The discipline of capital

The discipline of capital

January 12, 2014

DT Cochrane

The title of this piece might make readers think of capitalist power over the masses. However, in this case, I’m thinking of how capital serves to discipline the decision-makers of capitalism. A recent Globe & Mail article discussed the desire of Canadian banks to keep the corporate bond market going. The banks serve as the issuers and therefore the more bonds corporations offer, the greater the fees collected by the banks for their role. The article noted how corporations often prefer to offer bonds rather than borrow from banks because bank loans “come with strict covenants that dictate how the companies must be run.” The covenants for the bonds, on the other hand, are, according to one commenter, “very, very soft.”

Critical accounts of capitalism rarely consider the day-to-day functioning of corporations and other businesses. The analysis takes place through large scale concepts that cannot accommodate micro events, even when those events have widespread ramifications. However, it is precisely these sorts of day-to-day functions that banks will seek to constrain through borrowing covenants. The particularities of these constraints and the basis for them could be a fruitful area of analysis, since the consequences can be considerable. A firm founded by engineers may have a penchant for R&D spending. The bank, on the other hand, may demand that the firm hold a certain amount of cash, which requires cuts that eat into that R&D. Bank dictates may undermine a family firm’s plan for in-family succession. At the same time, those pressuring a corporation to affect certain changes, such as environmental practices, may find banks suitable conduits to achieve their aims, as they may prefer to avoid the negative publicity.

Fundraising via bonds, meanwhile, frees corporate decision-makers from these sorts of micro-dictates. However, it does not leave them entirely free. Bondholders care strictly about returns, more or less. The corporation must be able to service its debt or suffer the wrath of market participants, not least if they attempt a subsequent bond issue. This debt service demand effectively disciplines the corporation, ensuring that returns remain the literal bottom line. This disciplining is precisely why capital as power puts the analytical focus on the mechanisms of capitalisation, of which debt is one.