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Sorry, Prime Minister: Legislation won’t end excess in the boardroom

Sorry, Prime Minister: Legislation won’t end excess in the boardroom

A key platform of our new Prime Minister is to curb what she perceives to be boardroom excesses.  “It is not anti-business to suggest that big business needs to change”, she said.

One of her proposals is to allow employee and worker representatives to sit on company boards, a suggestion which has not gone down well in the corporate world.  The debacle at the Co-op, with its legion of elected directors, has been cited many times as an argument against Mrs May’s idea.  First Group already has employees on the boards not just of its component companies, but of the group plc itself.  However, given that one of the companies is Great Western trains, one of the most notoriously unreliable of all the rail operators, this has not proved to be a panacea.

May is keen on making shareholder votes on executive remuneration legally binding.  True, in the spring, a clear majority, some 60 per cent, rejected BP boss Bob Dudley’s £14 million pay.  But only 33 per cent of shareholders failed to back Martin Sorrell’s package at the WPP AGM last month, even though both Standard Life and Hermes, two of Britain’s most influential fund managers, voted against the pay report.

Board members receive emoluments.  Shop floor workers get pay.  Yet however we describe them, the gap between the two has opened up in dramatic fashion in recent decades, with no obvious economic justification.  In the United States, for example, the average compensation of CEOs in the top 350 firms is some $15 million a year.  This enormous sum is 300 times higher than the amount the companies pay to the typical worker.  In the mid-1970s, the ratio was not 300:1 but only 30:1.  Even in the mid 1990s it was around 100:1.  This latter figure would still hand the average CEO some $5 million today, not a bad sum to have.  The American economy has done well, but it also did well in the decades immediately after the Second World War, when remuneration disparities were much narrower.

Legislation is the brutal option, but there is no guarantee it would work.  The fundamental challenge is to alter the set of values which has become dominant.  The social norm at the top of industry has become one in which it is perfectly acceptable to be paid very large amounts, virtually regardless of performance.  This behaviour has influenced remuneration in non-market sectors of the economy, such as the pay of top management in universities, and in particular that of Vice-Chancellors.  Their average salary in 2014/15 was £274,000.  Incredibly, the Vice-Chancellor of Falmouth University – it does in fact exist – received £285,000.

There is a simple policy which could radically alter attitudes and behaviour.  The Prime Minister should let it be known that no-one who behaves in an ostentatious way on this matter will either be knighted or elevated to the Lords.  Indeed, such honours might be reserved for captains of industry who volunteer for substantial pay reductions.  Miracles might then happen and social norms drastically changed.

Paul Ormerod

As published in CITY AM on Wednesday 20th July

Image: Home Secretary, Theresa May, speaking at the Girl Summit, by DFID – UK Department for International Development  licensed under CC BY 2.0

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Scotland’s fiscal fantasy and the impact of an OUT vote

Scotland’s fiscal fantasy and the impact of an OUT vote

A short visit to the Highlands last week was refreshing. The scenery is just as spectacular as ever, and the people just as welcoming.  But elsewhere, the tectonic plates are shifting.  Last week, a televised debate took place amongst the political leaders contesting the elections to the Scottish Parliament in May.   It resembled a bidding contest in which each participant had to outdo the previous one in terms of boasting about how much public money they would spend. The excellent Ruth Davidson from the Conservatives was the conspicuous exception.

The sense of unreality was heightened when visiting the prosperous market towns of Perthshire, which would not be out of place in the Home Counties. Yet the polls suggest that they are about to vote for the SNP in large numbers, waiting to be fleeced to subsidise the less energetic denizens of the old industrial belt of Central Scotland.

Under the SNP government, the health service has deteriorated markedly and education has gone backwards. But it seems they will be returned to power with a large majority.  These problems are not believed to be the fault of the Scottish government but, in some mysterious way, the English.

If we plump for Brexit and North of the Border they do not, the strategy is to vote for independence and apply to be a member of the EU. But would the EU want them?  To put it in perspective, no one imagines that Portugal, say, is an important country which possesses clout in the European Commission.  Yet its population is over 10 million, and there are only 5 million Scots.

In addition, the public finances are shot to pieces. The Government and Expenditure Review Scotland announced earlier this month that the deficit in Scotland’s public finances is almost twice that of the UK as a whole.  Scotland’s net fiscal deficit was £16.7 billion, some 9.7 per cent of its GDP, compared with UK figures of £89 billion and 4.9 per cent.  The EU already has enough basket cases in the Mediterranean.  Why would the Germans welcome another country which they would have to bail out?

The Alice in Wonderland flavour is heightened by the posturing on tax. The SNP had been firmly committed to a top rate of income tax of 50p.  At the start of last week, Nicola Sturgeon pronounced that it was not possible.  Why?  She had just discovered that only 17,000 people in Scotland earned enough to pay it.  But these contribute no less than 14 per cent of the total take from income tax, and may simply move.  In the leader’s debate, she was once again in favour of the 50p rate, but only in the sense of St Augustine: “O Lord, make me chaste, but not just yet”.

Scotland epitomises the problems which all centre-Left governments face. They want high public spending, but the electorate will not pay the necessary tax.  They cannot finance it by issuing debt for very long.  The only solution is to find a kindly uncle who will pay, in this case the English.

