Strategic Golden Rules of Corporations and Their Impact on Global Economies
Why do large companies like banks, oil companies, and major airlines occasionally need immediate bailouts, despite making huge profits for years? This article explores the intricate reasons behind these financial emergencies and how corporate practices influence the broader economic landscape.
The Purpose of Companies
Companies exist to serve specific purposes, rather than simply maximizing profits. Typically, profits after taxes are reinvested into working capital, business growth needs, and investor returns. The cash flow dynamics of most corporations differ significantly from individuals, who often have only 1-2 weeks of cash on hand. Surprisingly, many companies hold 6-9 months of cash in the bank, which is more than an average person is likely to have.
The Role of Banks in Corporate Finances
Banks play a crucial role in providing loans to corporates for new business ventures or business expansions. These projects often have a gestation period of 5-10 years before they start generating profits. Any failure during this period can result in cash flow problems for corporates. When these businesses default on loans, it can put pressure on banks, leading them to seek government bailouts.
It's important to note that banks are required to adhere to reserve bank norms for loan disbursement, ensuring they maintain a portion of their funds as reserves. This is akin to individuals saving a portion of their salary for unforeseen expenses. Thus, banks cannot and do not lend out all of their money.
Corporate Practices and Corruption in India
In India, at least 99% of corporates are found to be corrupt, with fake project reports being used to secure loans. These reports are often padded with inflated data, which can lead to page-filling investigations. For instance, gold plating can be used to beautify business reports, masking underlying issues.
This corruption cycle has existed since India's independence in 1947, with businesses often relying on political connections to secure loans. Now, the present nationalist BJP government has taken steps to curb this practice, but the questions remain: why should a business house that cannot run an entity successfully be allowed to seek more loans?
The real problem lies in the fact that profits reported by many corporations are a result of gold plating the accounts, with black money from abroad being reinvested to appear as white. In reality, these companies are often operating at a loss, rather than making substantial profits.
Corporate Practice and the Wuhan Virus
Recently, many "billion dollar" companies in the West have faced financial challenges due to the Wuhan virus lockdowns. CEOs have taken dubious measures like cutting employee salaries to maintain financial balance sheets. In this environment, CEO bonuses increase when shareholders are kept interested and dividends are paid, creating a form of modern slavery. If a company is barely surviving, it should be shut down; businesses that are profitable should be encouraged to give back to their employees from their profits. It’s unfair that shareholders can easily switch stocks, while employees are more committed to their jobs.
Government Involvement and Taxation
Global economies often struggle with the burden of continuous tax increases. When corporates default, banks seek government assistance, which is often redirected via additional taxes on common citizens. This cycle continues with each budget, placing an increasing financial strain on the general public.
The fundamental issue is the relationship between companies and the broader economic system. If a company is struggling, why aren't they expected to reduce their profits to ensure employees receive their salaries? While banks and governments may provide bailouts, this does not address the root cause of financial problems within the corporate sector.
Ultimately, addressing these issues requires a shift towards more ethical practices and a focus on long-term sustainability rather than short-term gains. The current system does not effectively serve the needs of either the corporate sector or the general public, leading to a perpetual cycle of dissatisfaction and disillusionment.
As we continue to navigate this complex landscape, it's essential to question the underlying mechanisms that shape our economies. Until a more equitable and transparent system is established, the challenges faced by both corporations and common citizens will persist.