How can we end the UK’s fat cat culture?

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

12 Responses to “How can we end the UK’s fat cat culture?”

  1. Richard MacKinnon

    The answer to the question ‘How can we end the UK’s fat cat culture?’ is, you cant. I’m surprised that a professor of accounting doesn’t know that. And I wonder why anyone would want to. The health of an economy is directly proportional to the difference in wealth between the richest and poorest. Unpalatable as the fact may be to supporters of Labour it nevertheless remains a fact.

  2. Quentin

    High rewards are not in themselves a problem – the economy is not a zero sum game. Disproportionate rewards are, and people should look back 100 years to the Russian Revolution to see the results of that.

  3. Robert

    So the poor have to become poorer and the rich richer for the economy to thrive. That’s not simply unpalatable, Richard. It’s wrong.

  4. steroflex

    Prem, lets leave the greedy pigs to get on with it. If they can, they will. There have always been fat cats and there has always been inequality. In this post Christian country, why not?
    What makes me mad is the fat cats in Oxfam who take £34,000,000 off the EU every year. Where does all that go to? How much goes into the pockets of starving Africans in, say, Ghana. How much goes into the hands of the agents and Big People at the Top?
    What about that woman who ran HMRC so very badly and got a baronessship?
    The woman in charge of the scandalous Social Services didn’t do badly either.
    And don’t start me on the floodmeister who was ‘at home’ during the flooding which, by the way, was nothing to do with him guv.

  5. steroflex

    Please tell me why it is wrong?
    If I were in charge, I should be out there looking and visiting and asking and seeing and checking and making sure everyone was happy. That is why I am a professional man who is not very well off.

  6. RoyB

    Evidence for “fact” please. Healthy places like Zimbabwe? Sick places like Norway?

  7. blarg1987

    What organisations and groups such as LFF and trade unions need to do is name and shame these companies so consumers can vote with there feet.

    If profits start falling you can guarantee those at the top will jump ship.

  8. Bradley B.

    I worked overseas in what my friends in the UK told me was the corrupt oil and gas industry. The top boss in the plant I worked made around ten times the average technician or process worker.

    I come back to the UK and discover my progressive friends are working in organisations which are not evil like the oil and gas industry and their top bosses are making (in several cases) FORTY times or more than they earn.

  9. Richard MacKinnon

    I’m not advocating poverty for the poor as a policy to grow the economy, I am only pointing out that healthy economies have very rich and very poor amongst the population. You might consider it wrong Robert, I have come to accept it because I believe there is nothing the government can do to change it.

  10. Richard MacKinnon

    I don’t know about Zimbabwe but Norway is one of the richest or maybe the richest countries in the world so there fore there must be a huge gap between the wealthiest and poorest, as of course there is. Maybe Norwegians don’t flaunt it as we do? Maybe they help their poor more?

  11. RoyB

    I think you’ll find that Norway is one of the more equal societies. Have you read The Spirit Level? That has abundant evidence on this issue.

  12. Richard MacKinnon

    RoyB you are wrong. Norway is an unequal country. It is not ‘one of the more equal societies’ as you claim, it is one of the most unequal countires in the world.
    Forget wealth and poverty for a minute. This argument is more basic.
    It is writen into the constitution of Norway that Norway will always be unequal. Why? Because, a country with a ‘royal’ family has to be, an unequal society. Any country that looks up to, or, lets try and put this in a more diplomatic language, has inherited and tolerates a family which believes in the ‘devine right of kings’ is by definition an unequal society.
    I am a man of independent mind. All men are equal. I believe that to be a fact. It is what makes me. Go and reread your book with this in mind.

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