As published in CITY AM on Wednesday 30th March 2016

Image: St Andrew’s Flag by Jim Bradbury is licensed under cc by 2.0

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Why we are much better off than the official statistics say

Why we are much better off than the official statistics say

The oldest surviving map of Britain was created in Canterbury a thousand years ago. Our ancestors had a good idea of how to get around. The country is depicted in its familiar shape. Understanding of the world outside Western Europe remained sketchy for centuries.  The phrase ‘here be dragons’ was allegedly used to conceal ignorance about substantial parts of the world.

Sir Charles Bean’s Independent Review of UK Economic Statistics was published last week.   It is an impressive and well argued document.  But it leaves the distinct impression that the state of our knowledge about how to measure the size of the economy is not much better than that of the Canterbury map makers.  The Office for National Statistics knows how to guide us around the old, familiar parts of the economy.

The second paragraph of the Bean report hones in on the dragons: “The Review was prompted by the growing difficulty of measuring output and productivity accurately in a modern, dynamic and increasingly diverse and digital economy.” An anecdote illustrates the point. Last week, our old washing machine finally packed up.  My wife went onto the internet in the afternoon, did some searches, read some price and quality comparisons sites and blogs, and placed the order.  Thanks to just in time stock control and vastly improved logistics, the new one was safely installed and working the next morning.

Even thirty years ago, the whole process would have required much more time and nervous energy. Perhaps writing to get catalogues, visiting retailers to inspect the machines, trudging around to compare prices, finally placing the order, and hoping that there wasn’t a six week wait for your chosen model, then finding someone to install it.

None of these savings of effort or improved quality of service appear in the national accounts. The national accounts just see a retail purchase, a delivery and an installation: exactly what they would have seen thirty years ago. Yet economic statistics are, again as Bean puts it, “central to monitoring, understanding and managing the economy, at both national and regional levels”.

A major issue for policy makers is the so-called productivity puzzle. Since the trough of the recession in 2009, output has grown by 12.6 per cent and employment by 7.0 per cent.  So productivity, output per worker, has only expanded by just over 5 per cent, or less than 1 per cent a year.  By historical standards, this is pitifully low, especially during a period of economic recovery.  Companies need to be sure that demand is growing before they take people on, so employment growth lags behind output growth and productivity rises sharply.  Or, at least, it did in every other recovery since the Second World War.

The Nobel Laureate Bob Solow, still going strong in his 90s, presciently remarked as long ago as 1987 “You can see the computer age everywhere but in the productivity statistics”. We can rely on employment data, based as it is on PAYE returns to HMRC.  But the Bean report implies we have been grossly underestimating output in the digital economy.

As published in CITY AM on Wednesday 16th March 2016

Image: Old Map by rosarlo flore as licensed under CC BY 2.0

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A radical idea to revive the North

A radical idea to revive the North

The Head of OFSTED, Sir Michael Wilshaw, warned last week that secondary schools in Liverpool and Manchester were ‘going into reverse’. Too many pupils in Northern towns and cities are simply not prepared for the next phase of their education, training or employment. In Liverpool, for example, four out of every ten schools are judged to be either inadequate or, in the bureaucratic jargon, ‘requiring improvement’, which basically means they are just not delivering the goods. The proportion of children securing five good GCSEs has fallen in many areas of the North.

All this is in sharp contrast to the dramatic turn around which has taken place in recent years in the performance of schools in London, whose results, particularly amongst poorer pupils, are now amongst the best in the country At the other end of the ability spectrum, the North falls short. The area from Cheshire and South Yorkshire up to the Scottish border has nearly 30 per cent of the total population of England and Wales. But in terms of A-level results, only 12 schools from this area make it into the national top 100 of state schools – leaving aside the massive domination of London and the South East in terms of private sector exam results.

This gloomy picture does not bode well for the future economic prospects of the region. Increasingly, growth is being determined not by physical investment but by the more intangible, but nevertheless real, concept of the stock of productive knowledge of an area. Not everyone can be a biochemist or work at the frontiers of artificial intelligence. But the ability to innovate and adapt to changed circumstances is required at all levels.

A visionary and challenging solution to the economic problems of the North is put forward in the unlikely setting of the academic journal ‘Environmental Planning: Planning and Design’. The author, Mike Batty, is an extremely distinguished professor in University College London’s Centre for Advanced Spatial Analysis. I work with Batty, so maybe this colours my view of his ideas. But despite many billions of pounds of public money having been spent in conventional ways in recent decades in trying to close the North-South divide, the situation has only got worse. A Liverpudlian himself, Batty is characteristically blunt about the prospects of new infrastructure projects making an impact: ‘None of this is going to work. If it does, it would have done so years ago’.

Instead, we need to break the vicious circle of cumulative causation, the forces which cause people from the North, especially the skilled and talented, to drift South. Not just in the UK, but across the West as a whole, many students in top universities stay on in the places where they studied. The dominance of the London-Cambridge-Oxford golden triangle needs to be challenged. Instead of spending on HS2, the monies should go to Northern universities to transform some of them into world class institutions. Mergers need to be forced through, and the poorly performing departments axed. It is a radical concept, but it might just work.

As Published in City AM on Wednesday 2nd March

Image: Angel of the North by Stuart Richards licensed under CC BY 2.0

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