Volume 2, Number 48
8 July 2002

Accountability, Part 2

Dear Friends,

In the recent splurge of corporation scandals, our first thought is to strengthen the power of government (or the Securities and Exchange Commission) to control them. This is vertical accountability. In vertical accountability each person responds to a higher authority. In pure feudalism, serf accounted to lord, lord to king, king sometimes to emperor, and emperor to God.

But I prefer sidewise accountability where, with a few exceptions (such as children accountable to parents), there is no social hierarchy.

Why did we not employ sidewise accountability in the corporate scandals? Mainly because we have built up a culture of vertical accountability for over a century, so that government as protector is the first remedy to come to mind. A century ago, this would not have been the case.

So, transplant ourselves to an earlier century. What would our thought processes have been? We might have thought that stockholders, creditors, workers, bankers, and others who suffer from the scandals should be the ones to protect themselves. How? Well, a bankers' association could insist on financial statements audited according to standards that it set. If not, bankers would not lend to the company. A stockholders' association would demand audited statements to its standards, plus the separation of auditing and consulting services. If not, they would sell their stock. Workers through their unions would demand that managers and directors hold their stock during the full time of their appointments, instead of selling it just before a crash. They might also demand independent pension funds, invested in outside companies under the care of fund organizations of their own choosing. If not, they would either strike or work elsewhere.

Sidewise accountability implies two groups, each of which holds the other to some consequence if it does not do what the first demands. But no one is forced to do anything. If they do not agree, one party simply walks away

Accountability to the market is a kind of sidewise accountability. A customer may buy products singly while a producer who fails in price or quality loses business. The customer also has a choice: he or she may prefer one supermarket for bananas and another for peas. This accountability is sidewise because the customer is accountable for payment and the grocer for quality of product, and either can walk away.

The main reason our society does not think of sidewise accountability is historical. Before the sixteenth century, Western society (mostly feudal) held to vertical accountability. From the sixteenth to the nineteenth, as democracy took hold, we gradually shifted to sidewise accountability. King James I thought he was accountable only to God. His son, Charles I, lost his head discovering accountability to Parliament. With the Industrial Revolution, accountability to the market became widespread

In the latter part of the nineteenth century, we became impatient to correct many social ills: monopolies, excessive pricing by utilities, etc. We had two choices: (1) to strengthen sidewise accountability or (2) to shift back to the vertical by entrusting the control of monopolies and utilities to the government. Mostly, we chose the latter. Social security, health care for the elderly, unemployment insurance, and others followed. All of them might have been handled sidewise, but they were entrusted vertically to government.

Vertical accountability brings several problems. The first is bundling. President Bush has agreed to higher textile and steel tariffs, causing U.S. consumers to pay billions of dollars more for these products, while also undercutting producers in less developed countries. Suppose we oppose this policy but favor Bush's promise of more funds for education. We can't decide on these issues separately because they are bundled. We vote Bush up or down; we don't "buy" his policies singly, as we do products in a grocery store.

Second, with vertical accountability the spending of public funds is also bundled. Often taxes are not spent on the purposes we intend. Every penny I have put into social security since I joined it in 1944 has been blown up over Korea, Vietnam, Bosnia, Kosovo, or Afghanistan (or otherwise spent), and there is zero in the till. Current workers pay my social security, and in another generation there will be too many old people for the young ones to support. If we invested our pension money into funds of our choosing, this would not have happened. (NOTE: For any 30-year period in the history of the United States, including years of market crashes, blue chips have yielded on average about 7% per annum).

Third, vertical accountability creates a power center ö the government. When the President has power over so many things, he begins to think of himself as God. War is much easier to declare than if most accountability were sidewise.

Finally, the return to vertical accountability has weakened sidewise accountability. We no longer save as much for retirement because social security will take care of us. We do not save for the rainy day because unemployment insurance will handle that. Worst of all, we want more than we are willing to pay for. If it's "free" (government-provided), we want as much as we can get. This is where greed comes in.

Prosperity and the decline in ethics

I believe the shift away from sidewise accountability is part of the reason for the decline in business ethics. Each bit of sidewise accountability had created the ethic that "that way" of doing business (e.g. paying debts) was the proper one. But, accustomed to the Securities and Exchange Commission validating stock issues, we lost "caveat emptor." Not squandering our money because of the "rainy day" and "taking care of ourselves" were among the many other ethics that are diminished. When one by one these ethics were diminished or lost, wealth seeking (always popular) expanded into their places.

I can think of no other reason why the decline in business ethics should have occurred in the latter part of the twentieth century. In the sixteenth century, parents could send their children to Quaker stores, confident that they would not be cheated. When I was a child, and later working as a CPA (in the late 1940s), business ethics were much stronger then now.

The rush toward profits has made us all greedy. Yes, me too. I wanted to sell my house for the greatest value so Robin and I could afford a comfortable retirement. To satisfy all of us, our pension funds have tried for the highest return. Enron employees were happy with the stock boom; now we pity them with the fall. Though Enron, WorldCom and Arthur Andersen managers betrayed trust, they were not the only greedy ones.

Accountability for the environment

The environment belongs to everybody and to nobody. That is its beauty and its problem. When our culture accepts that we can get more than we pay for, we fall into the "tragedy of the commons." Wanting more is the reason for fouling the environment. When accountability is sidewise, our personal budgets constrain us. With vertical accountability and deficit financing, the public budget is not a constraint. We count on the government to preserve the environment, or (if we are big business) to help us profit by destroying it. In reality, we will preserve the environment only when we form institutions of sidewise accountability for its protection.

