Crony capitalism and craven folly

The term crony capitalism has re-entered the public debate. David Cameron and Nick Clegg have both used it when denouncing the way pay for company bosses has soared, and continues to do so despite the faltering economy. The chief executives of the top 100 FTSE companies last year each earned an average of £4.2 million in basic pay, bonuses, share incentives and pension contributions. That is a rise of more than 400 per cent in just over 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.

And it is a nonsense that this in some way reflects their success in the way thy do their jobs. Last year shares in those companies rose by an annual average of just 1.7 per cent.

What all this suggests is that we have not merely been dragged into an economic downturn, but a fundamental shift of values in which excessive financial speculation has been normalised along with executive pay which is unrelated to performance. All that may have gone unnoticed during the good times when a high tide raised all boats. But when things get tough all that becomes unacceptable.

That’s not economics, it’s politics – though 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.

Since the financial deregulation which loosed our present problems began under Margaret Thatcher there is a tendency for fire to turn on the Conservatives or capitalism more generally, as it is driven by greed and has an inbuilt tendency to celebrate the intrinsically immoral.

Which brings us to crony capitalism. The term has been revived by the Tory MP  Jesse Norman who provided the ideological underpinning for David Cameron’s Big Society. He has just published a paper contrasting real conservative wealth-creating capitalism with the corrupt neo-liberal brand which has held sway in the US and UK in recent decades and which he brands “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 and quick returns dominate.

It is on Jesse Norman’s work that the prime minister drew last weekend when he promised measures to curb excessive boardroom pay and golden good-byes for bosses who leave having failed. But all he actually committed himself to the publication of more information so everyone can easily see what top people are being paid. He lasso hinted that shareholders votes on pay packages should be made binding rather than advisory.

That only takes us so far. Transparency is good, but it is not enough. It hasn’t stopped taxpayer-funded banks 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 £4m a year 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, like 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 to thinking that crony capitalism is, in reality, the only kind.  

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