One of the potentially positive consequences of the economic slump and long period of turmoil in financial markets is that it has led to a broad public debate about the morality of free market capitalism.
The disputation has taken many forms from the “Occupy” movements across the globe, the “Shareholder Springs” (investor uprisings) seen at annual general meetings in the UK and overseas, and most recently, the vilification of high-profile people such as the comedian Jimmy Carr and companies that aggressively use legal tax avoidance plans.
At a time of economic hardship, the degree of public resentment at the well-off gaming the system has grown to a crescendo. Moreover, there is absolutely no reason to believe that the protests, media coverage and political interest is going to subside anytime soon, given the negative economic vibrations coming from the eurozone.
What is fascinating is how quickly the uprisings are provoking a political reaction. Boardroom pay has become a lightning rod for criticism. With pay among the executive classes running at a ratio of 200 times the median in many public quoted firms and still on the rise, despite flat or falling share prices, this year’s annual general meeting (AGM) season has seen a remarkable number of revolts.
Much of it has been directed at the unpopular banks from Citigroup and Goldman Sachs in New York, to Barclays in the UK. The focus on the behaviour of Barclays has become even more intense since the disclosure that its unscrupulous traders rigged the interest rate at which banks lend to each other. As a result, chairman Marcus Agius has been forced to resign with pressure on chief executive Bob Diamond to do the same.
Among the biggest negative votes happened at the AGM of Sir Martin Sorrell’s WPP group, that took place in Dublin, where more than 60 per cent of investors voted against the remuneration report and in effect, Sorrell’s £13 million package of pay and long-term bonuses. Sorrell, as the founder of one of the few British businesses to shine internationally over the past several decades, felt wounded by the rebellion.
But as an expert in the fields of marketing and communications he should have perhaps realised that on this issue, the public zeitgeist has moved against him.
Here in Britain the “Shareholder Spring” has provoked a strong reaction from institutional investors and Vince Cable at the Department of Business.
Cable has tabled reforms designed to put the brakes on pay in the boardroom. These include changing the voting pattern at AGMs so that individual pay packets have to be approved in addition to the whole remuneration report.
He also wants to see annual pay put on a similar basis at all firms so there can be like-for-like comparisons in a single number comprising pay and benefits, like pensions, bonuses as well as share options schemes that vest in the year of the report.
This is a formula already used by GlaxoSmithKline and Legal and General. Cable also wants pay votes to be binding on a triennial basis.
Britain is not the only country that is responding to public dissatisfaction. In Israel, the Knesset is seeking to counter the social upheaval, that began with worries about cottage cheese prices, and developed into a mass movement disturbed by the increasing gap between ordinary Israelis and the super-rich.
Among the radical reforms proposed in a bill passing through the Knesset is an end to concentrated ownership, using what the FT has described as “pyramidal ownership structures.” Some 20 prominent Israeli families at present lay claim to ownership of 50 per cent of the value of Israel’s stock market.
Such patterns of ownership lead to monopolist behaviour under which competition is diminished and prices are pushed up to the benefits of the owners rather than the consumers. As a first step the Knesset is seeking to limit the cross-holdings between banks and non-banks.
In these straitened times another source of public resentment is the way in which some of the richest individuals and companies are able to play the tax system, setting up what Chancellor George Osborne has called “morally repugnant” avoidance schemes while 20 million ordinary citizens of the UK have no means of escape because their tax is paid at source through PAYE.
Jimmy Carr has taken the bulk of the opprobrium but it is a system that goes much further and wider than that, embracing footballers, show business personalities, political donors as well as some of our best known high-street entrepreneurs and their families.
Vodafone has developed a reputation for using the tax system so efficiently that it pays little tax in the UK. WPP, United Business Media, plus the internet giants Google and Amazon, have chosen to take advantage of Ireland’s low corporation taxes. Other companies like Alliance Boots have shifted tax domicile to Zug in Switzerland.
Does it matter? Of course it does. Every tax pound that leaks out of the pockets of the privileged and corporate Britain means that more burden falls on the general populous with neither the means or skills to access such avoidance plans.
It is immoral that the most able to pay can afford the most elaborate but perfectly legal schemes.
One solution would be a simpler and flatter tax system that makes avoidance less attractive. That is better than the current game of cat and mouse that goes on between the smart accountants and HMRC.
But as we are seeing with the “Shareholder Spring” and the Knesset action on crony-capitalism, protest and moral outrage can lead to change.