Corporate Britain was given one last chance to sort out its executive pay problem and now it’s

There was something conspicuously absent from the Government’s Green Paper on corporate governance when it was published last November. Four months earlier, Theresa May had proclaimed she wanted to see annual binding shareholder votes on executive pay in order to end the “irrational, unhealthy and growing gap between what these companies pay their workers and what they pay their bosses” and to “make our economy work for everyone”.

For all May’s crusading rhetoric, this would have been only an incremental reform. Under the existing system, introduced by the Coalition in 2013, all UK-listed firms must already subject their general pay policies to a binding vote at least once every three years. Further, they have to hold an annual advisory vote on actual remuneration packages for directors.

May was, in effect, simply pledging to make those annual advisory votes on pay packages legally binding, meaning if the awards were rejected by shareholders, the directors would be compelled to come up with something else that was acceptable.

Yet, curiously, November’s Green Paper – effectively a consultation ahead of legislation – backed away from annual binding shareholder votes on pay, despite the Prime Minister’s very clear pledge only months earlier.

The policy, despite being dear to May’s heart, seemed, in effect, to have been snuffed out at birth. Why? What changed? The simple answer is lobbying. Consultants, asset managers, accountants and companies themselves had all told ministers it would be a bad idea.

This view was reflected in the report of a group called the Big Innovation Centre which described an annual binding vote as a “disproportionate response” to concerns about executive pay and one that would have “many negative unintended consequences”. These acts of self-harm supposedly including frightening off top executive talent from British firms and prompting boards to engage in “excessive consultation” with shareholders ahead of votes.

Ministers must have bought it.

But perhaps the proposal isn’t quite dead. For nothing upsets the carefully-laid plans of corporate lobbyists quite like dunderheaded behaviour of their employers.

Last week Crest Nicholson, one of the UK’s largest house-building companies, put its executive pay package for 2016 to a shareholder vote. Ahead of the vote, Institutional Shareholder Services (ISS), an advisory body for asset managers, had pointed out that Crest had moved the goalposts for the triggering of bonus awards for its top executives in the most shameless way, proposing to slash its profit growth target from 22 per cent to 8 per cent over just two years.

Crest chief executive, Stephen Stone, was set to receive a share bonus worth £812,000, on top of a salary of £541,158 while chief operating officer, Patrick Bergin, was pencilled in for £562,500, in addition to basic pay of £375,000.

“The profit target has been reduced for the second consecutive year without any compelling rationale, and the revised targets do not appear to be sufficiently stretching,” said ISS. This was effectively saying Crest was rigging its own remuneration system to ensure big pay-outs for executives.

Then something that is still pretty unusual happened: shareholders rebelled. Some 77.3m votes were cast in favour of the pay policy. But 107.3m were cast against. Roughly 58 per cent of Crest shareholders rejected the awards.

So how did the board of Crest respond to this comprehensive and humiliating rejection? Did the head of the remuneration committee, in charge of deciding pay policy, instantly fall on his sword? Did the company pledge to scrap the proposed awards without delay and redesign the whole package? Did the chairman bow his head, beg the forgiveness of shareholders and promise a period of deep and serious reflection on the company’s priorities? Far from it. Crest declared itself “disappointed” with the way the pay vote had turned out, but said that it would, nevertheless, proceed with paying the bonuses. And why not? After all, this was only an advisory vote. Nothing to get excited about.

May’s original pledge was the right one. These pay votes should be annual and legally binding. The practical objections were always weak and ought not to have influenced the Green Paper.

There is also a bigger picture here which Theresa May’s July speech rightly alluded to. Consider the damage that shrugged-off shareholder pay protests already inflict today on public confidence in UK business. Simon Walker, the former head of the Institute of Directors, said last year in the wake of two previous major shareholder rebellions that “British boards are now in the last chance saloon”. Crest has surely drained the last drop of goodwill.

