Two reports have caught my eye recently. Both are looking at the relationship between businesses and their stakeholders but from very different angles.
The High Pay Centre (HPC) report “Do dividends pay our pensions?” contends that the prioritisation of shareholder returns (as defined by Directors Duties) over the interests of other company stakeholders adversely impacts investment and workforce pay. This contributes to the UK’s poor productivity.
The report says that with 55% of UK shares now owned by overseas investors, and shareholder returns (dividends and share buy-backs) representing 90% of pre-tax profits (FTSE 350 for 2020) there are implications for company resilience. The pressure for short-term returns puts a constraint on using profits for investment, innovation, or better wages.
One of the arguments in favour of dividends has been that our pension funds (and by extension the workforce) reap the benefits. But the report suggests that only 2.4% of shares are owned by UK pension funds.
Of course, one group who do benefit are executives whose LTIP packages are aligned to shareholders.
This goes to the heart of the HPC report: that the UK corporate governance model hinders wealth equality.
To tackle this the report recommends:
- A rebalance of Directors Duties to ‘the promotion of the long-term success of the company taking into account the interests of all stakeholders (employees, suppliers, customers, community etc.).
Reporting over a 10-year rolling period of:
- spending on wages, R&D, executive pay and, dividends and share buy-backs
- comparison of wage rises vs. shareholder returns
- greater workforce representation
On the other hand, the Adam Smith Institute argues that serving too many stakeholders enables executives to shirk accountability, as the priorities of each differ and may produce conflicting goals.
This leads to the demotion of ‘the priorities of the actual owners of the business (the shareholders), who have put their capital at risk’.
The report suggests that this isn’t about maximising short-term profits, or not providing good working conditions or delivering poor quality products and services. But that profit benefits all stakeholders by promoting innovation and efficiencies, providing value for money products, wages to workers and taxes to fund public services.
It criticises businesses that adopt a social justice or ESG (Environment, Social and Governance) agenda as blurring the lines between business and government. Setting themselves up for failure and opening themselves up to criticism of double standards, corporate virtue signalling and ‘green-washing’. An example of this has been the criticism of Unilever by Terry Smith, the fund manager.
The argument is that businesses on their own are unable to make sufficient strides towards social justice goals as many require political collective action which should be the remit of government.
The report concludes that governments need to shrink so businesses can get back to allocating resources to where they are most productive and that both government and business need to stick to their areas of competence to ensure broader prosperity.
As ever, the optimum place is probably the middle ground, recognising that businesses exist to provide a product or service and make a profit.
But that the profit must be sustainable and not at the expense of its other stakeholders.
Image adapted from: I think this is up
Courtesy of: Jaysin Trevino