LONDON: Twenty years ago Britain was one of the most equal countries in the developed world. Today it is one of the most unequal. It is a transformation that has been driven by a remarkable revolution — a great surge in the numbers and wealth of the mega-rich. Not only have they been accumulating fortunes on a scale and at a pace not seen for close to a century, but the flaunting of wealth is back.
The parties and the yachts are ever more lavish; Premiership football clubs are being used as toys of the global super-wealthy; champagne-spraying in London clubs is increasingly common among investment bankers. The rich like nothing more than to outscore their rivals in the wealth stakes. When Philip Green paid himself a dividend of £1.2bn last year, it conveniently beat the previous record set a few months earlier by the steel magnate Lakshmi Mittal.
Not so long ago a soaring wealth gap would have proved politically unacceptable. But today’s wealth explosion has been broadly welcomed across the political spectrum. Tony Blair has applauded the rise of the super-rich. As Peter Mandelson put it, New Labour is relaxed about people getting “filthy rich”. Today’s consensus is that provided we improve the lot of the poorest, the gap is no longer an issue. The wealth boom is defended as a sign of a more entrepreneurial Britain. Few could quibble with modern levels of personal enrichment if they reflected successful business creation and added value at historic levels. But is this really what has been driving runaway executive pay, soaring City fees and record bonuses?
Regrettably, the answer appears mainly to be no. Of course, there are many examples of entrepreneurs, from James Dyson to the internet pioneers, who have created wealth, jobs and opportunities and are widely seen as worth their place at the top. But founding entrepreneurs hardly dominate the rich lists. We are not living through an entrepreneurial and economic renaissance in which the new rich are making society wealthier, dragging up the rest of us. In fact, Britain has internationally low innovation and productivity rates.
Today’s escalating personal fortunes are not closely linked to record levels of wealth creation. Rather, the ranks of the rich contain many tycoons, investment bankers and business executives who, far from creating wealth, have taken advantage of our pro-rich culture to grab a larger slice of the cake. Far from what some pro-wealth supporters claim is a “positive-sum game” with no losers, what is happening is a complex transfer of wealth from ordinary taxpayers, shareholders and customers.
The modern entrepreneur tends to play a very different role from that of the moguls of the past. They are more likely to have made their money not through building up firms and products from scratch, or adding value by introducing new processes, but through financial raiding, deal-making and speculative share-dealing, which involve less risk and arguably create less, if any, wealth.
Twenty years ago the typical chief executive of a FTSE 100 company earned some 25 times the pay of the average worker; today it is close to 120 times. This surge might be justified if it had been driven by a transformation in Britain’s business performance. But this is decidedly not the case. A Manchester University study has shown that top-company heads have enjoyed pay increases that have greatly outstripped a range of measures of business performance. “Value skimming” is how the authors defined it. The business magazine Management Today has condemned the growing gulf in pay as defying “any sense of fairness”.
“Rewards for failure” have become the norm. Most chief executives have negotiated contracts that guarantee them, even when pushed out, generous payoffs known as “golden parachutes”. The management expert Charles Handy has noted that such payouts have made ineptitude by senior executives the shortest route to millionaire status. In America they are known as “golden condoms” because they “protect the executive and screw the shareholder”.
Most City bankers are also engaged in a form of “value skimming”. The City in effect operates as a giant, informal cartel, charging excessive fees for activity that, for the most part, involves the transfer (or sometimes destruction) of wealth, rather than its creation. Increasingly, the emphasis is on short-term, “fast-buck” deals that are at odds with the patient organisation-building on which enduring companies and long-term wealth creation are founded and many large and successful companies were originally built. Mergers and acquisitions are often driven by the prospect of fat bonuses and fees for directors and their City advisers rather than the long-term interests of the companies.
Financial speculation, the source of many modern fortunes, is rarely associated with creating value. As one leading figure in the hedge fund industry has admitted: “When I first went into the City, I could not believe that anyone would want to pay me so much for creating nothing.”
Modern entrepreneurship and tax avoidance largely go hand in hand. There are few top tycoons who have not exploited tax loopholes to boost their personal fortunes — at the expense of the broad body of taxpayers. Philip Green has saved hundreds of millions in personal tax in the past three years because ownership of his companies — Bhs and Arcadia — is vested in the hands of his wife, Tina, who is a resident of Monaco. (With 5,000 Britons, mostly businessmen, living in Monaco, the tax haven has become known as le rocher anglais.) Sir Richard Branson, Lakshmi Mittal and Hans Rausing all use offshore tax havens, quite legally, to reduce their tax liabilities.
Successive (and welcome) attempts to encourage a new enterprise culture would, we were promised, lead to a process of “trickle-down” and, ultimately, benefit us all. In fact, what has happened is that the richest 1% have been taking an increasingly disproportionate share of the nation’s wealth: 23% today compared with 17% at the end of the 1980s. In contrast, the share going to the bottom half of the population has fallen from 10% to 6%. This is more “trickle-up” than “trickle-down”.
There is nothing inevitable about the soaring wealth gap. It is a largely Anglo-Saxon phenomenon. The “anything goes” culture can be challenged, as it was in the post-war era when a social norm emerged that effectively capped runaway greed at the top. However, recent years have seen the decline of the shame gene that once kept corporate abuse in check. Just as shareholders have been expressing their outrage at some of the worst excesses of company executives, the government has the power and the public’s backing to take a lead on what is acceptable. That capitalism has its “unacceptable face” was, after all, openly acknowledged by a Conservative prime minister — Edward Heath — and not that long ago.—Dawn/The Guardian News Service
(Stewart Lansley is the author of Rich Britain, The Rise and Rise of the New Super-Wealthy; a longer version of this article appears in April’s Fabian Review) stewartlansley@aol.com