The corporate governance Green Paper consultation ended on 17 February. Doubtless ministers received even more advice from corporate lobbyists reiterating why the current system is the best of all possible worlds. The events of last week give the lie to that idea.

Theresa May and her Business Secretary Greg Clark should disregard the lobbying and consider the egregious behaviour of Crest. Then they should legislate.

#crestnicholson #executivepay

No, the rich are not bearing too much of the nation’s tax burden

”Death and taxes, as we all know, are the two great guarantees of life. But a strong candidate for a third is crude anti-tax lobbying by the right-wing press.Their favoured argument in recent years has been that the “burden” of taxation is falling ever more heavily and unfairly on the very rich.

The Daily Telegraph this week presented an analysis showing that the top 1 per cent of income tax payers pay 27 per cent of all income tax receipts, up from just 11 per cent in the 1970s. The report also noted that the top 10 per cent of taxpayers account for 59 per cent of total receipts, up from 35 per cent in 1976.

It asserts that “the wealthy … are making a bigger contribution to the UK’s income tax receipts than they have done at any other point during the post-war era”. The piece throws in references to the pledge from the late Labour Chancellor Denis Healey to squeeze some unfortunate souls until “the pips squeak” and warnings from a Conservative MP about how oppressive taxes are in danger of deterring smart people from working.

But the analysis, like many previous ones in the same vein, is misleading because it neglects to mention a crucial piece of context, namely that the very rich have been getting richer in recent decades – especially those at the very top.

According to the World Top Incomes database, the total pre-tax income share of the top 1 per cent of UK earners has doubled since the 1970s from 6 per cent to around 12 per cent, largely a reflection of the explosion in pay of financiers and senior company executives. The pre-tax income share of the top 10 per cent has also risen since over that time from 30 per cent to 40 per cent. These groups are paying a larger share of the total income tax take because they have larger slices of the pie than they used to.

This says little about the direction of tax policy. Rather, it’s an arithmetic property of a progressive income tax system, whereby above certain thresholds a fixed proportion of earnings go to HMRC.

Another vital piece of context which these analyses omit, as Jonathan Portes of King’s College London exhausts himself in stressing, is that income tax is not the only tax. In 2015-16 the Government raised £630bn in taxes. Of this just 27 per cent (£169bn) came from the income taxes. Very large chunks came from National Insurance (£114bn), VAT (£116bn) and corporation tax (£45bn).

It is either ignorant or disingenuous to imply that the entire national tax burden is accounted for by the income tax take. Any consideration of the social fairness of the tax system has to factor in the incidence of other levies to be even vaguely credible.

There are, it is true, challenges presented by the disproportionate reliance of HMRC on a relatively small number of high-income individuals. But despite the complaints of Tory MPs and right-wing newspapers these challenges have nothing to do with equity or Ayn Rand-style effort deterrence.

This is rather an issue of practicality. The rich can shift their incomes about ominously easily, as we saw vividly last year when a change in the taxation of dividends prompted large-scale income forestalling. An army of well-resourced accountants generate (entirely legal) avoidance schemes, leaving HMRC outgunned and ministers chasing their tails.

A part of the solution ought to be to shift the focus of taxation from income to residential property, where wealth inequality is vast and avoidance is much harder. The capital gains and inheritance tax systems are also in crying need of reform. The tax rates on the income of company owner managers should be brought into line with that of employees to eradicate an obvious avenue for avoidance by the very wealthy.

But we should also be trying to reform the structure of our economy, which throws up such large pre-tax disparities in pay. Pay at the very top is sometimes a reward for outstanding effort, inspiration and entrepreneurial activity. But often it is merely zero-sum wealth extraction and the exploitation of uncompetitive markets.

A more equal distribution of earnings would make the tax system less fragile. There are also reasons to suspect this could result in more sustainable GDP growth due to higher corporate investment and productivity.

A new tax campaign angle for the right-wing press? Don’t hold your breath.”

