Written evidence from Oxfam GB (CGV0133)

Introduction

Oxfam welcomes this inquiry and thanks the Committee for the opportunity to submit written evidence.  Globally a consensus is emerging that more needs to be done to halt the trend towards extreme economic inequality across the world. Oxfam believes that inequality is one of the great challenges of our time, that it impedes our ability to eradicate poverty, and that it makes our world less prosperous and secure. Last year, the UK was joined by more than 190 countries as we signed up to the UN Sustainable Development Goals.  At the heart of these goals is the principle of ensuring that the benefits of development are felt at all levels of society and that no one is left behind.  The goals also set out a specific goal of reducing inequality within and between countries.[i] The Overseas Development Institute have argued that unless we act on inequality now, 200 million more people will be trapped in poverty by 2030.

Extreme global inequality in numbers:

• Since 2001, the poorest half of the world’s population has received just 1% of the total increase in global wealth, while 50% has gone to the top 1%.[ii]
• The wealth of the richest 62 people has risen by 45 percent since 2010, an increase of more than half a trillion dollars ($542bn), to $1.76 trillion.[iii]
• The wealth of the poorest half fell by just over a trillion dollars in the same period – a drop of 38 percent.[iv]
• 62 people own more than half the world’s population.[v]

Here in the UK we believe that three decades of sustained high levels of economic inequality has helped to create a divided society. This was brought into sharp relief by the EU Referendum vote in June 2016. The result has encouraged decision-makers in the UK, including the Prime Minister, to reflect on how our economy is structured and whether economic growth and prosperity is truly felt by all or whether we need more action to build an economy that works more for everyone, not just those at the top.

The company is the fundamental unit of the UK and global economy, making decisions that decide how equally the benefits of commerce are spread. Whether the economy is fuelling or tackling economic inequality is can be driven by decisions that companies make on wages to workers, prices paid to suppliers, prices charged to customers, dividends paid to shareholders and efforts to minimise taxes. Whose interests determine such decisions hinges on the structures of business, namely their governance and ownership model.

For UK companies, the dominant model of ownership and governance favours shareholders. UK companies have increasingly become institutions that are driven to benefit their shareholders above all other stakeholders. As a result, who these shareholders are is immensely important. In reference to the role of shareholders in today’s publicly listed company, Andrew Haldane, the Chief Economist at the Bank of England, states: “It is they who claim the profits of the company, potentially in perpetuity.  It is they who exercise control rights over the management of the company from whom they are distinct.  And it is they whose objectives have primacy in the running of the company.”[vi]

The focus of this submission, therefore, is on tackling both poverty and extreme economic inequality, and the regulation, policy, practices and behaviours which may address this. 

Directors Duties

How are the interests of shareholders, current and former employees best balanced?

Ownership and governance mechanisms determine which stakeholder interests get prioritised. Unless company structures ensure that there is some balance of power through ownership and governance between stakeholders, such as workers (including in supply chains), suppliers (such as farmers), communities (including those impacted by supply chains), consumers, and society – as well as shareholders -  then corporate decisions will fail to balance out the interests of these stakeholders.

Yet the stakeholder footprint of each company is different. Pharmaceutical companies have a critical impact on consumers who depend on their products being affordable in order to live, while coffee farmers and tea plantation workers depend on pricing and terms of trade from beverage companies in order to escape poverty. Where such stakeholders are significantly impacted, they should be represented on the board and in other relevant governance mechanisms.

Meanwhile all companies have workers that rely on them for decent work, while society relies on responsible tax behaviour in order to fund public services. Hence workers and the broader public interest should also be represented in all corporate boards. Companies that are able to incorporate an ownership stake for such stakeholders (e.g. through multi-stakeholder cooperatives) are also better able to balance the interests of stakeholders who are impacted by company decisions.

Which stakeholders own the company usually drives who has power over key decisions, and who gets the profit.  Cooperatives, as a form of collective stakeholder ownership taking various statutory forms, continue to be an important part of the business landscape in economies across the world, particularly in agriculture (e.g. India’s dairy cooperatives with membership in the millions[vii]). Successful cooperatives can lead to greater income and business opportunities for farmers and workers, and can lead to more equal economic development (by sharing profits and value with a broader, lower-income demographic instead of higher income investors).

