CHAPTER 11 OF BOOK
CHAPTER 11 OF BOOK “HOW I WOULD RUN THE COUNTRY IF I WERE DICTATOR” by Argus C. Zall
In this chapter, I decree a new social contract between business and society, make significant changes to the organization of corporations, prohibit greater than 40% foreign ownership of US corporations, and decree certain changes in the operation of American business, and of the civil court system.
I also make final remarrks
CHAPTER I1
BUSINESS
(Copyright July 31 2006)
Calvin Coolidge once said “The business of the American people is business”. (John Bartlett, “Familiar Quotations”, Little Brown & Co, 15th Edition p 736 (1980)). American business is the provider of essentially all the jobs in the country. Those in the public sector that are not directly supported by business are indirectly supported by the taxation levied on the economic activity business creates. Therefore the health of business is vital to the health of the country. That said, there appear to be many ways in which business acts that are not good for the country.
Thomas Jefferson once said (John Bartlett “Familiar Quotations” Little Brown & Co 19th Edition p 736 (1980)) “Merchants have no country. The mere spot they stand on does not constitute so strong an attachment as that from which they derive their gains.” Nowhere has this been more clear than in the wholesale exporting of American jobs during the last decade to every low-wage corner of the world. My cash-in-advance restructuring of our foreign trade will make many of these exports of jobs unprofitable. I will go farther than that, saying to American business, “You are allowed to exist for the twin purposes of providing world-class goods and services, and of providing jobs for American Citizens. As long as you do that, you will not be taxed except in the form of the universal transfer taxes. If you hire foreign nationals, I will add a tax equal to their salaries, unless you can prove to me that their presence on your payroll is necessary for improving your export sales and increasing the number of jobs you have for Americans.”
Next, I will prohibit majority foreign ownership of any American business. Foreign entities or persons will not be permitted to own more than 40% of any US Company. Any US companies that presently have greater than 40% foreign ownership will be required to issue sufficient additional stock for sale to the American public (at whatever price the market will allow) to reduce their foreign ownership to less than 40%
The stockholders of a corporation are its owners. The board of directors is supposed to be the agent of the owners, and members of management are employees, hired by the agents to operate the enterprise. The present common practice of having members of management sit on the board of directors is an egregious conflict-of-interest; the frequent practice of having the chairman of the board of directors serve as chief executive officer of the corporation is a doubly-egregious conflict-of-interest. The nomination by management of candidates for seats on the board is a triply-egregious conflict of interest. I will abolish all of these practices.
No employee member of management of any corporation may sit on the board of directors of any corporation, most especially not his/her own. The chairman of the board may not be chief executive officer. Boards of directors will then be one-hundred percent “independent”. They will be responsible for hiring the management and for overseeing its stewardship of the company’s business. The board of directors itself will have the responsibility of nominating a slate of candidates for vacant seats on the board, at least two candidates for every vacant seat, to be voted on by the stockholders.
The composition of present-day boards of directors is heavily skewed toward lawyers, financiers, salesmen, personnel experts. There is never anyone who ever worked in manufacturing, and if there is anyone versed in science or technology, it is either the in-house Director of R&D, or an academic scientist who has not a clue about how to get new products developed and introduced into manufacture. These boards are incapable of providing oversight of management’s stewardship of the health of the manufacturing and R&D operations of the company. Moreover, they then hire managements in their image, and those specialties are almost never found on the upper-management team.
I will also decree a change in how boards of directors are composed. There must be three directors with previous working experience in every major function of the corporation; Finance, Accounting, Sales and Marketing, Personnel, R&D, and Manufacturing (if the corporation has such functions). Only such a board can provide proper oversight of all of the operations of the corporation. One third of the board (one in every category) must be re-elected or replaced every year. Necessarily, many of these positions will have to be filled by retired former executives of other corporations, since they will have the necessary expertise while not being in the employ of any other corporation.
