Why there’s more to business than profits

Last week Jeremy Corbyn delivered one of his trademark denunciations of the greed and short-sightedness of British capitalism. 

“Being a company director, and in particular a chief executive, requires more [than just commercial success],” he told an audience of young socialist activists. 

“It requires a broader context. It requires a personal motivation that goes beyond simply amassing a fortune. It requires an understanding of where the company sits within the society within which it operates.”

Actually, that’s not true.

Those words didn’t come out of the mouth of Labour’s leader. They were said by Euan Stirling, global head of stewardship at the giant UK fund manager Aberdeen Standard Investment. And Stirling wasn’t addressing a Momentum rally, but rather the annual general meeting of the house builder Persimmon, whose board notoriously created a £100m bonus scheme for its chief executive, Jeff Fairburn.

For many years a conception held sway in markets and corporate board rooms and indeed in large parts of public life that the fundamental, indeed the only, responsibility of a company’s managers was to maximise “shareholder value”.

“There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits,” wrote Milton Friedman, one of the senior deities of the libertarian pantheon, in 1970. The UK’s Companies Act explicitly states otherwise. But many on the libertarian right still believe this Miltonian assertion to be essentially true. And many on the left also believe this is the antisocial philosophy which animates the modern market economy.

Asset managers – the people like Stirling who invest money on behalf of pension funds – are difficult to portray as the economy’s white knights, as a glance at their historic gouging of ordinary investors through excessive fees and their own often excessive pay confirms.

 Activist funds – which amass large stakes in target companies and then put pressure on managements to change corporate strategy – are more concerned with generating a quick payday than being long-term stewards of listed companies. The same applies to many hedge funds. 

Nevertheless, Stirling’s Persimmon speech shows the idea that all asset managers are part of some neoliberal conspiracy is a caricature.

And there is tentative evidence of a change in attitudes further afield. Larry Fink, boss of BlackRock, the world’s largest asset manager – with an astonishing $ 6 trillion under management – has expressed similar sentiments to Stirling.

“To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society,” Fink wrote in his recent letter to all the firms around the world in which BlackRock invests. “Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.”

Many company executives will doubtless read the words of Stirling and Fink and mutter about pious sermons from people who don’t have to answer to aggrieved investors when financial results fall short of expectations. And many on the left will detect public relations flannel from people who preach corporate responsibility yet still, somehow, end up backing rapacious managements.

And both have a point. Some fund managers may take a broader view, but while many don’t it’s not easy for managers to take the high road, as Paul Polman of Unilever, a company that has long put an unusual accent on ethics, has been finding lately. And it’s also true that, despite the spread of progressive rhetoric on stewardship, there have been vanishingly few executives punished for non-financial shortcomings.

Depressingly, even the purely advisory vote on Persimmon’s remuneration report – which absolutely no one is prepared to defend – was actually narrowly approved last week.

Yet writing finance off as irredeemable wouldn’t be warranted while there are some signs of improvement, even if so far it has largely been rhetorical. And for Labour it would represent a missed opportunity. If Corbyn and John McDonnell, his shadow chancellor, want to blunt the relentless media attacks on them for being rabid Marxists out to level the City of London they should cite the words of Stirling and Fink and pledge to hold asset managers and corporate bosses to those fine sentiments.

We all have an interest in this. The proper role of asset managers is to be stewards of companies on behalf of end investors – that’s you and me through our pensions and life insurance policies. These are the companies for which many of us work, whose investment helps drive national productivity growth. They are indeed socially embedded organisations, with multiple stakeholders and broad social responsibilities.

And those who insist it’s socialist extremism to argue so should take it up with BlackRock and Aberdeen Standard Investments.

#CompaniesAct #corporatesocialresponsibility #MiltonFriedman

Correlation, causation, food banks and benefit cuts

“Spurious correlations” is a website created by the management consultant Tyler Vigen which delivers, magnificently, what its name promises. It shows a graphical correlation between the number of Americans who drown in swimming pools and the number of films in a year starring Nicolas Cage. 

The site features evidence that the number of murders by “steam, hot vapours and hot objects” moves in tandem with the age of Miss America. One particularly close relationship is the number of civil engineering doctorates awarded and the US per capita consumption of mozzarella cheese.

But the crowning glory of the website is a chart showing how the use of UK food banks shot up as the British state imposed benefit cuts on the least well off.

Actually, it isn’t. There’s no such chart adorning Vigen’s site. But government ministers seem to feel this ought to be on his list of laughable correlations.

The Trussell Trust has announced that it provided Britons with a record level of emergency food supplies – 1.3 million – in the year to March 2018. That’s up from just 3,000 in 2006. The number of supplies started rising rapidly around 2012, when government benefit cuts, enacted by the previous chancellor George Osborne, started to bite.

The charity says that the explosion in demand really is driven by benefit cuts, in particular the punitive new “sanctioning” regime, where benefits can be cut or withheld as a punishment for, say, missing appointments or failing to apply for enough jobs.

But the government denies it. “It’s wrong to link a rise [in food bank use] to any one cause,” said a spokesperson for the Department for Work and Pensions (DWP) when asked about the latest Trussell figures.

But what other “causes” could there be? The DWP does not elaborate, but a former minister at the department, Lord Freud, hypothesised a few years ago that it was actually a rising number of food banks which was stimulating demand. “Clearly food from a food bank is by definition a free good and there’s almost infinite demand,” mused the former investment banker.