Employee-ownership is one type of business structure that has grown particularly in the UK and other developed economies. 175,000 people now work in employee-owned enterprises in the UK alone, which has been growing 5.3 percent year-on-year[viii]. There is a lot of variation in the scale, structure, governance and outcomes of employee owned businesses (e.g. sometimes shares owned in trust for workers, such as the John Lewis Partnership, and other times shares owned directly by employees), but their continued success shows that employee-ownership is a viable model that can help spread more prosperity with workers.

Ownership can also be vested in other stakeholders, such as farmers in supply chains. Divine Chocolate is one such model, owned by 80,000 farmers, and is on retail shelves across the UK and the world.[ix]

Multi-stakeholder cooperative models also demonstrate how the interests of various stakeholders, such as consumers and workers can be balanced, based on The Somerset Rules for multi-stakeholder co-operatives.[x] The emerging model of the Go-op train cooperative[xi] in the UK is one such example, which has developed a model for how profits and power can be balanced to pursue the interests of both consumers and workers, who make up its multi-stakeholder membership.[xii]

Oxfam has a rich history of supporting and founding businesses that prioritise the interests of workers, farmers and communities living in poverty. This includes running programmes to support farmer-owned enterprises through our Enterprise Development Programme[xiii], co-founding of Fairtrade[xiv], founding an impact fund to channel finance to small enterprises[xv], and supporting women-owned enterprise models[xvi].

In 1991, Oxfam also co-founded Cafédirect, a business governed for the benefit of coffee farmers. [xvii] Cafédirect is one of the success stories and pioneers of the Fair Trade movement. As a company set up for the benefit of small-scale producers in developing countries, it channels its profits back into producer communities. Farmers sit on the company’s board – sharing in both profits and decision making. Cafédirect is now the fifth largest coffee brand and seventh largest tea brand in the UK.[xviii]

Business structures such as these, which are not engineered to channel profits to disproportionately rich shareholders, can become prevalent in the UK economy. As the average company only lives for 15 years[xix], supporting SMEs that are structured to give power and profits to stakeholders other than shareholders will be key.

According to Andrew Haldane, restructuring the company so it is not over-focused on shareholder interests is neither new nor radical: “Such modifications are not, in fact, that radical either from an historical or international perspective.  History clearly suggests that shareholder primacy has not always been the centrepiece of company law.  Nor has the current practice of endowing only shareholders with explicit control rights.”[xx] The key is how to give greater power to other stakeholders, such as workers, suppliers, consumers and communities impacted by business decision-making. The Prime Minister’s policy to put workers on boards is one way this can be achieved.

Executive pay

What factors have influenced the steep rise in executive pay over the past 30 years relative to salaries of more junior employees?

The productivity approach is widely used to explain the rise in high pay. Despite a sustained rise in supply of skilled and educated workers, demands for such skills have increased even further owing to what is known as skill-biased technological change. Graduates, and particularly those with skills demanded by new technologies and new financial sectors, have been able to extract a higher premium for their human capital. These developments not only raise earnings for the highest deciles but account for the even more dramatic rise for the top 1%[xxi] . According to Diane Coyle:

“The digital technologies have spread “winner take all” or “superstar” effects. Just as the most popular movie stars earn vastly more than actors who are almost as good, the wide reach of online and increasingly global markets means the top earners in many professions have pulled far ahead of the pack.” [xxii]

However, technological change does not explain why the UK has higher wage inequality than many OECD countries that all face the same technological challenges. There are especially high economic rents in the finance sector which enable it to reward these apparently scarce skills, but these rents may arise from opportunities for the exploitation of market deregulation and not from genuine innovations that add to society’s overall well-being.

Hiring a CEO on a high salary may be interpreted as a boost to the status and prospects of the organisation and lead to a short-term stock market bounce. Furthermore, research[xxiii] suggests that companies’ unwillingness to risk untried talent restricts the talent pool to existing CEOs artificially creating scarcity and upward pressure on wages.  Similar exclusions of those with potential may apply further down the chain as companies prefer to hire those with an existing track record than risk investing in developing new talent especially when under pressure to produce short term results.

Another explanation is the changing employment relationship for those in high paying jobs. Instead of climbing a long internal labour market ladder, with guaranteed job security but slow wage progression, employees with high potential are now expected to be mobile across organisations and consequently less willing to defer high rewards in return for promotion later.  This greater mobility is also associated with reduced company loyalty, apparently necessitating the use of incentives, through bonuses or stock options, to tie the appointee’s efforts into promoting the interests of the organisation.  However complex performance-linked payments systems, instead of controlling management’s efforts in the interests of the company, may act to disguise actual remuneration levels even from shareholders[xxiv] and thereby allow inequality to rise yet further. Certainly there is far from clear evidence that firm performance is enhanced by such payment systems.

