The Tories’ proposals are (unsurprisingly) toothless against fat-cattery

Companies might have to justify pay gaps between bosses and workers, but without a body to oversee it the measure is futile. Prem Sikka writes.

All wealth is generated by the collective efforts of stakeholders, but company executives have continued to collect a disproportionate share compared to other workers.

Some have collected 160 times the average wage in the same company.

This has inevitably led to public disquiet, especially as many people have been facing wage freezes and income inequalities have been rising.

In response, the government has unveiled proposals for tackling the pay gap. These will require (only) listed companies to annually publish and justify pay difference between chief executives and their staff. The government hopes that shareholders will take this information into account when voting on director bonuses, otherwise known as “long-term incentive plans”.

In addition to the reporting of pay ratios, large companies (i.e. with more than 250 employees) will be required to report on how their directors take employee and other stakeholder interests into account.

Disclosure and public information is always welcome as it enables discussion, but on their own they will neither check fat-cattery nor boost the share of income going to workers.

Directors’ remuneration has been disclosed in notes to company accounts since the Companies Act 1967, but that has not prevented or rebalanced large wage differentials between bosses and workers. And despite poor performance, company directors have continued to collect exorbitant pay.

Total wage bill and the average number of employees have also been disclosed since 1967. From this data, it has long been possible to calculate the pay ratios, but the pay gap has continued to widen. This has been facilitated by the absence of any real checks on executive pay.

And the pay gap has been worsened by the relentless drive to weaken trade unions and the voice of workers.

In the mid-1970s UK trade unions had nearly 13 million members, representing 55.4% of the workforce. In 1976, workers share of the gross domestic product (GDP – the wealth that we all generate in any year) was of 65.1%. In the 1980s, the Conservative Party introduced raft of laws to weaken trade unions under the guise of flexible labour practices.

By the time the Conservatives left office in 1997, workers’ share of the GDP had declined to 52.6%. The introduction of the National Minimum Wage and investment in public services by the incoming Labour administration stabilised and marginally increased the workers’ slice, and at the end of 2009, just before the Tories came back into power, employees’ share of the GDP was 55.7%.

By the end of 2017, trade union membership had fallen to just over half its peak, with only 23.2% of the workforce being represented. The proportion of workers covered by a collective agreement has fallen by two-thirds – the largest decline in advanced economies.

This has been accompanied by zero hour contracts, wage freezes and austerity. The National Minimum wage is low and insufficient, but many employers have failed to meet their legal obligations.

The result: Workers’ share of the GDP has plummeted once again, now to 49.5%. Almost the lowest since the records began.

However, a word of caution: The worker’s share of the GDP statistics also includes highly paid executives and premier league footballers. The government data does not identify their share and if the statistics were to be adjusted they would show that the average workers’ piece is likely to be much lower.

The growing income inequality is harmful to society and businesses. Without adequate income people can’t afford to buy the goods and services produced by companies. With household debt standing at £1.584 trillion, the people’s capacity to borrow and build a sustainable economy is exhausted.

Unchecked inequalities incubate social instability and the government has no policies for addressing this.

The idea that shareholders will somehow take action to address the pay gap has no empirical foundations.

Shareholders have a short-term interest in companies and have shown no inclination to increase wages for workers or firing directors to reduce the pay gap. The shareholder-centric model of corporate governance is a real problem.

Section 172 of the Companies Act 2006 requires directors to have regard to the interests of employees, but only if these enrich shareholders. This does not create pressures to address pay ratios and the government has not offered to reform directors’ duties.

The government can strengthen trade unions, but that is anathema to the Conservative Party. It can ensure that all workers receive at least the Living Wage, but it won’t do that. It can put worker elected directors on company boards and strengthen the voice of employees, but, after promising that during her campaign to be become Prime Minister, Theresa May has since reneged on that.

Workers and consumers can be empowered to vote on executive pay, but corporate democratisation is not on the government’s agenda.

Instead, the government relies on voluntarist Code of Corporate Governance issued by the discredited Financial Reporting Council which does not give anyone enforceable rights. The Code does not even mention the need for directors to reduce income inequalities.

This government’s toothless proposals are part of another impression management exercise and will not reduce income inequalities. Only a radical reform of corporate governance, employee and trade union rights can begin to address inequalities.

Prem Sikka is Professor of Accounting at University of Sheffield and Emeritus Professor of Accounting at University of Essex. He tweets here.

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