Why does our corporate governance system put shareholders first? Why are company directors required under law to promote their interests? Why do shareholders have the right to elect company directors and vote on executive pay at company Annual General Meetings? The usual explanation is that shareholders carry the greatest risk in companies and their extensive corporate governance rights stem from this.
Our report, published today with the High Pay Centre, punctures this myth. Our analysis of dividends and share buybacks paid by the FTSE 100 reveals that companies protect and increase payments to shareholders, even when company finances are struggling.
From 2014 to 2018, FTSE 100 companies generated net profits of £551 billion and returned £442 billion of this to shareholders. This means that overall the FTSE 100 paid shareholders an average of £1.7bn a week over the period.
Even a small proportion of this money could mean better wages and working conditions for their staff and workers in their supply chains. But putting shareholders first means less money for workers and other stakeholders, hampering efforts to tackle in-work poverty and climate change.
Returns to shareholders across the FTSE 100 rose by 56% over the period, growing nearly seven times faster than the median wage for UK workers, which increased by just 8.8% (both nominal). If pay across the UK economy had kept pace with shareholder returns, the average worker would now be over £9,500 better off.
The theory behind shareholder primacy, the doctrine of putting shareholders first, is that when profits fall, returns to shareholders should fall too. Our research found that in practice this is not the case. In aggregate, shareholder returns rose by 56% from 2014 to 2018, while net income fell by 3%. In 2015 and 2016, total returns to shareholders came to more than total net profits for the FTSE 100 as a whole. Looking at individual companies over the period, in 27% of cases returns to shareholders were higher than the company’s net profit, including 7% of cases where dividends and/or buybacks were paid despite the company making a loss.
We are calling for corporate governance reform to require company directors to promote the long-term success of the company as their primary aim, rather than prioritising the interests of shareholders as at present. And we need worker directors on company boards to bring a workforce perspective to company decision-making so that companies focus on organic growth that benefits all their stakeholders.
This election is a chance to change the rules and put working families first.
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