What would they be? Pollution permits, for a starter. Since some pollution will be nature-corrected, issue tradable permits for that amount and no more. Privatize water and electricity. Count on competition to cause us to produce enough of both and to keep us from consuming too much of either. If we count on legislation, we will be betrayed, because the government protects the polluters as much as (and probably more than) it does the rest of us. There are many ways to re-establish sidewise accountability, and many of you will dispute my suggestions. That's OK. But do let's talk about them.

If sidewise accountability means the poor cannot afford to pay for education, water, or what have you, give them money or vouchers. Don't presume our government knows best about how to spend for them.

Finally, sidewise accountability is Quakerly. It respects the individual, honoring that of God in him or her. It does not force others to bend to our will.

If you think these ideas are hopelessly idealistic, read my reply to Roger Conant's comment in Part 1 of this letter.

Sincerely your friend,

Jack Powelson

Readers' Comments:

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A little oversimplification, but I like this newsletter. Gets us all thinking in a different mode. Do you have concrete suggestions for the individual on this subject? Is there direct action? Don't we have to work through existing governmental structures, e.g. Congress?

— Howard Baumgartel, Oread Friends Meeting and retired prof.

Reply: No, No, and Yes. Changes will come only as we discover that vertical accountability doesn't work. That is happening in most of the world right now. See TQE #43 on Commanding Heights. — Jack

A lot of concern for institution building in development is based on the realization that institutions shape and guide behavior. Efficient institutions guide behavior into productive channels better than inefficient ones. While it is clear that institutions are created by people, in this other sense institutions are not neutral or without a brain. Rather, they consist of a set of incentives that rewards those whose objectives are consistent with those of the institution and punish those whose are not. This seems ironic: on one hand people create institutions, while on the other institutions shape behavior.

— J.D. Von Pischke, a Friend from Reston (VA).

A wonderfully thought-provoking essay! I also believe the world would work better if run with sideways accountability where possible. I was with you till I got to: "Privatize water and electricity. Count on competition to cause us to produce enough of both and to keep us from consuming too much of either." Our public water systems has been one strong element in our good public health. We both have visited countries where this is not the case. I heard a better suggestion on NPR: Cities could hire the water management services of private companies, but if they were not serving the public good responsibly, they could fire them. This would introduce competition into what would otherwise be a local monopoly. I think local citizens should have some way of having strong input in this matter.

— Trudy Reagan, Palo Alto (CA) Friends Meeting.

A tiny caveat to privatising utilities: it has been done in the UK and, in the case of the railways, is a disaster. Privatised companies seem to HAVE to prioritise shareholder interests over safety issues, and are reluctant to spend money to solve a LONG-TERM problem when there is no prospect of an instant return.

— K.J. Persson, United Kingdom.

It's fascinating to hear about these accounting scandals in the US. I have been in Russia for three weeks, and the local media is thrilled. They see it as the US getting what it deserves after years of saying how corrupt Communism was. Russia is happy that all of our finger-pointing is coming back to us. There was a quote in the English-language paper yesterday that made me laugh, because it was printed about four times in the same paper. I don't remember the exact quote, unfortunately, but it was a Russian official saying how happy he was that the Russian people could now see that Russia was in fact better than the US all along.

— Beth Stevenson, Boulder (CO) Meeting of Friends.

Sideways accountability can therefore quickly deteriorate into every bit a dominating system as vertical accountability can. Citizens' groups with the most power — where power is not only found in numbers but also in money, and perhaps above all knowledge — will win the fight. That is, unless a number of safeguards are put into place. Who can implement these safeguards unless a (vertical) democratically selected governing body?

— Knut Mork Skagen, Trondheim, Norway.

My theory is that the quality of ethics has gone down as the number of paid, professional ethicists has gone up.

— Signe Wilkinson, Chestnut Hill (PA) Friends Meeting.

Your term "sidewise accountability" is very good. In further embellishments, you might add that the sidewise accountants normally have incentives to demand behavior that is in the interests of all (e.g., economizing on inputs).

— Steve Williams, Bethesda (MD) Friends Meeting.

You mentioned that some people no longer save because they rely on social security, but I wonder. Everything I've ever heard or seen about social security suggests that it will not maintain a baby boomer in the comfortable style to which he or she has become accustomed. And thus I wonder if people really think about it much as a significant force for comfort in retirement.

— Roger Williams III, Fort Myers (FL).

If we, the American People, don't get our act together, we are doomed. As I watch the direction this country has been taking over my lifetime, I do worry. Freedom is wonderful however people must be held accountable for their actions under Freedom. Freedom is now defined as 'Do whatever you want!". This must change. I thought I saw this attitude change on 11 September, but it really didn't last long. Are we going to follow the Roman Empire? "The Rise and Fall of the USA".

— J.C. Schiffler, Sergeant, US Marine Corps. Semper Fi.


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Publisher: Russ Nelson, St. Lawrence Valley (NY) Friends Meeting

Editorial Board

  • Roger Conant, Mount Toby Meeting, Northampton, MA.
  • Caroline Conzelman, Boulder (CO).
  • Ann Dixon, Boulder (CO) Meeting of Friends.
  • Virginia Flagg, San Diego (CA) Friends Meeting.
  • Merlyn Holmes, Boulder, Colorado.
  • Janet Minshall, Anneewakee Creek Friends Worship Group, Douglasvillle (GA).
  • Jack Powelson, Boulder (CO) Meeting of Friends, Principal Editor.
  • J.D. von Pischke, a Friend from Reston, VA.
  • Geoffrey Williams, Attender at New York Fifteenth Street Meeting.

Members of the Editorial Board receive Letters several days in advance for their criticisms, but they do not necessarily endorse the contents of any of them.

This newsletter was formerly known as The Classic Liberal Quaker.

Copyright © 2002 by Jack Powelson. All rights reserved. Permission is hereby granted for non-commercial reproduction.

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