Why there's more to business than profits

Last week Jeremy Corbyn delivered one of his trademark denunciations of the greed and short-sightedness of British capitalism. 

"Being a company director, and in particular a chief executive, requires more [than just commercial success]," he told an audience of young socialist activists. 

"It requires a broader context. It requires a personal motivation that goes beyond simply amassing a fortune. It requires an understanding of where the company sits within the society within which it operates."

Actually, that's not true.

Those words didn't come out of the mouth of Labour's leader. They were said by Euan Stirling, global head of stewardship at the giant UK fund manager Aberdeen Standard Investment. And Stirling wasn't addressing a Momentum rally, but rather the annual general meeting of the house builder Persimmon, whose board notoriously created a £100m bonus scheme for its chief executive, Jeff Fairburn.

For many years a conception held sway in markets and corporate board rooms and indeed in large parts of public life that the fundamental, indeed the only, responsibility of a company's managers was to maximise "shareholder value".

"There is one and only one social responsibility of business - to use its resources and engage in activities designed to increase its profits," wrote Milton Friedman, one of the senior deities of the libertarian pantheon, in 1970. The UK's Companies Act explicitly states otherwise. But many on the libertarian right still believe this Miltonian assertion to be essentially true. And many on the left also believe this is the antisocial philosophy which animates the modern market economy.

Asset managers - the people like Stirling who invest money on behalf of pension funds - are difficult to portray as the economy's white knights, as a glance at their historic gouging of ordinary investors through excessive fees and their own often excessive pay confirms.

 Activist funds - which amass large stakes in target companies and then put pressure on managements to change corporate strategy - are more concerned with generating a quick payday than being long-term stewards of listed companies. The same applies to many hedge funds. 

Nevertheless, Stirling's Persimmon speech shows the idea that all asset managers are part of some neoliberal conspiracy is a caricature.

And there is tentative evidence of a change in attitudes further afield. Larry Fink, boss of BlackRock, the world's largest asset manager - with an astonishing $ 6 trillion under management - has expressed similar sentiments to Stirling.

"To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society," Fink wrote in his recent letter to all the firms around the world in which BlackRock invests. "Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate."

Many company executives will doubtless read the words of Stirling and Fink and mutter about pious sermons from people who don't have to answer to aggrieved investors when financial results fall short of expectations. And many on the left will detect public relations flannel from people who preach corporate responsibility yet still, somehow, end up backing rapacious managements.

And both have a point. Some fund managers may take a broader view, but while many don't it's not easy for managers to take the high road, as Paul Polman of Unilever, a company that has long put an unusual accent on ethics, has been finding lately. And it's also true that, despite the spread of progressive rhetoric on stewardship, there have been vanishingly few executives punished for non-financial shortcomings.

Depressingly, even the purely advisory vote on Persimmon's remuneration report - which absolutely no one is prepared to defend - was actually narrowly approved last week.

Yet writing finance off as irredeemable wouldn't be warranted while there are some signs of improvement, even if so far it has largely been rhetorical. And for Labour it would represent a missed opportunity. If Corbyn and John McDonnell, his shadow chancellor, want to blunt the relentless media attacks on them for being rabid Marxists out to level the City of London they should cite the words of Stirling and Fink and pledge to hold asset managers and corporate bosses to those fine sentiments.

We all have an interest in this. The proper role of asset managers is to be stewards of companies on behalf of end investors - that's you and me through our pensions and life insurance policies. These are the companies for which many of us work, whose investment helps drive national productivity growth. They are indeed socially embedded organisations, with multiple stakeholders and broad social responsibilities.

And those who insist it's socialist extremism to argue so should take it up with BlackRock and Aberdeen Standard Investments.

Correlation, causation, food banks and benefit cuts

"Spurious correlations" is a website created by the management consultant Tyler Vigen which delivers, magnificently, what its name promises. It shows a graphical correlation between the number of Americans who drown in swimming pools and the number of films in a year starring Nicolas Cage. 

The site features evidence that the number of murders by "steam, hot vapours and hot objects" moves in tandem with the age of Miss America. One particularly close relationship is the number of civil engineering doctorates awarded and the US per capita consumption of mozzarella cheese.

But the crowning glory of the website is a chart showing how the use of UK food banks shot up as the British state imposed benefit cuts on the least well off.

Actually, it isn't. There's no such chart adorning Vigen's site. But government ministers seem to feel this ought to be on his list of laughable correlations.

The Trussell Trust has announced that it provided Britons with a record level of emergency food supplies - 1.3 million - in the year to March 2018. That's up from just 3,000 in 2006. The number of supplies started rising rapidly around 2012, when government benefit cuts, enacted by the previous chancellor George Osborne, started to bite.

