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Anthony Hilton: Fat cats are out of control and can’t see revolt coming

Society will revolt against managerial excess, even if not this time with Jeremy Corbyn
Society will revolt against managerial excess, even if not this time with Jeremy Corbyn / AFP
29 November 2019

hadow Chancellor John McDonnell was in thrall to Milton Friedman, the Chicago economist who promoted shareholder value, a well-known fund manager joked last week.

The cost of debt is far less than the cost of equity and is likely to be for the foreseeable future. Companies know this and are buying their own shares. Private equity also uses huge amounts of debt to take over whomever it likes. A Labour government arguably is simply behaving like a private equity house and wants public shareholders to swap their equity for debt, he said.

Should shareholders be alarmed? Well, if we are talking about monopolies like water and rail perhaps not. Most water companies are private equity owned and many, like Thames Water, can hardly afford to invest because they have been so pillaged. For example Thames Tideway, the Thames supersewer, has been constituted as a separate company and has to go to the markets, not Thames Water, for capital.

Likewise the railways. Railtrack was a private company but it collapsed after the Hatfield crash and had to be rescued by the state as Network Rail. The franchise companies which actually run the trains are in the private sector but these shareholders include German, French, Dutch and Belgian state entities, so they are in effect nationalised but not by us. Most franchises also lose money without a government subsidy and some private operators just abandon their franchises because they think they will go broke. It is hard to see why nationalisation would be such a trauma.

McDonnell and the Labour manifesto has been accused going back to the 1970s, but the 1945-50 Attlee government is a better example. This established the NHS, but when that was first mooted four out of five doctors were against it, as was the Conservative party. The Conservatives also voted against it in Parliament because health was being nationalised.

Now of course this nationalisation is part of our civilised society. Will the same be said one day of Openreach and free broadband?

So Friedman does not really hack it. Companies have lost their social licence to operate, which is why so many organisations and charities are pushing boards to adopt more inclusive metrics, and stop putting shareholders first. As Hermes, the investment manager, put it in a paper this month: companies should consider the impact of their decisions on society, the environment and the wider world.

But companies take little notice in spite of pretending they do. Chief executives tend not to be particularly nice given they have had to fight to get to the top, and have little empathy for the public.

Indeed, according to academic research, some are even psychopaths, people who are superficially charming, adept at stealing ideas, using loyalty only when it suits them, hankering for bold initiatives, but utterly ruthless. According to such studies there are more psychopaths in the boardroom than there are in mental hospitals.

Be that as it may it is certainly the case that executives carry on adding to their already outrageous bonuses in spite of widespread opprobrium and the fact 90% of the population have had their pay squeezed for more than 10 years.

In fact chief executives are behaving in much the same way as the leaders of trade unions did in the 1970s. They started off gently but gradually they realised there was no real control over their behaviour so they could do what they liked.

They may convince themselves they are doing the right thing but in fact they use their power for their own ends and with little thought for society. If government tried to rein them in during the 1970s, trade unions would threaten strikes. If government challenges executives today they say they will take their companies and tax revenues abroad. The effect is the same, government and society are stuffed.

Money talks too. Trade unions in the 1970s used to supply most of the Labour party’s funds; now executives do the same today with massive donations for right-wing parties.

Institutional shareholders do not put meaningful pressure on company boards because their self-interest does not allow them to; they pay themselves outrageously and their gross profit margins typically are over 30%, so why should they bother?

Employees in union days were similar. They went along with the disruption caused by union bosses because they could grab their pay increases. Again, why should they call them to account?

It was only when society really had more than enough that it was ready for Margaret Thatcher. It will be the same with Labour. Society will revolt against managerial excess, if not this time with Jeremy Corbyn, then at some point later.

But like the union leaders in 1979, the executives think they are invulnerable and they just can’t see this coming.