Indeed another interpretation of growing high pay is that it reflects the power of elites to extract surpluses, in particular by using their key positions in the financial system in their roles as accountants, lawyers, consultants and the like[xxv]. The exercise of power by elites to increase their share does not necessarily require overt collective action but may arise from a lack of scrutiny of the value attached to activities such as  consultancy or legal services. The decline in collective power among non elite groups also provides scope for management to redirect resources towards the management elite. Higher remuneration for this group overall helps to legitimate the need for yet higher rewards in top executive positions:

“The rising tide of remuneration raised all elite boats with perhaps an understandable tendency for the professional advisers to the corporate elite to take a sympathetic, rather than a critical stance, in reviewing rapidly escalating managerial remuneration”[xxvi].

These changes do not necessarily mean that UK citizens are happy: around 4 in 5 people consider that pay inequalities are too large[xxvii]. Social norms may not have much influence on pay at the top end. Workers and  even shareholders may have limited effect on pay ‘excesses’ in part because of a lack of awareness and transparency over true remuneration levels.  Surveys reveal that people tend feel that those in higher jobs should earn less, but at the same time underestimate by a large margin what those in higher level jobs currently earn[xxviii]. Social attitudes are not fully consistent however, and views that pay relativities are too large are not matched by similar active support for redistributive policies.

These issues require a clear policy response to increase the number of skilled workers to reduce skill premiums. A weakening of labour market institutions, leading to a deterioration in the negotiating power of certain groups of workers, require a policy response about addressing how to build effective institutions or redressing power imbalances between workers. If changes in the balance of power has affected the ability for some groups of workers to command very high salaries and bonuses this too needs to be addressed through regulation, breaking down barriers to high paying jobs and, if necessary, higher taxation.

What evidence is there that executive pay is too high? How, if at all, should Government seek to influence or control executive pay?

Statistics from the High Pay Centre show that Chief Executive pay has risen significantly from £4.129 million in 2010 to £5.480 million in 2015.  This is despite the recession following the global economic crash in 2008, and many workers continuing to earn the National Minimum Wage which didn’t rise in real terms until 2015[xxix].  The pay ratio of Chief Executives at FTSE100 companies to the average aggregate wage of their workers in 2015 was 147:1, a far cry from the widely supported 20:1, and one which is supported by the public, as shown by polling recently undertaken for Oxfam[xxx]. 

One interpretation from the EU referendum result is a concern that the UK’s economy does not work for everyone – that the economy is out of balance and that a significant portion of the country feels left behind by economic growth and globalisation. The government should seriously consider how they explore this phenomenon more, building on the joint work of the Joseph Rowntree Foundation, Legatum Institute, and the Centre for Social Justice. The referendum result should act as a wakeup call to political leaders of all stripes and to those at the very top of the economy which requires a clear response that responds to public concern.

In general, survey evidence shows that people believe that a certain level of inequality is desirable, with the argument often made that pay differentials are important to motivate and reward work effort and entrepreneurship.

However, analysis for the British Social Attitudes survey shows that the majority of Britons agree that the current gap between those with high and low incomes is too large - and there is little variation in this view between education groups[xxxi].

The share of the population agreeing that income inequality is too high increased following the financial crisis and over the subsequent economic recession, from 76% in 2007 to 82% in 2012. In 2013, the most recent observation available, the share had fallen a little to 79%. This dislike of inequality is not exclusive to the UK population (see evidence from a thirty country study in Nolan et al., 2014).

Our polling gives a good insight into the public perception of the role of business in our economy with high levels of concern about issues such as tax avoidance.  Of particular note is that 76 per cent of those surveyed think that businesses have a responsibility to reduce the gap between the highest paid and the average or lowest salaries in the business and this remained high regardless of socio economic indicators or political preferences; and 64 per cent would support legislation which limits this gap to 20 times the company’s average salary[xxxii].

Composition of boards

What evidence is there that more diverse company boards perform better?

There has been significant success with worker representation on boards in Germany. German companies with over 2,000 Germany-based workers allow workers to elect one-half of the members of the supervisory board. This supervisory board, in turn, appoints the managing board, monitors its performance and approves major business decisions. This model has been shown to generally improve working conditions and enhanced productivity. Some evidence is also emerging to suggest that it is associated with improved environmental sustainability [xxxiii].

