12 October 2018

By Dr Ewan McGaughey, Senior Lecturer at the School of Law, King’s College, London, and research associate at the Centre for Business Research, University of Cambridge

Democratic socialism in the 21st century must answer one critical question: who gets the votes in the economy?

We all know how votes work in politics, but if you are committed to democracy, you believe that power should be ‘in the hands of the many and not of the few’. That goes for power in every social institution, including the multinational corporations that dominate our economy, are destroying our environment, driving inequality, and holding back human freedom. At 2018 conference, the Labour Party announced it would (1) give rights to workers to elect one-third of company board members, (2) create ‘Inclusive Ownership Funds’, and (3) start a shareholder campaign for responsible corporate governance. But how should these basic outlines work in detail? My niche areas of labour, corporate and pension law has now become a hot-topic, so I’d like to set out some suggestions.

The ideas from Jeremy Corbyn and John McDonnell combine at least three major reports: the Institute for Employment Rights, Manifesto for Labour Law (summary here), the New Economics Foundation, Co-operatives Unleashed, and the IPPR, Prosperity and Justice. The Manifesto covers reform for all labour rights, advocating sectoral collective bargaining, rights for all workers from day 1, and a Ministry of Labour to ensure labour rights are met in practice and guarantee full employment. Its corporate governance proposals, set out in detail in chapter 5 of Rolling out the Manifesto advocated:

• in every company startup, workers would become ‘members’ (like shareholders, but without any risk on insolvency or getting dividends) with votes for the board or to enforce directors’ duties.
• Companies will be able to opt out until they reach 250 workers (this threshold can be put down by the responsible Minister).
• at least 20% of the votes in company general meetings should be reserved for workers (again, amendable up)
• workers also get the right to appoint at least 2 workers to the company board (amendable up)
• all pension funds (where workers’ retirement savings – labour’s capital – is saved) must be half-elected by workers, and asset managers cannot cast shareholder votes except on their instructions

The reason to make workers ‘members’ of a company is to guarantee voting and governance rights, without the burdens of shareholding. All prudent shareholders diversify, to reduce their risk if one company goes insolvent. This is why employee share-schemes – like in the failed American energy giant, Enron – have always been such a bad deal. The figures of 20% votes or 2 board members are designed to be low. They establish the principle of participation, which can be raised as the plan works.

Why reform pension funds and asset management too? Even if workers get votes for their investment of labour, most capital investment is still controlled by big financial institutions – like BlackRock, State Street, Vanguard, or Schroders – that hold ‘other people’s money’. They invest your pension fund money, but also vote on the shares they buy with it. It’s good to have retirement savings from workers in big, pooled, diversified funds. It’s wrong that asset managers are taking the votes that labour’s capital buys. They have been inflating executive pay, stopping union recognition, doing little about climate damage, and seeking to avoid tax. They don’t represent people’s real preferences, so the Manifesto requires that all capital is democratised.

Labour’s proposals mix these and the NEF and IPPR plans. IPPR proposed putting two workers on boards and a commission to investigate other questions (pp. 140-3). The NEF proposed ‘Inclusive Ownership Funds’ (p.42) where employees would gradually be given shares as they worked, but not be able to sell them (this wisely means the shares carry no risks). The Labour Party has gone further than the Manifesto or IPPR by proposing one-third workers on boards. This already reflects the standard today in OECD countries – and recent proposals in the United States by leading Democrats.

By contrast, Labour’s IOF plan says workers will get up to 10% of shares in a collective fund. Workers will become ‘shareholders’, and receive dividends till a cap of £500 per year: the surplus goes to the Treasury. In effect, this operates like a corporate tax – it roughly compensates for the Tory-led government’s 9% cut in corporation tax since 2010: corporations never enjoyed the same austerity as human beings.

The Labour Party has not yet said which reforms it wants for pension and asset management governance, but John McDonnell did say he wants pension funds to flex their shareholder power. At the moment 1/3 of pension boards are employee-elected or union-nominated. Asset managers should, in law already follow instructions of pension funds on how to vote, for instance, to stop tax avoidance, improve labour rights or environmental standards. They have been dragging their heals, even though the TUC and the AMNT (a trustee union) have been pushing. Once light is shone on the City, it will be hard to avoid.

But what about the rest of the detail on worker votes for boards, and ownership funds? There are still basic questions. Should workers have governance rights in companies with under 250 staff? Should they not be able to delegate their voting rights, if they choose, to a union? Are dividends the best way of raising worker pay? Dividends are unstable, and some of the evidence in behavioural economics shows that, like the ‘tipping culture’ or ‘bonus culture’, they skew incentives rather than raising productivity. If IOFs with a £500 cap function like corporate tax, why not just have a corporate tax? There is, obviously, a desire to raise wages. But if sectoral collective bargaining raises wages for everyone, and progressively more money goes into ensuring better retirement schemes, the best Inclusive Ownership Funds may be the diversified pensions we already have.

Whatever details are worked out, the plans announced at Labour Party conference are bound to lead to qualitative changes in economic governance. The frightening fact is how autocratic our economy has become again. About 45 people in corporate governance departments of asset managers control the weight of votes in 438 of the 500 top US companies, all unelected. If we had the numbers, we would probably find that in the UK matters are worse. Getting votes at work, taking back votes in our capital, is the fight for democracy in the 21st century. This is the new suffrage movement.

An abridged version of this article was originally published in Left Foot Forward