The charity says that the explosion in demand really is driven by benefit cuts, in particular the punitive new "sanctioning" regime, where benefits can be cut or withheld as a punishment for, say, missing appointments or failing to apply for enough jobs.

But the government denies it. "It's wrong to link a rise [in food bank use] to any one cause," said a spokesperson for the Department for Work and Pensions (DWP) when asked about the latest Trussell figures.

But what other "causes" could there be? The DWP does not elaborate, but a former minister at the department, Lord Freud, hypothesised a few years ago that it was actually a rising number of food banks which was stimulating demand. "Clearly food from a food bank is by definition a free good and there's almost infinite demand," mused the former investment banker.

Jacob Rees-Mogg advanced a related theory on his LBC radio show last year, claiming that food bank usage had shot up because ministers had changed policy and allowed job centres to inform people that the charitable resource existed: "The real reason for the rise in numbers is that people know that they are there and Labour deliberately didn't tell them," he said.

Maybe ministers are thinking of such explanations when they object to charities that suggest a link between their benefit cuts and soaring food bank use. Many will be tempted to take the analysis of charities, which actually distribute food to people and talk to them, more seriously than the airy theorising of various well-heeled Conservative politicians.

But we should respect the underlying serious message of Vigen's website. Correlation really doesn't automatically equate to causation and we should beware of taking charts at face value. Proving causation beyond doubt in the social sciences is nigh on impossible, but, at the very least, an observed association needs supporting evidence before we can talk confidently of one thing causing another.

So what evidence do we have in relation to food bank usage? Two academics from the University of Kent, Owen Davis and Dr Ben Baumberg Geiger, analysed pan-European survey data on food insecurity. They found that insecurity rose across Europe in the wake of the global financial crisis and associated recessions.

And the rise was especially stark in the UK.

This in itself should raise warning signs over the Freud/Rees-Mogg argument that people are using food banks not because something has got worse in their circumstances, but simply because they're there.

But what about the benefits link? Other researchers - Rachel Loopstra, Aaron Reeves, David Taylor-Robinson, Ben Barr, Martin KcKee and David Stuckler - have found that food banks are more likely to open in areas with higher unemployment rates and where local authorities have had greater aggregate cuts in welfare spending. There is also an association between higher local benefit sanctioning rates and the amount of local food parcels distributed. Analysis of the types of people who attend food banks shows they are much more likely to be on benefits or with low and precarious incomes.

The evidence is not conclusive, but it is highly suggestive. When government ministers and Conservative Party pontificators can produce a similar weight of evidence to support their own pet theories they will merit a hearing. Until then, we can file their views in a cabinet labelled "politically-motivated reasoning".

Now perhaps that would make for a good website…

Why you should be cautious about revealing what you were paid in your last job

You're in a job interview. You think it's gone reasonably well. The end is approaching so the interviewer casually asks what salary you're on in your current job. Should you tell them? Talking money might feel like a good sign. After all, they wouldn't ask unless they were seriously considering offering you the job, would they? If they considered you an unemployable drongo why would they bother inquiring? 

But some say this innocuous question actually represents a trap. The theory is that the divulgence of this information can perpetuate historic pay discrimination as people move from job to job. "The only reason that employers ask this is so that they can low-ball you when they make you an offer,"says one career coach.

It's claimed that women and ethnic minorities sometimes arrive at a new firm with a low salary relative to their peers because employers (roughly) matched their job and pay offer to that of their previous salary, which may well itself have been unfairly low. And they then remain tethered to this low base over time at the company, even if they get incremental pay rises to match inflation. "Are you underpaid? Then let's make sure we keep you there" is how the New York psychologist Sonia Banks describes the dynamic.

Another complaint over the question is that employers sometimes treat an existing salary as a signal of how much an individual was valued by a previous employer - and may make a judgement about whether to offer a job at all on the basis of it.

One former female City worker I know suspects she was once not offered a job because she divulged a bonus from a previous prestigious employer which was not deemed large enough. "The problem is I was being undervalued at that other place - so it was an inaccurate signal," she says.

It's for these kinds of reasons that some cities in America, including Pittsburgh and New Orleans, have banned employers asking the question about previous salary in interviews. New York became the latest earlier this month.

A number of US states are also considering banning it - though some are encountering resistance.

Nevertheless, some giant corporations, including Bank of America and Amazon, recently decided to get ahead of the law and unilaterally instruct their own interviewers not to ask the question.

But is this proscription really helpful in terms of fighting pay discrimination? Earlier this month I wrote about how mandatory aggregate gender pay gap reporting facilitates transparency and can help to empower a workforce. Doesn't removing these questions represent a step back in terms of transparency? And don't many people suggest that we should learn to overcome our reticence to discuss our pay with colleagues in order to flush out glaring pay injustices? Shouldn't women be encouraged to ask for pay rises, to "lean in"?

