy alone as a tool to narrow the wealth gap would not take us to the finishing line. In a market economy, it requires the entire private sector to step in and correct itself from a century of incongruity in its purpose that traces its origin to the obscure Michigan case of Dodge v Ford.

Under the leadership of Henry Ford, his namesake corporation, the Ford Motor Company, quickly grew into an industrial success and paid millions of dollars in dividends to its shareholders. However, in 1916, after 15 years in business, Ford, as the company’s majority shareholder and chairman, decided that the firm would no longer pay discretionary dividends. Instead, profit would be reinvested in the company for the purpose of increasing wages for workers and decreasing prices for consumers.

“My ambition,” Ford declared, “is to employ still more men, to spread the benefits of this industrial system to the greatest possible number, to help them build up their lives and their homes.” The Dodge brothers, minority shareholders in the company, protested and brought a legal suit against Ford for violating his fiduciary duties to them.

The Michigan Supreme Court rebuked Ford and handed down a judgment that would shape our understanding of the role of the corporate sector until today. In ruling that “a business corporation is organised and carried on primarily for the profit of the shareholder”, Dodge v Ford effectively reversed the Adam Smith doctrine of wealth sharing as an economic principle and put into motion the notion of “maximising shareholder return” as the ultimate objective of a corporation.

It altered the age-old belief that private enterprises exist not just to make money but also to serve humanity and achieve the common good, to build infrastructure and make lives better. It transformed the nature of the market economy and capitalism with rate of return becoming the sole benchmark of business success.

Under the new economic order, the real economy becomes subservient to the financial market. Investment and buyout firms, with the help of trillions of dollars from pension and sovereign wealth funds, thrive entirely on the promise of double-digit investment return. Along with the banking industry, there have never been any real jobs created in their investment model — only job losses and high return. The financialisation of the economy is so penetrating that even governments, whose only concern should be the provision of public goods, are demanding financial return from the companies they own.

In the proverbial rat race, workers often become the victim. Wages are suppressed to increase profit margin and business rationalisation simply means separation schemes for the employees. As a result, it amplifies rising inequality as seen from the overwhelming share of corporate profits in relation to gross domestic product over the course of the century.

Many policy advocates today place much emphasis on the role of taxation and, by extension, the government, to correct the imbalance. But as decades of economic growth since Dodge v Ford has demonstrated, it is the notion of shareholder primacy that keeps significant wealth in the hands of a few. Thus, the primary responsibility lies with the market — one that would drive the corporate sector to move away from the narrow doctrine and bring itself closer to a longer-term multi-stakeholder model.

Unilever, the venerable consumer goods company, is a living example of how taking a developmental approach to business is by no means sacrificing its return. For the past 10 years since it first aligned its business strategies and operations with societal goals rather than mere profits, it has delivered more than 300% return to its shareholders.

As the UN Global Compact data has shown, there are many more corporations around the world that have achieved a similar feat. It simply demonstrates that it is possible for businesses to employ a multi-stakeholder development-focused agenda that delivers for the shareholders.

Instead of patch-up strategies that will do little to solve inequality, the government would do well to turn its focus to designing policies that promote a fundamental shift in the purpose of the private sector. They could range from going along the Unilever approach of eliminating requirements for quarterly corporate results, to granting incentives for companies to transition from the dubious CSR (corporate social responsibility) to SRC — socially-responsible corporation.

It requires nothing short of a paradigm shift. Otherwise, the government would be in a perpetual bind to intervene to achieve the elusive economic justice.

Nazim Rahman works in private equity and is head of the World Bank and the International Monetary Fund Asian Parliamentary Network secretariat

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