The failure of ‘shareholder democracy’

With concentrating shareholder wealth, voice, power and better pay is what really gives workers a stake in society writes Andrew Speke for Red Pepper.

Margaret Thatcher claimed that shareholder democracy would give ordinary people the chance to have a greater stake in the economy and the companies they work for. At the same time, she demolished Britain’s post-war settlement and privatised the nation’s industries, taking power away from the state and handing it to shareholders. Yet despite Margaret Thatcher’s aspiration of a nation of share-owning households, individual private investors have declined from over 50 per cent of UK share value in the mid-1960s to less than 14 per cent today. Nevertheless, a defence is maintained that people benefit from dividends through their pensions; if companies are doing well and paying out large dividends, we all benefit, because those dividends pay our pensions.

But the latest findings from our research with the TUC and Common Wealth show that while share dividends have increased, the proportion going into pensions has decreased substantially in recent decades. Moreover, a tiny percent of people in the UK overwhelmingly benefit from share dividends, with the vast majority of people seeing little benefit at all.

While fewer people are benefiting from shareholder returns, companies have prioritised them more than ever. Greater sums of money are going to shareholders which could alternatively be allocated to workforce wages, investments in research and development, and building resilience against external shocks such as Covid-19. Dividends have risen as a share of pre-tax profits at FT350 companies between 1997 and 2020, while investment has fallen over the same period. Shareholder returns at the FTSE 100 grew by 56 per cent between 2014 and 2018, while average earnings grew by just 8.8 per cent (both nominal). It is relatively common for companies to pay dividends that exceed their total profits – this happened in 27 per cent of cases in the FTSE 100 between 2014 and 2018.

A common defence for high levels of dividend payments brings us back to pensions, afterall, they are invested in the stock market. But our analysis shows that only a tiny proportion of UK dividends and buybacks accrue to UK pension funds. Official statistics record that the proportion of UK shares directly held by UK pension funds fell from almost one in three in 1990 to less than one in twenty five by 2018 – a decline of over 90 per cent. Most UK shares are now held by overseas investors, rising from 12 per cent in 1990 to 55 per cent in 2018.

Unequal wealth

In addition to direct share ownership, some pension funds own shares indirectly through pooled funds controlled by insurance companies and asset managers. But even when these investments are taken into account, we conclude that UK pension funds own directly or indirectly under six per cent of UK shares.The returns that do accrue to pension savers are very unequally allocated and disproportionately benefit a wealthy minority. In fact, the distribution of private pension wealth in the UK is highly unequal. The richest twenty per cent of households by income own 49 per cent of pension wealth.

Although auto-enrolment has given more low-paid workers access to a workplace

pension, participation remains strongly correlated to income. Just under half of low-paid private sector employees working full-time belong to a pension scheme. In reality, the poorest pensioners depend largely on the state pension, rather than private (personal or occupational) pension savings, for their income in retirement. For many pensioners, and in particular the poorest, corporation tax is more important than dividends in terms of the contribution of corporate Britain to their pensions.

Individual share ownership is even more unequally allocated than pension fund wealth. The richest one per cent of households own 39 per cent of total individual share-based wealth – almost as much as the poorest 80 per cent combined.

Rewriting the rules

These findings are critical, because the UK’s economic policy is driven almost entirely by the demands of the business lobby in the belief that what is good for big business is good for the economy as a whole. Our corporate governance system relies on the investment industry to police companies. It’s hinged on the basis that investors need investee companies to be profitable and successful and behave in a manner consistent with the interests of wider society, in line with the expectations of the ordinary savers who the investors ultimately represent.

So what are the policy implications of these findings?

First – we need to change the law to ensure that companies no longer prioritise the interests of shareholders over workers, their customers, wider society and the environment. This requires a rewriting of Directors’ duties to remove the current requirement for directors to prioritise the interests of shareholders over those of other stakeholders.

Second – we need to give real power and influence to workers. Worker directors, elected by the workforce, should comprise one third of the board at all companies with 250 or more staff. Unions should have access to workplaces to tell workers about the benefits of union membership and collective bargaining following the system in place in New Zealand. Workers should have new rights to make it easier to negotiate collectively with their employer.

Of course these are policies that most Red Pepper readers will strongly support. But while we have a government unlikely to implement any of the following policy proposals, the best thing readers can do hoping to challenge the status quo in the here and now is to get active in a trade union and encourage your colleagues, friends and family to do the same. Those active in political parties should also use the channels available to ensure these policies are embedded in manifestos. We must be ready the next time a General Election comes around. As the disconnect between public limited companies and the lives of workers grows, workers must use their collective power to reverse this trend.