Labour must join forces with reform-minded business, argues Liam Byrne
In the battle against spiralling inequality, progressives are not alone. Across the business community there is fast forming a new consensus that our economy today is quite simply too unequal, too unstable, and too unsustainable. And things now need to change.
The facts speak for themselves. The richest five families in Britain own more than the poorest 12 million of their fellow citizens. Here in Britain the number of billionaires is up nearly 50 per cent since before the crash – while 300,000 more children live in poverty. The gender pay gap still looms large and social mobility is at best now flat. While the United Kingdom’s millionaires are getting richer faster than anywhere else in Europe, our under-25s are the first generation in a century to be worse off than the generation before them; they are more likely to live in poverty than pensioners are.
This makes everyone who cares about injustice angry. But the irony is that we are in some pretty good company. The world’s economic leaders are now clear that today’s inequality is not just immoral – it is inefficient. The World Economic Forum – of Davos fame – now says that the Washington consensus is ‘incomplete and unbalanced’. Christine Lagarde, head of the International Monetary Fund, talks of a new ‘gilded age’ where ‘excessive inequality has also become a problem for economic growth and development’. Mark Carney, governor of the Bank of England, says the social contract is now breaking down because, ‘unchecked market fundamentalism can devour the social capital essential for the long-term dynamism of capitalism itself’.
Once upon a time we thought there was a choice between efficiency and equality – Lyndon Johnson’s adviser Arthur Okun called it, ‘the big trade-off’. Now we know better. Indeed, the IMF says that if you decrease the standard measure of inequality, the Gini coefficient, by three per cent you can boost economic growth by 0.5 per cent a year.
The rules governing a wealth of institutions in Britain and the world beyond are simply not working – and Labour has to lead the debate about how we rewrite the rules. We simply cannot persist with a situation where output per hour goes up and pay per hour goes down, while the earnings of board directors go through the roof.
The business community is now zeroing in on where change needs to happen – in business attitudes, in financial markets and at the very top of companies. First, groups like A Blueprint for Better Business, a coalition of reform-minded firms that include huge companies like Unilever, are developing serious programmes that put purpose, not profit, first.
Second, there is a growing chorus of voices arguing that capital markets have got to become more patient – and start investing long term. The Bank of England’s chief economist, Andrew Haldane, pointed out this summer that firms are paying huge sums out in share buybacks – and are still sitting on £522bn in cash. What they are not doing enough of is investing in creating the kind of good jobs that pay well. That is partly why Larry Fink, head of the world’s largest asset manager, BlackRock, has argued, ‘More and more corporate leaders have responded with actions that can deliver immediate returns to shareholders, such as buybacks or dividend increases, while underinvesting in innovation, skilled workforces or essential capital expenditures necessary to sustain long-term growth.’
In other countries reforms are being introduced to encourage longer-term investment. In France, for example, the Florange law introduced last April automatically gives shareholders holding shares for more than two years double voting rights. A similar law has passed in Italy, while in the United States companies are adopting ‘proxy access’, giving long-term shareholders the right to appoint directors.
‘Dual class shares’ would allow us to go further – enabling the original founders and early venture capital supporters to control voting power. They have become de rigueur for the hottest tech initial public offerings, from Facebook and LinkedIn to Zynga and Groupon. These changes are allowed in the US and on the continent. Why not here?
There are other ideas too. Xavier Rolet, chief executive of the London Stock Exchange, has called for reform to reduce the tax rules that incentivise companies to take on bucketloads of corporate debt, which renders firms so unstable. Ronald Cohen has argued it is time to accelerate the creation of a huge new capital market to unlock $1tn of investment in businesses that have a positive social impact.
The third change must be the way company boards work. Experienced businesspeople are arguing that companies have to change at the very top. The former head of McKinsey, Dominic Barton, has declared, ‘Boards aren’t working’. Why? Because the business community fell prey in the 1980s to the idea of ‘shareholder value’, the notion popularised by Milton Friedman that the purpose of business is profit. But when investors hold shares for such a short period of time there is a good argument to put people with a longer-term perspective on the board, like creditors – and workers.
There is an old saying in politics that the only thing worse than fighting with allies is fighting without them. Labour at its best has always connected an ambition for wealth creation with a passion for social justice. It is time for Labour to start finding the reformers and work with them on an agenda for change.
Liam Byrne is chair of the all-party parliamentary group on inclusive growth
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