Monday, 14 February 2011

Keep the corporate fat cats in check

In the week the bonus bonanza began again, Austin Mitchell MP and Prem Sikka argue that workplace democracy is the only way to curb executive excess

The Tories are now embarked on a process dear to their hearts by squeezing the poor, slashing benefits and public services and punishing the people for the crimes of the banks. Their Liberal Democrat co-conspirators are busily trying to persuade themselves that targeting women, children and the poor is somehow “fair”. Neither seems to notice the extent to which companies and those who run them are back in the greed game.

The Government preaches wage and pension cuts for public servants and demands that no one should be paid more than the Prime Minister. Yet no one has the guts to demand the same sacrifices of the private sector, even though private sector excesses are far more damaging to social cohesion.

A recent survey by Income Data Services shows that directors of FTSE 100 companies have seen their pay rise by 55 per cent to an annual average of £4.9 million each. FTSE 100 directors received average bonuses of £701,512 – more than many people collect during their entire working lives. This is an increase of 34 per cent on the previous year. Average wages for the same period rose by 3.6 per cent.

Bankers have brought the economy to its knees, but still get their executive bonuses. Barclays Bank is paying more than £2 billion in bonuses. Goldman Sachs is paying around £8.068 billion in executive pay and bonuses. The state-funded Royal Bank of Scotland has announced a third quarter pre-tax loss of £1.4 million, but will pay out £2 billion in bonuses. The gamblers – investment bankers – will receive an average bonus of £110,000. The new boss of the state-funded Lloyds Banking group is to collect an estimated package of £8.3 million. Lehman Brothers is in bankruptcy but still wants to pay out £20 million in bonuses.

All this constitutes a major scandal. Labour did all too little to check the antics of the fat cats and the resulting social inequalities. The corporate lobby has effectively bought political parties and calls to control it lead to claims that executive pay is the outcome of market forces and set by remuneration committees consisting of independent directors.

The fat cats claim to work long hours to create wealth and feel they deserve more for that. However, wealth creation is a co-operative effort involving the investment of finance, human capital, local communities and social infrastructure. Why should the fat cats gobble a disproportionately large slice of the pie?

The claims of the super-rich must be countered. Here are some pointers.

The old boys’ (and old girls’) networks effectively make the market for fat cats. There are no such things as equal opportunities or free markets when it comes to executive appointments. Workers and representatives of local communities and other stakeholders are excluded from boards. They give their blood, brawn, brains and sweat to generate profits, but have no say in how the financial pie is divided or whether the bosses are worth their large pay cheques. Even the shareholder vote on executive remuneration is only advisory and not binding on company directors.

Executive remuneration is under the control of a small, well-connected economic elite masquerading as “independent directors’ on remuneration committees. These elites are rarely elected but usually handpicked by executive directors. The remuneration handed out to their friends also pushes up their own benchmark salaries. Reckitt Benckiser supremo Bart Becht collected £90 million. His company’s four-man remuneration committee includes Graham Mackay, chief executive of SAB Miller, who took home £13 million.

The mutual back-scratching is demonstrated by Tesco’s remuneration committee, which is staffed by millionaires. These include Karen Cook, managing director of investment bank Goldman Sachs International and president of Goldman Sachs, Europe; former ITV chief executive Charles Allen, who is also chairman of Global Radio, EMI Music, and a senior advisor to Goldman Sachs; Patrick Cescau, former chief executive of Unilever; Ken Hanna, chairman of Inchcape PLC and former director of Cadbury, Dalgety, United Distillers and Avis Europe; Rodney Chase, non-executive chairman of Petrofac Limited and a non-executive director of the Computer Sciences Corporation in Los Angeles, the Nalco Company in Chicago and the Tesoro Corporation in San Antonio; Harald Einsman, a director of the Carlson Group of Companies, Harman International Industries Inc and Checkpoint Systems Inc in the United States. Einsman is also on the board of Rezidor AB in Sweden.

