Lady Rothschild, Thomas Piketty and inclusive capitalism

Lady Rothschild (left) at her English estate

by Michael Roberts

A curious conference took place in London today. It was called Inclusive Capitalism, the brain-child of Lady Lynn Forester de Rothschild, Chief Executive Officer, E.L. Rothschild, the exclusive London investment company with investments in media, asset management, energy, consumer goods, telecommunications, agriculture and real estate worldwide. http://www.inc-cap.com/

Lady Rothschild has been promoting Inclusive Capitalism through a series of conferences in which the great and the good present speeches to assembled groups of “world’s most influential asset owners, asset managers and corporate CEOs” in order to persuade them that capitalism must go “beyond financial performance only, in an effort to enhance the value of environmental, human, ethical and social capital”.

The London conference was ‘graced’ with the presence of Bill Clinton; Mark Carney, Governor of the Bank of England; Justin Welby, Archbishop of Canterbury, the Church of England; and, to cap it all, Prince Charles of the British monarchy. These eminences were out to tell the world that capitalism is a great and good thing and can be made even better if we can reduce inequality and poverty, end global warming and wars, and operate in a moral way.

Such an ‘inclusive capitalism’ is, of course, an oxymoron, just as previous talk of ‘responsible capitalism’ is (see my posts, https://thenextrecession.wordpress.com/2012/09/16/ed-miliband-and-responsible-capitalism/
and https://thenextrecession.wordpress.com/2012/01/19/irresponsible-capitalism/.

Lady Rothschild argues that “Capitalism emphasises the importance of the other forms of capital too – most particularly human, social and natural capital. This reflects the inter-dependencies and relationships both inside and outside the firm that enable it to operate and create profit. Inclusive Capitalism holds that by taking a broader view of the firm – its purpose and its stakeholders – it is more likely to prosper over the long term. But this is only possible if investors extend their investment time horizons, overcoming the myopia of short-term financial metrics.”

Lady Rothschild was quick to tell the conference that Inclusive Capitalism would also include the interest of the ordinary workers that the assembled CEOs in the City of London Mansion House employ. “The imbalance of capital and labour” must be acted upon. How was not clear.

There a serious blast of irony here, when, as Prince Charles opened the conference, the US Economic Policy Institute announced a study that showed CEO pay at US’s largest companies was up 54% since recovery began in 2009. While America’s CEOs have seen their compensation soar in the past six years, the average annual earnings of employees haven’t budged. CEOs at the 350 largest companies in the country pocketed an average of $16.3m in compensation each last year. That’s up 3.9% from 2013, and a whopping gain of 54.3% since the recovery began in 2009.  On the other hand, the average annual earnings of employees was only $53,200. And in 2009, when the recovery began? Well, that was $53,200, too. In other words, while the CEOs have seen their compensation soar by 54%, the typical worker’s pay hasn’t budged.

Right now, the average CEO compensation package is 303 times the size of the average earnings of their employees. In 1978, when the idea of giving a CEO the majority of his compensation in the form of stock was almost non-existent, that CEO earned about 30 times what his average employee did. By 1989, when the idea of stock-based compensation was gaining traction (and activist investors and corporate raiders were taking aim at corporate managers they considered fat, lazy and unmotivated to increase returns for shareholders), the figure was closing in on 60. By 2000, getting a significant portion (or most) of one’s compensation in stock, option grants or deferred grants of equity was standard, and the gap was 376, according to the EPI.

The more affluent you are, the more likely you are to own stocks – and to have participated in the post-2009 stock market rally, and to have become wealthier from your investments, even if your salary was stagnant. Studies have shown that these phenomena have resulted in the top 1% getting richer, and doing so at the expense of the rest of us.  Prince Charles and others who addressed the 0.1% in the audience said nothing about this.

In another coincidence, the Financial Times published an interview with Thomas Piketty, the rock-star economist, whose book, Capital in the 21st century, exposed the rising inequality of wealth and incomes in modern post-war economies (see Unpicking Piketty – SASE). Piketty has done great work in exposing these inequalities, but in a sense he is also goes no further than Lady Rothschild and Prince Charles in arguing that capitalism must sort itself out. As Piketty put it in the interview: “I believe in capitalism, private property, the market” — but “how can we tackle inequality?” http://www.ft.com/cms/s/0/7ca6cfc2-1b39-11e5-a130-2e7db721f996.html

Piketty’s answer is a global wealth tax which he admits is a “utopian” dream. So he says a confiscatory tax rate of more than 80 per cent on earnings exceeding $1m would work. In fact, he continues, such a rate was in place for five decades before the presidency of Ronald Reagan, and would curb exuberant executive pay without hurting productivity. “It did not kill US capitalism then — productivity grew the fastest during that time,” he notes. “This idea, according to which no one will accept to work hard for less than $10m per year . . .  It’s OK to pay someone 10, 20 times the average worker’s salary but do you really need to pay them 100 or 200 times to get their arses in gear?”

Lady Rothschild said that Inclusive Capitalism “is a journey not a destination – a set of evolving practices not an end point. It holds that with properly structured incentives, meaningful stakeholder engagement, supportive governments and effective business leadership, firms can generate broad and sustainable prosperity in a manner that respects our communities and our environment for generations to come.”

I leave the reader to decide what that guff means. But it seems that Lady Rothschild wants to get shareholders in companies to take a stand on CEO compensation and on the ethical and environmental policies of the companies they own. But all the evidence shows that this is also utopian claptrap. Unlike the employees stuck with wages that have flat-lined, stockholders are enjoying profits from soaring stock prices. As one 2005 academic study found, investors – whose representatives on the board of directors have the final say on CEO compensation – seem to become complacent during bull markets, indifferent to how rich CEOs, too, are getting, as long as they are sharing in the riches.

And this sort of ‘financial engineering’ to boost profits while holding down wages is not productive in any way. Mark Carney spoke on behalf of the City of London at the conference. But his deputy, Andy Haldane, has shown elsewhere the unproductive nature of finance capital. Finance “could [not] be said to boost overall economic activity or productivity in the economy. They re-allocate risk in the system but do not fundamentally change its size or shape. For that reason, statisticians do not count these activities in capital markets as contributing to activity or welfare. Rightly so.” https://thenextrecession.wordpress.com/2013/10/31/the-value-of-banking-according-to-mark-carney-and-alan-greenspan/.

Both Lady Rothschild and Thomas Piketty believe in capitalism. Both reckon that capitalists can be made to or persuaded to act to reduce inequality, create a better environment and adopt moral policies in investment. Piketty wants more and higher taxes to do this; Lady Rothschild wants shareholder power. But ‘responsible’ or ‘inclusive’ capitalism won’t and can’t deliver.