Sunday, January 25, 2015

Will Hutton - A too powerful financial elite threatens wider prosperity

Quindell is an insurance claims processor; an unexceptional business. But it is the latest addition to the long list of examples of the ills of British capitalism. Last November, the company’s founder, Rob Terry, was forced to leave it after telling the world that, via a complex share deal, instead of buying his company’s shares, he was actually selling them, thus completing the personal harvesting of £5.5m. Investors took fright, feeling that the ploy betrayed underlying weakness in the company, and the share price plunged.
Ten days ago, Quindell announced that as part of its effort to restore confidence, it was hiring as deputy chair and strategy director Jim Sutcliffe, a well-regarded former chief executive of another insurance company, Old Mutual. As part of his financial package, he would receive share options worth millions, which he could exercise within 12 months of receiving them. Another day, another executive being rewarded before anybody can know whether he will turn the company around.
Except that Sutcliffe was also deputy chair of the Financial Reporting Council (FRC), an independent regulator partially funded by government to ensure that companies comply with all their financial responsibilities. He also chaired the FRC’s codes and standards committee, one of whose duties is to ensure that executives only exercise their share options after three years.
Plainly anxious to pocket what in effect is a bung as soon as he could, Sutcliffe made no effort to ensure that Quindell complied with the rules of the council, of which he was deputy chair, or of its codes and standards, for which he was personally responsible. Instead, he resigned to accept the share options, a signal British finance and business that rules to constrain excessive executive pay in essence don’t matter a damn. The open question is: how much longer can this carry on? There is certainly the beginning of a political reaction under the catch-all title of “inclusive capitalism”, with politicians, economists and some business people daring to challenge the orthodoxies that have brought us to this pass. Excessive executive pay, the incentives it generates and the resulting inequality are not only unfair, they are part of a set of economic and social propositions that do not deliver the good economy and society.
At Davos last week, there was much wringing of hands over the growth of inequality; claims that the biggest danger to capitalism was the operation of capitalism itself, as the chief executive of Unilever, Paul Polman, declared, echoed by the managing director of the IMF, Christine Lagarde.
One important political milestone achieved last week was Barack Obama’s State of the Union address, in which he asked rhetorically how much longer we will “accept an economy where only a few of us do spectacularly well” and set out a policy framework informed by the inclusive capitalists’ new theoreticians. In essence, he proposed a set of justifiable tax increases on high income and wealth to fund an attractive array of interventions to support the lives of squeezed, middle-class Americans. With both houses of Congress dominated by Republicans the policies have zero chance of being implemented, but the Democrats think this is the direction in which to fight back.
Obama’s address was preceded by – and seemingly influenced by – publication of a report on Inclusive Prosperity, from an international commission co-chaired by Harvard’s professor emeritus Larry Summers and Ed Balls.
I began reading it, worried that it would be another third way, bloodless bromide in the spirit of Davos in which we are told that the only response to the transformations of technology and globalisation is world-class education and training and that the operation of capitalism itself can never be challenged for fear of damaging “wealth-generation”.
Democrats and our own bruised Labour party would never dare to analyse what is happening in terms of raw power: that one of the chief drivers of secular stagnation, rising inequality and ebbing economic dynamism is an over-empowered and overpaid corporate and financial elite. Furthermore, that gravely weakened trade unions are no longer capable of giving workers a voice or the power to bargain collectively for just wages.
Instead, the report is something of a landmark. In a series of killer graphs, it eloquently tells the story of today’s dysfunctions. The growth in the incomes of the bottom 90% of industrialised countries’ workforces is everywhere slowing down, but is actually falling in the US and UK. The share of wages in national income is falling. Wage growth is everywhere lagging behind productivity growth. Austerity is causing ever-diminishing growth prospects. And my favourite – The Great Gatsby graph – shows how as income inequality grows, so inter-generational mobility slows.
Of course globalisation and new technology are a cause of some of this, but the commissioners go much further. Responsible too are weakened trade unions, along with companies that put the maximisation of the share price – and thus executive pay – before all else. It is obvious that well-functioning capitalist economies need a broadly based growth of wages and companies incentivised to invest and innovate to deliver the goods and services thus demanded; it is just as obvious that we don’t have them and need to create them.
Thus the habitual and correct call for revisioned education and apprentice systems to empower workers with skills. But these are accompanied, on the American side at least, by some well-thought-through policies designed to – wait for it – revive trade unions and collective bargaining. On companies, the commission has some good ideas on how to constrain executive pay.
There can be no inclusive prosperity in Britain and the US unless our companies are repurposed around value generation for all, requiring reform of company law, redefined ownership obligations and the operation of financial markets. (This is what I propose in detail in How Good We Can Be.)
Nonetheless, here is a commission that is firmly and bravely in the right ballpark. Of course the Anglo-American right, an army of well-paid commentators and lobbyists, will dismiss its recommendations as more top-down meddling. But the world the right has created is increasingly hard to defend. The trouble is that today’s arrangements perfectly enrich the few such as Quindell’s Jim Sutcliffe and Rob Terry. An employee on its remuneration committee would never have nodded through Sutcliffe’s deal. That is why it is important to put an employee on remuneration committees as the commission recommends.
Inclusive capitalism is too often dismissed as a harmless sop. Wrong. It will involve a big battle precisely because it challenges real power. Whatever else, this is hardly a sop.