Regulating Markets, not Companies

[.green]Josh Gabert-Doyon:[.green] I wanted to start by asking you about the distinction between internal and external regulation of firms when it comes to competition and monopoly law. That seems to be central to your work: competition regulation at the firm level.  

[.green]Michelle Meagher:[.green] So I've just written a book which is coming out in September called Competition is Killing Us where I really try to tackle this paradox that exists within market capitalism which means that, on one hand, we don't have enough competition to challenge monopolistic companies. But on the other hand, we've got, in some areas of the economy, too much competition, which leads to costs being externalised and inflicted on society. What I've tried to debunk in the book is these various myths of capitalism that lead us to assume that companies are a good way to organise capital, and that if they if they serve their shareholders' interest then the public interest will also be served, as well as other nuances within that.  

In terms of this idea of internal and external regulation, you're exactly right, that's central to what I found when I started to uncover and dig into the principles underneath this idea of competition. We are obsessed with competition. Even those that talk about challenging monopolies with more competition, they're essentially using the same paradigm that got us there in the first place.  

I like to instead re-centre the discussion on this idea of balance of power. That allows us to look not just at disempowering powerful incumbents through vigorous competition laws, which would block mergers or look to unwind market concentrations, but would also look on the other side, which is empowering the currently disempowered. That's where you get into the whole internal regulation side: looking at stakeholder governance within companies, but also unionisation; looking at the power of civil society; looking at cooperatives and other business models that would act as a countervailing power to the inevitable concentration that happens within the corporate structure.  

We've given corporations this wonderful set of privileges, and in the meantime created incredible wealth. That wealth has been channeled towards the already wealthy. We have this idea that we're all shareholders through our pensions and we all benefit. Therefore, to use an example, the perception is that it's really devastating if we decarbonise our economy because that's our pension down the toilet, if we're talking about removing value from some of these companies [that benefit from carbon-intensive industry]. But given that pension wealth is tied directly to your income during your lifetime, it's incredibly skewed towards men in the place of women, trans or non-binary people. It's incredibly skewed towards whites, or white-presenting people as opposed to people of colour. And it's skewed, class-wise, towards the already wealthy.  

In the last 10 years there's been an increase in interest around inequality within economics, and almost all of that work shows what I suppose we already knew from watching period dramas – that basically the rich get richer. The corporation has been a huge part of that because rich people hold a disproportionate amount of their wealth in equity. And so if a middle class or a working class person is lucky enough to own a home, their land and property would likely be their biggest asset and the biggest sources of their wealth, and would fluctuate according to the whims of the property market.

The wealthy, as we've seen in the Covid-19 crisis, have assets in these liquid forms that are really easy to move to whichever industry could drive up their wealth. I have no doubt that there is a lot of investment going on in the remote voice technology that we're using to have this call. And I don't know about you, but I have not called up my broker and asked them to move my money around – because I don't have a broker. We need to mediate that in order to make sure it's not just this illusory promise that one day we'll all benefit because there'll be a big enough pie to share around. We need to share it around in the meantime.  

That's where I get the idea of looking not just at competition and how competitive a market is. And not even just looking at say, corporate responsibility, but really tying [external and internal regulation] together, as they were originally. Corporate law and competition law were originally a single body of law. In the 1800s they got split off, and further split into tax law, securities law, etc. There was a proliferation of different types of ways to regulate the company.  

We used to have a very different way of regulating the company. It was quite primitive, but it had its own effect. You had an act of parliament or a signature from the crown to create a company and those companies had various obligations and if they didn't fulfil them then the charter would be removed, and the company would be shut down. Obviously, that model has some serious problems, particularly around nepotism and the elitism of being able to actually secure one of these sought after charters which effectively gave you monopoly rights that we would now think of as something that a company creates itself. It was something that you would be granted by the sovereign or by parliament.  

We then had a vision that we could democratise the company through general incorporation – where anyone can start a company. But we then didn't put any real safety valves on that. I think most companies would say that they're heavily regulated but to that I would say that actually the vast concentration of wealth is facilitated by the company – a lot of that regulation is essentially written by companies themselves, or heavily influenced by it.

I was a competition lawyer in the City, and I started to have a bit of a crisis of conscience over what it was we were facilitating. I believed in this idea of free markets, I believed, perhaps naively, that more competition would always be better. And I had to start asking myself if this regime that absorbs a huge amount of money and resource to regulate competition was ultimately not having the effect that it was meant to be having.  

The discipline has only very recently started to look introspectively to assess the success or otherwise of competition law and anti-trust law that has gone global over the last 20-30 years. And the results are pretty embarrassing. Even despite this huge amount of regulatory activity, markets are still concentrating. Even on those benchmarks – the highly problematic benchmarks that competition law sets for itself, which is to ensure that markets aren't concentrating – they're failing on that. Let alone the whole host of other public interest issues that I argue in my book that we should be taking into account.

