Other countries have much better legislation to ensure income is distributed fairly
Despite the recession and enforced wage freezes, the rich are getting richer whilst others are left behind. The distribution of income and wealth is becoming more skewed in favour of a small minority. The UK has neither legislation nor the political will to address such issues.
A report by Oxfam states that globally the richest 1 per cent now has as much wealth as the rest of the world combined; and the richest 62 people had as much wealth as the poorest half of the global population. At home, the inequalities have been widening too.
According to data published by the Office for National Statistics (ONS), the wealthiest 10 per cent of households own 45 per cent of total aggregate household wealth, and the least wealthy half of households own 9 per cent of total aggregate household wealth.
The UK inequalities are set to worsen because the workers’ share of the gross domestic product (GDP), in the form of wages and salaries (see Table D on page 85), has now shrunk to 49.3 per cent, the lowest ever recorded. In 1976, it stood at 65.1 per cent. This figure does not indicate the full plight of normal people because it also includes fat-cat executive rewards.
Despite the banking crash, ensuing recession and never-ending tide of scandals, a typical FTSE 100 chief executive collects a pay packet of £4.96 million whilst workers average around £27,645 a year.
Some executives have collected 180 times the average pay in the same company. Since the 2007-08 banking crash, the finance sector has paid out bonuses of around £100 billion . This is so even though it is riddled with malpractices, such as mis-selling of financial products, money laundering, tax avoidance/evasion, rigging interest rates and foreign exchange rates, just to mention a few.
There is no relationship between corporate performance and executive rewards.
The inequalities have material consequences for quality of life and even life expectancy as the wealthy tend to live longer. The less well-off have difficulty in securing access to good housing, education, food, pension, healthcare, heating, transport, justice and security.
The wealthy skew public policymaking through ownership of media, donations to political parties, consultancies for legislators and patronage of regulators; and this in turn has implication for building a fair and just society.
So what is being done? In 2013, following a referendum, Switzerland introduced a law to prohibit golden handshakes, parachutes, goodbyes and severance payments. Golden handshakes are payments made to poach high flying executives away from competing companies, but that does not guarantee good corporate performance.
One study noted that of the 107 cases of golden handshakes, about half of those companies produced a worst performance. Golden goodbyes are usually ex-gratia payments to failed CEOs. In both cases, the payments do not relate to actual performance and are now prohibited.
In 2011, Australia introduced the Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Act 2011, commonly known as the ‘two-strike’ rule. The first-strike occurs when 25 per cent of shareholders say ‘No’ to a company’s remuneration report, which provides information about each director’s salary and bonuses.
This is equivalent to a yellow card in a football match. The second-strike occurs when at a subsequent general meeting 25 per cent of shareholders again say ‘No’. If so, the AGM has to consider another resolution to determine whether all directors now need to stand for re-election.
Whilst the above is not a panacea for checking ingenuity of fat-cats, the UK legislation is toothless. The UK has no overall regulator for enforcement of company law though the Financial Reporting Council is supposed to be responsible for good governance. It has not banned anything or chastised any company director ever for fat-cattery, even after scandals. It issues corporate governance codes, compliance with which is voluntary.
The UK legislation for dealing with fat-cattery is in Sections 79-82 of the Enterprise and Regulatory Reform Act 2013. It requires listed companies to put the remuneration policy to a shareholder resolution at least every three years.
Shareholders also have an annual advisory (not binding) vote on a resolution to approve the report on how the remuneration policy is implemented. No individual director’s remuneration is dependent on the resolution on the implementation report being passed as it is an ‘advisory’ resolution. The original intention of the legislation was to give shareholders an annual binding vote, but under pressure from corporate lobby all that has disappeared.
The UK’s corporate legislative framework cannot check fat-cattery or secure equitable distribution of income. It is good to see that Labour leader Jeremy Corbyn has signalled his intention to secure a more equitable distribution of income for people at work. That will require fundamental changes in the way companies and their boards are governed.
Perhaps, Scandinavian and German style corporate board structures will be appropriate. Here employees sit on company boards and have a say in deciding executive rewards, and address the concerns of employees.
No doubt, the corporate lobby will oppose any reforms that threaten to end its elfish games.
Prem Sikka is Professor of accounting at the University of Essex
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