Full speech by John McDonnell on 'Rewriting the Rules of our Economy'

John McDonnell, Labour's Shadow Chancellor, speaking today in London, said:

***Check Against Delivery***

The slogan “Taking back control” was mobilised to great effect in the Brexit debate because people rightly felt that they had little or no control over much of their lives anymore.

For many this is no more so than at work.

Decisions are made about the companies or services they work in over which they have no say and no influence.

Their wages and conditions of employment are largely imposed upon them rather than agreed.

The major decisions about the operation, organisation, investment and even the future of their firms are often made without them having a voice.

Companies are sold and takeovers take place with employees treated virtually as chattels.

The privatisation of major public utilities has meant that both their workers and consumers have no effective direct role in shaping the delivery of the services they provide or depend upon.

What regulation that exists has generally proved to be ineffective.

The Conservatives’ vision of a post Brexit De-regulated economy threatens to undermine what protections and controls that currently exist.

Labour will rewrite the rules of our economy.

It’s all about treating people fairly and with the respect they deserve.

Today’s business model of shareholder domination is increasingly proving to be incompatible with not just the fair and respectful treatment of workers but also with the responsibilities associated with any organisation operating within a democracy.

Labour’s reforms to how our large businesses and public utilities are governed, owned and regulated and how both workers and consumers are represented will genuinely enable them to take back control.

Today Labour has published a report summarising the extensive work we have been undertaking with others on a comprehensive reform programme for corporate governance.

We aim to take on the excesses of the shareholder model and lay some of the foundations of a stakeholder economy.

Our argument is that under the existing system the unfettered pursuit of profit maximisation has been allowed to override all other considerations.

Whether it’s the care of the company’s employees, their wages, pensions or conditions of employment and in some instances even their health and their safety.

Or whether it’s the social and environmental consequences of a company’s operations.

There have been too many examples to demonstrate that the relentless pursuit of shareholder value has been to the detriment of workers, consumers, communities and our environment.

The recent litany of Carillion, BHS and Thomas Cook are just recent examples of what happens when short termism and corporate greed rule the roost.

Several studies have shown how the short-term focus of many company shareholders and executives is a major reason for the poor performance of the UK economy. 

Too often corporate greed forcing short term profit-taking overrides good business sense.

In our report we assert a basic principle that companies form part of our societyand must abide by the same norms and rules as the rest of us.

We want good businesses that make long term decisions and create good jobs.

But the problem is that shares are now held for less than a year on average and CEOs rarely last more than 5 years.

The pressure to maximise returns at all costs has often persuaded executives to boost dividends at the expense of stable, sensible, long term investment.

Those businesses that do take a long term and responsible view should not be undercut or disadvantaged by those that don’t - and don’t play by the rules.

We believe that a new model of business is needed.

At its heart is our belief that any business should be a partnership between employees, customers, management and shareholders for the long-term success of the enterprise.

Many European countries have more robust systems to secure long term decision making than the UK.

Labour will rewrite the Companies Act so that directors have a duty to promote the long-term interests of employees, customers, the environment and the wider public.

The group with the longest-term stake in a company is usually the workers and yet in this country worker representation and participation in decision making is extremely limited.

We have already announced that a third of a company’s board membership will be workers.

We will supplement this by giving larger companies the choice of adopting a unitary board or a two-tier board structure.

The unitary board includes elected stakeholder representation.

The two-tier board comprises an executive board, responsible for the day to day operations, and a supervisory board made up of stakeholders such as customers, employees and long-term investors.

The supervisory board will have overall power to steer the direction of the company.

We will also explore and consult on incentives to encourage long term shareholding.

In France shareholders holding their shares for more than two years have strengthened voting rights.

In line with our commitment to building a stakeholder economy we aim to broaden the ownership base of UK businesses to give workers more of a stake in their company.

There is evidence to show that this not only advances long term decision making but also boosts productivity.

We have announced the introduction of Inclusive Ownership Funds in which larger companies will be required to transfer 1% of their shares into an employee fund until the fund owns 10% of the company.

Shares would be owned collectively by employees with dividend payments distributed up to a maximum of £500 per employee per year.

I see in the USA that Bernie Sanders is proposing a 20% transfer.

Private companies may not have shares but may not issue dividends.

So as an alternative Labour will ensure that these companies introduce a profit sharing scheme that would achieve equivalent benefits.

Independent assessments have estimated that the IOF policy could raise £2 billion for workers after 5 years with an average annual pay-out per worker of £181.

Payments above the £500 cap will go to a Climate Apprenticeship fund to train the skilled workers needed for our green new deal to tackle climate change.

Tackling the existential threat of climate change is Labour’s overriding priority as we enter government.

If we are meet the climate change target to keep global warming to 1.5 degrees above pre-industrial levels, we need to ensure that companies are pulling their weight alongside government.

Many now are.

Business bodies are calling for companies to improve climate related financial reporting and for all companies to bring forward decarbonisation plans.

For those companies not taking adequate steps under Labour they will be delisted from the London Stock Exchange.

The Corporate Governance Code and legislation will be amended to set out a minimum standard for listing related to evidencing the action being taken to tackle climate change.

Disparities in pay between senior executives and other employees have become extreme to the point of obscene in recent years.

If someone gave you £1 every 10 seconds, it would take you more than 300 years to become a billionaire.

Someone on the national minimum wage would have to work 69,000 years to be paid £1 billion.

And a newly qualified nurse would have to wait 50,000 years.

No one needs or deserves to have that much money

It is obscene.

It is also obscene – by the way – that these billionaires are buying access and tax breaks to Boris Johnson’s Conservative Party.

