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Is crony capitalism the only kind?

11 January 2012

The PM needs to get serious about excessive executive pay, says Paul Vallely

The term “crony capitalism” has re-entered the public debate. David Cameron and Nick Clegg have used it when denoun­cing the way that pay for company bosses has soared, and continues to do so.

The chief executives of the top 100 FTSE com­panies last year earned an average of £4.2 million each in basic pay, bonuses, share in­centives, and pension contributions. That is a rise of more than 400 per cent in little more than a decade. The ordinary board members of those companies netted a whopping 49-per-cent rise last year alone. All this is happening as average wages stagnate, and ordinary people lose their jobs. It is a non­sense to say that this in some way reflects their success in the way they do their jobs. Last year, shares in those companies rose by an average of only 1.7 per cent.

What all this suggests is that we have not merely been dragged into an economic downturn, but into a fundamental shift of values, in which excessive financial speculation has been normal­ised, along with executive pay that is unrelated to performance.

This is not economics: it is politics — although many studies suggest that gross pay inequalities make companies perform more poorly. The recent successes of the egalitarian John Lewis Partnership offer the counter-example.

Because the financial deregulation that loosed our present problems began under Margaret Thatcher, there is a tendency for fire to turn on the Conservatives, or capitalism more generally, since it is seen as being driven by greed and having a tendency to celebrate the intrinsically immoral.

This brings us to crony capitalism. The term has been revived by the Tory MP Jesse Norman, who provided the ideological underpinning for the Big Society. He has just pub­lished a paper that contrasts real conservative wealth-creating capitalism with the corrupt neo-liberal brand that has held sway in the US and UK in recent decades, and which he calls “crony capitalism”.

The evil variety has two hallmarks, he argues.

It has dissolved the relationship between business activity and the wider public interest. And it has separated high rewards from the risk-taking and results on which they ought to depend. In its culture, values of decency, modesty, and respect are disregarded, and short-termism dominates.

It is on Dr Norman’s work that the Prime Minister drew last weekend, when he promised measures to curb excessive boardroom pay. But all he actually committed himself to was the publica­tion of more information, so that everyone can easily see what top people are being paid. He also hinted that shareholders’ votes on pay packages should be made binding rather than advisory.

Transparency is good, but it is not enough. It has not stopped taxpayer-funded banks from paying obscene bonuses. And the biggest share­holders are pension companies and hedge funds, which often hold shares for months, or weeks, or even fractions of a second; they are relatively unbothered that a chief executive is on £4 million, when that is just 0.025 per cent of the average market capitalisation of a FTSE 100 company.

If Mr Cameron is serious, he must bring in other measures, such as making it compulsory to have staff representatives on remuneration committees, and forcing the publication of the ratio between the earnings of a company’s highest- and lowest-paid workers. He needs to find ways to incentivise institutional shareholders to care about soaring executive pay. If he cannot, then the public will be forced into thinking that crony capitalism is the only kind.

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