I will next interfere with the operation of all American business by prohibiting the use of what is commonly called “mark-up pricing” Let me explain. The last place in American (or world, for that matter) business where anyone knows the true cost of doing any one thing is the factory floor. The cost of materials and labor to fabricate a putty knife is known to within pennies per thousand items. And that cost, known as “total direct cost” is typically ten percent or less of the final selling price of a mass-manufactured and mass-merchandised item. There are many other costs that are included in the final selling price: the “period costs” or “fixed costs” of owning and operating the factory; warehousing and shipping costs; wholesalers “break-bulk” costs; distributor’s costs, advertising costs (“my putty knife is better than yours!”); retail shelving costs; retail customer transaction costs; and yes, profit. The problem is, these costs are known in total, but not how much is accounted for by an individual product.
Therefore, they have to be “allocated” among the multifarious products in a given distribution chain. I may know the monthly cost of operating my factory which makes xx thousand putty knives, xx thousand paint brushes, xx thousand spatulas, x thousand paint-can stirrers, etc., etc. etc., every month, but I have to charge that cost in some way to the individual items that make up the product stream. In the nineteenth century, when the only computing instrument was a green eyeshade and a lead pencil, business developed a very simple way of performing this allocation. Add up the total direct costs of all of the items that were produced in a month and divide it into the total fixed cost for the month. Then charge each item its share of the fixed cost by multiplying its total direct cost by that quotient. The quotient was usually expressed as a percentage, so in effect the cost of the product was “marked up” by its percentage share of the costs to be allocated. This was then repeated at every stage through the distribution chain; costs of each stage were allocated in proportion to the cost of the goods entering that stage, by a “mark-up” percentage.
This made sense in the nineteenth century. The markups were small, ten percent or so. The fact that in the vast majority of cases the true cost incurred by a product at every stage was most-emphatically-not proportional to its cost entering the stage made little difference, and the cost of trying to do the allocation right was exorbitant. The system makes no sense today. The ease of spread-sheet manipulation and calculation makes determining much more realistic allocations trivial. The markups are now forty and fifty percent; the total cost to be allocated is 80% or more of the final sales price, and the economic distortion incurred by allocating it wrongly is significant.
Let me give you a simple current example. In 2005, gasoline was selling for about $2 a gallon, of which perhaps one quarter, $0.50, was due to the cost of the oil that went into manufacturing it. The other dollar and a half was divided among allocated costs through the manufacturing and distribution chain, say $1.30, and profit $0.20. This year, the price of a barrel of oil is much higher, representing say, $0.75 of cost per gallon of gasoline. No other costs in the system changed!!! The price of a gallon of gas should have gone up only to $2.25. But since the prices were figured on a markup basis and the same percentage markup was used as previously, the price of a gallon of gas has gone to $3, with $2.25 instead of a dollar-fifty to cover allocated costs and profit. But none of the other costs changed; they are still only $1.30. Guess where the other seventy-five cents went? Straight to the bottom line! Total profit goes from $0.20 to $0.95, nearly quintuple what it had been before.
Do you wonder that Exxon/Mobil is reporting record profits while the rest of us groan under the burden of $3 gas? And the executives of Exxon/Mobil can testify with a straight face before Congress that it’s not their fault. They are pricing their product the same way they always have! They’ve done it this way for more than a century, and are completely blind to the fact that the method by which they allocate indirect costs is responsible for this outrage.
For more examples of the foolishness of markup pricing, see the companion article following this book, entitled “Markup Pricing: A Distorter of True Costs; an Obstacle to Progress; and an Exporter of American Jobs”
I will decree that the use of markup pricing by any business is forbidden. Allocation of fixed, non-proportional costs must be done by a realistic algorithm. For example: the true cost of warehousing an item is equal to the multiplication-product of cost per-unit-time-per-unit-area of warehouse, times the area occupied per item, times the length of time the item remains in the warehouse, plus the cost of storage and retrieval, plus the cost of processing the paperwork. All of these quantities are known, and none of them has any relationship whatsoever to the cost of the item entering the warehouse, which is the assumption of markup allocation of costs.
Having dealt with business in general, I will turn to the operation of several specific businesses. First, the operation of the civil court system, in which all disputes that do not involve the criminal system are settled. At present, this system is largely publicly-funded, and has been systematically starved of resources. As a result, multi-year delays in adjudicating a claim are the norm. This system is taken advantage of by the legal defense lawyers, who request and usually receive repeated “continuances” or postponements of trials. It can take five years to get to trial in court against a defendant’s insurance company for a claim stemming from an auto accident, by which time the plaintiff’s witnesses may have moved, forgotten what they saw, or died.
