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The UK’s poor performance on investment, productivity and inequality stems in part from how – and in whose interest – British companies are owned and controlled. Shifting structures of shareholding – with shares of public companies increasingly held by institutional investors2 and concentrated ownership of private companies – has combined with the assertion of shareholder primacy in corporate governance to transform the behaviour of the company. This process has privileged the interests of shareholders over labour. Over time, this has resulted in increased inequality and under-investment, as the imperative of maximising shareholder value has come at the expense of rising real wages or investment.3 It has also generated a deep imbalance in decision-making. Labour has very little ability to influence corporate decision-making or strategy, especially relative to distant institutional investors or large shareholders, with too few workers having a genuine stake and say.
Tinkering won’t address these imbalances, as the Financial Times acknowledged only a few weeks ago4 . To build an economy that is democratic and sustainable by design, we need to transform how the company operates and for whom. Fundamental to this must be a deep institutional turn in ownership to redistribute not just wealth and income, but power and control within the firm.
The IOF proposal is one means to do this. First proposed in a 2018 NEF paper and supported by Common Wealth, a version of the Fund idea was adopted by Shadow Chancellor John McDonnell at Labour Party conference in 2018, and subsequently taken up by Bernie Sanders’s presidential campaign. At its core, the Fund idea seeks to democratise the company by redistributing economic and political rights away from external shareholders and executive management toward the workforce as a collective. The proposal may appear radical but its intention is not. It simply aims to ensure decision-making and the wealth generated by the company is shared more equally between all stakeholders within the firm: external shareholders, management, and workers. The truly radical position is the status quo, whereby workers are not guaranteed a fair stake and say in the companies they contribute so vitally to.
The policy's announcement has led to debate over its effects. Our version of the policy can be deployed through reform of existing rules around share issuance. Current investor principles of remuneration already allow for companies to issue new shares to employees – through executive remuneration and all-employee share schemes – up to 10% of the issued ordinary share capital in any rolling 10 year period.5 However, given inequalities in power within the company, new shares issued to employees disproportionately benefits senior executive management. This proposal therefore redraws existing principles of share dilution in a progressive direction, building a collective stake for the workforce over a finite period of time.
Our version of the policy would limit the IOF share of dividend income to UK-economic activity. This would be distributed to the workforce as a whole, ensuring they benefit directly when their company does well.
The IOF having rights to UK-based economic activity, rather than global activity, would have important consequences for the impact of the policy. By way of comparison, Clifford Chance’s analysis, which assumed a global scope, estimated the total dividend payout to the IOF to be £10.7bn, relative to £5.8bn estimated here (for a 10% stake).6 Given the scope of economic rights is reduced, the effect on shareholders will, mechanically, also be reduced.
Another key difference between a national and international scope, provided a cap is set, is that the proportion of total dividends going to the government is significantly reduced in the national scope version. This is primarily based on the differential treatment of FTSE companies under a UK or global based IOF. Last year, the top five FTSE companies gave out £33bn in dividends.7 In other words, these five firms would contribute nearly £3.3bn to the total IOF pot under an international scope. In addition, these five firms only have roughly 60,000 UK-based employees.8 Without a cap, and with a 10% IOF stake, this would work out at roughly £55,000 per employee, a highly unequal outcome. With a cap, the worker share would be less than 1% of the total IOF of these companies, with the remaining 99% going to the state.9
By contrast, a UK-activity based approach would avoid concentrating the policy’s effect on such a small number of firms. By tying the policy to UK activity rather than UK headquarters, it would significantly mitigate the incentive on firms to relocate, as the policy’s cost would be proportional to UK activity, and could not simply be avoided by changing a company’s registered headquarters. It would also be fairer as UK workers would share in the rewards most directly linked to their own work, rather than that of their international colleagues.
Linking the IOF stake to UK activity would also be administratively simple, as HM Revenue and Customs could use the same definitions and principles to calculate the IOF stake as it uses to determine UK activity for the purposes of calculating UK profits and UK corporation tax. While, of course, there are issues with the current framework and corporate tax avoidance is a definite concern, any improvements made to the framework could apply equally to estimating the IOF stake as to corporation tax receipts. Though the corporation tax information did not disclose the exact number of large firms, recent business population estimates suggest, that if it were implemented today, there would be 7,500 large firms employing 10.7m people who would be covered by an IOF10. We therefore believe a UK-based model is the most effective design of the Fund.11
There are, of course, still important questions of design to explore and debate, but our analysis suggests a viable roadmap toward building more inclusive, democratic and productive companies, and one we hope all political parties will consider.
Common Wealth is publishing further details of its design of the ownership fund proposal shortly, in partnership with The Democracy Collaborative. This will explore the design and potential implications of this policy in more detail, as well as exploring similar related options such as the Fund having income rights based on profit-sharing, with a mechanism akin to the Employee Ownership Trust, which allows tax-free bonuses to be paid to beneficiaries out of company profits. This bonus could be paid in relation to IOF shares, and could help mitigate for the fact that certain firms may not regularly pay-out dividends. By attaching the payment to profits, rather than dividends, workers would always be rewarded where their firms performs well. Regardless of the design, the impulse of our proposal is clear: the company is a vital institution, its rights and privileges publicly defined, and to ensure it best serves prosperity and justice, rethinking who controls it, how it operates, and who has a claim on its surplus, is a critical question.
To estimate a UK-based economic activity IOF, we relied on HMRC’s Corporation Tax receipts and the Office for National Statistics’s Business Population Estimates.1213 From the Corporation Tax receipts, we approximated post-tax profits.14 At a high-level, the UK corporation tax regime is based on the principle that only profits derived from UK activity should be subject to UK corporation tax. In practice, the rules are a little more complicated, but we are here assuming that the same rules currently applicable to the calculation of UK corporation taxes would apply to the calculation of the IOF share. In other words, it would apply to both UK and non-UK resident companies. With these estimates of UK profits, we approximate the associated UK dividends, using a relatively conservative dividend to post-tax profits ratio of 52.8%.15 This allows us to estimate the total IOF pot. To approximate the distribution of that pot between workers and the state, assuming a £500 cap, we estimate the (pre-cap) payouts at the sector level and redistribute any excess from the worker pot to the state pot.
The final stage of the analysis was to project existing data forward. In the interest of both simplicity and transparency, we use the Office for Budget Responsibility’s most recent forecasts of population and profits to approximate the sector-level pay-outs in future years, assuming no behavioural change. We then use their GDP deflator to ensure all our estimates are in 2019 money.
In short, our methodology provides a reasonable and transparent ‘first pass’ estimate of the revenue implication of a UK-based IOF. The main drawback to our analysis is that it can only provide an upper-bound on the sectoral worker share since firm-level profits per worker can differ from sector average. However, as firm-level corporate tax records aren’t available, it wasn’t possible to do the analysis at the firm-level. In practice though, any government implementing this version of the IOF would have access to firm-level tax receipts and could estimate the worker/state share more precisely.
Mathew Lawrence is director of Common Wealth.
Loren King is a consultant at Frontier Economics but undertook the research and writing in a personal capacity.