Responsible Capitalism

I read with interest Chuka Umunna outlining The Labour Party view of capitalism in the 21st Century. Increased transparency on remuneration, obligations for  investors and pension funds to disclose how they vote on executive pay deals. It is good to see that The Labour Party recognise the massive disconnects that can be created when reward and remuneration is not linked to performance, or is linked to activities that directly impact the UK economy in a negative way.

The new focus on a “responsible capitalism” reminds me of a speech given by Bill Gates in 2008 to the Davos Annual Meeting, outlining what he called “creative capitalism“. That is to use the benefits of capitalism to positively influence the people who do not directly benefit from market forces. In the speech he recognises that “capitalism does not work for all”, as large swathes of the population do not proportionately benefit from proceeds of capitalism.

You can see the speech here:

This speech started a revolution in large national and multi-national companies where they valued social responsibility highly within their operational organisations. This lead to small scale philanthropic gestures where workplaces would raise money for charity, or volunteer to help the less fortunate. These actions made a difference on a local level. However, this social responsibility did not enter into executive decision making, nor did it look at tackling inequalities either in the world population or in the economy where their business is situated. This is where capitalism can make a real change in the world today.

So, is it possible to develop a capitalist system where profit making is encouraged, and those profits are then directed into creating a more equal society? What kind of regulation is needed, if any, to ensure that this is done? Or can this be done with new and different types of entrepreneurs, creating socially beneficial products and services where profits are recycled back into the local community?

There are many examples of where entrepreneurs can develop socially responsible ideas from building affordable homes using local labour and local materials and reinvesting the profits into the local community to improve skills through training and education, to creating new products and techonology that push down the cost of living, benefiting those on low incomes. By encouraging these ideas and entrepeneurs, the inequalities that currently exist in our society can be tackled.

An important caveat.

It is very important to remember that the encouragment of these enterprises is not the be all and end all of tackling inequality in the UK and the world. Government does and always should play a role by ensuring that the tax system is progressive and fair, that regulation is robust and competitive, that the education system is fit for the 21st Century and that the welfare system protects the most vulnerable in our society.

Obviously, the other impact on inequality in our society is the massively disproportionate levels of pay across the workforce, where executive pay and average pay can differ by a factor of 75. Looking at this blog from George Eaton from November last year, it discusses the High Pay Commissions report, and it shows that executive pay has soared over the last 30 years.

When such a disparity occurs it creates a disconnect between different areas of society. The people who receive this remuneration become seperated, and do not operate on the same level as their employees or their customers. This leads to an inability to empathise or understand the pressures that impact on the day to day lives of Joe Public. Examples of this can be seen from comments made by executives such as Burger King’s CEO Bernardo Hees, or politicians such as Lord Young.

To avoid these disconnects, much of what was said today by The Labour Party needs to be actioned: Pay needs to become more transparent by companies publishing the pay gaps between the high paid and the median average. Pay needs to be more equalised, not just in amount but also in the packages available. For example, increasing the availability of share options for entry level employees. Shareholders need to exercise their power in curbing executive pay, with information being published on how investors and pension funds vote on remuneration packages.

History has taught us that inequality on this scale has a negative impact on society with increasing mis-trust and higher civil unrest. Actions as outlined today by The Labour Party are a step in the right direction to re-balance UK plc in a way that rewards strong positive performance and discourages dangerous risk taking ventures.


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