Do Corporations Increase Inequality?

Abstract

Do corporations increase inequality? Rising inequality of income and wealth has recently been linked to corporate governance, but closer analysis is still developing. This article provides a conceptual grammar to understand the problem. Which ‘significantly distributive rules’ affect the income of executives and directors, employees, retirement savers and shareholding intermediaries the most? Evidence of legal change since 1900, compared with changes in the top 1% of income earners, shows remarkably common outcomes across three major ‘varieties’ of jurisdiction: the UK, Germany and the US. First, executive pay began rising, not just when shareholders generally lost a binding ‘say on pay’ in the 1970s, but when institutional shareholders could monopolise pay decisions. Second, inequality was driven dramatically by the loss of voice at work for employees and their unions from 1980, but far more in so called ‘single channel’ systems of labour-management relations. Third, over the late 20th century asset managers and banks came to appropriate shareholder voting rights with ‘other people’s money’ (mostly from retirement savings). They have been able to use those votes to make corporations buy their own financial products, subsidising financial intermediaries’ share of GDP, and inflating the income of the financial sector. This means corporations are probably the most important ‘pre-tax’ cause of increasing inequality. However, with small but careful reforms, corporations could become institutions that promote economic stability and social justice.

Keywords: Inequality, corporations, corporate governance, labour rights, institutional investors, pensions, executive pay, say on pay, democracy

JEL Classification: D63, G30, G38, J26, K22, K30, K31, M14