The Inner Level

by Richard Wilkinson

  An additional reason for supporting all forms of economic democracy is that the existing forms of company ownership and control are becoming a counterproductive anachronism. A report called Workers on Board, from the British Trades Union Congress, describes how the traditional form of share ownership has become increasingly inappropriate for modern businesses.473 It points out that in the 1960s most shares were owned by individuals with a longer-term stake in a small number of companies, which they followed and took some interest in. People would own shares in the same company for an average of seven years. But now, in many countries, the vast majority of shares are owned by financial institutions which spread their investments across hundreds or even thousands of companies. Because they make money through short-term share trading, often triggered simply by computer algorithms, the average length of time they own a share is thought to be less than a minute, so they have no long-term (or even short-term) interest in or knowledge of these companies. Even outside high-frequency trading systems, shares are on average owned for only a few months. A large listed company may now have thousands, or even tens of thousands, of shareholders and will find it difficult even to obtain full information on who its shareholders are.

  At the same time, modern production increasingly involves the integration of the expertise and knowledge of many different people, so much so that the value of a company is now less a matter of its buildings and capital equipment, than of the combined skills, expertise and know-how of its employees. This means that buying and selling a company increasingly amounts to buying and selling a group of people – an appallingly anachronistic concept, especially when that group of people would be likely to run that company more successfully themselves. The purpose is of course to buy rights to the profit stream which that group of people produce.

  But if companies with more democratic structures tend to have higher productivity, and modern shareholding has become an anachronism, why don’t we see rapid extensions of democracy into the economic sphere? The answer is that companies do not exist simply to produce the goods and services that we all need. By their very nature, they tend to concentrate power and wealth in the hands of a few people at the top. As a result, the ‘captains of industry’ face a conflict of interest between what might maximize their individual private gain, and what might be best for their companies. The problem was illustrated in Figure 9.5 (here), which showed that the performance of companies in which the CEOs were paid less was better than in the ones where they were paid more. The danger is that very high salaries will be particularly attractive to people whose primary focus is self-advancement, rather than the interests of the company.

  The turnover of many multinational corporations is larger than the GDP of many whole countries. A few are larger even than countries like Norway and New Zealand, and yet they lack democratic accountability and often pay little or no tax. In 2008, the US Government Accountability Office reported that 83 of the USA’s biggest 100 corporations used subsidiaries in tax havens to avoid tax. The Tax Justice Network said that 99 of the 100 biggest companies in Europe did the same. And yet they depend on the entire publicly funded infrastructure – from transport systems to education and the police – which others pay for.

  Despite the popularity of corporate responsibility programmes, what is best for a company’s bottom line often isn’t in the interests of the public at large. Indeed, large corporations play an increasingly antisocial role in society. In his book Lethal But Legal, Nicholas Freudenberg, who is Distinguished Professor of Public Health at the City University of New York, provides copious and detailed evidence that the food, tobacco, alcohol, gun, pharmaceutical, agribusiness and automobile industries are now among the most important threats to public health.474 Whether it is food manufacturers fighting against attempts to reduce obesity or the scandal of the falsification of emissions from diesel vehicle engines, the cost is measured in tens and hundreds of thousands of human lives. Freudenberg shows how corporations use advertising expenditure, political influence and the media to counter evidence from scientific research of the harm their products do and to fight any legislative attempts to reduce risk. They pack regulatory systems with people who will defend their interests, and spend vast sums on lobbying politicians in order to continue to sell their products in the face of massive evidence of harm. Even companies that make products which do not damage health still aim to maximize sales and consumption in the face of overwhelming evidence that carbon emissions have to be reduced by at least 80 per cent to save us from the worst effects of global warming. It should not be beyond the wit of modern societies to ensure that production is undertaken in the service of the public good, humanity and the planet.

  THE GREAT TRANSITION

  The existing structure of our societies imposes huge costs on us all. It is, as we have shown, an inefficient way of producing well-being; as well as being better for everyone, a more equal society would be less, rather than more expensive. The Equality Trust calculated that if the UK reduced its inequality merely to the average of the OECD countries, it would save £39 billion a year just from the resulting improvements in physical and mental health and from the reductions in violence and rates of imprisonment.475 Given that inequality is a powerful predictor of many other aspects of social dysfunction, the total cost reductions would be higher still.

  In the 1970s, Britain was as equal as the Scandinavian countries are now. Since then the gap between the richest and poorest 20 per cent in Britain has widened so rapidly that it is now twice as big as in Scandinavia. The contribution of top incomes to increasing inequality matters just as much as poverty and low incomes. Equality can be increased by reducing income differences either before tax or by redistributing incomes through progressive taxes and more generous benefits. Judging from examples of more equal countries or American states, the specific path taken to achieve greater equality is less important than the levels of equality they achieve. Both approaches seem to bring the social benefits of greater equality, and both must be pursued.

