NICK GARBUTT: The emergence of ‘responsible capitalism’
ONE of the most obvious consequences of the global turndown of the economy has been the manifest unfairness of its consequences.
It has led to a growing gulf between rich and poor with those at the bottom – and indeed to so-called “stretched middle” being expected to shoulder the burden of responsibility for mistakes made by others.
This applies not just to citizens but to entire regions like Northern Ireland, which because of its high dependence on the public sector has been in recession for four years, and will continue to decline because of the impact of public spending cuts.
At the same time executive pay continues to rise in major companies despite the fact that there is very little correlation between company performance and bosses’ pay
The notion that what is happening is unfair is permeating throughout society, not just in Northern Ireland and in the UK as a whole but right across the western world.
There is genuine anger as the middle classes see a drop in their standards of living, young people face the prospect of long term unemployment and those in poverty see no means of advancement.
Governments around the world are concerned about this because the anger created by this sense of injustice is palpable and growing, and is already spilling out into social unrest in some western countries.
In that context it is gratifying to see Ed Miliband, Prime Minister Cameron and President Obama all making important pronouncements in the past few days on the theme of “responsible capitalism”.
In the UK this week there were two main prongs to this. The first is the examination of whether Sir Fred Goodwin, former boss of the Royal Bank of Scotland, who came to epitomise “greedy bankers”, should be stripped of his knighthood, a symbolic act of condemnation. The second is a new initiative which would see shareholders having rights to veto excessive executive pay. This would give those who own companies the means of tying bosses’ remuneration to their performance.
In the US Obama is wanting to increase tax for the very rich in order to remove the anomaly that super rich individuals like his potential republican opponent Mitt Romney do not end up paying considerably less tax than the ordinary citizen.
These initiatives are laudable and the consensus around fairness that is starting to emerge within the UK and across the Atlantic is positive and should be welcomed.
However, it is unlikely that the specific measures to curb pay settlements in the UK will be effective as they stand. The problem stems from the way that the markets work. One big positive is that we will be able to see precisely how much each director is paid. That in itself will have a powerful effect. But the new rules are unlikely to result in too many packages being vetoed.
This is because very few shareholders are in for the long term. Many deals are done by speculators on behalf of hedge funds and holdings are bought and sold over a matter of weeks, days or even seconds. It is unlikely that such individuals will really care either way about pay levels of the companies they trade shares in. It’s not what they are interested in.
There’s another issue as well. Many of these traders are also in receipt of huge bonuses and it is hard to see why they would be motivated to be part of a clampdown on excessive pay. It’s too much like turkeys voting for Christmas.
What is more likely to happen is that media pressure on excessive payouts will intensify and companies will be forced to act because the reputational damage caused by excessive pay will outweigh the self-interest of those at the top.
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