Austria has a very similar system to Germany, and many other European countries also have forms of employee representation, including Denmark, Luxembourg, Hungary, Slovenia and the Czech Republic. In these countries, companies are required to allow workers to elect or nominate a portion of the board’s membership. France, which also requires employee interests to be represented in boards, takes a different approach by reserving board seats for labour representatives. The only EU states without formal worker representation are Belgium, Italy, Portugal, and the UK[xxxiv].

Studies of the German model at a micro level show that the structure leads to workers having detailed knowledge of firm operations, which leads to employee-representatives bringing valuable first-hand operational knowledge to corporate decision-making[xxxv]. Worker representation on boards also provides a powerful means of monitoring and reduces agency costs within the firm, leading to greater market value for companies[xxxvi].

How should greater diversity of board membership be achieved? What should diversity include, e.g. gender, ethnicity, age, sexuality, disability, experience, socio-economic background?

Income inequality reflects horizontal inequalities in society, and inequalities based for example on gender, race or disability can negatively affect the power of workers in those groups and requires strategies that ensure these inequalities are also addressed. The gender pay gap in the UK is currently 18%.[xxxvii] A recent study by the Institute of Fiscal Studies identified the gap being strongest after women have children and then see their income rise more slowly. Men who have children on average do not see their earning progression slow. Reducing the gender wage gap and inequalities in women accessing the labour market has been shown to reduce income inequality. [xxxviii] Ensuring greater diversity on boards for gender, ethnicity, disability and other horizontal inequalities could help to address some of the inequalities that these groups face in the work place and provide them with greater voice within the workplace.  Diversity on boards should include all aspects for which there are potential inequalities and which people could experience workplace inequalities. 

Oxfam has found in programming work that, for instance, when women are empowered into positions of leadership, at the local, community and political levels that issues which affect poverty and economic inequality are addressed through addressing gender inequalities.  For example, through empowering women to take up school board positions in Pakistan, gender segregated toilets were introduced which meant that girls on reaching menstruation were more likely to stay in school, and so reduced this barrier to education for girls, reducing their poverty, and the poverty of their families and communities.[xxxix]  Thus if people experiencing different intersects of inequalities are empowered to take up board places in companies, then companies are more likely to address inequalities within the workplace and reduce poverty and economic inequality overall. 

Research shows that where economic inequality is greater, other inequalities in gender, race, disability etc are exacerbated[xl] and horizontal inequalities are a driver of economic inequality.  The intersection between economic inequality and gender inequality is acute here in the UK and around the world. The Sustainable Development Goals have acknowledged the importance, for example, of women’s economic empowerment as a route to ending poverty, and include addressing structural issues such as recognising, reducing and redistributing unpaid care work, addressing violence against women and girls and supporting women’s leadership and decision making. 

Should there be worker representation on boards and/or remuneration committees? If so, what form should this take?

There should be worker representation on boards and remuneration committees, and this should encompass a democratic process where all employees have a say in who represents them. It should also ensure that the voting power of these representatives is not diluted in any way. Some strong examples of employee-representation from across Europe are worth considering further and a model capturing their lessons should be proposed. Critically, models that lead to greatest pay and negotiating power for workers should be prioritised in order to reverse the growth of economic inequality in the UK. It is important that other stakeholders, including workers and farmers in supply chains of UK companies also have a voice and power in the board room. According to the International Finance Corporation (part of the World Bank Group):

“Engaging with stakeholders has governance implications because it goes to the heart of how power and authority are understood and used within the company. By definition, stakeholders have a stake in the company, and have the possibility of gaining benefits or experiencing losses or harm as a result of the operations of a company.“[xli]

Workers are among the stakeholders most impacted by corporate decisions and having their interests formally and structurally represented at the highest level of decision-making within companies is critical. Farmers and workers in developing countries, often trapped in poverty within the supply chain of UK companies, are hugely impacted by decisions in the boardroom. Models such as Cafe Direct demonstrate that this is possible.

Oxfam’s own experience through founding the successful coffee and tea company, Cafe Direct, provides some insights into stakeholder representation on boards. Cafe Direct’s board reserves two of eight seats for farmers who grow the coffee and tea.[xlii] This means that critical corporate decisions are made not only with farmer voices heard, but firmly represented. It is when there are trade-offs between different stakeholder interests that real voting power on boards assures that the interests of the right stakeholders are also represented.

26 October 2016