  In terms of redistributive policies, action to tackle offshore tax havens and other forms of tax avoidance is self-evidently a necessary preliminary to making taxes more progressive again. Because greater equality seems to diminish prejudice against those lower on the social ladder, greater equality might also make it easier to provide a more generous system of social security benefits. More radical proposals to reform taxes and benefit systems include plans for a basic income and for a land tax. Both have found their advocates among academics and policy experts and have a lot to recommend them.476-479 Indeed, the increasing prospect of many jobs being replaced by automation and artificial intelligence means that a basic income may become a necessity.

  On income differences before tax, a number of countries have seen campaigns to increase minimum wages or to encourage employers to pay a ‘living wage’ substantially above the legal minimum. But to successfully reduce income differences before tax governments will have to manage their economies to keep unemployment low enough to ensure stronger competition for labour. Historically, as Figures 9.2 and 9.3 show (here and here), trade unions have also played a key role in reducing inequality. Although the shift from large heavy industries to small service-sector businesses means trade unions are unlikely ever to regain their former strength, their legal ability to represent and act on behalf of their members nevertheless needs to be restored. To maintain an orderly wage bargaining system now that trade unions are weaker, it is even more important to counter low incomes among the non-unionized. Part of the answer is to re-establish national wage councils, made up of trade union, employer and expert members, to set and oversee minimum wage agreements, rights and conditions of employment. This is particularly urgent in those sectors where employers have shrugged-off their responsibilities, using notions of self-employment and zero-hours contracts to avoid fulfilling their obligations to employees, leaving them without rights to holidays, pensions, sickness absence cover and more.480

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y far the most important long-term measure, however, will be the reduction of pre-tax income differences by extending democracy into the economic sphere. Policy initiatives developed for this purpose will meet powerful resistance from business – though, as we have seen, CEOs and shareholders are not always the best champions of their companies’ interests. Likewise, although many ideologically driven interpretations of the merits of growth and ills of regulation are presented as if they were concerned only with the greater good, they frequently reflect the efforts of an affluent minority to justify and protect their own interests. This is an important point because policy development will require a great deal of discussion and ideologies serving sectional interests will constantly threaten to derail it. In the past, the interests of the less well-off were partly protected by recognition that different class interests give rise to different class ideologies. But when political leaders of even progressive political parties get too close to the very wealthy, that notion is lost – and voters can start to believe that people as wealthy as President Trump will somehow serve the interests of the least well-off.

  With occasional admirable exceptions, extensions to democracy are rarely supported by those whose power they would curtail. Opposition will be strong, but the democratization of the economy needs to be a publicly recognized political objective. It should be advocated and defended by all progressive politicians as the next major step in human progress. We need to create a popular understanding that this is part of a transition to a sustainable future, capable of producing a higher real quality of life than is currently possible. Rather than a revolution, what is needed is a gradual and far-reaching transformation.

  To help in this process, the profile of the existing employee-owned and co-operative businesses needs to be raised in every country. They already have substantial strength. Even in the UK, where this more democratic sector of the economy is weaker than in many other countries, there are close to 500 employee-owned and co-operative businesses, with a combined annual turnover of £10.7 billion and close to 100,000 employees. According to the UK’s Employee Ownership Association, this sector of the economy has been growing over the last few years at a rate of 9 per cent a year. Attention also needs to be drawn to examples of highly successful companies with more democratic business models, including large companies like Arup, Scott Bader, Swann-Morton and John Lewis. The largest employee-owned company in the USA is Publix Super Markets with 175,000 employees and a turnover of $30 billion from over 1,000 branches – which makes it one of the ten largest privately held companies in the USA. Eighty per cent of the company is owned by past and present employees, with the remaining 20 per cent owned by the family of the company’s founder. There are also a number of large US companies owned wholly by their employees, including Lifetouch, a photographic services business with a staff of 20,000.

  One way of raising the profile of the whole sector would be to encourage these companies to mark their greater commitment to fairness and democracy by displaying their status as part of their logo. It might be helpful to set up a ‘democratic company’ logo – perhaps modelled on the ‘fair trade’ example – to increase the visibility of these companies and make people more aware of their ethical and practical advantages. Consumer campaigns have shown that companies are very sensitive to publicity on reputational issues which might adversely affect their sales, and this could be included in the criteria used to certify businesses as meeting various other social, environmental and ethical standards.

  A more direct approach to assisting the development of more democratic businesses would be to set up an internet portal to make it easier for people to do their shopping, banking and selection of utility suppliers from them: a website which would let customers select a category of goods and then connect them with democratic companies supplying those goods and services. With time and development it could work like an egalitarian version of Amazon, but without that company’s record of tax avoidance and mistreatment of employees. As well as giving the more democratic sector of the economy an additional market advantage, such a website would also increase public awareness of the practical and ethical benefits of more democratic business models.

