Can Labour control corporate power?

Bryn Jones sees limitations in Labour’s worker director model

Labour promises radical reforms to company law to make corporations more equitable, efficient and socially beneficial. It would empower employees through representation on company boards and create ‘inclusive ownership funds’ of collectively held shares for employees. Two important questions arise from these proposals. Firstly, are they likely to tackle the basis of 21st century corporate power or merely provide a veneer of industrial democracy? Secondly, would their practical implementation really counter the powers of the present controllers of big business? Consider first the nature of corporate power and its abuses created by contemporary neoliberalism.

Today’s dominant global finance constrains share-owned corporations to maximise ‘shareholder value’, forcing corporate executives to prioritise financial returns – as dividends, share buy-backs or rising share prices –rather than employees’ training or wages, physical capital investment, or research and development. Companies do fund some of these non-financial assets but only if investors’ expectations are satisfied; otherwise share prices fall, fresh capital is less forthcoming and other businesses may stalk and take over the company. As Labour’s 2017 manifesto put it, financial priorities “encourage companies to . . . cut wages, instead of investing for the long term, or . . . spend longer inventing new tax avoidance schemes than they do inventing new products”. However, this description doesn’t distinguish ‘short-term’ investors from those holding ‘patient capital’: investors prepared to wait for long-term growth in a company’s value through continuous investment in its tangible assets. Expert commentators argue company law reform should favour the latter share owners – such as pension funds and small investors – above speculative investors who encourage ‘short-termism’.

According to the manifesto corporate power structures ensure “decisions about our economy are often made by a narrow elite”. True, but this doesn’t distinguish between differences within the elite. Investors’ expectations constrain executive managers but these can still aim to secure their own narrow interests – such as over-generous executive pay awards – by reducing dependence on longer-term shareholders and rewarding short-term investors. Recognising corporations’ even wider influence over everyday life for individuals and communities, the manifesto proposed a different tack: changing company law “so that directors owe a duty directly not only to shareholders, but to employees, customers, the environment and the wider public”. But how would directors’ obligations be monitored and policed? Labour’s separate plans for “key utilities’ public ownership” would mean direct accountability: to state institutions and elected bodies. However, for the greater mass of incorporated businesses, more accountability would require reforms to firms’ own governance structures.

Corbyn’s 2018 Conference speech proposed reserving a third of the seats on large UK businesses’ boards for representatives elected by the workforce to give them ‘a genuine voice and a stake’. Complementing this idea John McDonnell promised to transfer 1% of the ownership of companies with more than 250 staff into an ‘inclusive ownership fund’ of collectively held shares, with the same voting rights as shareholders but with dividends ‘capped at £500 a year’. Any surplus would become a ‘social dividend – estimated at £2.1 billion’ – transferred to ‘social services’.

These two proposals seem unlikely to enforce directors’ duty to the broader range of stakeholders. Employee directors would lack a majority of board votes. Moreover, both worker-shareholders and directors’ self-interest may prioritise financial returns rather than wider environmental or community benefits. If the board controlling Heathrow airport proposed an expansion would worker-directors prioritise environmental concerns rather than increases in distributable profits and employment?

Finally, an inner core of key executives – the CEO, finance director and chair – pre-determine board policies. So these individuals’ character and ethos is crucial. Yet this same core group is, effectively, self-recruiting. Labour’s proposals would not enable worker directors, nor customer, community or environmental interests to decide the appointment of new directors. Alternatively however, Labour could adapt Sweden’s corporate governance model. This excludes executives from the main board and appoints them through committees of key shareholders (details in my book Corporate Power and Responsible Capitalism). Labour could tweak this model so that such committees include representatives of long-term, ‘patient’ investors, workers and small shareholders, communities and environmental interests. Corporations’ vast power over all of these spheres makes it only just that these also have some say in who forms policies and how they are decided.

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