Building a human economy requires more than a quick fix to corporate governance

Alex Maitland General, Inequality

Alex Maitland explores what business can do to help make a fairer economy that works for everyone. 

Employees phone supporters

Oxfam employees at work during the ‘Thankathon’ 2017. Credit: Oxfam

Prime Minister Theresa May has pledged to “build an economy that works for everyone, not just the privileged few”. Quite a task given that Britain has become one of the most unequal developed countries in the world.

The private sector employs 80% of the UK workforce and almost 5 million people overseas , clearly companies have a powerful role in reducing poverty and inequality at home and abroad. Oxfam, therefore, welcomed the Government’s Green Paper on corporate governance as an opportunity to rethink the rules and practices that govern our companies.

In a human economy, companies wouldn’t be pressured to return ever greater returns to investors

While the consultation rightly looked at the issue of excessive executive pay and ways to improve stakeholder’s voices, it failed to mention the root cause of why companies work for the few, not the many. For as long as the rules that govern business and investment concentrate power on shareholders, companies will continue to fuel poverty and inequality, whether their directors want to or not.

Kraft Heinz’s attempted acquisition of Unilever is a case in point. By becoming industry leaders on social and environmental issues, Unilever has become vulnerable to take-over. While their investments might mean slightly lower profits today, they are creating a stronger business, and a fairer world, for tomorrow.

In a human economy, one that works for everyone, companies wouldn’t be pressured to return ever greater returns to investors.

Companies need to make a profit, agreed, but to what extent and at whose expense? Unilever is certainly profitable, to such a degree that they were able to return over €3.6bn in dividends to shareholders last year. Just a small percentage of that ‘surplus profit’ could make the difference between a precarious job on minimum wage and secure work on a living wage for millions of farmers and factory workers.

My former boss used to say that inside every corporate CEO there’s a human being trying to climb out. I’m sure many Chief Executives would rather give workers a better way of life than increase shareholder returns but the market isn’t designed in that way. In fact, it is riddled with perverse and possibly unintended incentives that can reward executives for pushing workers into poverty and damaging the environment.

What can be done?

The Green Paper consulted on changes to executive remuneration, stakeholder voice and reporting. Oxfam responded with specific policy recommendations but also called for wider reforms to market-based governance in order to create a human economy.

Executive compensation has risen dramatically over the last twenty years while the wages of ordinary workers in the UK have stagnated . Inequality across global supply chains is even more extreme. Reducing these gaps is critical. Oxfam made several proposals on pay. A key recommendation was that boards should be required to set a pay ratio policy which acts as a cap for the salary of the highest paid employee. This is not a new idea and many UK companies already have similar policies.

Oxfam supports the introduction of Stakeholder Advisory Panels, consisting of employees, representatives of supply chain workers, local communities, and consumers, with the requirement that they have real influence and voice on material issues. We also appealed to the Prime Minister not to renege on her commitment to have employee representatives on boards , proposing that the Panel should select a third of the company directors, with at least one of those being an employee.

Improved reporting would help hold companies to account. We proposed requiring companies to report on the pay ratio of median to top and lowest to top workers. Quality of work is often overlooked and we suggested requiring companies to publish a fair work policy, report on the number of workers on temporary and irregular contracts and explain why they are being used.

These policies would be a good start but would not overcome the fundamental flaw in our corporate governance, the primacy given to shareholders.

Section 172 of the Companies Act, requires directors to have ‘regard’ for other stakeholders but this isn’t strong enough. Even if it was, it’s a law without an enforcement mechanism. Re-writing and enforcing this law isn’t a silver bullet, but would be a step in the right direction.

Above all else, we need to reform market-based governance. Our economy should incentivise shareholders to own, not extract from, companies; should reward businesses who tackle in-work poverty and protect the environment; and give ownership, not just to those who provide capital, but to all those who contribute to a company’s success.

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Lucia Rost