Leave aside the evidence that women may get punished, rather than rewarded, for asking for more money: the specific problem here is asymmetric information. Greater transparency is a worthy goal, but when you disclose your previous salary in an interview situation the prospective employer knows more about you than you do about them, at least as regards their sense of how much filling the position ought to cost.

The solution may be to turn the tables and compel a company to disclose what it thinks the specific job is worth. Perhaps what really needs to be proscribed is not the previous salary question but the common practice of firms advertising a salary as merely "competitive", rather than putting a figure, or a rough price band, on it.

Unlike in the US, making the previous salary question illegal is not on the agenda here in Britain. And the simple reality is that many will find it difficult to refuse to answer a straight question in an interview context. Who really wants to mark themselves out as uncommunicative, or even obstructive, when trying to get that new job? Whatever the advice should be for people on how to handle this dilemma, the US trend towards banning the previous salary question is further evidence that the popular economic theory of financial rewards being linked to "marginal productivity" (in simple terms that you tend to get roughly what you're worth to the organisation) does a poor job of describing the modern white collar workforce.

The manifest scale of managerial discretion over salary rates, which underpins this whole debate, demonstrates that pay is more a function of power than productivity. And information is a form of power that workers should probably think twice before surrendering.

Landlords should be tenants’ servants, not their monarchs

How does the thought of renting your home for your entire life sound? For many Britons, it probably evokes a horror show of chronic insecurity and broken homeownership dreams. But for the typical German, lifelong renting isn't a nightmare; it's just normal life.

The UK home ownership rate has slumped from 73 per cent a decade ago, to just 63 per cent today. For those born after 1980 - the millennial generation - the ownership rate has, of course, collapsed even more dramatically, mainly thanks to fast rising house prices and pitifully meagre wage growth since the financial crisis.

Politicians of every stripe - from Theresa May to Jeremy Corbyn, to whoever leads Ukip these days - agree that the British aspiration of home ownership ought not to be snuffed out, and that this worrying trend must be put into reverse.

But must it? In Germany, the proportion of the population who own their own home is just 52 per cent.

The rest, of course, rent. And, for the most part, they rent happily too.

While most private renters in the UK aspire to buy, their German counterparts mostly do not. Why the difference? The answer largely lies in Germany's extensive guarantees of tenants' rights.

Indeterminate tenancy leases in the German private rental sector are the norm. That means that those who wish to stay in their rented house or apartment for their whole life usually can. And since 2015 German local authorities can now also cap rent increases on new lettings in their area if they see the market overheating.

Compare that with the standard rental contract in the UK of "assured shorthold tenancy", which gives landlords the right to remove tenants at just two months' notice. And think of the avalanche of opposition when Ed Miliband suggested a modest rent increase cap a few years ago - an idea since taken up by Jeremy Corbyn.

Basic economic theory suggests caution over any kind of price cap, with the warning that they can create damaging distortions. But there are grounds for looking at housing - especially the British market, where housing is regarded as a high-returning store of wealth, but which is historically prone to disruptive boom and bust cycles - as a special case.

Some form of mild, sensitively designed rent control could disincentive people from ploughing their savings into property, and curb the tendency for people to look on their rented-out properties as an excellent pension plan.

But the German divergence on housing is not just about different regulations; it's a divergence of political philosophy. It's said an Englishman's home is his castle. And that has come to apply to the various other "castles" owned by landlords too. The Thatcher government, in particular, was determined to enhance the power of landlords.

But in Germany, a different philosophy prevails. Article 14 of the Federal Republic's constitution states: "Property entails obligations. Its use shall also serve the public good." The upshot is that in Germany the landlord is not the tenant's monarch, but the tenant's servant.

In some respects, though, we are already becoming more like Germany here in Britain. A new report by the Resolution Foundation think tank estimates that, if current trends of declining home ownership continue, up to a third of millennials will be "cradle to grave" renters.

The social implications of that are stark. It is already exerting stress on families in their thirties who are starting to have children, but who often cannot find suitable accommodation - or who fear being asked to leave at a landlord's whim, potentially disrupting their children's schooling.

Resolution also estimates that current trends could ultimately lead to a near-doubling of the pensioner housing benefit bill, as low-income millennial renters need more support to pay their rent in their old age.

German-style renting levels and UK-style renting regulations will make for a toxic combination. 

With housing comprising a huge chunk of total wealth in the UK, the impact on wealth inequality of falling home-ownership rates are also likely to be profound.

