Inequality

Michael Meacher Excerpts

Thursday 27th November 2014 Commons Chamber

[Mr Michael Meacher (Oldham West and Royton) (Lab)]

I beg to move,

That this House calls on the Government to set guideline targets for remuneration which over time reduce the ratio between top and bottom incomes in large organisations to no more than 50 to 1.

Even at this rather late hour, when the first debate would normally be drawing to a close, I am nevertheless grateful to the Backbench Business Committee for granting this debate on inequality—not least because the excesses of extreme inequality are increasingly seen as a serious, moral, economic and social problem, yet the issue has not received the attention in this House that it clearly deserves.

It is worth saying at the outset that concern over this matter is not the preserve of the political left. In this past month, Mark Carney, Governor of the Bank of England, and Janet Yellen, the chair of the US Federal Reserve, have both argued that the enormous growth in inequality over the past few decades was not only wrong morally but was having increasingly baleful economic consequences. Then there were the strictures of Christine Lagarde, the managing director of the International Monetary Fund, arguing that the current explosion of inequality was now acting as a brake on growth. They all say that inequality fosters fear, creates too much demand for credit to compensate for squeezed living standards, drives asset price bubbles, catalyses financial instability, and, by displacing too much risk on those who cannot bear it, undermines the legitimacy of capitalism.

The facts on ballooning inequality are broadly well understood. Official statistics show that average weekly pay in June this year was £477, while the average annual take-home remuneration among the FTSE 100 chief executives was £4.3 million, or £83,000 a week. The ratio between their remuneration and the remuneration of the average UK worker is therefore about 175:1. That needs to be put into perspective. In 1998, according to the High Pay Centre think-tank, a FTSE 100 boss was typically paid 47 times more than their workers. In other words, in just 16 years, the gap between top incomes and the average wage has nearly quadrupled. The obvious question then is: is all this justified? In fact, there is rather little correlation between the surge in executive remuneration and company performance; sometimes, there is even a negative correlation.

The director of the High Pay Centre, Deborah Hargreaves, explains the phenomenon. She says:

“The only reason why their pay has increased so rapidly compared to their employees is that they are able to get away with it.”

They are able to get away with it largely because of the structural divide in the way in which pay is determined in this country. For manual workers, it is by collective bargaining. That has dramatically declined in the past 30 years, leading to a very sharp fall in the share of wages in GDP from 65% to about 53%. For white-collar workers, it is by private contracts, which are laid down by the employers. But for chief executives in the boardroom, it is by remuneration committees, specifically chosen by the board itself, which largely operate on the principle of “you scratch my back and I’ll scratch yours.” That is not a system that carries credibility across the whole spectrum of the work force.

One might even question why such elaborate devices are needed for top executives to secure a maximum uplift in pay, since one would have thought that £80,000 a week was far beyond what is necessary for the most comfortable lifestyle. Indeed, one could reduce a £2.5 million income by almost 95% and the recipient would still be in the top 1% of all earners in the UK. That is a staggering fact.

Are incomes 10 or 20 times more than the earnings of those already considered very, very rich strictly necessary? The only answer seems to be that these turbo-charged salaries have almost nothing to do with performance and everything to do with chief executive officers keeping up with each other in a status race. In other words, rather as in the end of the Victorian period, which we are getting closer to now, the very rich constantly demand yet more wealth to show it off in order to demonstrate where they stand in the pecking order.

Does that matter? The apologists for inequality have always traditionally argued that it does not because it does no harm to other people. Peter Mandelson notoriously argued that new Labour was

“intensely relaxed about people getting filthy rich”.

But he did add

“as long as they pay their taxes.”

That was partly on the grounds that wealth would then trickle down to everyone else, but it has not trickled down; it has gushed up as if from a geyser. According to the Sunday Times rich list, the richest 1,000 persons in this country—just 0.003% of the adult population—have doubled their collective wealth in the six years since the crash, from a staggering £250 billion to more than £500 billion. Moreover, that does harm other people. It leads to smouldering resentment, which can at times explode if triggered by a sudden event, such as the five days of rioting after Mark Duggan was shot in August 2011. It undermines trust and solidarity and it weakens the social fabric of communities. Above all, it has been shown unequivocally by Richard Wilkinson and Kate Pickett in “The Spirit Level” that across all countries—it is not just the UK—the greater the inequality, the greater the degree of social pathology in terms of homicide levels, crime and violence, mental illness, imprisonment, teenage pregnancies, obesity, maths and literary educational scores, life expectancy, infant mortality and many others.

It is not just the poor who suffer, although they certainly suffer the most; those impacts extend widely across the whole society. It is not just the social impacts of inequality that damage society, but the economic ones as well. It weakens aggregate demand, which is serious at times like the present when all the other potential sources of demand—Government expenditure, business investment and net exports—are negative.

Andy Haldane, the chief economist at the Bank of England, recently summed up the economic impacts of excessive inequality. He said that

“there is rising evidence that extreme inequality harms, durably and significantly, the stability of the financial system and growth in the economy. It slows development of the human, social and physical capital necessary for raising living standards and improving wellbeing. That penny is starting to drop among policymakers and politicians.”

I hope that his last comment was right.

What should be done? The terms of the motion suggest that the Government should set guidelines for remuneration that, over time, reduce the ratio between top and bottom incomes in large organisations to no more than 50:1. That would still allow top incomes to reach nearly £24,000 a week or £1.25 million a year. I think that that is justified on two grounds. First, in the period when capitalism flourished most in the UK—that is, the three decades after the war—the ratio was 40:1 or less. Secondly, the most successful dynamic economies with the highest long-term growth figures and the greatest social cohesion in the past 40 years—I am thinking of Japan up to the 1990s, the east Asian tiger economies, Sweden, Norway and Singapore, among others—all had a ratio of less than 50:1.