#competition #incometax #wealthextraction

Liberals can still use facts to defeat populist ignorance

This is, as has been widely noted, a bleak time for enlightenment values. In the face of a populist tide, a feeling of pessimism has gripped many liberals about the ability of logic, reason and evidence to influence the wider public.

Discussion often turns to psychological research showing that when ordinary people are presented with facts in the context of a political debate it has little impact. There’s growing chatter about a “backfire effect”, where rebutting misconceptions actually serves to entrench falsehoods, perhaps by making the myths more salient. Thus, fact-checking exercises by the media become, at best, as a waste of time (“leftliberal comfort food” in the words of Rob Ford of Manchester university). At worst, they’re counterproductive.

Technology doesn’t seem to be helping. Social media helps people to herd themselves into informational silos, where they only hear what they want to hear, and inflates ideological bubbles. Traditional sources of authority are no longer respected. We’re warned that “elites” telling people they are wrong is patronising.

Some argue that describing overtly racist opinions and policies as racist only serves to drive the alienated masses further into the populist corral.

So what’s to be done? How can progressive politicians and experts get across the facts behind politicised subjects, whether it is the economic impact of immigration, the circumstances of welfare recipients, the science behind climate change, the safety of vaccines or the overall benefits of free trade? How can we ensure that political decisions are taken and votes cast not on the basis of prejudice and myth, but with at least some regard to evidence and serious analysis? Perhaps liberals should forget facts and instead to go with the populist flow. In this view of the world the best hope for progressives lies in pandering to popular “feelings” but trying to steer the ship of policy in a vaguely progressive direction.

But this prescription is dangerous. When gross fallacies in public debate go unchallenged the fallacies don’t die out, they spread. The cancer metastasises. A culture of anti-intellectualism is liable to be a breeding ground for bigotry and intolerance. And in any case the populist wolves are likely to prove rather better at this game than the progressive sheep in wolves’ clothing. Moreover, there’s a better way. There are other academic studies that point to ways that liberals can try to turn the tide.

Christina Boswell and James Hampshire have highlighted how the public discourse on immigration in Germany was transformed between 2000 and 2008. Social Democratic politicians used familiar arguments about the economic benefits of immigration. But they did this alongside a campaign to promote positive narratives about immigration and its place in the country’s history to counter entrenched perceptions of Germany being kein Einwanderunglsand (“not a country of immigration”). This twin approach largely succeeded in changing attitudes, flowering in the generous position taken by Angela Merkel’s Christian Democrat government towards Syrian refugees in the summer of 2015.

By contrast in the UK, at the same time, Labour began to talk up “British jobs for British workers” and never seriously rebutted the dominant and dismal narrative of the tabloid press about immigration being an economic burden and culturally corrosive, arguably helping to set the scene for the current bout of selfharming Brexit-related xenophobia.

Eric Kaufmann of Birkbeck College London points out that the strength of far-right parties in Europe is roughly correlated with the size of a nation’s Muslim community. But polling shows that Europeans are often wildly misinformed about the rate of Muslim immigration and fertility.

Public information campaigns might well help. Research by Alexis Grigorieff, Christopher Roth and Diego Ubfal showed that when a large sample of people in the US and Europe were told the actual share of immigrants in the country – rather than relying on their own often grossly exaggerated estimates – they became less likely to argue that there were too many incomers. The facts do, it seems, get traction.

There are other sources of hope. In a recent essay Tim Harford of the Financial Times has highlighted research which suggests that a way to open peoples’ minds to evidence and bypass politically-motivated reasoning is to appeal to their sense of non-political scientific curiosity. It’s not simple, but it can be done.

All of this suggests that a counsel of despair about the persuasive potential of facts and evidence is unwarranted; people can still be amenable to reason. Progressive politicians, researchers and liberal activists should not be laying down their enlightenment weapons in the face of angry and destructive populism, but rather wielding them more effectively.

#facts #enlightenment #backfireeffect #populism #socialmedia