Fizzy Drinks and Pricing

[.green]JGD:[.green] Tell me more about that moment when you started to reconsider competition law.

[.green]MM:[.green] I had worked on all sorts of cases which probably should have been ringing more alarm bells than they did. But the case that really shook me in a way was a fizzy drinks merger. It was realising that what in theory we were doing as competition lawyers was ensuring that there was enough competition in every market so that the prices would be low as possible, so that would be good for consumers. There's this sacrosanct idea that what we're looking at is benefits for consumers. It just hit me when I was working on this case at four in the morning, pulling an all-nighter to get deal approved, that this billion-pound deal on fizzy drinks doesn't serve the public good. It's not doing anybody any good to ensure that fizzy drinks are as cheap as possible. What about all the health costs of fizzy drinks? Or the amount of money that goes lawyers and economist and regulators to look at this market, as opposed to looking at all of the concentrations in the rest of the food supply chain. And what about on the production side? What about food culture and the nutrition and all sorts of other things that are rendered completely irrelevant? All that matters is how cheap that fizzy drink is going to be.  

That, for me, was a real moment where I started to understand that the costs associated with production, that aren't accounted for, is what we should be looking at. Many of these goods are too cheap. Now that doesn't mean that it's okay if a monopolist jacks up the price because people will be drinking less fizzy drinks. Companies shouldn't have the ability to privately tax the citizenry which is what it is when a monopolist is able to increase the price.  

I started to prise open all these issues. And at the time I believed, and I still do believe, that there is scope within capitalism for it to benefit a broader range of people. I started to ask myself well where were these companies then? If the company is supposed to be this channel for innovation and public benefits, where these companies that were doing good things? That led me into the whole world of corporate governance. What probably surprises people looking at this from the civil society perspective, is that within the legal world it is so siloed that I had never asked myself what happens within a company. That's not relevant to competition law. All competition law really cares about is what is going on in the market. It assumes that the company is driven by profit maximisation and maximising shareholder value. That's what's taken as a given.  

Our only job, therefore, is to make sure that there's fair competition between such companies. I started to understand that it won't ever get us anywhere. It really matters, what companies are competing for. Which is why you can't really have one or the other: more competition won't get you there and more corporate responsibility won't get you there. You need a combination of across the two ways that the company works, both internally and towards the external market, which is how I came to this this idea of a balance of power.

Acquisitions and "Creative Destruction"

[.green]JGD:[.green] What does our current competition law regime encourage, or facilitate, within the firm?

[.green]MM:[.green] What's interesting to think about is what the competition regime is essentially doing: it says that it wants more competition, but how that is interpreted is extremely selective.  

At the basic level, the company, as an entity, is a cartel of capital. A company is a permitted cooperative enterprise. You're allowed to do whatever you want and cease competition within the bounds of your company. There are certain other things that are also okay: you're allowed to merge, and when you do merge with another company, although it will be scrutinised, it's also often interpreted in your favour that you will generate efficiencies. Companies will trot out the long line of synergies that any merger will create, but the way the system works you just claim these synergies and it's just assumed that they will benefit the consumer. But if we know how companies operate on the basis of maximising shareholder value, then we also know that if companies do generate synergies, then those will likely be channeled towards shareholders and not necessarily towards consumers, particularly if the merger will give the company a better market position and a greater market share.  

You have to question why companies want to do mergers. They certainly don't want to do it just to benefit consumers. They want to do it because it's going to give them a stronger market position or a way to funnel more profits towards shareholders.

Then if we look at dominant conduct, which has historically not been prosecuted as strongly as it could have been. A lot of that regulation is around, again, these mythologies, the idea of "creative destruction". The Schumpeterian idea that a monopoly will not persist in the market because they'll always be a challenger that will come along, to take that market position away. You don't have to be too concerned with monopolies, this argument goes, because they can't persist. They will always disintegrate from within and be challenged by another company. But if you tie that then to the permissive attitude towards mergers, what you get is what we have now particularly in the tech industry, but also in pharma and agri-business and so on: if a company sees a challenger coming on the horizon, they just buy it. And either absorb the technology, so maybe as a consumer, you get the benefit of the innovation anyway, although you don't get the benefit of the competition and rivalry that might have spurred on a lower price, or even a better product. Alternatively, the company just kills it. They buy it, and then they kill the innovation that was going to challenge them.  