Of course, there are other ways of moving towards the same objective. The Business Secretary introduced new regulations that became operative this year, empowering shareholders with a binding veto over company executive pay policy. Despite his good intentions and the shareholder spring that peaked in 2012, that has not ever been called on, partly because the holdings and voting rights on pay are controlled by very wealthy fund managers and the work force have no say in the process at all. That suggests that the structure of incentives and pressures needs to be recalibrated.

I have already quoted Deborah Hargreaves’s remark that executive pay soars because they can get away with it. Corporate power and the greed and self-interest that go with it have increased dramatically over the past three decades and they are still increasing. That needs to be redressed. There are several measures that could help. One is the mandatory publication of company pay ratios, as is already operated by John Lewis, where the ratio is 75:1, and TSB bank, where it is 65:1. Another would be to strengthen the coverage of trade union collective bargaining, which has shrunk dramatically over the past 30 years from 82% to a wholly inadequate 23%.

A further measure would be to increase the prevalence of work force-wide profit sharing. In my view, the most effective mechanism would be the introduction in all large companies of what I would call an enterprise council, made up of representatives of all the main grades of employees and meeting at least once a year to open up the books, look at all the company’s activities, consider how failures could be corrected and performance improved, think about the financial implications of depreciation, investment, stock control, dividends and so on and then examine the bids for pay increases across the company over the next year. That would strengthen the cohesion and solidarity of the company, greatly improve morale and productivity and almost certainly enhance profitability. I commend that, and all the other measures I have proposed, to the House.

--- Later in debate ---

[Jo Swinson]

I will talk about the particular reforms in a moment. There are two ways in which the Government’s reforms can have an impact on executive pay and, therefore, company behaviour when agreeing directors’ remuneration. One way, obviously, is to have a binding vote that a company could lose, and as a result the pay policy would not go forward. The other way—it is an important one—is that companies, because they know they will face a binding vote on executive pay, will be incentivised to have more detailed discussions with investors and shareholders in advance of the annual general meeting. I would not want us to get into a situation in which we thought that it was only if lots of votes were won that the reforms were not successful, when actually it might be a sign that there is much more engagement, which in itself would be a sign of success.

[Mr Meacher]

Does the Minister accept that, despite the good intentions of the Business Secretary’s reforms, the fact that they have not actually been exercised suggests that we need to go significantly further and that that is probably because of the excessive influence of very wealthy fund managers and, in particular, because the work force has no say at all? Does she believe that the work force should have some say in executive pay?

[Jo Swinson]

I certainly think that the points the right hon. Gentleman made about involving the work force are important. That is why our reforms require that it be set out how employees have been involved and consulted. It is not a prescriptive approach, but it requires that to be taken into consideration. Indeed, the Government have tried in other ways to influence corporate governance. For example, the work we have done on employee ownership has supported different types of ownership and engagement models, through various changes to the tax system and the provision of materials on how to make it easier for companies to convert to employee ownership models, so that employees can be much more involved in the running of their companies. We know that that can have real business benefits, because employees buy much more into the success of the company. That also starts to deal with some of the productivity issues that the hon. Member for Hartlepool mentioned.

--- Later in debate ---

[Mr Meacher]

This has inevitably been a rather short and truncated debate, but a useful one for all that. I think it fair to say that there is broad cross-party agreement that inequality is now out of control and further action needs to be taken. My hon. Friend the Member for Hartlepool (Mr Wright) made the essential point that an increase in the ratio between top and bottom from 11:1 to 116:1, within one generation, cannot remotely be justified in terms of the performance of the British economy.

I am grateful to my hon. Friend the Member for City of Durham (Roberta Blackman-Woods) for making important points about the raft of measures that are still necessary to deal with poverty, including tax credits to deal with in-work poverty; the continuing unfair span of gender inequality; the need for the Government to press the issue of the living wage—some companies are paying it but far too many still are not—and the need, above all, to shift away from a low-pay, low-skills and low-productivity economy to a high-pay, high-skills and high-productivity economy.

I thank my hon. Friend the Member for Hartlepool for observing that the relationship between executive pay and company performance does not justify these excesses and cannot remotely do so, that the voice of workers needs to be directly involved in the determination of pay, and that we do not currently have a productive economy to the degree that we need and that is clearly possible both socially and economically.

I am grateful to the Minister for her, as always, positive and bubbly tone, but I realise that she cannot go beyond her brief. I hope that if there is one lesson she will take to her right hon. Friend the Business Secretary, it is that he has to move from the action that he has already taken, which is valuable, to direct involvement of workers in executive pay. If we can get that message across, this debate has been worth it. I beg to ask leave to withdraw the motion.

Motion, by leave, withdrawn.

[Diana Johnson (Kingston upon Hull North) (Lab)]

On a point of order, Madam Speaker. It is reported in The Independent today that John Vine, the Government’s independent chief inspector of borders and immigration, has written to the Chair of the Public Accounts Committee expressing concern that the Home Secretary has been intervening to delay and manipulate the publication of inconvenient reports on the Government’s immigration and asylum policy, and compromising the independence of his role. Given today’s news of the continuing mess that the Government’s immigration policy is in, have you, Madam Deputy Speaker, had any indication that the Home Secretary will be making a statement to the House on this matter?