Tesco’s 2010 annual accounts show that the average salary of its 372,338 full-time equivalent employees, inflated by the inclusion of executives, was just over £16,500. The average for ordinary workers is considerably less. Many Tesco employees have to apply for tax credits and social security benefits to keep their heads above water. Yet chief executive Terry Leahy picked up £17.9 million in pay, bonuses and share options. No wonder Sir Terry can contemplate retiring at the ripe old age of 54 and seek comfort in his pension pot of £15 million. His employees do not have that luxury.

Let us suppose that, because of their genetic make-up, fat cats are somehow better endowed with creative and innovative talent. It still does not follow that they automatically deserve huge rewards. Their genetic disposition is purely due to an accident of birth, a lottery of nature. They have done absolutely nothing to create those genes. It is the outcome of centuries of social interaction and not the creation of any single individual, clan or family.

Genetic endowments are the outcome of food, healthcare, water, medicines and many other forms of social support provided by society at large. Since fat cats are not the creators of any genetic advantage, their claims to appropriate the economic benefits can’t be sustained.

Even if we concede that some fat cats have superior skills, they cannot be brought to fruition without the appropriate social arrangements. Bankers speculate on financial markets in order to make money. That is not made by their individualistic endeavours alone. They must enter into financial contracts with other companies. Through the Companies Act, the state is the ultimate creator of all companies. Without due process of the law, companies cannot be created. Corporate contracts need to be enforced with the public provision of courts, the judiciary and the police. Indeed, without particular social arrangements market contracts are not feasible.

Further, society provides education and healthcare for bankers. It provides public transport and social infrastructure to enable bankers to travel and plug their computers in. It tests food and medicines for their nourishment. It even bails out bankers who squander other people’s savings. The profits made by bankers, no matter how clever, cannot be made by them alone. So they have no moral, ethical or natural claim for appropriation of so much wealth. That right lies with society at large.

It could be argued that someone has to be energetic and far-sighted enough to spot gaps in the markets, provide innovative products and services or use social resources to generate new wealth. In recognition of that, society may be willing to give them extra rewards. Yet precisely how much extra must be a matter for public debate. It must have due regard for social welfare.

Thousands of workers are not been made better off by the telephone number salaries of executives. Ordinary people’s freedom to improve their life chances and opportunities for their families are impaired by the grossly unfair distribution of wealth.

The same fat-cattery has also impoverished the pension prospects of workers as, instead of returns to members of pension schemes, the wealth is gobbled-up by executives. Many toil in sweatshops and poor working conditions because executives prefer to collect fatter pay cheques rather than invest in health and safety. Stop excessive rewards and we benefit as customers through lower prices.

Britain’s skewed distribution of wealth damages democratic participation. The wealthy can set up think tanks, control newspapers, radio and television stations and shape public choices through donations to political parties. Apologists frequently defend excessive executive rewards by claiming that wealth will somehow trickle-down. However, no means of achieving this have been identified and managers who have made disastrous decisions continue to collect huge rewards – as happened with the banks.

Nor has any satisfactory way of measuring executive performance been devised. Directors at WorldCom and Enron reported higher corporate earnings. Subsequently these were discovered to be the product of fraud and creative accounting.

The main reason for excessive executive rewards is simple. It is the control of boardrooms by economic elites. That needs to be dismantled by democratisation of companies. Labour must seek to ensure that employee representatives are on the boards of all large companies. Executive contracts need to be publicly available.

Corporate stakeholders, including employees, should be able to vote on executive remuneration. If employees, shareholders, borrowers, depositors and others feel that directors deserve their gigantic pay cheques, then all well and good. However, unless stakeholders are getting a fair share of the wealth they are unlikely to support massive executive salaries.

Democracy may be anathema to corporate barons. But it is the only way of checking their greed and promoting social justice.

This article first appeared in Tribune

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