Jacob Rees-Mogg advanced a related theory on his LBC radio show last year, claiming that food bank usage had shot up because ministers had changed policy and allowed job centres to inform people that the charitable resource existed: “The real reason for the rise in numbers is that people know that they are there and Labour deliberately didn’t tell them,” he said.

Maybe ministers are thinking of such explanations when they object to charities that suggest a link between their benefit cuts and soaring food bank use. Many will be tempted to take the analysis of charities, which actually distribute food to people and talk to them, more seriously than the airy theorising of various well-heeled Conservative politicians.

But we should respect the underlying serious message of Vigen’s website. Correlation really doesn’t automatically equate to causation and we should beware of taking charts at face value. Proving causation beyond doubt in the social sciences is nigh on impossible, but, at the very least, an observed association needs supporting evidence before we can talk confidently of one thing causing another.

So what evidence do we have in relation to food bank usage? Two academics from the University of Kent, Owen Davis and Dr Ben Baumberg Geiger, analysed pan-European survey data on food insecurity. They found that insecurity rose across Europe in the wake of the global financial crisis and associated recessions.

And the rise was especially stark in the UK.

This in itself should raise warning signs over the Freud/Rees-Mogg argument that people are using food banks not because something has got worse in their circumstances, but simply because they’re there.

But what about the benefits link? Other researchers – Rachel Loopstra, Aaron Reeves, David Taylor-Robinson, Ben Barr, Martin KcKee and David Stuckler – have found that food banks are more likely to open in areas with higher unemployment rates and where local authorities have had greater aggregate cuts in welfare spending. There is also an association between higher local benefit sanctioning rates and the amount of local food parcels distributed. Analysis of the types of people who attend food banks shows they are much more likely to be on benefits or with low and precarious incomes.

The evidence is not conclusive, but it is highly suggestive. When government ministers and Conservative Party pontificators can produce a similar weight of evidence to support their own pet theories they will merit a hearing. Until then, we can file their views in a cabinet labelled “politically-motivated reasoning”.

Now perhaps that would make for a good website…

#benefits #universalcredit #foodbanks #correlationcausation #welfare

Why you should be cautious about revealing what you were paid in your last job

You’re in a job interview. You think it’s gone reasonably well. The end is approaching so the interviewer casually asks what salary you’re on in your current job. Should you tell them? Talking money might feel like a good sign. After all, they wouldn’t ask unless they were seriously considering offering you the job, would they? If they considered you an unemployable drongo why would they bother inquiring? 

But some say this innocuous question actually represents a trap. The theory is that the divulgence of this information can perpetuate historic pay discrimination as people move from job to job. “The only reason that employers ask this is so that they can low-ball you when they make you an offer,”says one career coach.

It’s claimed that women and ethnic minorities sometimes arrive at a new firm with a low salary relative to their peers because employers (roughly) matched their job and pay offer to that of their previous salary, which may well itself have been unfairly low. And they then remain tethered to this low base over time at the company, even if they get incremental pay rises to match inflation. “Are you underpaid? Then let’s make sure we keep you there” is how the New York psychologist Sonia Banks describes the dynamic.

Another complaint over the question is that employers sometimes treat an existing salary as a signal of how much an individual was valued by a previous employer – and may make a judgement about whether to offer a job at all on the basis of it.

One former female City worker I know suspects she was once not offered a job because she divulged a bonus from a previous prestigious employer which was not deemed large enough. “The problem is I was being undervalued at that other place – so it was an inaccurate signal,” she says.

It’s for these kinds of reasons that some cities in America, including Pittsburgh and New Orleans, have banned employers asking the question about previous salary in interviews. New York became the latest earlier this month.

A number of US states are also considering banning it – though some are encountering resistance.

Nevertheless, some giant corporations, including Bank of America and Amazon, recently decided to get ahead of the law and unilaterally instruct their own interviewers not to ask the question.

But is this proscription really helpful in terms of fighting pay discrimination? Earlier this month I wrote about how mandatory aggregate gender pay gap reporting facilitates transparency and can help to empower a workforce. Doesn’t removing these questions represent a step back in terms of transparency? And don’t many people suggest that we should learn to overcome our reticence to discuss our pay with colleagues in order to flush out glaring pay injustices? Shouldn’t women be encouraged to ask for pay rises, to “lean in”?

Leave aside the evidence that women may get punished, rather than rewarded, for asking for more money: the specific problem here is asymmetric information. Greater transparency is a worthy goal, but when you disclose your previous salary in an interview situation the prospective employer knows more about you than you do about them, at least as regards their sense of how much filling the position ought to cost.

The solution may be to turn the tables and compel a company to disclose what it thinks the specific job is worth. Perhaps what really needs to be proscribed is not the previous salary question but the common practice of firms advertising a salary as merely “competitive”, rather than putting a figure, or a rough price band, on it.

Unlike in the US, making the previous salary question illegal is not on the agenda here in Britain. And the simple reality is that many will find it difficult to refuse to answer a straight question in an interview context. Who really wants to mark themselves out as uncommunicative, or even obstructive, when trying to get that new job? Whatever the advice should be for people on how to handle this dilemma, the US trend towards banning the previous salary question is further evidence that the popular economic theory of financial rewards being linked to “marginal productivity” (in simple terms that you tend to get roughly what you’re worth to the organisation) does a poor job of describing the modern white collar workforce.

The manifest scale of managerial discretion over salary rates, which underpins this whole debate, demonstrates that pay is more a function of power than productivity. And information is a form of power that workers should probably think twice before surrendering.

#asymmetricinformation #genderpaygap #jobinterviews #salary