Opinion

Companies put shareholders ahead of people and planet. The next government must change that

The next government should make sure businesses work in all our interests – not just the interests of shareholders

Capitalism: Skyscrapers in the city of London

Business needs to put people and planet ahead of shareholders. Image: William James from Pixabay

When Labour and the Conservatives set out their opening message to voters on 22 May, Britain’s economic future was front and centre. Both Rishi Sunak and Keir Starmer acknowledged that times have been tough, and both set out their vision for how the economy might turn a corner if they were elected.

This battle is likely to define the upcoming election: which party is best able to convince the country that their plan is the best one to reverse Britain’s fortunes.  

The challenges are clear. Since the 2008 financial crisis, UK productivity has grown at half the rate of the richest 25 countries in the OECD. This period of stagnation has not been felt equally: real wages have fallen for the median worker, and the UK now has one of the highest levels of income inequality in Europe. Achieving broad-based, equitably distributed growth must be the priority of any future government.

This cannot be done without taking on a topic on which most politicians have so far been silent: the way our companies are structured.  

Companies are one of our fundamental economic institutions. If we want to build a thriving and inclusive economy, we need thriving and inclusive enterprise. But that will require rewriting the rules that shape their incentives and behaviours. In particular, it will require challenging the rules that have increasingly prioritised shareholders over all other stakeholders in a company, including its workers. 

The effects of these rules speak for themselves: between 1995 and 1999, FTSE350 companies distributed an average of 34% of their post-tax profit as dividends and buybacks; in the last five years, that has risen to 103%. In other words, we have seen a dramatic shift in money flowing to shareholders rather than being put back into the business as wage increases for workers or as investment. It is no coincidence that this rise in payouts to shareholders has coincided with a long-term decline in business investment; nor is it surprising that dividends payments have grown 5.5 times faster than compensation for employees between 2000 and 2019.  

There is nothing natural or inevitable about this model; they are shaped by our corporate governance rules and incentives.  If we look outside the UK, we see examples across Europe of countries that take a different and successful approach: 12 of the 27 EU countries have provisions for workers to be represented on company boards across most of the private sector, with a further six having those rights for a smaller selection of companies.

These countries typically enjoy higher investment, lower inequality, and stronger productivity growth. Within the UK itself, some businesses have already taken it upon themselves to rethink how they are governed, looking to purpose-led models such as B Corporation status which ensures companies are held accountable to all their stakeholders.  

Voluntary uptake of these standards is welcome, but we need a much faster pace of change if we want to avoid another decade of British economic stagnation. Calls for reform are coming from all quarters, from civil society organisations, trade unions, climate organisations and businesses themselves, with almost 3,000 businesses signed up to the Better Business Act campaign. It’s time to end the silence from all major political parties on how companies operate. Any future government should commit to changing the law to make these participatory and purpose-led governance models mandatory across the economy.  

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We know from this international and domestic evidence that this could have a significant effect on economic performance. Last year, Common Wealth analysis found a correlation between higher economic participation and higher productivity and investment, while analysis supported by B Lab has estimated that if all businesses in the UK adopted a purpose-led governance model, this could add £149bn a year to GDP, making our economy 7% larger than it is today.   

We cannot afford to keep doing business as usual. The old model that puts profit for shareholders ahead of people and planet is not sustainable, nor is it good for business in the long run. Unless this changes, any future government will struggle to make good on their election promises to the British people, to boost economic growth and make sure that everyone feels the benefits. An alternative is possible, and the growing coalition in support of it is broad. The next government should heed the call, and make sure businesses work in all our interests, not just the interests of shareholders.   

Eleanor Shearer is a senior research fellow at Common Wealth think tank, Chris Turner is director at Better Business Act.

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