  Making the case for economic democracy and placing it at the centre of the political agenda will have to be complemented by legislative change. The first objective should be to require, by law, that all but the smallest companies must have employee representatives on their boards and remuneration committees. To embed democracy into the economy, the proportions of employee representatives on company boards and remuneration committees should increase over time, moving eventually to majority control and beyond. Another way of setting up a gradual transfer of control might be to include a requirement that a small proportion of shares should be transferred each year to employee-controlled trusts. If just 2 per cent were transferred each year, employees would be in majority control after twenty-five years. The Swedish trade unions once proposed a system of Employee Investment Funds, intended to increase employees’ control over their companies. It was set up, in a watered-down form, in 1983 and involved companies paying a small part of their profits into collectively controlled employee funds with voting rights in their companies.481 They were fiercely opposed by the Swedish Employers’ Federation and cancelled when the Social Democratic Party lost power in 1991, before the funds were large enough to contribute more than marginally to the stabilization and democratization of the Swedish economy. Nevertheless, in terms of financial performance and the valuable experience gained by those involved, the scheme proved that such funds could work well.

  Even before legislation to increase economic democracy, forms of representation could be made a condition of gaining public-sector contracts, or lower corporation tax rates. In both Rhode Island and California, there have been legislative initiatives to reduce corporation taxes for companies with smaller pay ratios, and to give them preferential treatment when awarding government contracts. Elsewhere, there are initiatives to use public expenditure to support the development of ‘community wealth building’. These initiatives funnel the expenditure of local public-sector ‘anchor’ institutions – such as the local hospital, university and city government – towards the local economy. The aim is to build sustainable businesses controlled by their employees and to ensure local development is under local community control. The Democracy Collaborative, in Cleveland, Ohio, established the ‘Evergreen Cooperative’ modelled on the hugely successful Mondragon co-operative group in Spain. So far the Ohio venture consists of Ohio Cooperative Solar, producing energy, the Green City Growers Cooperative, with five acres of greenhouses for growing vegetables, and the Evergreen Cooperative Laundry serving local hospitals and hotels. Preston in Lancashire has begun a similar initiative with agreement from local public-sector institutions willing to divert a higher proportion of their expenditure to support local wealth building and businesses.

  In Britain, the Employee Ownership Association and Co-operatives UK have set out policy proposals to accelerate the growth of employee-controlled businesses. Both organizations suggest that a major obstacle to the development of this sector is the lack of awareness of these models among professional legal and financial advisers. As a result, more democratic models are not considered as options at key stages of business development: when businesses are started, when they plan major expansions, when they have to deal with succession issues when founders retire, or when a business needs to be rescued. The lack of interest and knowledge among legal and financial advisers would be diminished if public awareness was raised, but government departments responsible for business could also provide the necessary support and advice for the establishment of, or conversion to, employee ownership. They might also provide a training and advice service on how to set up employee-owned and co-operative companies.

  Because banks are generally unfamiliar with co-operatives, there are often difficulties in arranging loans to help fund employee buyouts. There is a strong case for making special
loans available for this purpose. Ideally, government should work out a complete package of measures to grow the democratic sector, complete with tax incentives, sources of advice and support, readymade rules of governance and sources of finance.

  The constitutions of employee-owned and co-operative business should, in all cases, be designed to prevent employees selling their companies back to external shareholders. The absence of effective provisions of this kind has in the past led to major waves of ‘demutualization’ and has prevented a faster growth of the more democratic sector.

  Lastly, employees taking on new functions as members of company boards will need training in areas such as management, business law, accountancy and economics. Options should range from very short courses – like some of the learning schemes designed to prepare school governors – to the provision of master’s degree courses to which people could be seconded. As well as improving the confidence and quality of decision making among elected board members, the provision of preparatory courses would also communicate the seriousness of a government’s commitment to seeing this transition through.

  Creating a new society involves much more than pressure for forms of workplace democracy. That has been the central subject of this chapter because, without structural change to embed greater income equality more fundamentally into our society, inequality will simply rise, fall, and rise again, following orchestrated shifts in public opinion. Without the reductions in inequality which these proposals aim to bring about, we may have to accept that we will be defeated by climate change. There are already indications that the 195 nations that agreed in December 2015 to make voluntary reductions in carbon emissions are unlikely to achieve their goals. If they do, then we should be on target for keeping global warming to no more than a fairly disastrous 3°C. But unlike international trade agreements – which allow companies to sue when elected governments harm their commercial prospects by, for instance, introducing legislation to protect the environment or public health – there is no provision for their enforcement. And the longer we delay, the more sudden, difficult and traumatic the transition to low-carbon economies will have to be. A new outlook, provided by a new society, seems increasingly necessary.