The question of what corporations are for is deeply political. In a 1970 article for the New York Times, Milton Friedman argued that the “social responsibility of business is to increase its profits”. The idea that CEOs should worry about providing good jobs was “pure and unadulterated socialism”, he wrote. Friedman and his fellow neoliberals saw companies as vehicles for enforcing their politics. Their ideas endured: UK bosses are now paid 130 times more than average workers.
Despite Andy Burnham’s pledge to end neoliberalism, a 12-week consultation recently launched by his government risks entrenching it. The consultation was first announced as part of the Starmer government’s crusade against “red tape”. The average annual report for some businesses now runs to 98,000 words, and no doubt there are areas that could be simplified. But the consultation proposes removing vital information and presumes that company reports primarily serve shareholders, rather than other stakeholders. Both are steps in the wrong direction.
The consultation proposes scrapping information about the ratio between CEO and worker pay, removing a vital benchmark for inequality. British CEOs already earn 95% more on average than their European equivalents, and opaque pay ratios only serve their interests. There is scant evidence that higher-paid CEOs create more productive firms. As one Harvard Law School paper observed, pay ratios show how much a company invests in its “human capital”, and matter to workers and investors alike. Consumers who are made aware of this information are more likely to choose products from firms where the ratio is lower, encouraging those firms to address glaring pay disparities.
The consultation reflects the idea that inequality within a company is immaterial, a perplexing stance for a government concerned with fairness. It suggests removing annual shareholder votes on director pay, on the basis that votes are still required every three years. Annual votes were a modest attempt from Theresa May’s Tory government to tame the “unacceptable face of capitalism”, and the GC100 lobby group of corporate leaders has called to scrap them. By giving way, Labour would be removing a Tory policy designed to rein in boardroom greed.
It also proposes allowing companies to shift towards fully virtual annual general meetings. Companies have been holding online AGMs since Covid, and the government suggests these can improve “accessibility”. This is misguided: such meetings tend to be shorter, and prevent shareholders from asking as many questions. In-person AGMs are an imperfect form of accountability, but confrontation is easier to avoid when people aren’t in the room. Earlier this year, more than 50% of BP shareholders voted against a resolution to replace in-person AGMs with online meetings. Shareholders and climate groups argued these were a threat to accountability.
If reporting is too onerous, it would be better to start afresh with a new regime that recognised the interests of workers and society at large. Some voluntary initiatives, such as B Corporations, already take a more holistic approach to the information they disclose. Even better would be a requirement to include workers on company boards and provide greater transparency on pay levels, including that of all executives and workers paid less than the living wage. As the legal professor Katharina Pistor observes, corporate law is a tool that creates inequality. If the government wants to end neoliberalism, it should scrap this consultation and start again.