Perhaps Theresa May's latest homebuilding drive will deliver such an expansion in the supply of new homes that the home ownership rate will return to the heights of a decade ago. But the recent history of politicians' promises to crank up construction rates is not encouraging.

And in an era of relatively low interest rates and tighter financial controls on how much people can borrow from banks to purchase homes, there are grounds to be sceptical about how much difference even a significant increase in supply would make.

Which leaves us with a simple question: if we are destined for German-style renting levels, don't we need German-style tenant protections too?

Transparency does help tackle inequality

Two decades ago, as part of the Good Friday peace process, laws were introduced in Northern Ireland requiring local firms with more than 250 employees to publish the breakdown of their staff by religion.

Brexit has raised some bleak clouds over the peace process and the politics of the region have fallen into a slough of dysfunction, but many credit the Fair Employment and Treatment Order of 1998 with helping Northern Ireland overcome a historic and toxic culture of anti-Catholic discrimination.

Over the past 20 years the share of Catholic employees in public and private firms in Northern Ireland has risen. The gap between Catholic and Protestant unemployment rates has also diminished. It's worth considering this successful history as we approach the 4 April deadline for all UK companies of a certain size to report their gender pay gap.

Some are grumbling that these mandatory statistical breakdowns are doing more harm than good.

"Variations in hourly wages or bonuses between men and women are often interpreted - wrongly - as evidence of different pay for the same work," complains Julian Jessop of the Institute of Economic Affairs, a libertarian think tank.

Jessop paints a picture of firms being so unfairly monstered on the basis of such misconceptions that they start outsourcing the jobs of, for instance, low-paid women, in order to avoid them impacting their headline gender gap figures. If Jessop is right, the gender gap reporting requirement could, indirectly, hurt the very people the law is intended to help. But there's little reason to believe he is actually right.

We saw some similar issues of statistical interpretation in relation to the religious employment gap in Northern Ireland.

In 1999, the year after the legislation was introduced, the share of the Catholic workforce was 39.6 per cent. Anyone anticipating a 50-50 split might have concluded this represented a vast level of anti-Catholic discrimination. In fact, the Catholic share of the workforce available for work in that year was 42 per cent.

So the employment gap was real - 2.4 percentage points - and supported the impression of anti-Catholic discrimination. But it was not as high as the naive expectation would have put it.

Rigorous statistical analysis suggests the Northern Irish employment equality situation has improved. The Equality Commission for Northern Ireland reports that in the early 1990s the gap between the Catholic employment share (35 per cent) and the available Catholic labour force share (40 per cent) was 5 percentage points. In 2015 this gap had been whittled down to 1.6 percentage points (with the Catholic employment share rising to 47.9 per cent and the available Catholic workforce to 49.5).

If the people of Northern Ireland have been able to cope with these kinds of statistical adjustments based on firm-by-firm reporting, it seems somewhat pessimistic to fear that the wider UK will be unable to do something similar with regard to the gender pay gap.

The UK government's separate plans to require firms to publish their chief-executive-to-average-worker ratio have elicited similar complaints of the creation of a supposedly dangerously misleading data point.

Some have, like Jessop, issued warnings of the outsourcing of low-paid workers in response to the requirement.

"Pay ratios do not lend themselves to valid comparisons between companies, even within the same industry, and would likely add to misunderstanding over executive pay as well as potentially creating perverse incentives," claims a group called Big Innovation Centre. 

Again, the scent of alarmism is powerful here. Is it really credible to believe that the public will be unable to appreciate the factors that lie behind the differences in the pay ratio between, say, the London arm of a US investment bank, a multinational mining company and a domestic supermarket chain? 

The "single figure" reporting requirement for senior executive remuneration, introduced by the coalition government, has already facilitated much better appreciation on the part of the public, and indeed investors, of the reality of pay at the top of public companies. The roof has not yet fallen in. Indeed, there are some tentative signs of pay at the top of companies being reined in, which may well have something to do with the clarity created by such clear figures.

The historical evidence, then, suggests that when it comes to various dimensions of equality in the workplace, some information is better than no information.

It's true that a company's gender pay gap is a crude metric. Averages, of course, conceal a great deal. But the generally overlooked merit of disclosure is that it can spur other questions. Why is an organisation's gender pay gap high? If it's because there are few women in senior roles, why is that? Many of those companies that have already reported a gap have felt the need to engage with their workforces, to explain the divergence, to set out longer-term plans to deal with it. That's already a benefit.

A mild irony in all this is that libertarian outfits such as the Institute of Economic Affairs are leading the charge against company gender pay reporting, when it was that movement's intellectual godfather, Friedrich Hayek, who wrote so compellingly of the authority of decentralised knowledge - and the merit of allowing people the power to act on it.