We can see lots of examples of both. Facebook buying Instagram, that's a good example. It seems quaint to us now but if you go back and look at the original decisions, there was this idea that Facebook and Instagram didn't compete, because at the time, there was no camera functionality within Facebook. Instagram was like a photo sharing thing, and Facebook was something else. Obviously, that's not how Facebook saw it, or the venture capitalist that bankrolled the acquisition. They saw it as a company that either was going to come and take our market, or we want to get into that market, and we can buy them to take it. There is almost a need for regulators to start looking at the world likes venture capitalists do so that we don't get tied up in these outdated ideas around how innovation flourishes within these firms. And that's exactly the narrative that they put forward in their submissions.

Delivery Driver Cartels

[.green]JGD:[.green] What do you think the state's role should be in regulating competition and monopolies?

[.green]MM:[.green] One of the things is disempowering the powerful incumbent and empowering the currently disempowered. You tie together the idea of say, stakeholder governance, and when you identify power in a market, you can impose stakeholder governance as a remedy. We don't have anything like that now.  

We also can have a much stronger idea around regulation. We do regulate quite a few markets. Utilities are the usual example, I think there's scope to treat different markets as either utilities that should be regulated in that particular way, or at least require more state intervention. In the UK, we are developing a digital market regulator that will likely fit within the Competition Markets Authority, but the vision currently is for quite a voluntary system around code of conduct and so on. I think we need to understand that the business models, essentially anything to do with data, if we're worried about scale, the scale of data is infinite, and you will never be able to change their business models through any voluntary conduct. They will only ever do what they have to do.

Additionally, tying together these ideas of ownership and governance. For example, competition law is quite hostile to co-operation between entities – regardless of their power. It seems very counterintuitive to us, but competition law would see a collective action between a bunch of Uber drivers or Deliveroo riders as a cartel, even though that is effectively collective bargaining against an employer. But Deliveroo has managed to secure in the High Court a decision saying that these riders aren't workers, they're independent contractors. If they're independent contractors, they're independent businesses, which means that they can't collude to set their wages. You get into this Kafkaesque regulatory regime that all works to the advantage of the deep-pocketed companies. Deliveroo is a good example because it's a fundamentally loss-making business that is being financed by venture capital and now an injection from Amazon, which is imminently being approved by the competition authority.  

We're only 15 years or so into this experiment with these big tech companies, and we're approaching the point where we're not going to be able to put the brakes on any of this. It's really time for us to think about the question of what world we want our kids to grow up in. What do we want that to look like? Obviously, climate change is the other huge aspect of that. If you look at how we regulate big oil and big energy, it's on this assumption that private capital can do what it wants within the regulatory regime. Our understanding within competition law looks at market power purely as power over price – price and output. It doesn't consider, for example, political power, or power to skew the market outcomes in ways that benefit the company that might have nothing to do with price. It might be to do with what cost you can get away with externalising.  

Meanwhile, as you generate profits on the basis of a business model for which you are not paying the full cost of that production, you are then generating profits that allow you to insulate yourself from litigation and from the blowback that comes when eventually everyone realises like with tobacco, that "oh, actually, it's really poisonous and killing people and it turns out you knew about it all along." You don't have an obligation to share any of that information, because arguably, the directors could hand on heart say we knew that it was causing cancer, but it was against our fiduciary duty to shareholders to reveal that. We're in this absurd situation when it comes to how we regulate the corporation.

German Model Scandals

[.green]JGD:[.green] What do you think employee ownership can do to deal with some of these issues around competition and monopoly, and where do you think are its limits as a model?   

[.green]MM:[.green] Employee ownership is interesting and has huge potential to do lots of things, because it mutually shares the profits and dividends of a company. It also gives employees a say over how the company is run. I think that the limits come from the fact that anything around the corporation must be seen from an insider/outsider perspective.  

A good example is the VW emissions scandal. VW is a German company that has a German corporate governance structure. In the UK when we talk about reforming corporate governance, we look to the codetermination procedures in Germany. Although VW say they had no idea that any of this was going on, even if they did, it didn't make a difference that there were employees on the board. There were employees, there were banks, some members of the local community were on the supervisory board but not an NGO protecting the environment, for example.  

You have to always be thinking about who is being privileged. What are their interests? And to what extent are those interests fully aligned with the public interest, however, that is determined? In a democracy we determine that through a democratic process, and it's not to say that everybody is always going to benefit from every single thing that a company does, but are there checks and balances? Is there a possibility for intervention should it be identified that there is a significant class of issues that are not being addressed?  

I have faith that if you broaden the types of people that are privy to the information that is currently sitting within a very tight circle of people that have all been socialised and educated in the same way, if you broaden that circle, and broaden the base of people who have to control and power to do something about it, I have faith that that would bring benefits. But there is no utopian answer. We have to understand that it's always going to be messy. But we need to have systems so that those messes don't become entrenched.