No longer. The civil court system is to be funded entirely by the litigants. Upon filing a suit, the plaintiffs will indicate how many days it will take them to present their case, and pay up front a fee equal to court costs for that length of time. The defendants’ response will include a statement of how many days the defense will require for presentation of its case, and a fee to cover the corresponding court costs. The date of trial will be set at six months from the date of the defendants’ response. One six-months continuance may be allowed if required by either party for the sole purpose of gathering additional evidence. Attorney, plaintiff or defendant inconvenience will not constitute grounds for continuance. On the appointed day, the case goes to trial. If neither party is prepared to go to trial at that time, the suit will be dismissed with prejudice (ie, it cannot be filed again). If one of the parties is not prepared to go to trial, a summary judgment will be issued in favor of the other party. When the case goes to trial, neither of the parties will be allowed to take longer to present their cases than specified in the original filings. However, there will be no refund of unused court costs. Since the system is entirely funded by the litigators, the number of trial days required is known for at least the upcoming six months, and has already been paid for, the necessary facilities and judicial personnel can be provided to handle the demand. Since at present the court costs are heavily subsidized by the public, the costs of litigation will increase significantly; this may have the effect of favoring out-of-court settlements of claims, a result greatly to be desired.
The loser in a civil trial must pay to the winner the judgment established by the court plus the winners’ court and legal costs. Punitive damages will be allowed in the case of willful misconduct or gross negligence on the part of the defendant. However, the purpose of punitive damages is to punish the defendant, not to enrich the plaintiff. The plaintiff will receive in the judgment of the court his actual losses plus award for pain and suffering, and is made whole, to the extent money can do so, without collection of punitive damages. Punitive damages will be assessed by the court where indicated, but the payments will go toward covering overhead costs of the court system and to the general funds of the jurisdiction.
Where the plaintiff’s injuries and damages are the result of a crime, no civil suit will be allowed. Victims of crimes are already made whole (again, to the extent that money can so do) by the municipality, which then holds criminal trials to obtain reimbursements from the perpetrators. Thus, the reformed system will abolish the present “double jeopardy” of an alleged perpetrator having to defend against a civil suit (with a lower standard of proof) as well as a criminal trial for the same wrongful act.
The next industry I am going to shake by the nape of the neck is the so-called “Entertainment Industry”, which has become nothing but a University instructing the young in the tools, methods, and “beauties” of antisocial behavior and violence. It claims protection under the freedom of speech clause of the Constitution. I refer you to the opinion of the Supreme Court and the words of Oliver Wendell Holmes. Jr. mentioned in Chapter 3. There is no right to incite illegal or criminal behavior, in film, TV, music, stage, or literature.
Since these industries have proven to be completely incapable of regulating themselves, I will place them under censorship, with every product having to meet tests based on the last five of the ten commandments (wholly secular social prescriptions that form the basis for any civilized society): Does it incite the dishonoring of parents and other elders? Does it incite murder, theft, or any form of sexual misconduct? Does it incite perjury? Does it incite covetousness? Does it incite the violation of any laws or acts of Congress? This is not to say that portrayal of any of the above acts is forbidden, but they must not be glorified or presented as anything other than depraved behavior which ultimately is punished. If the answer to any of the above questions is “yes” (as determined by a randomly-selected panel of citizens not in any way associated with any branch of the entertainment industry), the work may not be publicly distributed or presented. Service on these juries will be a required civic duty, the same as service on criminal or civil juries. A two-thirds majority vote will be required for the work to receive the imprimatur of acceptance.
FINAL REMARKS
Of Book
Argus C. Zall
Copyright July 31 2006
So that’s my jeremiad, and set of prescriptions to get the country back on track. Some of them may even be worth considering. I will be interested to read what comments people might care to make.
There are a number of other areas where a dictatorship might be useful, that I haven’t touched on: Homosexual “rights”, Homosexual “marriage” (my avoidance of the euphemism “gay” may be clue as to my mindset in these matters); more in-depth examination of the workings of the economy; a polemic about the lousy deal present-day heterosexual marriage has become for a guy.
Maybe I’ll get around to these topics in future postings.