Inequality is a choice – and overcoming it means rewriting the rules by which businesses operate

The Prime Minister's proposals for employees on company boards is welcome - but if we're serious about tackling inequality, reforms to corporate governance must go much further

Oxford City Councillor for St. Clement's Ward


NEW YORK, NY - JUNE 21: ING Groep N.V. CEO Jan Hommen rings the opening bell at the New York Stock Exchange on June 21, 2012 in New York City. (Photo by Ben Hider/NYSE Euronext)

Inequality isn’t inevitable, it’s a choice. Everybody should enjoy a fairer share of the prosperity that we produce together, yet today a small percentage of the population takes home the lion’s share of economic gains. We don’t have to choose inequality. It lies within our power to rewrite the rules.

In her keynote speech to Conservative Party conference, Theresa May promised to lead a Government unafraid to stand up for workers on low and middle incomes and to stand up to big business. Weeks earlier, she stood on the steps of Number 10 for the first time as Prime Minister and pledged to be driven not “by the interests of the privileged few” but by those of the powerless and poor.

Overhauling governance of the corporate economy and improving its performance appears to be a key part of the Prime Minister’s plans to deliver on this pledge. This includes, as she has made clear, the appointment of employees to company boards. We co-operators need to guarantee that this reform happens and that it happens on our terms.

But we co-operators also need to push Mrs May to go further. We could start with ensuring that profits benefit those who deliver them – with profit sharing or increases in wages especially at the lowest end – instead of profits simply disappearing into the pockets of shareholders.

The conventional wisdom that corporations belong to shareholders and exist to maximise their wealth is misjudged. Whereas in the past a company’s destructive actions mainly caused harm to customers and investors, corporations today threaten to bring financial systems to collapse and national governments to a state of bankruptcy. The cumulative losses to the overall UK economy from the 2007-8 financial crash amount to over a year’s worth of pre-crisis GDP – £1.8 trillion.

Some banks performed much worse than others because they were predisposed to experience larger losses. The banks the market rewarded with big stock increases in 2006 suffered bigger losses during the crisis. Attributes which the market valued in 2006 were also a source of weakness one year later. The banks that paid more profits to investors fared worse during the financial crisis.

Dividends paid by UK-based firms are up from 10% of profits in the 1970s to a staggering 70% today. Profits aren’t being reinvested in the future growth of a company or shared with other stakeholders such as a company’s workers or workers in a supply chain. Short-termism undermines a company’s inability to withstand shocks and feeds systemic inequality.

Today’s shareholders are not your usual person with a pension fund. Workers may be shareholders through pension funds – but they hold just 3% of the value of shares.  In 1990, pension funds and insurance companies held more than half of UK equities; now they own less than 9% combined.

Today the majority of shares are owned by overseas shareholders, with individuals and institutions owning significantly greater levels of shares than pension funds. Ownership of UK companies has changed enormously, and seems set to go on changing.

When shareholder interests drive the corporate decisions that affect the country’s economic divide, it matters who those shareholders are. When shareholders are disproportionately lower-income and have less wealth, their company is more able to tackle inequality by maximising returns to shareholders. But, when shareholders are disproportionately wealthy—as they tend to be today—companies and the corporate economy become less effective devices for closing the inequality gap.

The co-operative or mutual society avoids these conflicts between the ownership and stakeholder interests of a firm. A firm’s owners are its customers and employees, so that they share the responsibilities and rewards of success. Rightly, the Co-operative Party is calling for a formal role for employees in deciding how companies are run. This means placing employee representatives and other stakeholders onto boards with the power to participate in a collective, democratic decision making.

It matters that we move on from short-termism obsession. A lasting reform would empower corporations to plan for the long term without constantly supplying shareholder dividends and higher share prices. Companies would be better insulated from pressure to treat share price as the key metric of performance in the short-term when doing so harms their long-term future.

Long-term shareholders think differently from the speculator. They want the company to invest in its employees’ skills, the innovation of new products, and good relationships with all customers and consumers—even if the value of these investments cannot instantly be reflected in today’s share price. Short-term shareholders are far more focussed on the short term, on share value and will accept strategies that may be damaging in the longer-term like selling assets, or allowing pay differential to grow exponentially as we have seen in recent years.

Public companies could be challenged by Mrs May to encourage longer-term shareholdings. Shareholders could be incentivised to commit to retain shares and remain with a corporation for a specific period, with the level of reward linked to the length of time that they retain shareholdings. Shareholders would hold voting rights in relation to the amount of capital invested and the length of time for their investment.

The ambition would be to increase the percentage of shareholders who invest in the long-term and benefit all the stakeholders of the company and the interests of the real economy. The intent would be that long-term investors would come to dominate a system that currently privileges investors unwilling to defer their gratification.

Co-operators need to go on setting out a vision for our economic future that is properly inclusive and rewrites the rules and power dynamics affecting inequality. Closing the gap between the rich and the rest isn’t just about redistribution anymore; it’s about getting serious with the underlying drivers of inequality.

Changing course will take time and be tough. But, if we overhaul these rules, we could build a shared and inclusive economy that works for everyone.

Tom Hayes is an Oxford City Councillor and Midcounties Co-op Party member