7 steps we can take right now to tackle greedflation

Professor Prem Sikka outlines how we can rein in predatory practices

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Prem Sikka is an Emeritus Professor of Accounting at the University of Essex and the University of Sheffield, a Labour member of the House of Lords, and Contributing Editor at Left Foot Forward.

Corporate profiteering is fuelling inflation and eroding living standards. Corporate executives are incentivised to inflict hardships on people and rewarded with big pay packets. There are no effective mechanisms for countering this.

The UK government is in denial, but this week the International Monetary Fund (IMF) said that “Rising corporate profits account for almost half the increase in Europe’s inflation over the past two years as companies increased prices by more than spiking costs of imported energy”. Similar sentiments are also expressed by the president of the European Central Bank who said that “corporate profits accounted for about two-thirds of inflation in 2022 compared with the average over the previous 20 years of one-third”.

Schemes for profiteering are driven by corporate executives, with little regard for the consequences. In the UK supermarkets, banks, food, medicines, oil, gas, energy, shipping, haulage and other businesses are making record profits.

In an ideal world, executives would think about the consequences for their friends, families and neighbours, but capitalism is not accompanied by any moral guidance on how much profit is enough. There is always a quest for more. Greedflation is hard-wired into the economic system through executive remuneration contracts which attach weight to higher profits and hardly any to social consequences.

BP more than doubled its profits to £23bn. Its chief executive’s remuneration doubled to £10m. Shell doubled its profits to £33.2bn, and its CEO remuneration rose by 53.3% to £10m. Indeed, in 2022, pay of FTSE 100 chief executives rose by an average of 23%. Median FTSE 100 CEO pay at the beginning of 2023 was equivalent to the average wage of 103 workers. At troubled Thames Water, the chief executive’s salary doubled in less than three years. The company made profits by not plugging leaks and dumping tons of raw sewage into rivers. Executive pay at care homes has doubled over the past five years while workers barely get the minimum wage. At Sainsbury’s, the chief executive collected £2,298 an hour compared to shop workers collecting £11 an hour.

Workers are systematically denied an equitable share of wealth created with their labour. The average real pay of workers is unchanged since 2005. Shareholders and corporate remuneration committees have shown little interest in checking greedflation. That task must fall to society at large. Here are a few suggestions that could be applied to 7,675 large companies, as defined by the Companies Act 2006.

  1. Large companies must have worker-elected directors on company boards to ensure that their interests are represented in designing executive remuneration contracts and equitable distribution of income.
  2. Employees must vote on executive pay. This will encourage directors to reflect on condition of the employees as no employee would vote for mega pay-packet for directors and pittance for themselves.
  3. Customers must be empowered to vote on executive pay. They can be identified with certainty at water, energy, banks, insurance, pension funds and many other companies. They can be identified from loyalty cards operated by supermarkets. Those who have been customers for a specified period and spend £x should be empowered to vote on executive pay. This form of democracy will ensure that directors delivering unacceptable standard of goods/services will not collect mega pay packets.
  4. Currently, shareholders merely rubber stamp the executive pay decisions made by the boards. Their vote is ‘advisory’ and is not binding. This needs to change. The remuneration of each executive at a large company must be the subject of an annual binding vote by stakeholders, including shareholders, employees and consumers.
  5. Currently, shareholders are not allowed to fix an upper limit to executive pay. This needs to change too. Stakeholders, including employees, must be permitted to table a resolution at AGM and fix upper limit to executive pay.
  6. The central and local governments are the biggest spenders and must use their purchasing power to secure good corporate practices. They must apply a ‘fit and proper’ person test for awarding any public contract. Thus executives dumping sewage into rivers, polluting the environment, ripping-off customers and employees would be denied publicly-funded contracts.
  7. Greedflation and resulting social squalor is funded by the state. Currently, the whole of executive pay is treated as a tax deductible expense and reduces the taxable profits of companies. There must be an upper limit on the tax deductibility of executive remuneration for each member of the board. This could be £500,000 per executive, or less, and the amounts exceeding that should not qualify for tax relief. So, if an executive is paid £10.5 million, only £500,000 would be treated as a tax deductible expense. The remaining £10m would augment taxable profits and be subject to corporation tax at the prevailing rate i.e. the company will pay higher amount of corporation tax. This form of Inequality Tax does not constrain a company’s ability to remunerate directors at any amount it wishes. It penalises them for creating inequalities and other forms of social pollution.

The above suggestions will not necessarily eliminate predatory practices, but they do have the potential to empower the people and reduce its excesses.

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