Tax grab or workers’ liberation?
On both sides of the Atlantic, the normally specialist topic of corporate governance – rules governing the structure and administration of listed companies – is becoming one of the key political battlegrounds. In the US, Senator Elizabeth Warren wants to shake up corporate America with her Accountable Capitalism Act. This would require all companies with over $1bn of tax receipts to obtain a federal charter of ‘corporate citizenship’. It is not just the Democratic side championing these principles – President Trump has signalled he is in favour of scrapping quarterly reporting and replacing it with bi-annual disclosure requirements, in an attempt to tackle short-termism.
Here in the UK, it was Theresa May who began the conversation over two years ago with her pledge to put workers on boards and tackle what in her view are unacceptably high levels of executive pay. The loudest voice in this area now belongs to Labour’s Shadow Chancellor John McDonnell.
In the latest and most radical instalment of his corporate governance plans, he is proposing a mandatory transfer of up to 10 per cent of a company’s equity to a collective fund administered by worker representatives. The fund would pay dividends of up to £500 per worker a year, with the rest paid in tax. This would apply to every company with 250 employees or more, though UK branches of foreign companies would be exempt. This is a policy apparently designed to appeal to voters who feel that Britain’s market economy doesn’t work for them – that the benefits of capitalism have been hidden, especially since the 2008 financial crisis. It may prove popular too. A YouGov poll on the day of its announcement showed 54% in favour compared to 17% against, which is why the idea deserves to be thoroughly tested and seriously considered.
Companies with 250 employees or more make up about 0.1 per cent of total companies. They account for 40 per cent of employment and almost 50 per cent of turnover. 10 per cent share dilution in each of Britain’s biggest companies is a significant transfer, which makes the £500 limit all the more questionable. As it seems whatever is left over would have to be paid to the Treasury, this measure would – according to the estimates done by the Financial Times – net the Exchequer £5.9bn extra if it was in place this year. In other words, this policy could amount to a significant stealth tax as well as a bonus to employees.
The principle of employee share ownership is a good one. Market economies enjoy greatest political legitimacy when more rather than fewer people own capital. Equity ownership provides access to wealth for people who tend to rely solely on income. Over time, it can form the basis of more diversified portfolios and work towards addressing low levels of saving.
In addition, share ownership promotes a fundamentally different dynamic between the employer and the workforce. When the fortunes of a company are tied more closely to the material wellbeing of employees, this works to prevent the sort of industrial relations widespread in 1970s Britain, where ‘the going rate’ had to be paid to employees no matter how the company had performed that year, making it difficult to set long-term strategy or commit to significant long-term investment.
If employees are granted a stake in the company and all the rights and privileges of a shareholder, they will start to behave like one. This means being more understanding of decisions taken as part of a long-term strategy, but also using the experience and expertise built up over their time with the company to provide a new perspective at AGMs. They may push back against plans which may appear right to the management, but would be spotted as potential disasters if those who have to carry them out were consulted.
From the proposals put forward by Mr McDonnell, it is not clear whether these benefits would be achieved. Indeed, it is not clear whether they are the intended outcome in the first place. If John McDonnell truly cares about giving more people a stake in our economy – an admirable goal – why the £500 dividend limit? If the principle is one of sharing the fruits of labour, of greater participation in the proceeds of success, surely a particularly good year for a company should mean a particularly good year for the workforce? Surely the rewards of a successful expansion, or a successful product launch – the result of collective efforts of everyone in the company – should be as significant as the revenues from it?
Then there is the fundamental problem hiding in plain sight – under Labour’s plans for employee share ownership, no employees would actually own shares. The ‘Inclusive Ownership Fund’ would be administered by elected worker representatives, and presumably they would be the ones representing the interests of the fund at AGMs. There are many companies where 10 per cent of equity would make the fund by far the largest single shareholder. Who would be holding that power to account? How would the representatives be elected? How would the disagreements be resolved? Could it be that this is simply an attempt to give even more power to trade unions? Difficult decisions frequently have to be made about, for example, closing an unprofitable part of the business for the benefit of the group as a whole – how realistic is it to expect worker representatives to sign off on it?
There are also countless questions about how companies and markets will respond. Will this create a huge downward pressure on wages as companies attempt to offset the costs, eliminating the financial benefits for workers? Will they attempt to restructure to take advantage of foreign company exemptions, causing an additional hit to corporation tax receipts? Will companies on the brink of employing 250 people be disincentivised to expand, hitting growth? Will there be a further reduction in the number of companies choosing to list their shares? Would companies be disincentivised to continue the employee share schemes many of them already have, which do offer full voting rights and an uncapped dividend? These are just some of the problems, and we are yet to see any answers.