We know whose side Boris Johnson is on – the billionaires, the bankers and big business.

While Jeremy Corbyn and the Labour Party are on the side of the people, offering real change for our country. Putting wealth and power in the hands of the many not the few.

The High Pay Centre described how, after just three working days in 2019, the UK’s top executives made more money than the typical fulltime worker will earn in the entire year.

The pay of the average FTSE 100 CEO has risen from 60 times their average employee to 150 times in 2017.

Long-Term Incentive Plans (LTIPs) set by remuneration committees have resulted in sharp increases in executive pay and bonus packages over recent years. 

On gender pay almost 8 in 10 companies pay male employees more than women.

A pay gap also exists between different ethnicities, with the percentage difference in median hourly pay between people of a White ethnicity and all those who belong to an ethnic minority group being the largest in London at 21.7%.

We believe that the wealth of a company is the result of the collective endeavour of all its workers, whether at the top or at the bottom, and that wealth should be shared more equitably.

That’s why Labour has committed to introduce an Excessive Pay Levy on companies

And will bring in a 20:1 pay ratio between lowest and highest paid employees in the public sector.

We will also move towards a 20:1 pay ratio between lowest and highest paid employees in companies bidding for public sector contracts.

A 20:1 ratio means someone earning the living wage, just over £16,000 a year, would permit an executive to be earning nearly £350,000.

All large companies will be required, as part of annual reporting, to disclose the ratio of total CEO remuneration to median employee pay and the steps being taken to reduce it.

Directors will be required to explicitly state in their annual report that no employee has received pay less than the Real Living Wage – which will be a statutory requirement under a Labour Government.

We will ensure that all executive remuneration packages in large companies are subject to an annual binding vote by stakeholders, including shareholders, employees and consumers.

Companies must also set out their policy for tackling the gender and ethnicity pay gap and outline the progress made since the last report and their renewed target to reduce it.

We will ensure that companies are prevented from neglecting pension deficit recovery payments in order to deliver executive bonuses, dividends, and pay.

Audits are vitally important for determining corporate accountability.

The dominance of the Big 4 major accountancy firms means that, according to a report by the House of Commons Library, auditors are unable to deliver independent and robust audits, and the auditing industry lacks competition.

They are now too big to fail.

Auditing firms have a variety of conflicts of interest.

They must win and retain engagements from companies in order to generate revenue, but at the same time objectively scrutinize the company’s reports. 

Under Labour, the Big Four firms will not be allowed to continue to act like a cartel.

The audit business of accounting firms should be structurally separate, and auditors prevented from selling any non-auditing services.

Labour will establish a new statutory body to conduct audits.

Its purpose will be to conduct real-time audits of banks, building societies, credit unions, insurers and major investment firms.

The auditor will not be dependent on fees from client companies and as a result could become independent and robust.

Through this new statutory body, the regulator will be able to enforce prudent financial reporting practices and change the culture and practices at financial enterprises.

Audit tenders should be publicly available and auditor files should available for stakeholder scrutiny.

Members of the audit team should not be allowed to join the staff of the audit client for five years after ceasing to be a member of the audit team.

Large companies must be required to change audit firms, partners and entire audit staff at least once every five years.

Auditing firms will not be permitted to write their own accounting, auditing and financial reporting rules.

Accounting trade associations must not be permitted to write accounting rules for businesses controlled by their members.

We will regulate to ensure auditing firms provide socially useful information about their operations, including information about their offshore links, captive insurance companies, political links, audit failures, cooperation with regulators, regulatory action, lawsuits and profits from practices that would be deemed unfair.

The Competition and Markets Authority, or the relevant regulatory authority, will examine the auditing industry at five yearly intervals, until such time that its structure and practices change to secure a high degree of competition and choice to deliver value for money and high quality audits to protect stakeholders.

Finally, a Labour government will undertake a much-needed overhaul of our system of regulation to ensure that it serves the public interest.

Our report describes a confusingly labyrinthine system of regulation.

There are at least 41 financial sector regulators.

A separate set of dispute resolution bodies exists.

The public is poorly represented on boards of regulators.

The RBS Global Restructuring Group fiasco highlighted flaws across the regulatory architecture, including amongst insolvency practitioners,

The collapse of Carillion in 2018. Scandals at Tesco, HBOS and in relation to tax avoidance have raised serious questions about regulatory negligence.

Parliamentary committees and the media are having to fill the gap left by the inadequacy of regulation.

All in all, regulatory bodies appear to be failing to protect society.

Labour will legislate to establish a Business Commission, containing a Companies Commission, Finance Commission, and Enforcement Commission.

This will close the gaps in regulation and establish and more robust and independent regulatory system.

The Business Commission will integrate the accounting, auditing, insolvency, and financial sector regulators.

All the commissions should have open meetings and publicly available minutes, agendas, correspondence, and working papers.

An independent Ombudsman will adjudicate on disputes between regulators and stakeholders.

Labour will commit to select committees having oversight of the Business Commission.

We believe that our corporate model is not serving our economy, the environment or wider society.

Labour in government will institute a radical overhaul of UK company law and practice in order to bring about real change in the corporate sector.

Our comprehensive reform programme will bring greater democracy, justice, and accountability to the world of business.

We describe this in the report as a step change in corporate governance and regulation that will support efforts to tackle the climate emergency, improve long-run economic performance and realise greater equality across society.

We pay tribute to all those businesses and enterprises that form the backbone of our economy and make their important contribution to our society.

Our aim is to strengthen good business practice whilst we drive out the bad.

This new architecture of corporate governance and regulation has the potential to lay the foundations of the successful dynamic economy we need, serving our whole community.